[JPRT 112-2-11]
[From the U.S. Government Publishing Office]



                                                             JCS-2-11

                        [JOINT COMMITTEE PRINT]
 
                         GENERAL EXPLANATION OF
                            TAX LEGISLATION
                     ENACTED IN THE 111TH CONGRESS

                               ----------                              

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION






                               MARCH 2011




                                                               JCS-2-11








                        [JOINT COMMITTEE PRINT]



                         GENERAL EXPLANATION OF

                            TAX LEGISLATION

                     ENACTED IN THE 111TH CONGRESS

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION







                               MARCH 2011








                                  _____

                  U.S. GOVERNMENT PRINTING OFFICE

  64-669                  WASHINGTON : 2011              JCS-2-11















                            SUMMARY CONTENTS

                              ----------                              
                                                                   Page
Part One: Children's Health Insurance Program Reauthorization Act 
  of 2009 (Public Law 111-3).....................................     4

Part Two: American Recovery and Reinvestment Act of 2009 (Public 
  Law 111-5).....................................................    16

Part Three: Airport and Airway Trust Fund Extensions (Public Laws 
  111-12, 111-69, 111-116, 111-153, 111-161, 111-197, 111-216, 
  111-249, and 111-329)..........................................   153

Part Four: Highway Trust Fund Extensions and Restoration (Public 
  Laws 111-46, 111-68, 111-118, 111-144, 111-147, and 111-322)...   155

Part Five: Worker, Homeownership, and Business Assistance Act of 
  2009 (Public Law 111-92).......................................   158

Part Six: Haiti Tax Relief (Public Law 111-126)..................   174

Part Seven: Hiring Incentives to Restore Employment Act (Public 
  Law 111-147)...................................................   176

Part Eight: Health Care Provisions (Public Laws 111-148, 111-152, 
  111-173, and 111-309)..........................................   252

Part Nine: Preservation of Access to Care for Medicare 
  Beneficiaries and Pension Relief Act of 2010 (Public Law 111-
  192)...........................................................   384

Part Ten: Homebuyer Assistance and Improvement Act of 2010 
  (Public Law 111-198)...........................................   416

Part Eleven: Dodd-Frank Wall Street Reform and Consumer 
  Protection Act (Public Law 111-203)............................   424

Part Twelve: __ Act of __ (Public Law 111-226)...................   426

Part Thirteen: Firearms Excise Tax Improvement Act of 2010 
  (Public Law 111-237)...........................................   459

Part Fourteen: Small Business Jobs Act of 2010 (Public Law 111-
  240)...........................................................   463

Part Fifteen: Claims Resolution Act of 2010 (Public Law 111-291).   508

Part Sixteen: Tax Relief, Unemployment Insurance Reauthorization, 
  and Job Creation Act of 2010 (Public Law 111-312)..............   512

Part Seventeen: Regulated Investment Company Modernization Act of 
  2010 (Public Law 111-325)......................................   665

Part Eighteen: Omnibus Trade Act of 2010 (Public Law 111-344)....   689

Part Nineteen: James Zadroga 9/11 Health and Compensation Act of 
  2010 (Public Law 111-347)......................................   693

Part Twenty: Authority of Tax Court to Appoint Employees (Public 
  Law 111-366)...................................................   696

Part Twenty-One: Customs User Fees, Corporate Estimated Taxes and 
  Extension of Assistance for COBRA Continuation Coverage........   697

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 111th Congress.............................................   705
                            C O N T E N T S

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

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

Part One: Revenue Provisions of the Children's Health Insurance 
  Program Reauthorization Act of 2009 (Public Law 111-3).........     4

  I. REQUIREMENTS FOR GROUP HEALTH PLANS..............................4

          A. Special Enrollment Period Under Group Health Plans 
              (sec. 311 of the Act and sec. 9801 of the Code)....     4

 II. OTHER REVENUE PROVISIONS.........................................5

          A. Increase Excise Tax Rates on Tobacco Products and 
              Cigarette Papers and Tubes (sec. 701 of the Act and 
              sec. 5701 of the Code).............................     5

          B. Modify Definition of Roll-Your-Own Tobacco (sec. 
              702(d) of the Act and sec. 5702 of the Code).......     8

          C. Permit, Inventory, Reporting, Recordkeeping 
              Requirements for Manufacturers and Importers of 
              Processed Tobacco (sec. 702 of the Act and secs. 
              5702, 5712, 5713, 5721, 5722, 5723, and 5741 of the 
              Code)..............................................     9

          D. Broaden Authority to Deny, Suspend, and Revoke 
              Tobacco Permits (sec. 702(b) of the Act and secs. 
              5712 and 5713 of the Code).........................    10

          E. Clarify Statute of Limitations Pertaining to Excise 
              Taxes Imposed on Imported Alcohol, Tobacco Products 
              and Cigarette Papers and Tubes (sec. 702(c) of the 
              Act and sec. 514 of the Tariff Act of 1930)........    11

          F. Impose Immediate Tax on Unlawfully Manufactured 
              Tobacco Products and Cigarette Papers and Tubes 
              (sec. 702(e) of the Act and sec. 5703 of the Code).    12

          G. Use of Tax Information in Tobacco Assessments (sec. 
              702(f) of the Act and sec. 6103 of the Code).......    12

          H. Study Concerning Magnitude of Tobacco Smuggling in 
              the United States (sec. 703 of the Act)............    14

          I. Modifications to Corporate Estimated Tax Payments 
              (sec. 704 of the Act and sec. 6655 of the Code)....    14

Part Two: Revenue Provisions of the American Recovery and 
  Reinvestment Act of 2009 (Public Law 111-5)....................    16

TITLE I--TAX PROVISIONS..........................................    16

          A. Tax Relief for Individuals and Families.............    16

               1. Making work pay credit (sec. 1001 of the Act 
                  and new sec. 36A of the Code)..................    16
               2. Increase in the earned income tax credit (sec. 
                  1002 of the Act and sec. 32 of the Code).......    20
               3. Increase of refundable portion of the child 
                  credit (sec. 1003 of the Act and sec. 24 of the 
                  Code)..........................................    22
               4. American Opportunity Tax Credit (sec. 1004 of 
                  the Act and sec. 25A of the Code)..............    24
               5. Temporarily allow computer technology and 
                  equipment as a qualified higher education 
                  expense for qualified tuition programs (sec. 
                  1005 of the Act and sec. 529 of the Code)......    27
               6. Modifications to homebuyer credit (sec. 1006 of 
                  the Act and sec. 36 of the Code)...............    29
               7. Election to substitute grants to states for 
                  low-income housing projects in lieu of low-
                  income housing credit allocation for 2009 
                  (secs. 1404 and 1602 of the Act and sec. 42 of 
                  the Code)......................................    31
               8. Exclusion from gross income for unemployment 
                  compensation benefits (sec. 1007 of the Act and 
                  sec. 85 of the Code)...........................    33
               9. Deduction for State sales tax and excise tax on 
                  the purchase of qualified motor vehicles (sec. 
                  1008 of the Act and secs. 63 and 164 of the 
                  Code)..........................................    34
              10. Extend alternative minimum tax relief for 
                  individuals (secs. 1011 and 1012 of the Act and 
                  secs. 26 and 55 of the Code)...................    35

          B. Tax Incentives for Business.........................    36

               1. Special allowance for certain property acquired 
                  during 2009 and extension of election to 
                  accelerate AMT and research credits in lieu of 
                  bonus depreciation (sec. 1201 of the Act and 
                  sec. 168(k) of the Code).......................    36
               2. Temporary increase in limitations on expensing 
                  of certain depreciable business assets (sec. 
                  1202 of the Act and sec. 179 of the Code)......    40
               3. Five-year carryback of operating losses (sec. 
                  1211 of the Act and sec. 172 of the Code)......    42
               4. Estimated tax payments (sec. 1212 of the Act 
                  and sec. 6654 of the Code).....................    43
               5. Modification of work opportunity tax credit 
                  (sec. 1221 of the Act and sec. 51 of the Code).    44
               6. Clarification of regulations related to 
                  limitations on certain built-in losses 
                  following an ownership change (sec. 1261 of the 
                  Act and sec. 382 of the Code)..................    50
               7. Treatment of certain ownership changes for 
                  purposes of limitations on net operating loss 
                  carryforwards and certain built-in losses (sec. 
                  1262 of the Act and sec. 382 of the Code)......    55
               8. Deferral of certain income from the discharge 
                  of indebtedness (sec. 1231 of the Act and sec. 
                  108 of the Code)...............................    57
               9. Modifications of rules for original issue 
                  discount on certain high yield obligations 
                  (sec. 1232 of the Act and sec. 163 of the Code)    62
              10. Special rules applicable to qualified small 
                  business stock for 2009 and 2010 (sec. 1241 of 
                  the Act and sec. 1202 of the Code).............    64
              11. Temporary reduction in recognition period for S 
                  corporation built-in gains tax (sec. 1251 of 
                  the Act and sec. 1374 of the Code).............    65

          C. Fiscal Relief for State and Local Governments.......    66

               1. De minimis safe harbor exception for tax-exempt 
                  interest expense of financial institutions and 
                  modification of small issuer exception to tax-
                  exempt interest expense allocation rules for 
                  financial institutions (secs. 1501 and 1502 of 
                  the Act and sec. 265 of the Code)..............    66
               2. Temporary modification of alternative minimum 
                  tax limitations on tax-exempt bonds (sec. 1503 
                  of the Act and secs. 56 and 57 of the Code)....    69
               3. Temporary expansion of availability of 
                  industrial development bonds to facilities 
                  creating intangible property and other 
                  modifications (sec. 1301 of the Act and sec. 
                  144(a) of the Code)............................    70
               4. Qualified school construction bonds (sec. 1521 
                  of the Act and new sec. 54F of the Code).......    72
               5. Extend and expand qualified zone academy bonds 
                  (sec. 1522 of the Act and sec. 54E of the Code)    77
               6. Build America bonds (sec. 1531 of the Act and 
                  new secs. 54AA and 6431 of the Code)...........    80
               7. Recovery zone bonds (sec. 1401 of the Act and 
                  new secs. 1400U-1, 1400U-2, and 1400U-3 of the 
                  Code)..........................................    85
               8. Tribal economic development bonds (sec. 1402 of 
                  the Act and new sec. 7871(f) of the Code)......    91
               9. Pass-through of credits on tax credit bonds 
                  held by regulated investment companies (sec. 
                  1541 of the Act and new sec. 853A of the Code).    93
              10. Delay in implementation of withholding tax on 
                  government contractors (sec. 1511 of the Act 
                  and sec. 3402(t) of the Code)..................    94
              11. Extend and modify the new markets tax credit 
                  (sec. 1403 of the Act and sec. 45D of the Code)    95

          D. Energy Incentives...................................    97

               1. Extension of the renewable electricity 
                  production credit (sec. 1101 of the Act and 
                  sec. 45 of the Code)...........................    97
               2. Election of investment credit in lieu of 
                  production tax credits (sec. 1102 of the Act 
                  and secs. 45 and 48 of the Code)...............   105
               3. Modification of energy credit (sec. 1103 of the 
                  Act and sec. 48 of the Code)...................   106
               4. Grants for specified energy property in lieu of 
                  tax credits (secs. 1104 and 1603 of the Act and 
                  secs. 45 and 48 of the Code)...................   109
               5. Expand new clean renewable energy bonds (sec. 
                  1111 of the Act and sec. 54C of the Code)......   111
               6. Expand qualified energy conservation bonds 
                  (sec. 1112 of the Act and sec. 54D of the Code)   113
               7. Modification to high-speed intercity rail 
                  facility bonds (sec. 1504 of the Act and sec. 
                  142(i) of the Code)............................   117
               8. Extension and modification of credit for 
                  nonbusiness energy property (sec. 1121 of the 
                  Act and sec. 25C of the Code)..................   118
               9. Credit for residential energy efficient 
                  property (sec. 1122 of the Act and sec. 25D of 
                  the Code)......................................   120
              10. Temporary increase in credit for alternative 
                  fuel vehicle refueling property (sec. 1123 of 
                  the Act and sec. 30C of the Code)..............   122
              11. Modification of credit for carbon dioxide 
                  sequestration (sec. 1131 of the Act and sec. 
                  45Q of the Code)...............................   123
              12. Modification of the plug-in electric drive 
                  motor vehicle credit (secs. 1141-1144 of the 
                  Act and secs. 30, 30B, and 30D of the Code)....   125
              13. Parity for qualified transportation fringe 
                  benefits (sec. 1151 of the Act and sec. 132 of 
                  the Code)......................................   127
              14. Credit for investment in advanced energy 
                  property (sec. 1302 of the Act and new sec. 48C 
                  of the Code)...................................   128

          E. Other Provision.....................................   129

               1. Application of certain labor standards to 
                  projects financed with certain tax-favored 
                  bonds (sec. 1601 of the Act)...................   129

TITLE III--HEALTH INSURANCE ASSISTANCE...........................   130

          A. Assistance for COBRA Continuation Coverage (sec. 
              3001 of the Act and new sec. 139C, sec. 4980B, and 
              new secs. 6432 and 6720C of the Code)..............   130

          B. Modify the Health Coverage Tax Credit (secs. 1899-
              1899L of the Act and secs. 35, 4980B, 7527, and 
              9801 of the Code)..................................   143

Part Three: Airport and Airway Trust Fund Extensions (Public Laws 
  111-12, 111-69, 111-116, 111-153, 111-161, 111-197, 111-216, 
  111-249, and 111-329)..........................................   153

Part Four: Highway Trust Fund (Public Laws 111-46, 111-68, 111-
  118, 111-144, 111-147, and 111-322)............................   155

          A. Extension of Surface Transportation Act Expenditure 
              Authority..........................................   155

          B. Highway Trust Fund Restoration......................   156

Part Five: Revenue Provisions of the Worker, Homeownership, and 
  Business Assistance Act of 2009 (Public Law 111-92)............   158

          A. Extension and Modification of First-Time Homebuyer 
              Credit (secs. 11 and 12 of the Act and sec. 36 of 
              the Code)..........................................   158

          B. Five-Year Carryback of Operating Losses (sec. 13 of 
              the Act and sec. 172 of the Code)..................   162

          C. Exclusion from Gross Income of Qualified Military 
              Base Realignment and Closure Fringe (sec. 14 of the 
              Act and sec. 132 of the Code)......................   165

          D. Delay in Application of Worldwide Allocation of 
              Interest (sec. 15 of the Act and sec. 864 of the 
              Code)..............................................   166

          E. Modification of Penalty for Failure to File 
              Partnership or S Corporation Returns (sec. 16 of 
              the Act and secs. 6698 and 6699 of the Code).......   170

          F. Expansion of Electronic Filing by Return Preparers 
              (sec. 17 of the Act and sec. 6011(e) of the Code)..   171

          G. Time for Payment of Corporate Estimated Taxes (sec. 
              18 of the Act and sec. 6655 of the Code)...........   172

Part Six: Haiti Tax Relief (Public Law 111-126)..................   174

          A. Accelerate the Income Tax Benefits for Charitable 
              Cash Contributions for the Relief of Victims of the 
              Earthquake in Haiti (sec. 1 of the Act)............   174

Part Seven: Revenue Provisions of the Hiring Incentives to 
  Restore Employment Act (Public Law 111-147)....................   176

TITLE I--INCENTIVES FOR HIRING AND RETAINING UNEMPLOYED WORKERS..   176

          A. Payroll Tax Forgiveness for Hiring Unemployed 
              Workers (sec. 101 of the Act and new sec. 3111 of 
              the Code)..........................................   176

          B. Business Credit for Retention of Certain Newly Hired 
              Individuals in 2010 (sec. 102 of the Act and sec. 
              38(b) of the Code).................................   179

TITLE II--EXPENSING..............................................   180

          A. Increase in Expensing of Certain Depreciable 
              Business Assets (sec. 201 of the Act and sec. 179 
              of the Code).......................................   180

TITLE III--QUALIFED TAX CREDIT BONDS.............................   182

          A. Refundable Credit for Certain Qualified Tax Credit 
              Bonds (sec. 301 of the Act and secs. 54F and 6431 
              of the Code).......................................   182

TITLE IV--EXTENSION OF CURRENT SURFACE TRANSPORTATON PROGRAMS....   191

          A. Revenue Provisions Relating to the Highway Trust 
              Fund (secs. 441-445 of the Act and secs. 9503 and 
              9504 of the Code)..................................   191

TITLE V--OFFSET PROVISIONS.......................................   193

          A. Foreign Account Tax Compliance......................   193

               1. Reporting on certain foreign accounts (sec. 501 
                  of the Act and new secs. 1471-1474 and sec. 
                  6611 of the Code)..............................   193
               2. Repeal of certain foreign exceptions to 
                  registered bond requirements (sec. 502 of the 
                  Act and secs. 149, 163, 165, 871, 881, 1287, 
                  and 4701 of the Code and 31 U.S.C. sec. 3121)..   219
               3. Disclosure of information with respect to 
                  foreign financial assets (sec. 511 of the Act 
                  and new sec. 6038D of the Code)................   223
               4. Penalties for underpayments attributable to 
                  undisclosed foreign financial assets (sec. 512 
                  of the Act and sec. 6662 of the Code)..........   230
               5. Modification of statute of limitations for 
                  significant omission of income in connection 
                  with foreign assets (sec. 513 of the Act and 
                  secs. 6229 and 6501 of the Code)...............   232
               6. Reporting of activities with respect to passive 
                  foreign investment companies (sec. 521 of the 
                  Act and sec. 1298 of the Code).................   234
               7. Secretary permitted to require financial 
                  institutions to file certain returns related to 
                  withholding on foreign transfers electronically 
                  (sec. 522 of the Act and sec. 6011 of the 
                  Code)..........................................   236
               8. Clarifications with respect to foreign trusts 
                  which are treated as having a United States 
                  beneficiary (sec. 531 of the Act and sec. 679 
                  of the Code)...................................   238
               9. Presumption that foreign trust has United 
                  States beneficiary (sec. 532 of the Act and 
                  sec. 679 of the Code)..........................   240
              10. Uncompensated use of trust property (sec. 533 
                  of the Act and secs. 643 and 679 of the Code)..   241
              11. Reporting requirement of United States owners 
                  of foreign trusts (sec. 534 of the Act and sec. 
                  6048 of the Code)..............................   242
              12. Minimum penalty with respect to failure to 
                  report on certain foreign trusts (sec. 535 of 
                  the Act and sec. 6677 of the Code).............   242
              13. Substitute dividends and dividend equivalent 
                  payments received by foreign persons treated as 
                  dividends (sec. 541 of the Act and sec. 871 of 
                  the Code)......................................   244

           B. Delay in Application of Worldwide Allocation of 
              Interest (sec. 551 of the Act and sec. 864 of the 
              Code)..............................................   247

           C. Corporate Estimated Tax (sec. 561 of the Act and 
              sec. 6655 of the Code).............................   251

Part Eight: Health Care Provisions...............................   252

PATIENT PROTECTION AND AFFORDABLE CARE ACT (PUBLIC LAW 111-148), 
  HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010 (PUBLIC 
  LAW 111-152), AN ACT TO CLARIFY THE HEALTH CARE PROVIDED BY THE 
  SECRETARY OF VETERANS AFFAIRS THAT CONSTITUTES MINIMUM 
  ESSENTIAL COVERAGE (PUBLIC LAW 111-173), AND MEDICARE AND 
  MEDICAID EXTENDERS ACT OF 2010 (PUBLIC LAW 111-309)............   252

PATIENT PROTECTION AND AFFORDABLE CARE ACT.......................   252

TITLE I--QUALITY, AFFORDABLE HEALTH CARE FOR ALL AMERICANS.......   252

          A. Tax Exemption for Certain Member-Run Health 
              Insurance Issuers (sec. 1322 of the Act and new 
              sec. 501(c)(29) and sec. 6033 of the Code).........   252

          B. Tax Exemption for Entities Established Pursuant to 
              Transitional Reinsurance Program for Individual 
              Market in Each State (sec. 1341 of the Act)........   259

          C. Refundable Tax Credit Providing Premium Assistance 
              for Coverage Under a Qualified Health Plan (secs. 
              1401, 1411, and 1412 of the Act and sec. 208 of 
              Pub. L. No. 111-309 and new sec. 36B of the Code)..   260

          D. Reduced Cost-Sharing for Individuals Enrolling in 
              Qualified Health Plans (secs. 1402, 1411, and 1412 
              of the Act)........................................   268

          E. Disclosures to Carry Out Eligibility Requirements 
              for Certain Programs (sec. 1414 of the Act and sec. 
              6103 of the Code)..................................   272

          F. Premium Tax Credit and Cost-Sharing Reduction 
              Payments Disregarded for Federal and Federally 
              Assisted Programs (sec. 1415 of the Act)...........   274

          G. Small Business Tax Credit (sec. 1421 of the Act and 
              new sec. 45R of the Code)..........................   274

          H. Excise Tax on Individuals Without Essential Health 
              Benefits Coverage (sec. 1501 of the Act and sec. 1 
              of Pub. L. No. 111-173 and new sec. 5000A of the 
              Code)..............................................   278

          I. Reporting of Health Insurance Coverage (sec. 1502 of 
              the Act and new sec. 6055 and sec. 6724(d) of the 
              Code)..............................................   282

          J. Shared Responsibility for Employers (sec. 1513 of 
              the Act and new sec. 4980H of the Code)............   283

          K. Reporting of Employer Health Insurance Coverage 
              (sec. 1514 of the Act and new sec. 6056 and sec. 
              6724(d) of the Code)...............................   289

          L. Offering of Qualified Health Plans Through Cafeteria 
              Plans (sec. 1515 of the Act and sec. 125 of the 
              Code)..............................................   291

          M. Conforming Amendments (sec. 1563 of the Act and new 
              sec. 9815 of the Code).............................   293

TITLE III--IMPROVING THE QUALITY AND EFFICIENCY OF HEALTHCARE....   295

          A. Disclosures to Carry Out the Reduction of Medicare 
              Part D Subsidies for High Income Beneficiaries 
              (sec. 3308(b)(2) of the Act and sec. 6103 of the 
              Code)..............................................   295

TITLE VI--TRANSPARENCY AND PROGRAM INTEGRITY.....................   297

          A. Patient-Centered Outcomes Research Trust Fund; 
              Financing for Trust Fund (sec. 6301 of the Act and 
              new secs. 4375, 4376, 4377, and 9511 of the Code)..   297

TITLE IX--REVENUE PROVISIONS.....................................   300

          A. Excise Tax on High Cost Employer-Sponsored Health 
              Coverage (sec. 9001 of the Act and new sec. 4980I 
              of the Code).......................................   300

          B. Inclusion of Cost of Employer-Sponsored Health 
              Coverage on W-2 (sec. 9002 of the Act and sec. 6051 
              of the Code).......................................   310

          C. Distributions for Medicine Qualified Only if for 
              Prescribed Drug or Insulin (sec. 9003 of the Act 
              and secs. 105, 106, 220, and 223 of the Code)......   311

          D. Increase in Additional Tax on Distributions from 
              HSAs Not Used for Medical Expenses (sec. 9004 of 
              the Act and secs. 220 and 223 of the Code).........   313

          E. Limitation on Health Flexible Spending Arrangements 
              under Cafeteria Plans (sec. 9005 of the Act and 
              sec. 125 of the Code)..............................   315

          F. Expansion of Information Reporting Requirements 
              (sec. 9006 of the Act and sec. 6041 of the Code)...   318

          G. Additional Requirements for Charitable Hospitals 
              (sec. 9007 of the Act and sec. 501(c), new sec. 
              4959, and sec. 6033 of the Code)...................   319

          H. Imposition of Annual Fee on Branded Prescription 
              Pharmaceutical Manufacturers and Importers (sec. 
              9008 of the Act)...................................   325

          I. Imposition of Annual Fee on Medical Device 
              Manufacturers and Importers (sec. 9009 of the Act).   327

          J. Imposition of Annual Fee on Health Insurance 
              Providers (sec. 9010 of the Act)...................   327

          K. Study and Report of Effect on Veterans Health Care 
              (sec. 9011 of the Act).............................   332

          L. Repeal Business Deduction for Federal Subsidies for 
              Certain Retiree Prescription Drug Plans (sec. 9012 
              of the Act and sec. 139A of the Code)..............   333

          M. Modify the Itemized Deduction for Medical Expenses 
              (sec. 9013 of the Act and sec. 213 of the Code)....   334

          N. Limitation on Deduction for Remuneration Paid by 
              Health Insurance Providers (sec. 9014 of the Act 
              and sec. 162 of the Code)..........................   335

          O. Additional Hospital Insurance Tax on High Income 
              Taxpayers (sec. 9015 of the Act and new secs. 1401 
              and 3101 of the Code)..............................   340

          P. Modification of Section 833 Treatment of Certain 
              Health Organizations (sec. 9016 of the Act and sec. 
              833 of the Code)...................................   343

          Q. Excise Tax on Indoor Tanning Services (sec. 9017 of 
              the Act and new sec. 5000B of the Code)............   345

          R. Exclusion of Health Benefits Provided by Indian 
              Tribal Governments (sec. 9021 of the Act and new 
              sec. 139D of the Code).............................   346

          S. Establishment of SIMPLE Cafeteria Plans for Small 
              Businesses (sec. 9022 of the Act and sec. 125 of 
              the Code)..........................................   348

          T. Investment Credit for Qualifying Therapeutic 
              Discovery Projects (sec. 9023 of the Act and new 
              sec. 48D of the Code)..............................   352

TITLE X--STRENGTHENING QUALITY, AFFORDABLE HEALTH CARE FOR ALL 
  AMERICANS......................................................   355

          A. Study of Geographic Variation in Application of FPL 
              (sec. 10105 of the Act)............................   355

          B. Free Choice Vouchers (sec. 10108 of the Act and sec. 
              139D of the Code)..................................   355

          C. Exclusion for Assistance Provided to Participants in 
              State Student Loan Repayment Programs for Certain 
              Health Professionals (sec. 10908 of the Act and 
              sec. 108(f)(4) of the Code)........................   357

          D. Expansion of Adoption Credit and the Exclusion from 
              Gross Income for Employer-Provided Adoption 
              Assistance (sec. 10909 of the Act and secs. 23 and 
              137 of the Code)...................................   358

HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010.............   360

          A. Adult Dependents (sec. 1004 of the Act and secs. 
              105, 162, 401, and 501 of the Code)................   360

          B. Unearned Income Medicare Contribution (sec. 1402 of 
              the Act and new sec. 1411 of the Code).............   363

          C. Excise Tax on Medical Device Manufacturers (sec. 
              1405 of the Act and new sec. 4191 of the Code).....   365

          D. Elimination of Unintended Application of Cellulosic 
              Biofuel Producer Credit (sec. 1408 of the Act and 
              sec. 40 of the Code)...............................   367

          E. Codification of Economic Substance Doctrine and 
              Imposition of Penalties (sec. 1409 of the Act and 
              secs. 6662, 6662A, 6664, 6676, and 7701 of the 
              Code)..............................................   369

          F. Time for Payment of Corporate Estimated Taxes (sec. 
              1410 of the Act and sec. 6655 of the Code).........   382

Part Nine: Revenue Provisions of the Preservation of Access to 
  Care for Medicare Beneficiaries and Pension Relief Act of 2010 
  (Public Law 111-192)...........................................   384

          A. Authority to Disclose Return Information Concerning 
              Outstanding Tax Debts for Purposes of Enhancing 
              Medicare Program Integrity (sec. 103 of the Act and 
              sec. 6103 of the Code).............................   384

          B. Single Employer Plans...............................   385

               1. Extended period for single-employer defined 
                  benefit plans to amortize certain shortfall 
                  amortization bases (sec. 201 of the Act and 
                  sec. 430 of the Code)..........................   385
               2. Application of extended amortization period to 
                  plans subject to prior law funding rules (sec. 
                  202 of the Act)................................   395
               3. Lookback for certain benefit restrictions (sec. 
                  203 of the Act and sec. 436 of the Code).......   403
               4. Lookback for credit balance rule for plans 
                  maintained by charities (sec. 204 of the Act 
                  and sec. 430 of the Code)......................   407

          C. Multiemployer Plans.................................   410

               1. Adjustments to funding standard account rules 
                  (sec. 211 of the Act and sec. 431 of the Code).   410

Part Ten: Revenue Provisions of the Homebuyer Assistance and 
  Improvement Act of 2010 (Public Law 111-198)...................   416

          A. Homebuyer Credit (sec. 2 of the Act and sec. 36 of 
              the Code)..........................................   416

          B. Revenue Offsets.....................................   419

               1. Application of bad check penalty to electronic 
                  checks and other payment forms (sec. 3 of the 
                  Act and sec. 6657 of the Code).................   419
               2. Disclosure of prisoner return information to 
                  State prisons (sec. 4 of the Act and sec. 6103 
                  of the Code)...................................   421

Part Eleven: Revenue Provisions of the Dodd-Frank Wall Street 
  Reform and Consumer Protection Act (Public Law 111-203)........   424

          A. Certain Swaps, etc., Not Treated as Section 1256 
              Contracts (sec. 1601 of the Act and sec. 1256 of 
              the Code)..........................................   424

Part Twelve: Revenue Provisions of the __ Act of __ (Public Law 
  111-226).......................................................   426

          A. Rules to Prevent Splitting Foreign Tax Credits from 
              the Income to Which They Relate (sec. 211 of the 
              Act and new sec. 909 of the Code)..................   426

          B. Denial of Foreign Tax Credit with Respect to Foreign 
              Income Not Subject to U.S. Taxation by Reason of 
              Covered Asset Acquisitions (sec. 212 of the Act and 
              sec. 901(m) of the Code)...........................   431

          C. Separate Application of Foreign Tax Credit 
              Limitation, etc., to Items Resourced Under Treaties 
              (sec. 213 of the Act and sec. 904(d) of the Code)..   439

          D. Limitation on the Amount of Foreign Taxes Deemed 
              Paid with Respect to Section 956 Inclusions (sec. 
              214 of the Act and sec. 960 of the Code)...........   442

          E. Special Rule with Respect to Certain Redemptions by 
              Foreign Subsidiaries (sec. 215 of the Act and sec. 
              304(b) of the Code)................................   447

          F. Modification of Affiliation Rules for Purposes of 
              Rules Allocating Interest Expense (sec. 216 of the 
              Act and sec. 864 of the Code)......................   449

          G. Termination of Special Rules for Interest and 
              Dividends Received from Persons Meeting the 80-
              Percent Foreign Business Requirements (sec. 217 of 
              the Act and secs. 861(a)(1)(A) and 871(i) of the 
              Code)..............................................   451

          H. Limitation on Extension of Statute of Limitations 
              for Failure to Notify Secretary of Certain Foreign 
              Transfers (sec. 218 of the Act and sec. 6501(c) of 
              the Code)..........................................   455

          I. Elimination of Advance Refundability of Earned 
              Income Tax Credit (sec. 219 of the Act and secs. 
              32(g), 3507, and 6051(a) of the Code)..............   457

Part Thirteen: Firearms Excise Tax Improvement Act of 2010 
  (Public Law 111-237)...........................................   459

          A. Time for Payment of Manufacturers' Excise Tax on 
              Recreational Equipment (sec. 2 of the Act and sec. 
              6302 of the Code)..................................   459

          B. Allow Assessment of Criminal Restitution as Tax 
              (sec. 3 of the Act and sec. 6213 of the Code)......   459

          C. Time for Payment of Corporate Estimated Taxes (sec. 
              4 of the Act and sec. 6655 of the Code)............   461

Part Fourteen: Revenue Provisions of the Small Business Jobs Act 
  of 2010 (Public Law 111-240)...................................   463

  I. SMALL BUSINESS RELIEF..........................................463

          A. Providing Access to Capital.........................   463

               1. Temporary exclusion of 100 percent of gain on 
                  certain small business stock (sec. 2011 of the 
                  Act and sec. 1202 of the Code).................   463
               2. Five-year carryback of general business credit 
                  of eligible small business (sec. 2012 of the 
                  Act and sec. 39 of the Code)...................   464
               3. General business credit of eligible small 
                  business not subject to alternative minimum tax 
                  (sec. 2013 of the Act and sec. 38 of the Code).   465
               4. Temporary reduction in recognition period for S 
                  corporation built-in gains tax (sec. 2014 of 
                  the Act and sec. 1374 of the Code).............   466

          B. Encouraging Investment..............................   467

               1. Increase and expand expensing of certain 
                  depreciable business assets (sec. 2021 of the 
                  Act and sec. 179 of the Code)..................   467
               2. Extend the additional first-year depreciation 
                  allowance (sec. 2022 of the Act and sec. 168(k) 
                  of the Code)...................................   469
               3. Disregard bonus depreciation in computing 
                  percentage completion (sec. 2023 of the Act and 
                  new sec. 460(c)(6) of the Code)................   472

          C. Promoting Entrepreneurship..........................   474

               1. Increase amount allowed as deduction for start-
                  up expenditures (sec. 2031 of the Act and sec. 
                  195 of the Code)...............................   474

          D. Promoting Small Business Fairness...................   476

               1. Limitation on penalty for failure to disclose 
                  certain information (sec. 2041 of the Act and 
                  sec. 6707A of the Code)........................   476
               2. Temporary deduction for health insurance costs 
                  in computing self-employment income (sec. 2042 
                  of the Act and sec. 162(l) of the Code)........   480
               3. Remove cellular phones and similar 
                  telecommunications equipment from the 
                  definition of listed property (sec. 2043 of the 
                  Act and sec. 280F of the Code).................   481

 II. REVENUE PROVISIONS.............................................484

          A. Reducing the Tax Gap................................   484

               1. Information reporting for rental property 
                  expense payments (sec. 2101 of the Act and sec. 
                  6041 of the Code)..............................   484
               2. Increase in information return penalties (sec. 
                  2102 of Act and secs. 6721 and 6722 of the 
                  Code)..........................................   486
               3. Annual reports on penalties and certain other 
                  enforcement actions (sec. 2103 of the Act).....   487
               4. Application of continuous levy to employment 
                  tax liability of certain Federal contractors 
                  (sec. 2104 of the Act and sec. 6330 of the 
                  Code)..........................................   491

          B. Promoting Retirement Preparation....................   494

               1. Allow participants in government section 457 
                  plans to treat elective deferrals as Roth 
                  contributions (sec. 2111 of the Act and sec. 
                  402A of the Code)..............................   494
               2. Allow rollovers from elective deferral plans to 
                  designated Roth accounts (sec. 2112 of the Act 
                  and sec. 402A of the Code).....................   495
               3. Permit partial annuitization of a nonqualified 
                  annuity contract (sec. 2113 of the Act and sec. 
                  72 of the Code)................................   500

          C. Closing Unintended Loopholes........................   502

               1. Make crude tall oil ineligible for the 
                  cellulosic biofuel producer credit (sec. 2121 
                  of the Act and sec. 40 of the Code)............   502
               2. Source rules for income on guarantees (sec. 
                  2122 of the Act and secs. 861, 862, and 864 of 
                  the Code)......................................   504

          D. Time for Payment of Corporate Estimated Taxes (sec. 
              2131 of the Act and sec. 6655 of the Code).........   507

Part Fifteen: The Claims Resolution Act of 2010 (Public Law 111-
  291)...........................................................   508

          A. The Individual Indian Money Account Litigation (sec. 
              101 of the Act)....................................   508

          B. Collection of Past-Due, Legally Enforceable State 
              Debts (sec. 801 of the Act and sec. 6402(f) of the 
              Code)..............................................   509

Part Sixteen: Revenue Provisons of the Tax Relief, Unemployment 
  Insurance Reauthorization, and Job Creation Act of 2010 (Public 
  Law 111-312)...................................................   512

TITLE I--TEMPORARY EXTENSION OF TAX RELIEF.......................   512

          A. Marginal Individual Income Tax Rate Reductions (sec. 
              101 of the Act and sec. 1 of the Code).............   512

          B. The Overall Limitation on Itemized Deductions and 
              the Personal Exemption Phase-Out (sec. 101 of the 
              Act and secs. 68 and 151 of the Code)..............   514

          C. Child Tax Credit (secs. 101 and 103 of the Act and 
              sec. 24 of the Code)...............................   516

          D. Marriage Penalty Relief and Earned Income Tax Credit 
              Simplification (sec. 101 of the Act and secs. 1, 
              32, and 63 of the Code)............................   517

          E. Education Incentives (sec. 101 of the Act and secs. 
              117, 127, 142, 146-148, 221, and 530 of the Code)..   519

          F. Other Incentives for Families and Children (includes 
              extension of the adoption tax credit, employer-
              provided child care tax credit, and dependent care 
              tax credit) (sec. 101 of the Act and secs. 21, 23, 
              36C, 45D, and 137 of the Code).....................   526

          G. Alaska Native Settlement Trusts (sec. 101 of the Act 
              and sec. 646 of the Code)..........................   528

          H. Reduced Rate on Dividends and Capital Gains (sec. 
              102 of the Act and sec. 1(h) of the Code)..........   530

          I. Extend American Opportunity Tax Credit (sec. 103 of 
              the Act and sec. 25A of the Code)..................   533

          J. Child Tax Credit (sec. 103 of the Act and sec. 24 of 
              the Code)..........................................   536

          K. Increase in the Earned Income Tax Credit (sec. 103 
              of the Act and sec. 32 of the Code)................   538

TITLE II--TEMPORARY EXTENSION OF INDIVIDUAL ALTERNATIVE MINIMUM 
  TAX RELIEF.....................................................   540

          A. Extension of Alternative Minimum Tax Relief for 
              Nonrefundable Personal Credits and Increased 
              Alternative Minimum Tax Exemption Amount (secs. 201 
              and 202 of the Act and secs. 26 and 55 of the Code)   540

TITLE III--TEMPORARY ESTATE TAX RELIEF...........................   542

          A. Modify and Extend the Estate, Gift, and Generation 
              Skipping Transfer Taxes After 2009 (sections 301-
              304 of the Act and sections 2001, 2010, 2502, 2505, 
              2511, 2631, and 6018 of the Code)..................   542

TITLE IV--TEMPORARY EXTENSION OF INVESTMENT INCENTIVES...........   556

          A. Extension of Bonus Depreciation; Temporary 100 
              Percent Expensing for Certain Business Assets (sec. 
              401 of the Act and sec. 168(k) of the Code)........   556

          B. Temporary Extension of Increased Small Business 
              Expensing (sec. 402 of the Act and sec. 179 of the 
              Code)..............................................   561

TITLE VI--TEMPORARY EMPLOYEE PAYROLL TAX CUT.....................   562

          A. Payroll Tax Cut (sec. 610 of the Act)...............   562

TITLE VII--TEMPORARY EXTENSION OF CERTAIN EXPIRING PROVISIONS....   565

          A. Energy..............................................   565

               1. Incentives for biodiesel and renewable diesel 
                  (sec. 701 of the Act and secs. 40A, 6426, and 
                  6427 of the Code)..............................   565
               2. Credit for refined coal facilities (sec. 702 of 
                  the Act and sec. 45 of the Code)...............   568
               3. New energy efficient home credit (sec. 703 of 
                  the Act and sec. 45L of the Code)..............   569
               4. Excise tax credits and outlay payments for 
                  alternative fuel and alternative fuel mixtures 
                  (sec. 704 of the Act and secs. 6426 and 6427(e) 
                  of the Code)...................................   570
               5. Special rule for sales or dispositions to 
                  implement FERC or State electric restructuring 
                  policy for qualified electric utilities (sec. 
                  705 of the Act and sec. 451(i) of the Code)....   572
               6. Suspension of limitation on percentage 
                  depletion for oil and gas from marginal wells 
                  (sec. 706 of the Act and sec. 613A of the Code)   573
               7. Extension of grants for specified energy 
                  property in lieu of tax credits (sec. 707 of 
                  the Act).......................................   574
               8. Extension of provisions related to alcohol used 
                  as fuel (sec. 708 of the Act and secs. 40, 
                  6426, 6427(e) of the Code).....................   576
               9. Energy efficient appliance credit (sec. 709 of 
                  the Act and sec. 45M of the Code)..............   579
              10. Credit for nonbusiness energy property (sec. 
                  710 of the Act and sec. 25C of the Code).......   581
              11. Alternative fuel vehicle refueling property 
                  (sec. 711 of the Act and sec. 30C of the Code).   585

          B. Individual Tax Relief...............................   586

               1. Deduction for certain expenses of elementary 
                  and secondary school teachers (sec. 721 of the 
                  Act and sec. 62 of the Code)...................   586
               2. Deduction of State and local sales taxes (sec. 
                  722 of the Act and sec. 164 of the Code).......   587
               3. Contributions of capital gain real property 
                  made for conservation purposes (sec. 723 of the 
                  Act and sec. 170 of the Code)..................   589
               4. Above-the-line deduction for qualified tuition 
                  and related expenses (sec. 724 of the Act and 
                  sec. 222 of the Code)..........................   592
               5. Tax-free distributions from individual 
                  retirement plans for charitable purposes (sec. 
                  725 of the Act and sec. 408 of the Code).......   593
               6. Look-thru of certain regulated investment 
                  company stock in determining gross estate of 
                  nonresidents (sec. 726 of the Act and sec. 2105 
                  of the Code)...................................   597
               7. Parity for exclusion from income for employer-
                  provided mass transit and parking benefits 
                  (sec. 727 of the Act and sec. 132 of the Code).   598
               8. Refunds disregarded in the administration of 
                  Federal programs and Federally assisted 
                  programs (sec. 728 of the Act and sec. 6409 of 
                  the Code)......................................   599

          C. Business Tax Relief.................................   600

               1. Research credit (sec. 731 of the Act and sec. 
                  41 of the Code)................................   600
               2. Indian employment tax credit (sec. 732 of the 
                  Act and sec. 45A of the Code)..................   603
               3. New markets tax credit (sec. 733 of the Act and 
                  sec. 45D of the Code)..........................   604
               4. Railroad track maintenance credit (sec. 734 of 
                  the Act and sec. 45G of the Code)..............   606
               5. Mine rescue team training credit (sec. 735 of 
                  the Act and sec. 45N of the Code)..............   607
               6. Employer wage credit for employees who are 
                  active duty members of the uniformed services 
                  (sec. 736 of the Act and sec. 45P of the Code).   608
               7. 15-year straight-line cost recovery for 
                  qualified leasehold improvements, qualified 
                  restaurant buildings and improvements, and 
                  qualified retail improvements (sec. 737 of the 
                  Act and sec. 168 of the Code)..................   610
               8. 7-year recovery period for motorsports 
                  entertainment complexes (sec. 738 of the Act 
                  and sec. 168 of the Code)......................   612
               9. Accelerated depreciation for business property 
                  on an Indian reservation (sec. 739 of the Act 
                  and sec. 168(j) of the Code)...................   613
              10. Enhanced charitable deduction for contributions 
                  of food inventory (sec. 740 of the Act and sec. 
                  170 of the Code)...............................   614
              11. Enhanced charitable deduction for contributions 
                  of book inventories to public schools (sec. 741 
                  of the Act and sec. 170 of the Code)...........   616
              12. Enhanced charitable deduction for corporate 
                  contributions of computer inventory for 
                  educational purposes (sec. 742 of the Act and 
                  sec. 170 of the Code)..........................   618
              13. Election to expense mine safety equipment (sec. 
                  743 of the Act and sec. 179E of the Code)......   619
              14. Special expensing rules for certain film and 
                  television productions (sec. 744 of the Act and 
                  sec. 181 of the Code)..........................   621
              15. Expensing of environmental remediation costs 
                  (sec. 745 of the Act and sec. 198 of the Code).   622
              16. Deduction allowable with respect to income 
                  attributable to domestic production activities 
                  in Puerto Rico (sec. 746 of the Act and sec. 
                  199 of the Code)...............................   624
              17. Modification of tax treatment of certain 
                  payments to controlling exempt organizations 
                  (sec. 747 of the Act and sec. 512 of the Code).   625
              18. Treatment of certain dividends of regulated 
                  investment companies (sec. 748 of the Act and 
                  sec. 871(k) of the Code).......................   627
              19. RIC qualified investment entity treatment under 
                  FIRPTA (sec. 749 of the Act and secs. 897 and 
                  1445 of the Code)..............................   628
              20. Exceptions for active financing income (sec. 
                  750 of the Act and secs. 953 and 954 of the 
                  Code)..........................................   629
              21. Look-thru treatment of payments between related 
                  controlled foreign corporations under foreign 
                  personal holding company rules (sec. 751 of the 
                  Act and sec. 954(c)(6) of the Code)............   631
              22. Basis adjustment to stock of S corps making 
                  charitable contributions of property (sec. 752 
                  of the Act and sec. 1367 of the Code)..........   632
              23. Empowerment zone tax incentives (sec. 753 of 
                  the Act and secs. 1202 and 1391 of the Code)...   633
              24. Tax incentives for investment in the District 
                  of Columbia (sec. 754 of the Act and secs. 
                  1400, 1400A, 1400B, and 1400C of the Code).....   639
              25. Temporary increase in limit on cover over of 
                  rum excise taxes to Puerto Rico and the Virgin 
                  Islands (sec. 755 of the Act and sec. 7652(f) 
                  of the Code)...................................   643
              26. American Samoa economic development credit 
                  (sec. 756 of the Act and sec. 119 of Pub. L. 
                  No. 109-432)...................................   644
              27. Work opportunity credit (sec. 757 of the Act 
                  and sec. 51 of the Code).......................   646
              28. Qualified zone academy bonds (sec. 758 of the 
                  Act and sec. 54E of the Code)..................   651
              29. Mortgage insurance premiums (sec. 759 of the 
                  Act and sec. 163 of the Code)..................   654
              30. Temporary exclusion of 100 percent of gain on 
                  certain small business stock (sec. 760 of the 
                  Act and sec. 1202 of the Code).................   655

          D. Temporary Disaster Relief Provisions................   656

               1. New York Liberty Zone tax-exempt bond financing 
                  (sec. 761 of the Act and sec. 1400L of the 
                  Code)..........................................   656
               2. Increase in rehabilitation credit in the Gulf 
                  Opportunity Zone (sec. 762 of the Act and sec. 
                  1400N(h) of the Code)..........................   657
               3. Low-income housing credit rules for buildings 
                  in Gulf Opportunity Zones (sec. 763 and sec. 
                  1400N(c)(5) of the Code).......................   658
               4. Tax-exempt bond financing for the Gulf 
                  Opportunity Zones (sec. 764 of the Act and sec. 
                  1400N(a) of the Code)..........................   659
               5. Bonus depreciation deduction applicable to 
                  specified Gulf Opportunity Zone extension 
                  property (sec. 765 of the Act and sec. 
                  1400N(d)(6) of the Code).......................   662

Part Seventeen: Regulated Investment Company Modernization Act of 
  2010 (Public Law 111-325)......................................   665

  I. OVERVIEW OF REGULATED INVESTMENT COMPANIES.....................665

 II. CAPITAL LOSS CARRYOVERS OF RICS................................666

          A. Capital Loss Carryovers of RICs (sec. 101 of the Act 
              and sec. 1212(a) of the Code)......................   666

III. MODIFICATION OF GROSS INCOME AND ASSET TESTS OF RICS...........668

          A. Savings Provisions for Failures of RICs to Satisfy 
              Gross Income and Asset Tests (sec. 201 of the Act 
              and sec. 851(d) and (i) of the Code)...............   668

 IV. MODIFICATION OF RULES RELATED TO DIVIDENDS AND OTHER DISTRIBUTI671

          A. Modification of Dividend Designation Requirements 
              and Allocation Rules for RICs (sec. 301 of the Act 
              and sec. 852(b) of the Code).......................   671

          B. Earnings and Profits of RICs (sec. 302 of the Act 
              and sec. 852(c)(1) of the Code)....................   674

          C. Pass-thru of Exempt-interest Dividends and Foreign 
              Tax Credits in Fund of Funds Structures (sec. 303 
              of the Act and sec. 852(g) of the Code)............   675

          D. Modification of Rules for Spillover Dividends of 
              RICs (sec. 304 of the Act and sec. 855 of the Code)   676

          E. Return of Capital Distributions of RICs (sec. 305 of 
              the Act and sec. 316 of the Code)..................   676

          F. Distributions in Redemption of Stock of RICs (sec. 
              306 of the Act and secs. 267 and 302 of the Code)..   677

          G. Repeal of Preferential Dividend Rule for Publicly 
              Offered RICs (sec. 307 of the Act and sec. 562 of 
              the Code)..........................................   678

          H. Elective Deferral of Certain Late-Year Losses of 
              RICs (sec. 308 of the Act and sec. 852(b)(8) of the 
              Code)..............................................   679

          I. Exception to Holding Period Requirement for Exempt-
              Interest Dividends Declared on Daily Basis (sec. 
              309 of the Act and sec. 852(b)(4) of the Code).....   683

  V. MODIFICATIONS RELATED TO EXCISE TAX APPLICABLE TO RICS.........684

          A. Excise Tax Exemption for Certain RICs Owned by Tax 
              Exempt Entities (sec. 401 of the Act and sec. 
              4982(f) of the Code)...............................   684

          B. Deferral of Certain Gains and Losses of RICs for 
              Excise Tax Purposes (sec. 402 of the Act and sec. 
              4982(e) of the Code)...............................   684

          C. Distributed Amount for Excise Tax Purposes 
              Determined on Basis of Taxes Paid by RIC (sec. 403 
              of the Act and sec. 4982(c)(4) of the Code)........   686

          D. Increase in Required Distribution of Capital Gain 
              Net Income (sec. 404 of the Act and sec. 4982(b)(1) 
              of the Code).......................................   686

 VI. OTHER PROVISIONS...............................................687

          A. Repeal of Assessable Penalty with Respect to 
              Liability for Tax of RICs (sec. 501 of the Act and 
              sec. 6697 of the Code).............................   687

          B. Modification of Sale Load Basis Deferral Rule for 
              RICs (sec. 502 of the Act and sec. 852(f)(1) of the 
              Code)..............................................   687

Part Eighteen: Revenue Provisions of the Omnibus Trade Act of 
  2010 (Public Law 111-344)......................................   689

          A. Extension of Health Coverage Tax Credit Improvements 
              (secs. 111-118 of the Act and secs. 35 and 7527 of 
              the Code)..........................................   689

          B. Time for Payment of Corporate Estimated Taxes (sec. 
              10002 of the Act and sec. 6655 of the Code)........   691

Part Nineteen: James Zadroga 9/11 Health and Compensation Act of 
  2010 (Pubic Law 111-347).......................................   693

          A. Excise Tax on Foreign Procurement (sec. 301 of the 
              Act and new sec. 5000C of the Code)................   693

Part Twenty: Authority of Tax Court to Appoint Employees (Public 
  Law 111-366)...................................................   696

          A. Authority of Tax Court to Appoint Employees (sec. 1 
              of the Act and sec. 7471 of the Code)..............   696

Part Twenty-One: Customs User Fees, Corporate Estimated Taxes, 
  and Assistance for COBRA Continuation Coverage.................   697

          A. Extension of Customs User Fees......................   697

          B. Modifications to Corporate Estimated Tax Payments 
              Due in July, August, and September, 2010, 2011, 
              2013, 2014, 2015, and 2019.........................   698

          C. Extension of Assistance for COBRA Continuation 
              Coverage...........................................   701

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 111th Congress.............................................   705

                              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 111th 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 111th 
Congress (JCS-2-11), March 2011.
---------------------------------------------------------------------------
    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 111th 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 of 1986, as amended, unless otherwise 
indicated.
    Part One of this document is an explanation of the 
provisions of the Children's Health Insurance Program 
Reauthorization Act of 2009 (Pub. L. No. 111-3) relating to 
requirements for group health plans and revenue offsets.
    Part Two is an explanation of the provisions of the 
American Recovery and Reinvestment Act of 2009 (Pub. L. No. 
111-5) relating to tax relief for individuals and families, tax 
incentives for business, fiscal relief for state and local 
governments, energy incentives, and health insurance 
assistance.
    Part Three 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. 111-12, 111-69, 111-
116, 111-153, 111-161, 111-197, 111-216, 111-249, and 111-329).
    Part Four is an explanation of the provisions relating to 
the extension of the Highway Trust Fund expenditure authority 
and restoration of the fund (Pub. L. Nos. 111-46, 111-68, 111-
118, 111-144, 111-147, and 111-322).
    Part Five is an explanation of the provisions of the 
Worker, Homeownership, and Business Assistance Act of 2009 
(Pub. L. No. 111-92) relating to the first-time homebuyer 
credit, carryback of operating losses, exclusion of payments 
from the Homeowners Assistance Program, and revenue offsets.
    Part Six is an explanation of the provision relating to the 
acceleration of the income tax benefits for charitable cash 
contributions for the relief of victims of the earthquake in 
Haiti (Pub. L. No. 111-126).
    Part Seven is an explanation of the provisions of the 
Hiring Incentives to Restore Employment Act (Pub. L. No. 111-
147) relating to incentives for hiring and retaining unemployed 
workers, increased expensing for certain business assets, 
qualified tax credit bonds, and foreign account tax compliance 
and other revenue offsets.
    Part Eight is an explanation of the provisions of the 
Patient Protection and Affordable Care Act (Pub. L. No. 111-
148), the Health Care and Education Reconciliation Act of 2010 
(Pub. L. No. 111-152), an Act to clarify the health care 
provided by the Secretary of Veterans Affairs that constitutes 
minimum essential coverage (Pub. L. No. 111-173), and the 
Medicare and Medicaid Extenders Act of 2010 (Pub. L. No. 111-
309) relating to incentives for quality, affordable health care 
and revenue offsets.
    Part Nine is an explanation of the provisions of the 
Preservation of Access to Care for Medicare Beneficiaries and 
Pension Relief Act of 2010 (Pub. L. No. 111-192) relating to 
disclosure of return information to enhance Medicare program 
integrity and temporary changes to funding requirements for 
single and multiemployer pension plans.
    Part Ten is an explanation of the provisions of the 
Homebuyer Assistance and Improvement Act of 2010 (Pub. L. No. 
111-198) relating to the homebuyer credit and revenue offsets.
    Part Eleven is an explanation of the provision of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Pub. L. 
No. 111-203) excluding certain swaps and similar agreements 
from the definition of a section 1256 contract.
    Part Twelve is an explanation of the provisions of the __ 
Act of __ (Pub. L. No. 111-226) relating to modifications to 
the foreign tax credit, the treatment of certain redemptions by 
foreign subsidiaries, and other revenue offsets.
    Part Thirteen is an explanation of the provisions of the 
Firearms Excise Tax Improvement Act of 2010 (Pub. L. No. 111-
237) relating to the time for payment of manufacturers' excise 
tax on recreational equipment and allowing assessment of 
criminal restitution as tax.
    Part Fourteen is an explanation of the provisions of the 
Small Business Jobs Act of 2010 (Pub. L. No. 111-240) relating 
to providing access to capital, encouraging investment, 
promoting entrepreneurship, promoting small business fairness, 
promoting retirement preparation, and revenue offsets.
    Part Fifteen is an explanation of the provisions of the 
Claims Resolution Act of 2010 (Pub. L. No. 111-291) relating to 
the settlement of litigation against the Federal government 
alleging mismanagement of individual Indian trust accounts and 
trust assets and the collection of past-due, legally 
enforceable State debts.
    Part Sixteen is an explanation of the provisions of the Tax 
Relief, Unemployment Insurance Reauthorization, and Job 
Creation Act of 2010 (Pub. L. No. 111-312) relating to the 
temporary extension of 2001, 2003, and 2009 tax relief, 
individual AMT relief, estate tax relief, investment 
incentives, unemployment insurance and related matters, a 
temporary employee payroll tax cut, and the temporary extension 
of certain expiring provisions.
    Part Seventeen is an explanation of the provision of the 
Regulated Investment Company Modernization Act of 2010 (Pub. L. 
No. 111-325) relating to the modification of certain rules 
applicable to regulated investment companies.
    Part Eighteen is an explanation of the provisions of 
Omnibus Trade Act of 2010 (Pub. L. No. 111-344) relating to 
extension of health coverage tax credit.
    Part Nineteen is an explanation of the provision of the 
James Zadroga 9/11 Health and Compensation Act of 2010 (Pub. L. 
No. 111-347) relating to the imposition of an excise tax on 
certain foreign procurement.
    Part Twenty is an explanation of the provision authorizing 
the Tax Court to appoint employees (Pub. L. No. 111-366).
    Part Twenty-One is an explanation of the provisions 
relating to the extension of custom user fees, the modification 
of corporate estimated tax payments and extension of assistance 
for COBRA continuation coverage (Pub. L. Nos. 111-3, 111-42, 
111-92, 111-118, 111-124, 111-144, 111-147, 111-152, 111-157, 
111-171, 111-210, 111-227, 111-237, 111-240, and 111-344).
    The Appendix provides the estimated budget effects of tax 
legislation enacted in the 111th Congress.
    The first footnote in each Part gives the legislative 
history of each of the Acts of the 111th Congress discussed.

PART ONE: REVENUE PROVISIONS OF THE CHILDREN'S HEALTH INSURANCE PROGRAM 
           REAUTHORIZATION ACT OF 2009 (PUBLIC LAW 111-3) \2\
---------------------------------------------------------------------------

    \2\ H.R. 2. The bill passed the House on January 14, 2009. The 
Senate passed the bill with an amendment on January 29, 2009. The House 
agreed to the Senate amendment on February 4, 2009. The President 
signed the bill on February 4, 2009. For a technical explanation of the 
bill prepared by the staff of the Joint Committee on Taxation, see 
Technical Explanation of the Code Provisions of H.R. 2, the 
``Children's Health Insurance Program Reauthorization Act of 2009'' as 
Passed by the House of Representatives on January 14, 2009 (JCX 3-09), 
January 14, 2009).
---------------------------------------------------------------------------

                 I. REQUIREMENTS FOR GROUP HEALTH PLANS

A. Special Enrollment Period Under Group Health Plans (sec. 311 of the 
                   Act and sec. 9801 of the Code \3\)
---------------------------------------------------------------------------

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

                              Present Law

    A group health plan is required to permit an employee who 
is eligible, but not enrolled, for coverage under the terms of 
the plan to enroll for coverage under the plan if certain 
conditions are satisfied.\4\ Included among the conditions are 
(1) the employee was covered under a group health plan or had 
health insurance coverage at the time coverage was previously 
offered to the employee, and (2) such other coverage terminated 
as a result of loss of eligibility for such coverage. This 
special enrollment right must also be extended to a dependent 
of an employee if the dependent is eligible, but not enrolled, 
for coverage under the terms of the group health plan and the 
dependent satisfies the conditions for special enrollment. The 
special enrollment rights apply without regard to the dates on 
which the employee (or dependent) would otherwise be able to 
enroll under the plan. If a plan receives a request for special 
enrollment, coverage under the plan must generally begin no 
later than the first day of the first calendar month beginning 
after the date that notice of the request is received by the 
plan.
---------------------------------------------------------------------------
    \4\ Sec. 9801(f).
---------------------------------------------------------------------------
    An excise tax is imposed if a group health plan fails to 
comply with the special enrollment rights requirement.\5\ The 
rate of the tax on any failure is $100 for each day in the 
noncompliance period with respect to each individual to whom 
the failure relates. In the case of a single employer plan, the 
tax is imposed on the employer that maintains the plan.
---------------------------------------------------------------------------
    \5\ Sec. 4980D.
---------------------------------------------------------------------------
    Special enrollment rights that are parallel to the Code's 
rules are set forth in the Employee Retirement Income Security 
Act of 1974 (``ERISA'') and the Public Health Service Act 
(``PHSA'').

                        Explanation of Provision

    Under the provision, a group health plan is required to 
permit an employee who is eligible, but not enrolled, for 
coverage under the plan to enroll for coverage if either (1) 
the employee is covered under a Medicaid plan or a State child 
health plan under titles XIX and XXI of the Social Security 
Act, respectively (a ``Medicaid plan'' or a ``State child 
health plan''), and coverage is terminated as a result of loss 
of eligibility for the Medicaid plan or State child health plan 
and the employee requests coverage under the group health plan 
within 60 days of coverage loss; or (2) the employee becomes 
eligible for assistance with respect to coverage under the 
group health plan under a Medicaid plan or State child health 
plan, and the employee requests coverage not later than 60 days 
after the employee is determined to be eligible for such 
assistance. The special enrollment rights of the provision also 
apply to a dependent of an employee if the dependent is 
eligible, but not enrolled, for coverage under the terms of the 
group health plan and the dependent satisfies the conditions 
for special enrollment. The provision requires an employer to 
provide employees with written notice of the availability of 
premium assistance programs under Medicaid or State child 
health plans. In addition, the administrator of a group health 
plan must provide information upon request of a State regarding 
the benefits available under the plan with respect to a 
participant or beneficiary who is covered under a Medicaid or 
State child health plan. The provision makes parallel 
amendments to ERISA and PHSA.

                             Effective Date

    The provision is effective on April 1, 2009.

                      II. OTHER REVENUE PROVISIONS


 A. Increase Excise Tax Rates on Tobacco Products and Cigarette Papers 
       and Tubes (sec. 701 of the Act and sec. 5701 of the Code)


                              Present Law


Rates of excise tax on tobacco products and cigarette papers and tubes

    Tobacco products and cigarette papers and tubes 
manufactured in the United States or imported into the United 
States are subject to Federal excise tax at the following 
rates: \6\
---------------------------------------------------------------------------
    \6\ Sec. 5701.
---------------------------------------------------------------------------
           Cigars weighing not more than three pounds 
        per thousand (``small cigars'') are taxed at the rate 
        of $1.828 per thousand;
           Cigars weighing more than three pounds per 
        thousand (``large cigars'') are taxed at the rate equal 
        to 20.719 percent of the manufacturer's or importer's 
        sales price but not more than $48.75 per thousand;
           Cigarettes weighing not more than three 
        pounds per thousand (``small cigarettes'') are taxed at 
        the rate of $19.50 per thousand ($0.39 per pack);
           Cigarettes weighing more than three pounds 
        per thousand (``large cigarettes'') are taxed at the 
        rate of $40.95 per thousand, except that, if they 
        measure more than six and one-half inches in length, 
        they are taxed at the rate applicable to small 
        cigarettes, counting each two and three-quarter inches 
        (or fraction thereof) of the length of each as one 
        cigarette;
           Cigarette papers are taxed at the rate of 
        $0.0122 for each 50 papers or fractional part thereof, 
        except that, if they measure more than six and one-half 
        inches in length, they are taxable by counting each two 
        and three-quarter inches (or fraction thereof) of the 
        length of each as one cigarette paper;
           Cigarette tubes are taxed at the rate of 
        $0.0244 for each 50 tubes or fractional part thereof, 
        except that, if they measure more than six and one-half 
        inches in length, they are taxable by counting each two 
        and three-quarter inches (or fraction thereof) of the 
        length of each as one cigarette tube;
           Snuff is taxed at the rate of $0.585 per 
        pound, and proportionately at that rate on all 
        fractional parts of a pound;
           Chewing tobacco is taxed at the rate of 
        $0.195 per pound, and proportionately at that rate on 
        all fractional parts of a pound;
           Pipe tobacco is taxed at the rate of $1.0969 
        per pound, and proportionately at that rate on all 
        fractional parts of a pound; and
           Roll-your-own tobacco is taxed at the rate 
        of $1.0969 per pound, and proportionately at that rate 
        on all fractional parts of a pound.
    In general, excise taxes on tobacco products and cigarette 
papers and tubes manufactured in the United States are 
determined at the time of removal.

Floor stocks tax and foreign trade zones

    Special tax and duty rules apply with respect to foreign 
trade zones. In general, merchandise may be brought into a 
foreign trade zone without being subject to the general customs 
laws of the United States. Such merchandise may be stored in a 
foreign trade zone or may be subjected to manufacturing or 
other processes there. The United States Customs and Border 
Protection agency of the Department of Homeland Security 
(``Customs'') may determine internal revenue taxes and 
liquidate duties imposed on foreign merchandise in such foreign 
trade zones. Articles on which such taxes and applicable duties 
have already been paid, or which have been admitted into the 
United States free of tax, that have been taken into a foreign 
trade zone from inside the United States, may be held under the 
supervision of a customs officer. Such articles may later be 
released back into the United States free of further taxes and 
duties.\7\
---------------------------------------------------------------------------
    \7\ 19 U.S.C. sec. 81c(a).
---------------------------------------------------------------------------

                        Explanation of Provision


Rate increases

    Under the provision, the rates of excise tax on tobacco 
products and cigarette papers and tubes are increased, 
generally in a proportionate manner. The special rules relating 
to the application of the tax rates to large cigarettes and 
cigarette papers and tubes longer than six and one-half inches 
apply under the provision in the same manner as under present 
law. The rates under the provision are as follows:
           Small cigars are taxed at the rate of $50.33 
        per thousand;
           Large cigars are taxed at the rate equal to 
        52.75 percent of the manufacturer's or importer's sales 
        price but not more than $0.4026 per cigar;
           Small cigarettes are taxed at the rate of 
        $50.33 per thousand;
           Large cigarettes are taxed at the rate of 
        $105.69 per thousand;
           Cigarette papers are taxed at the rate of 
        $0.0315 for each 50 papers or fractional part thereof;
           Cigarette tubes are taxed at the rate of 
        $0.0630 for each 50 tubes or fractional part thereof;
           Snuff is taxed at the rate of $1.51 per 
        pound, and proportionately at that rate on all 
        fractional parts of a pound;
           Chewing tobacco is taxed at the rate of 
        $0.5033 per pound, and proportionately at that rate on 
        all fractional parts of a pound;
           Pipe tobacco is taxed at the rate of $2.8311 
        per pound, and proportionately at that rate on all 
        fractional parts of a pound; and
           Roll-your-own tobacco is taxed at the rate 
        of $24.78 per pound, and proportionately at that rate 
        on all fractional parts of a pound. The rate for roll-
        your-own tobacco is intended to approximate the rate 
        for small cigarettes.

Floor stocks tax and foreign trade zone treatment

    The provision imposes a tax on floor stocks. Taxable 
articles (i.e., those articles listed above), except for large 
cigars, manufactured in the United States or imported into the 
United States which are removed before April 1, 2009, and held 
on that date for sale by any person are subject to a floor 
stocks tax. The floor stocks tax is equal to the excess of the 
applicable tax under the new rates over the applicable tax at 
the prior rates. The person holding the article on any tax 
increase date to which the floor stocks tax applies is liable 
for the tax. Each such person is allowed a $500 credit against 
the floor stocks tax.
    Notwithstanding any other provision of law, the floor 
stocks tax applies to an article located in a foreign trade 
zone on any tax increase date, provided that internal revenue 
taxes have been determined, or customs duties have been 
liquidated, with respect to such article before such date, or 
such article is held on a tax-and-duty-paid basis on such date 
under the supervision of a customs officer.
    For purposes of determining the floor stocks tax, component 
members of a ``controlled group'' (as modified) are treated as 
one taxpayer.\8\ ``Controlled group'' for these purposes means 
a parent-subsidiary, brother-sister, or combined corporate 
group with more than 50-percent ownership with respect to 
either combined voting power or total value. Under regulations, 
similar principles may apply to a group of persons under common 
control where one or more persons are not a corporation.
---------------------------------------------------------------------------
    \8\ Controlled group is defined in section 1563.
---------------------------------------------------------------------------
    The floor stocks tax shall be paid on or before August 1, 
2009, in the manner prescribed by Treasury regulations. In 
general, all of the rules, including penalties, applicable with 
respect to taxes on tobacco products and cigarette papers and 
tubes apply to the floor stocks tax. The Secretary of the 
Treasury or his delegate (``Secretary'') may treat any person 
who bore the ultimate burden of the floor stocks tax as the 
person entitled to a credit or refund of such tax.

                             Effective Date

    The provision applies to articles removed after March 31, 
2009.

 B. Modify Definition of Roll-Your-Own Tobacco (sec. 702(d) of the Act 
                       and sec. 5702 of the Code)


                              Present Law

    Federal excise taxes are imposed upon tobacco products and 
cigarette papers and tubes.\9\ Tobacco products are cigars, 
cigarettes, snuff, chewing tobacco, pipe tobacco, and roll-
your-own tobacco. A ``cigar'' is any roll of tobacco wrapped in 
leaf tobacco or in any substance containing tobacco, other than 
any roll of tobacco which is a cigarette. A ``cigarette'' is 
(i) any roll of tobacco wrapped in paper or in any substance 
not containing tobacco; and (ii) any roll of tobacco wrapped in 
any substance containing tobacco which, because of its 
appearance, the type of tobacco used in the filler, or its 
packaging and labeling, is likely to be offered to, or 
purchased by, consumers as a cigarette. ``Roll-your-own 
tobacco'' is any tobacco, which because of its appearance, 
type, packaging, or labeling, is suitable for use and likely to 
be offered to, or purchased by, consumers as tobacco for making 
cigarettes. ``Cigarette paper'' is paper, or any other material 
except tobacco, prepared for use as a cigarette wrapper. A 
``cigarette tube'' is cigarette paper made into a hollow 
cylinder for use in making cigarettes.\10\
---------------------------------------------------------------------------
    \9\ Sec. 5701.
    \10\ Sec. 5702.
---------------------------------------------------------------------------
    Wrappers containing tobacco are not within the definition 
of cigarette papers or tubes because they contain tobacco. They 
are also not generally within the definition of roll-your-own 
tobacco because they are usually used to make cigars, not 
cigarettes. For the same reason, loose tobacco suitable for 
making roll-your-own cigars is not considered to be roll-your-
own tobacco.

                        Explanation of Provision

    Under the provision, the definition of roll-your-own 
tobacco is expanded to also include any tobacco, which because 
of its appearance, type, packaging, or labeling, is suitable 
for use and likely to be offered to, or purchased by, consumers 
as tobacco for making cigars, or for use as wrappers for making 
cigars.

                             Effective Date

    The provision applies to articles removed after March 31, 
2009.

    C. Permit, Inventory, Reporting, Recordkeeping Requirements for 
 Manufacturers and Importers of Processed Tobacco (sec. 702 of the Act 
  and secs. 5702, 5712, 5713, 5721, 5722, 5723, and 5741 of the Code)


                              Present Law

    Tobacco products and cigarette papers and tubes are subject 
to Federal excise tax.\11\ Tobacco products are cigars, 
cigarettes, smokeless tobacco, pipe tobacco, and roll-your-own 
tobacco.\12\ Manufacturers and importers of tobacco products 
and export warehouse proprietors must obtain a permit from the 
Secretary of the Treasury or his delegate (``Secretary'').\13\ 
Manufacturers and importers of tobacco products or cigarette 
papers or tubes, and export warehouse proprietors, must also 
periodically make an inventory and certain reports and keep 
certain records, all as prescribed by the Secretary.\14\
---------------------------------------------------------------------------
    \11\ Sec. 5701.
    \12\ Sec. 5702.
    \13\ Sec. 5713.
    \14\ Sec. 5721 (inventories); sec. 5722 (reports); sec. 5723 
(packaging); sec. 5741 (records).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision creates a new category of manufacturers and 
importers who are subject to regulation but not to Federal 
excise tax. Under the provision, manufacturers and importers of 
``processed tobacco'' are subject to the present-law permit, 
inventory, reporting, packaging, and recordkeeping 
requirements. Processed tobacco is any tobacco other than 
tobacco products.\15\ A manufacturer of processed tobacco is 
any person who processes any tobacco other than tobacco 
products, and an importer includes an importer of processed 
tobacco. However, the processing of tobacco does not include 
the farming or growing of tobacco or the handling of whole 
tobacco leaf solely for sale, shipment, or delivery to a 
manufacturer of tobacco products or processed tobacco. For 
example, under the provision an importer of ``cut rag'' tobacco 
or a leaf processor that manufactures such tobacco is subject 
to the general permit, inventory, reporting, and recordkeeping 
requirements of the Code but is not subject to Federal excise 
tax (unless it also imports or manufactures tobacco products or 
cigarette papers or tubes).
---------------------------------------------------------------------------
    \15\ Sec. 5702(c) defines tobacco products as cigars, cigarettes, 
smokeless tobacco, pipe tobacco, and roll-your-own tobacco.
---------------------------------------------------------------------------
    Under the provision, any person who is engaged in business 
as a manufacturer or importer of processed tobacco on April 1, 
2009 and who submits a permit application within 90 days of the 
effective date of this provision may continue to engage in such 
business pending action on their permit application. Such 
persons will be subject to the requirements of this provision 
to the same extent as if the person was a permit holder while 
final action on the permit application is pending.

                             Effective Date

    The provision is effective on April 1, 2009.

D. Broaden Authority to Deny, Suspend, and Revoke Tobacco Permits (sec. 
         702(b) of the Act and secs. 5712 and 5713 of the Code)


                              Present Law

    Manufacturers and importers of tobacco products and 
proprietors of export warehouses must obtain a permit to engage 
in such businesses.\16\ A permit is obtained by application to 
the Secretary. The Secretary may deny the application if: (1) 
the business premises are inadequate to protect the revenue; 
(2) the activity to be carried out at the business premises 
does not meet such minimum capacity or activity requirements as 
prescribed by the Secretary; (3) the applicant is, by reason of 
his business experience, financial standing, or trade 
connections, not likely to maintain operations in compliance 
with the applicable provisions of the Code; or (4) such 
applicant has failed to disclose any material information 
required or made any material false statement in the 
application.\17\ In the case of a corporation, an applicant 
includes any officer, director, or principal stockholder and, 
in the case of a partnership, a partner.
---------------------------------------------------------------------------
    \16\ Sec. 5713.
    \17\ Sec. 5712.
---------------------------------------------------------------------------
    A permit is conditioned upon compliance with the rules of 
the Code and related regulations pertaining to taxes and 
regulation of tobacco products and cigarette papers and tubes. 
The Secretary may suspend or revoke a permit after a notice and 
hearing if the holder: (1) has not in good faith complied with 
those rules or with any other provision of the Code involving 
intent to defraud; (2) has violated the conditions of the 
permit; (3) has failed to disclose any material information 
required or made any material false statement in the permit 
application; or (4) has failed to maintain the business 
premises in such a manner as to protect the revenue.\18\
---------------------------------------------------------------------------
    \18\ Sec. 5713.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision broadens the present-law authority of the 
Secretary to deny, suspend, or revoke tobacco permits. Under 
the provision, the Secretary may deny an application for a 
permit if the applicant has been convicted of a felony 
violation of a Federal or State criminal law relating to 
tobacco products or cigarette papers or tubes, or if, by reason 
of previous or current legal proceedings involving a violation 
of Federal criminal felony laws relating to tobacco products or 
cigarette papers or tubes, such applicant is not likely to 
maintain operations in compliance with the applicable 
provisions of the Code.
    Similarly, a permit may be suspended or revoked if the 
holder is convicted of a felony violation of a Federal or State 
criminal law relating to tobacco products or cigarette papers 
or tubes, or if, by reason of previous or current legal 
proceedings involving a violation of Federal criminal felony 
laws relating to tobacco products or cigarette papers or tubes, 
such applicant is not likely to maintain operations in 
compliance with the applicable provisions of the Code.

                             Effective Date

    The provision is effective on the date of enactment 
(February 4, 2009).

E. Clarify Statute of Limitations Pertaining to Excise Taxes Imposed on 
Imported Alcohol, Tobacco Products and Cigarette Papers and Tubes (sec. 
       702(c) of the Act and sec. 514 of the Tariff Act of 1930)


                              Present Law

    Under the Code, amounts of tax must generally be assessed 
within three years after a tax return is filed, and no 
proceeding in court without assessment for the collection of 
such tax may begin after such period has expired.\19\ If no 
return is filed (but is required), the tax may be assessed, or 
a proceeding in court for the collection of such tax may be 
initiated without assessment, at any time.\20\
---------------------------------------------------------------------------
    \19\ Sec. 6501(a).
    \20\ Sec. 6501(c)(3).
---------------------------------------------------------------------------
    Customs collects duties and excise taxes on imports. 
Importers of taxable articles relating to tobacco and alcohol 
must file a tax return with Customs.\21\ In general, the 
limitations period for fixing and assessing duties and taxes 
with respect to an import is one year from the date of entry or 
removal.\22\ Under the applicable customs law, with some 
limited exceptions, any duty or tax imposed on an import is 
final and conclusive upon all persons, including the United 
States, unless a protest is filed within 180 days or a court 
action is timely commenced.\23\
---------------------------------------------------------------------------
    \21\ 24 C.F.R. sec. 41.81(b) (tobacco products and cigarette papers 
and tubes); sec. 5061(a) (distilled spirits, wines, and beer).
    \22\ 19 U.S.C. sec. 1504(a). The Secretary may extend this period 
under certain circumstances and with notice to the importer.
    \23\ 19 U.S.C. sec. 1514(a), (c)(3).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision clarifies the tax and customs law in the area 
of alcohol and tobacco products by providing that, 
notwithstanding customs law, the general statute of limitations 
for assessment under the Code (sec. 6501) applies with respect 
to taxes imposed under chapters 51 (relating to distilled 
spirits, wines, and beer) and 52 (relating to tobacco products 
and cigarette papers and tubes) of the Code.
    No inference is intended regarding the applicability of the 
statute of limitations under the Code to pending cases or to 
excise taxes imposed other than under chapters 51 and 52 of the 
Code.

                             Effective Date

    The provision is effective for articles imported into the 
United States after the date of enactment (February 4, 2009).

F. Impose Immediate Tax on Unlawfully Manufactured Tobacco Products and 
Cigarette Papers and Tubes (sec. 702(e) of the Act and sec. 5703 of the 
                                 Code)


                              Present Law

    Manufacturers and importers of tobacco products and 
proprietors of export warehouses must obtain a permit to engage 
in such businesses.\24\ A permit is obtained by application to 
the Secretary.\25\ A manufacturer of tobacco products or 
cigarette papers or tubes, or an export warehouse proprietor, 
must file a bond and obtain approval of such bond from the 
Secretary.\26\ In general, excise taxes on tobacco products and 
cigarette papers and tubes manufactured in the United States 
are determined at the time of removal. In the case of taxes on 
tobacco products and cigarette papers and tubes removed during 
any semimonthly period under bond for deferred payment of tax, 
payment is due no later than the 14th day after the last day of 
such semimonthly period.\27\
---------------------------------------------------------------------------
    \24\ Sec. 5713. A ``manufacturer of tobacco products'' does not 
include (1) a person who produces tobacco products solely for the 
person's own personal consumption or use, and (2) a proprietor of a 
customs bonded manufacturing warehouse with respect to the operation of 
such warehouse. Sec. 5702(d).
    \25\ Sec. 5712.
    \26\ Sec. 5711.
    \27\ Sec. 5703.
---------------------------------------------------------------------------
    Distilled spirits, wines, and beer produced at any place 
other than a place required by the Code are subject to tax 
immediately on production.\28\ There is no such rule imposing 
immediate tax on tobacco products and cigarette papers and 
tubes that are produced by an out-of-compliance manufacturer.
---------------------------------------------------------------------------
    \28\ Sec. 5006(c)(2) (distilled spirits); sec. 5041(f) (wines); 
sec. 5054(a)(3) (beer).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, in the case of any tobacco products or 
cigarette papers or tubes produced in the United States at any 
place other than the premises of a manufacturer that has 
obtained a permit (if required) and approval of a bond, the 
excise tax is due and payable immediately upon manufacture, 
unless they are produced solely for the person's own personal 
consumption or use.

                             Effective Date

    The provision is effective on the date of enactment 
(February 4, 2009).

 G. Use of Tax Information in Tobacco Assessments (sec. 702(f) of the 
                     Act and sec. 6103 of the Code)


                              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.\29\ 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.\30\ ``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.
---------------------------------------------------------------------------
    \29\ Sec. 6103(a).
    \30\ 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.\31\
---------------------------------------------------------------------------
    \31\ 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 6110(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.\32\
---------------------------------------------------------------------------
    \32\ 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.
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    For example, under section 6103(o) of the Code, returns and 
return information with respect to the taxes imposed on 
alcohol, tobacco and firearms are open to inspection by or 
disclosure to officers and employees of a Federal agency whose 
official duties require such inspection or disclosure.
    The Fair and Equitable Tobacco Reform Act of 2004 \33\ 
repealed the Federal tobacco support program and created a 
Tobacco Trust Fund. Funds from the Tobacco Trust Fund are used 
to provide transitional payments to tobacco quota holders and 
eligible tobacco producers. The Tobacco Trust Fund is funded by 
quarterly assessments paid by manufacturers and importers of 
tobacco products. The Farm Service Agency receives tax 
information from the Department of the Treasury's Alcohol and 
Tobacco Tax and Trade Bureau as part of its administration of 
the Tobacco Trust Fund assessments.
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    \33\ Title VI of the American Jobs Creation Act of 2004, Pub. L. 
No. 108-357.
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    A September 2008 Department of Agriculture inspector 
general report indicated that a number of companies were 
delinquent in paying their assessments and have been referred 
to the Department of Justice for debt collection.\34\ Section 
6103(o) does not provide for the use of the tax information 
received in civil actions against the delinquent companies. The 
Department of Justice could proceed with the lawsuits based on 
information provided by other entities, other than the tax 
data.
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    \34\ U.S. Department of Agriculture, Office of Inspector General, 
Southeast Region, Report No. 03601-15-At, Audit Report: Tobacco 
Transition Payment Program Tobacco Assessments Against Tobacco 
Manufacturers and Importers (September 2008).
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                        Explanation of Provision

    The provision provides that returns and return information 
provided to a Federal agency under section 6103(o) may be used 
in an action or proceeding, or in the preparation for an action 
or proceeding, brought under section 625 the Fair and Equitable 
Tobacco Reform Act of 2004 for any unpaid assessments or 
penalties arising under such Act.

                             Effective Date

    The provision is effective on and after the date of 
enactment (February 4, 2009).

H. Study Concerning Magnitude of Tobacco Smuggling in the United States 
                         (sec. 703 of the Act)


                              Present Law

    Present law does not require the Secretary to submit a 
tobacco smuggling study to Congress.

                        Explanation of Provision

    The provision requires the Secretary to submit to Congress 
a study concerning the magnitude of tobacco smuggling in the 
United States and to recommend the most effective steps to 
reduce it. The study would include a review of the loss of 
Federal tax revenue due to illicit tobacco trade in the United 
States, and the role of imported tobacco products in such 
illicit trade.

                             Effective Date

    The study will be completed no later than one year after 
the date of enactment (February 4, 2009).

 I. Modifications to Corporate Estimated Tax Payments (sec. 704 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 payments must be made by April 15, June 15, September 
15, and December 15. For tax years beginning on any date other 
than January 1, the payments are due in months of the fiscal 
year that correspond to the calendar year payment months.
    Under the Tax Increase Prevention Act of 2005 
(``TIPRA''),\35\ as amended, in the case of a corporation with 
assets of at least $1 billion, the payments due in July, 
August, and September, 2013, shall be increased to 120.00 
percent of the payment otherwise due and the next required 
payment shall be reduced accordingly.
---------------------------------------------------------------------------
    \35\ Pub. L. No. 109-222.
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                     Explanation of Provision \36\

---------------------------------------------------------------------------
    \36\ All the public laws enacted in the 111th Congress affecting 
this provision are described in Part Twenty-One of this document.
---------------------------------------------------------------------------
    The provision increases the otherwise applicable percentage 
for 2013 by 0.50 percentage points.

                             Effective Date

    The provision is effective on the date of enactment 
(February 4, 2009).

PART TWO: REVENUE PROVISIONS OF THE AMERICAN RECOVERY AND REINVESTMENT 
                  ACT OF 2009 (PUBLIC LAW 111-5) \37\

                        TITLE I--TAX PROVISIONS

               A. Tax Relief for Individuals and Families

1. Making work pay credit (sec. 1001 of the Act and new sec. 36A of the 
        Code)

                              Present Law

Earned income tax credit
    Low- and moderate-income workers may be eligible for the 
refundable earned income tax credit (``EITC''). Eligibility for 
the EITC 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 EITC 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.
---------------------------------------------------------------------------
    \37\ H.R. 1. The House Committee on Ways and Means reported H.R. 
598 on January 27, 2009 (H.R. Rep. No. 111-8). The text of H.R. 598 was 
added to H.R. 1 at Division B, Title I. H.R. 1 passed the House on 
January 28, 2009. The Senate Committee on Finance reported S. 350 
without a written report on January 29, 2009. The Senate passed H.R. 1 
with an amendment incorporating the text of S. 350, as amended, at 
Division B, Title I on February 10, 2009. The conference report was 
filed on February 12, 2009 (H.R. Rep. No. 111-16) and was passed by the 
House on February 13, 2009, and the Senate on February 13, 2009. The 
President signed the bill on February 17, 2009.
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    The EITC generally equals a specified percentage of earned 
income \38\ up to a maximum dollar amount. The maximum amount 
applies over a certain income range and then diminishes to zero 
over a specified phaseout range. For taxpayers with earned 
income (or adjusted gross income (``AGI''), if greater) in 
excess of the beginning of the phaseout range, the maximum EITC 
amount is reduced by the phaseout rate multiplied by the amount 
of earned income (or AGI, if greater) in excess of the 
beginning of the phaseout range. For taxpayers with earned 
income (or AGI, if greater) in excess of the end of the 
phaseout range, no credit is allowed.
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    \38\ 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.
---------------------------------------------------------------------------
    The EITC is a refundable credit, meaning that if the amount 
of the credit exceeds the taxpayer's Federal income tax 
liability, the excess is payable to the taxpayer as a direct 
transfer payment. Under an advance payment system, eligible 
taxpayers may elect to receive the credit in their paychecks, 
rather than waiting to claim a refund on their tax returns 
filed by April 15 of the following year.
Child credit
    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 
$12,550 (for 2009), 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 tax credit.
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EITC, 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 EITC, 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.

                           Reasons for Change

    The Congress believes that tax relief for working families 
is necessary to help the economy recover. By increasing after-
tax disposable income, this credit will permit taxpayers to 
purchase additional goods and services, make additional 
investments, or pay down debt more efficiently.

                        Explanation of Provision

In general
    The provision provides eligible individuals a refundable 
income tax credit for two years (taxable years beginning in 
2009 and 2010).
    The credit is the lesser of (1) 6.2 percent of an 
individual's earned income or (2) $400 ($800 in the case of a 
joint return). For these purposes, the earned income definition 
is the same as for the earned income tax credit with two 
modifications. First, earned income for these purposes does not 
include net earnings from self-employment which are not taken 
into account in computing taxable income. Second, earned income 
for these purposes includes combat pay excluded from gross 
income under section 112.
    The credit is phased out at a rate of two percent of the 
eligible individual's modified adjusted gross income above 
$75,000 ($150,000 in the case of a joint return). For these 
purposes an eligible individual's modified adjusted gross 
income is the eligible individual's adjusted gross income 
increased by any amount excluded from gross income under 
sections 911, 931, or 933. An eligible individual means any 
individual other than: (1) a nonresident alien; (2) an 
individual with respect to whom another individual may claim a 
dependency deduction for a taxable year beginning in a calendar 
year in which the eligible individual's taxable year begins; 
and (3) an estate or trust. Each eligible individual must 
satisfy identical taxpayer identification number requirements 
to those applicable to the earned income tax credit.
    Also, the Act provides that the otherwise allowable making 
work pay credit allowed under the provision is reduced by the 
amount of any payment received by the taxpayer pursuant to the 
provisions of the bill providing economic recovery payments 
under the Veterans Administration, Railroad Retirement Board, 
and the Social Security Administration and a temporary 
refundable tax credit for certain government retirees.\39\ The 
Act treats the failure to reduce the making work pay credit by 
the amount of such payments or credit, and the omission of the 
correct TIN, as clerical errors. This allows the IRS to assess 
any tax resulting from such failure or omission without the 
requirement to send the taxpayer a notice of deficiency 
allowing the taxpayer the right to file a petition with the Tax 
Court.
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    \39\ The credit for certain government employees is available for 
2009. The credit is $250 ($500 for a joint return where both spouses 
are eligible individuals). An eligible individual for these purposes is 
an individual: (1) who receives an amount as a pension or annuity for 
service performed in the employ of the United States or any State or 
any instrumentality thereof, which is not considered employment for 
purposes of Social Security taxes; and (2) who does not receive an 
economic recovery payment under the Veterans Administration, Railroad 
Retirement Board, or the Social Security Administration.
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Treatment of the U.S. possessions
            Mirror code possessions \40\
    The U.S. Treasury will make payments 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 these payments, 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.
---------------------------------------------------------------------------
    \40\ Possessions with mirror code tax systems are the United States 
Virgin Islands, Guam, and the Commonwealth of the Northern Mariana 
Islands.
---------------------------------------------------------------------------
            Non-mirror code possessions \41\
    To each possession that does not have a mirror code tax 
system, the U.S. Treasury will make two payments (for 2009 and 
2010, respectively) 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.
---------------------------------------------------------------------------
    \41\ Possessions that do not have mirror code tax systems are 
Puerto Rico and American Samoa.
---------------------------------------------------------------------------
            General rules
    No credit against U.S. income tax 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 tax 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 payments to the possessions, 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 credit 
allowed under the provision.
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. possession) 
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.
Income tax withholding
    The Act also provides for a more accelerated delivery of 
the credit in 2009 through revised income tax withholding 
schedules produced by the Department of the Treasury. Under the 
Act, these revised income tax withholding schedules would be 
designed to reduce taxpayers' income tax withheld for the 
remainder of 2009 in such a manner that the full annual benefit 
of the provision is reflected in income tax withheld during the 
remainder of 2009.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2008.
2. Increase in the earned income tax credit (sec. 1002 of the Act and 
        sec. 32 of the Code)

                              Present Law

Overview
    Low- and moderate-income workers may be eligible for the 
refundable earned income tax credit (``EITC''). Eligibility for 
the EITC 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 EITC 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.
    The EITC generally equals a specified percentage of earned 
income \42\ up to a maximum dollar amount. The maximum amount 
applies over a certain income range and then diminishes to zero 
over a specified phaseout range. For taxpayers with earned 
income (or adjusted gross income (``AGI''), if greater) in 
excess of the beginning of the phaseout range, the maximum EITC 
amount is reduced by the phaseout rate multiplied by the amount 
of earned income (or AGI, if greater) in excess of the 
beginning of the phaseout range. For taxpayers with earned 
income (or AGI, if greater) in excess of the end of the 
phaseout range, no credit is allowed.
---------------------------------------------------------------------------
    \42\ 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.
---------------------------------------------------------------------------
    An individual is not eligible for the EITC if the aggregate 
amount of disqualified income of the taxpayer for the taxable 
year exceeds $3,100 (for 2009). This threshold is indexed for 
inflation. Disqualified income is the sum of: (1) interest 
(taxable and tax exempt); (2) dividends; (3) net rent and 
royalty income (if greater than zero); (4) capital gains net 
income; and (5) net passive income (if greater than zero) that 
is not self-employment income.
    The EITC is a refundable credit, meaning that if the amount 
of the credit exceeds the taxpayer's Federal income tax 
liability, the excess is payable to the taxpayer as a direct 
transfer payment. Under an advance payment system, eligible 
taxpayers may elect to receive the credit in their paychecks, 
rather than waiting to claim a refund on their tax returns 
filed by April 15 of the following year.

Filing status

    An unmarried individual may claim the EITC if he or she 
files as a single filer or as a head of household. Married 
individuals generally may not claim the EITC unless they file 
jointly. An exception to the joint return filing requirement 
applies to certain spouses who are separated. Under this 
exception, a married taxpayer who is separated from his or her 
spouse for the last six months of the taxable year shall not be 
considered as married (and, accordingly, may file a return as 
head of household and claim the EITC), provided that the 
taxpayer maintains a household that constitutes the principal 
place of abode for a dependent child (including a child, 
stepchild, adopted child, or a foster child) for over half the 
taxable year,\43\ and pays over half the cost of maintaining 
the household in which he or she resides with the child during 
the year.
---------------------------------------------------------------------------
    \43\ A foster child must reside with the taxpayer for the entire 
taxable year.
---------------------------------------------------------------------------

Presence of qualifying children and amount of the earned income credit

    Three separate credit schedules apply: one schedule for 
taxpayers with no qualifying children, one schedule for 
taxpayers with one qualifying child, and one schedule for 
taxpayers with more than one qualifying child.\44\
---------------------------------------------------------------------------
    \44\ All income thresholds are indexed for inflation annually.
---------------------------------------------------------------------------
    Taxpayers with no qualifying children may claim a credit if 
they are over age 24 and below age 65. The credit is 7.65 
percent of earnings up to $5,970, resulting in a maximum credit 
of $457 for 2009. The maximum is available for those with 
incomes between $5,970 and $7,470 ($10,590 if married filing 
jointly). The credit begins to phase down at a rate of 7.65 
percent of earnings above $7,470 ($10,590 if married filing 
jointly) resulting in a $0 credit at $13,440 of earnings 
($16,560 if married filing jointly).
    Taxpayers with one qualifying child may claim a credit in 
2009 of 34 percent of their earnings up to $8,950, resulting in 
a maximum credit of $3,043. The maximum credit is available for 
those with earnings between $8,950 and $16,420 ($19,540 if 
married filing jointly). The credit begins to phase down at a 
rate of 15.98 percent of earnings above $16,420 ($19,540 if 
married filing jointly). The credit phases down to $0 at 
$35,463 of earnings ($38,583 if married filing jointly).
    Taxpayers with more than one qualifying child may claim a 
credit in 2009 of 40 percent of earnings up to $12,570, 
resulting in a maximum credit of $5,028. The maximum credit is 
available for those with earnings between $12,570 and $16,420 
($19,540 if married filing jointly). The credit begins to phase 
down at a rate of 21.06 percent of earnings above $16,420 
($19,540 if married filing jointly). The credit phases down to 
$0 at $40,295 of earnings ($43,415 if married filing jointly).
    If more than one taxpayer lives with a qualifying child, 
only one of these taxpayers may claim the child for purposes of 
the EITC. If multiple eligible taxpayers actually claim the 
same qualifying child, then a tiebreaker rule determines which 
taxpayer is entitled to the EITC with respect to the qualifying 
child. Any eligible taxpayer with at least one qualifying child 
who does not claim the EITC with respect to qualifying children 
due to failure to meet certain identification requirements with 
respect to such children (i.e., providing the name, age and 
taxpayer identification number of each of such children) may 
not claim the EITC for taxpayers without qualifying children.

                           Reasons for Change

    The Congress recognizes the importance of the EITC as a 
means of providing tax relief to low- and middle-income 
families with children. The Congress also recognizes that 
larger families need additional tax relief. The Congress 
therefore believes that the EITC should be expanded to provide 
additional tax relief to families with three or more qualifying 
children.

                     Explanation of Provision \45\


Three or more qualifying children

    The provision increases the EITC credit percentage for 
families with three or more qualifying children to 45 percent 
for 2009 and 2010. For example, in 2009 taxpayers with three or 
more qualifying children may claim a credit of 45 percent of 
earnings up to $12,570, resulting in a maximum credit of 
$5,656.50.
---------------------------------------------------------------------------
    \45\ The provision was subsequently amended by section 103 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------

Provide additional marriage penalty relief through higher threshold 
        phase-out amounts for married couples filing joint returns

    The provision increases the threshold phase-out amounts for 
married couples filing joint returns to $5,000 \46\ above the 
threshold phase-out amounts for singles, surviving spouses, and 
heads of households) for 2009 and 2010. For example, in 2009 
the maximum credit of $3,043 for one qualifying child is 
available for those with earnings between $8,950 and $16,420 
($21,420 if married filing jointly). The credit begins to phase 
down at a rate of 15.98 percent of earnings above $16,420 
($21,420 if married filing jointly). The credit phases down to 
$0 at $35,463 of earnings ($40,463 if married filing jointly).
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    \46\ The $5,000 amount is indexed for inflation in the case of 
taxable years beginning in 2010.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2008.

3. Increase of refundable portion of the child credit (sec. 1003 of the 
        Act and sec. 24 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 
$12,550 (for 2009), and is indexed for inflation.
    Families with three or more children may determine the 
additional child tax credit using the alternative formula, if 
doing so 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 tax credit (``EITC'').
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EITC, 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 EITC, 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.
    Any credit or refund allowed or made to an individual under 
this provision (including to any resident of a U.S. possession) 
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.

                           Reasons for Change

    The Congress believes that it is necessary to extend the 
benefit of the child credit to families that currently do not 
benefit by virtue of the earned income threshold in the formula 
for determining the refundable child credit.

                     Explanation of Provision \47\

---------------------------------------------------------------------------
    \47\ The provision was subsequently amended by section 103 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    The provision modifies the earned income formula for the 
determination of the refundable child credit to apply to 15 
percent of earned income in excess of $3,000 for taxable years 
beginning in 2009 and 2010.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2008.

4. American Opportunity Tax Credit (sec. 1004 of the Act and sec. 25A 
        of the Code)

                              Present Law

    Individual taxpayers are allowed to claim a nonrefundable 
credit, the Hope credit, against Federal income taxes of up to 
$1,800 (for 2009) per eligible 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.\48\ 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; these dollar amounts are indexed for inflation, with 
the amount rounded down to the next lowest multiple of $100. 
Thus, for example, a taxpayer who incurs $1,200 of qualified 
tuition and related expenses for an eligible student is 
eligible (subject to the adjusted gross income phaseout 
described below) for a $1,200 Hope credit. If a taxpayer incurs 
$2,400 of qualified tuition and related expenses for an 
eligible student, then he or she is eligible for a $1,800 Hope 
credit.
---------------------------------------------------------------------------
    \48\ 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, 2009.
---------------------------------------------------------------------------
    The Hope credit that a taxpayer may otherwise claim is 
phased out ratably for taxpayers with modified adjusted gross 
income between $50,000 and $60,000 ($100,000 and $120,000 for 
married taxpayers filing a joint return) for 2009. The adjusted 
gross income phaseout ranges are indexed for inflation, with 
the amount rounded down to the next lowest multiple of $1,000.
    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, 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.

                           Reasons for Change

    The Congress observes that the cost of a college education 
continues to rise, and thus believes that a modification of the 
Hope credit is appropriate to mitigate the impact of rising 
tuition costs on students and their families. The Congress 
further believes that making a portion of the credit refundable 
will deliver an incentive to attend college to those who do not 
currently benefit from the present-law credit.

                     Explanation of Provision \49\

---------------------------------------------------------------------------
    \49\ The provision was subsequently amended by section 103 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen.
---------------------------------------------------------------------------
    The provision modifies the Hope credit for taxable years 
beginning in 2009 or 2010. The modified credit is referred to 
as the American Opportunity Tax credit. The allowable modified 
credit is up to $2,500 per eligible student per year for 
qualified tuition and related expenses paid for each of the 
first four years of the student's post-secondary education in a 
degree or certificate program. The modified credit rate is 100 
percent on the first $2,000 of qualified tuition and related 
expenses, and 25 percent on the next $2,000 of qualified 
tuition and related expenses. For purposes of the modified 
credit, the definition of qualified tuition and related 
expenses is expanded to include course materials.\50\
---------------------------------------------------------------------------
    \50\ A technical correction may be necessary so that the statute 
reflects this intent. See section 2(a) of H.R. 4169, the ``Tax 
Technical Corrections Act of 2009,'' introduced December 2, 2009.
---------------------------------------------------------------------------
    Under the provision, the modified credit is available with 
respect to an individual student for four years, provided that 
the student has not completed the first four years of post-
secondary education before the beginning of the fourth taxable 
year. Thus, the modified credit, in addition to other 
modifications, extends the application of the Hope credit to 
two more years of post-secondary education.
    The modified credit that a taxpayer may otherwise claim is 
phased out ratably for taxpayers with modified adjusted gross 
income between $80,000 and $90,000 ($160,000 and $180,000 for 
married taxpayers filing a joint return). The modified credit 
may be claimed against a taxpayer's alternative minimum tax 
liability.
    Forty percent of a taxpayer's otherwise allowable modified 
credit is refundable. However, no portion of the modified 
credit is refundable if the taxpayer claiming the credit is a 
child to whom section 1(g) applies for such taxable year 
(generally, any child under age 18 or any child under age 24 
who is a student providing less than one-half of his or her own 
support, who has at least one living parent and does not file a 
joint return).
    In addition, the provision requires the Secretary of the 
Treasury to conduct two studies and submit a report to Congress 
on the results of those studies within one year after the date 
of enactment. The first study shall examine how to coordinate 
the Hope and Lifetime Learning credits with the Pell grant 
program. The second study shall examine requiring students to 
perform community service as a condition of taking their 
tuition and related expenses into account for purposes of the 
Hope and Lifetime Learning credits.
    Under the Act, bona fide residents of the U.S. possessions 
(American Samoa, the Commonwealth of the Northern Mariana 
Islands, the Commonwealth of Puerto Rico, Guam, and the U.S. 
Virgin Islands) are not permitted to claim the refundable 
portion of the American opportunity credit in the United 
States. Rather, a bona fide resident of a mirror code 
possession (the Commonwealth of the Northern Mariana Islands, 
Guam, and the U.S. Virgin Islands) may claim the refundable 
portion of the credit in the possession in which the individual 
is a resident. Similarly, a bona fide resident of a non-mirror 
code possession (the Commonwealth of Puerto Rico and American 
Samoa) may claim the refundable portion of the credit in the 
possession in which the individual is a resident, but only if 
that possession establishes a plan for permitting the claim 
under its internal law.
    The Act provides that the U.S. Treasury will make payments 
to the possessions in respect of credits allowable to their 
residents under their internal laws. Specifically, the U.S. 
Treasury will make payments to each mirror code possession in 
an amount equal to the aggregate amount of the refundable 
portion 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. To each possession that does not have a mirror code 
tax system, the U.S. Treasury will make two payments (for 2009 
and 2010, respectively) in an amount estimated by the Secretary 
as being equal to the aggregate amount of the refundable 
portion of the 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 refundable portion 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.

                             Effective Date

    The provision is effective with respect to taxable years 
beginning after December 31, 2008.

5. Temporarily allow computer technology and equipment as a qualified 
        higher education expense for qualified tuition programs (sec. 
        1005 of the Act and sec. 529 of the Code)

                              Present Law

    Section 529 provides specified income tax and transfer tax 
rules for the treatment of accounts and contracts established 
under qualified tuition programs.\51\ A qualified tuition 
program is a program established and maintained by a State or 
agency or instrumentality thereof, or by one or more eligible 
educational institutions, which satisfies certain requirements 
and under which a person may purchase tuition credits or 
certificates on behalf of a designated beneficiary that entitle 
the beneficiary to the waiver or payment of qualified higher 
education expenses of the beneficiary (a ``prepaid tuition 
program''). In the case of a program established and maintained 
by a State or agency or instrumentality thereof, a qualified 
tuition program also includes a program under which a person 
may make contributions to an account that is established for 
the purpose of satisfying the qualified higher education 
expenses of the designated beneficiary of the account, provided 
it satisfies certain specified requirements (a ``savings 
account program''). Under both types of qualified tuition 
programs, a contributor establishes an account for the benefit 
of a particular designated beneficiary to provide for that 
beneficiary's higher education expenses.
---------------------------------------------------------------------------
    \51\ For purposes of this description, the term ``account'' is used 
interchangeably to refer to a prepaid tuition benefit contract or a 
tuition savings account established pursuant to a qualified tuition 
program.
---------------------------------------------------------------------------
    For this purpose, qualified higher education expenses means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of a designated beneficiary at an 
eligible educational institution, and expenses for special 
needs services in the case of a special needs beneficiary that 
are incurred in connection with such enrollment or attendance. 
Qualified higher education expenses generally also include room 
and board for students who are enrolled at least half-time.
    Contributions to a qualified tuition program must be made 
in cash. Section 529 does not impose a specific dollar limit on 
the amount of contributions, account balances, or prepaid 
tuition benefits relating to a qualified tuition account; 
however, the program is required to have adequate safeguards to 
prevent contributions in excess of amounts necessary to provide 
for the beneficiary's qualified higher education expenses. 
Contributions generally are treated as a completed gift 
eligible for the gift tax annual exclusion. Contributions are 
not tax deductible for Federal income tax purposes, although 
they may be deductible for State income tax purposes. Amounts 
in the account accumulate on a tax-free basis (i.e., income on 
accounts in the plan is not subject to current income tax).
    Distributions from a qualified tuition program are 
excludable from the distributee's gross income to the extent 
that the total distribution does not exceed the qualified 
higher education expenses incurred for the beneficiary. If a 
distribution from a qualified tuition program exceeds the 
qualified higher education expenses incurred for the 
beneficiary, the portion of the excess that is treated as 
earnings generally is subject to income tax and an additional 
10-percent tax. Amounts in a qualified tuition program may be 
rolled over to another qualified tuition program for the same 
beneficiary or for a member of the family of that beneficiary 
without income tax consequences.
    In general, prepaid tuition contracts and tuition savings 
accounts established under a qualified tuition program involve 
prepayments or contributions made by one or more individuals 
for the benefit of a designated beneficiary, with decisions 
with respect to the contract or account to be made by an 
individual who is not the designated beneficiary. Qualified 
tuition accounts or contracts generally require the designation 
of a person (generally referred to as an ``account owner'') 
whom the program administrator (oftentimes a third party 
administrator retained by the State or by the educational 
institution that established the program) may look to for 
decisions, recordkeeping, and reporting with respect to the 
account established for a designated beneficiary. Generally, 
the person or persons who make the contributions to the account 
need not be the same person who is regarded as the account 
owner for purposes of administering the account. Under many 
qualified tuition programs, the account owner generally has 
control over the account or contract, including the ability to 
change designated beneficiaries and to withdraw funds at any 
time and for any purpose. Thus, in practice, qualified tuition 
accounts or contracts generally involve a contributor, a 
designated beneficiary, an account owner (who oftentimes is not 
the contributor or the designated beneficiary), and an 
administrator of the account or contract.\52\
---------------------------------------------------------------------------
    \52\ Section 529 refers to contributors and designated 
beneficiaries, but does not define or otherwise refer to the term 
account owner, which is a commonly used term among qualified tuition 
programs.
---------------------------------------------------------------------------

                     Explanation of Provision \53\

---------------------------------------------------------------------------
    \53\ The provision was subsequently amended by section 742 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    The provision expands the definition of qualified higher 
education expenses for expenses paid or incurred in 2009 and 
2010 to include expenses for certain computer technology and 
equipment to be used by the designated beneficiary and the 
beneficiary's family while the beneficiary is enrolled at an 
eligible educational institution.

                             Effective Date

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

6. Modifications to homebuyer credit (sec. 1006 of the Act and sec. 36 
        of the Code)

                              Present Law

    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 
unless the taxpayer makes an election as described below. The 
credit is allowed for qualifying home purchases on or after 
April 9, 2008 and before July 1, 2009 (without regard to 
whether there was a binding contract to purchase prior to April 
9, 2008).
    The credit phases out for individual taxpayers with 
modified adjusted gross income between $75,000 and $95,000 
($150,000 and $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.

                           Reasons for Change

    The Congress believes that additional support for the 
housing sector is warranted. To encourage purchases of homes, 
the Committee wishes to increase the benefit of the existing 
temporary provision to assist first-time homebuyers by waiving 
the recapture of the credit. This change transforms the credit 
from the equivalent of an interest-free loan (under present 
law) into direct financial support for qualifying home 
purchases. To prevent artificial sales for the purpose of 
garnering the refundable credit, the waiver of the credit 
recapture is available only if taxpayers retain the home and 
use it as a principal residence for at least 36 months.

                     Explanation of Provision \54\

    The Act extends the existing homebuyer credit for 
qualifying home purchases before December 1, 2009. In addition, 
it increases the maximum credit amount to $8,000 ($4,000 for a 
married individual filing separately) and waives the recapture 
of the credit for qualifying home purchases after December 31, 
2008 and before December 1, 2009. This waiver of recapture 
applies without regard to whether the taxpayer elects to treat 
the purchase in 2009 as occurring on December 31, 2008. If the 
taxpayer disposes of the home or the home otherwise ceases to 
be the principal residence of the taxpayer within 36 months 
from the date of purchase, the present law rules for recapture 
of the credit will apply.
---------------------------------------------------------------------------
    \54\ This provision was subsequently amended by sections 11 and 12 
of the Worker, Homeownership, and Business Assistance Act of 2009, Pub. 
L. No. 111-92, described in Part Five, and by section 2 of the 
Homebuyer Assistance and Improvement Act of 2010, Pub. L. No. 111-98, 
described in Part Ten of this document.
---------------------------------------------------------------------------
    The Act modifies the coordination with the first-time 
homebuyer credit for residents of the District of Columbia 
under section 1400C. No credit under section 1400C shall be 
allowed to any taxpayer with respect to the purchase of a 
residence during 2009 if a credit under section 36 is allowable 
to such taxpayer (or the taxpayer's spouse) with respect to 
such purchase. Taxpayers thus qualify for the more generous 
national first-time homebuyer credit rather than the D.C. 
homebuyer credit for qualifying purchases in 2009. No credit 
under section 36 is allowed for a taxpayer who claimed the D.C. 
homebuyer credit in any prior taxable year.
    The Act removes the prohibition on claiming the credit if 
the residence is financed by the proceeds of a mortgage revenue 
bond, a qualified mortgage issue the interest on which is 
exempt from tax under section 103.

                             Effective Date

    The provision applies to residences purchased after 
December 31, 2008.

7. Election to substitute grants to states for low-income housing 
        projects in lieu of low-income housing credit allocation for 
        2009 (secs. 1404 and 1602 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.\55\ 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.
---------------------------------------------------------------------------
    \55\ Sec. 42.
---------------------------------------------------------------------------

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 2009 is $2.30 per resident, with a minimum annual 
cap of $2,665,000 for certain small population States.\56\ 
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.
---------------------------------------------------------------------------
    \56\ Rev. Proc. 2008-66.
---------------------------------------------------------------------------

Basic rule for Federal grants

    The basis of a qualified building must be reduced by the 
amount of any Federal grant with respect to such building.

                           Reasons for Change

    The current economic downturn has reduced the 
attractiveness of low-income housing tax credits to potential 
investors, in part because some potential investors have 
reduced or no taxable income to offset with these tax credits. 
The Congress believes that this provision gives State 
allocating agencies added flexibility and will encourage the 
building of more low-income housing in the short term, until 
investors can again use these tax credits.

                        Explanation of Provision


Low-income housing grant election amount

    The Secretary of the Treasury shall make a grant to the 
State housing credit agency of each State in an amount equal to 
the low-income housing grant election amount.
    The low-income housing grant election amount for a State is 
an amount elected by the State subject to certain limits. The 
maximum low-income housing grant election amount for a State 
may not exceed 85 percent of the product of ten and the sum of 
the State's: (1) unused housing credit ceiling for 2008; (2) 
any returns to the State during 2009 of credit allocations 
previously made by the State; (3) 40 percent of the State's 
2009 credit allocation; and (4) 40 percent of the State's share 
of the national pool allocated in 2009, if any.
    Grants under this provision are not taxable income to 
recipients.

Subawards to low-income housing credit buildings

    A State receiving a grant under this provision is to use 
these monies to make subawards to finance the construction, or 
acquisition and rehabilitation of qualified low-income 
buildings as defined under the low-income housing credit. A 
subaward may be made to finance a qualified low-income building 
regardless of whether the building has an allocation of low-
income housing credit. However, in the case of qualified low-
income buildings without allocations of the low-income housing 
credit, the State housing credit agency must make a 
determination that the subaward with respect to such building 
will increase the total funds available to the State to build 
and rehabilitate affordable housing. In conjunction with this 
determination the State housing credit agency must establish a 
process in which applicants for the subawards must demonstrate 
good faith efforts to obtain investment commitments before the 
agency makes such subawards.
    Any building receiving grant money from a subaward is 
required to satisfy the low-income housing credit rules. The 
State housing credit agency shall perform asset management 
functions to ensure compliance with the low-income housing 
credit rules and the long-term viability of buildings financed 
with these subawards.\57\ Failure to satisfy the low-income 
housing credit rules will result in recapture, enforced by 
means of liens or other methods that the Secretary of the 
Treasury (or delegate) deems appropriate. Any such recapture 
will be payable to the Secretary of the Treasury for deposit in 
the general fund of the Treasury.
---------------------------------------------------------------------------
    \57\ The State housing credit agency may collect reasonable fees 
from subaward recipients to cover the expenses of the agency's asset 
management duties. Alternatively, the State housing credit agency may 
retain a third party to perform these asset management duties.
---------------------------------------------------------------------------
    Any grant funds not used to make subawards before January 
1, 2011, and any grant monies from subawards returned on or 
after January 1, 2011, must be returned to the Secretary of the 
Treasury.

Basic rule for Federal grants

    The grants received under this provision do not reduce the 
tax basis of a qualified low-income building.

Reduction in low-income housing credit volume limit for 2009

    The otherwise applicable low-income housing credit volume 
limit for any State for 2009 is reduced by the amount taken 
into account in determining the low-income housing grant 
election amount.

Appropriations

    The provision appropriates to the Secretary of the Treasury 
such sums as may be necessary to carry out this provision.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

8. Exclusion from gross income for unemployment compensation benefits 
        (sec. 1007 of the Act and sec. 85 of the Code)

                              Present Law

    An individual must include in gross income any unemployment 
compensation benefits received under the laws of the United 
States or any State.

                        Explanation of Provision

    The Act provides that up to $2,400 of unemployment 
compensation benefits received in taxable years beginning in 
2009 are excluded from gross income by the recipient.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2008.

9. Deduction for State sales tax and excise tax on the purchase of 
        qualified motor vehicles (sec. 1008 of the Act and secs. 63 and 
        164 of the Code)

                              Present Law

    In general, a deduction from gross income is allowed for 
certain taxes for the taxable year within which the taxes are 
paid or accrued. These include State, local, and foreign real 
property taxes; State and local personal property taxes; State, 
local, and foreign income, war profits, and excess profit 
taxes; generation skipping transfer taxes; environmental taxes 
imposed by section 59A; and taxes paid or accrued within the 
taxable year in carrying on a trade or business or an activity 
described in section 212 (relating to the expenses for 
production of income). At the election of the taxpayer for the 
taxable year, a taxpayer may deduct State and local sales taxes 
in lieu of State and local income taxes. 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, except in 
the case of a lower rate of tax applicable to items of food, 
clothing, medical supplies, and motor vehicles. In the case of 
motor vehicles, if the rate of tax exceeds the general rate, 
such excess shall be disregarded, and the general rate shall be 
treated as the rate of tax.

                        Explanation of Provision

    The Act provides a deduction for qualified motor vehicle 
taxes. It expands the definition of taxes allowed as a 
deduction to include qualified motor vehicle taxes paid or 
accrued within the taxable year. A taxpayer who itemizes and 
makes an election to deduct State and local sales taxes, 
including for qualified motor vehicles, in lieu of State and 
local income taxes for the taxable year shall not be allowed an 
additional deduction for qualified motor vehicle taxes. A 
taxpayer who does not itemize deductions is allowed an 
increased standard deduction for qualified motor vehicle taxes.
    Qualified motor vehicle taxes include any State or local 
sales or excise tax imposed on the purchase of a qualified 
motor vehicle. A qualified motor vehicle means a passenger 
automobile, light truck, or motorcycle which has a gross 
vehicle weight rating of not more than 8,500 pounds, or a motor 
home acquired for use by the taxpayer after the date of 
enactment and before January 1, 2010, the original use of which 
commences with the taxpayer.
    The deduction is limited to the tax on up to $49,500 of the 
purchase price of a qualified motor vehicle. The deduction is 
phased out for taxpayers with modified adjusted gross income 
between $125,000 and $135,000 ($250,000 and $260,000 in the 
case of a joint return).

                             Effective Date

    The provision is effective for purchases on or after the 
date of enactment (February 17, 2009) and before January 1, 
2010.

10. Extend alternative minimum tax relief for individuals (secs. 1011 
        and 1012 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 exemption amounts are: (1) $69,950 for taxable years 
beginning in 2008 and $45,000 in taxable years beginning after 
2008 in the case of married individuals filing a joint return 
and surviving spouses; (2) $46,200 for taxable years beginning 
in 2008 and $33,750 in taxable years beginning after 2008 in 
the case of other unmarried individuals; (3) $34,975 for 
taxable years beginning in 2008 and $22,500 in taxable years 
beginning after 2008 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, 
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, the credit 
for plug-in electric drive motor vehicles, and the D.C. first-
time homebuyer credit).
    For taxable years beginning before 2009, 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 2008, the nonrefundable 
personal credits (other than the adoption credit, the child 
credit, the credit for savers, the credit for residential 
energy efficient property, and the credit for plug-in electric 
drive motor vehicles) 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, the 
child credit, the credit for savers, the credit for residential 
energy efficient property, and the credit for plug-in electric 
drive motor vehicles are allowed to the full extent of the 
individual's regular tax and alternative minimum tax.\58\
---------------------------------------------------------------------------
    \58\ The rule applicable to the adoption credit and child credit is 
subject to the EGTRRA sunset.
---------------------------------------------------------------------------

                     Explanation of Provision \59\

---------------------------------------------------------------------------
    \59\ The provision was subsequently amended by sections 201 and 202 
of the Tax Relief, Unemployment Insurance Reauthorization, and Job 
Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of 
this document.
---------------------------------------------------------------------------
    The Act provides that the individual AMT exemption amount 
for taxable years beginning in 2009 is $70,950, in the case of 
married individuals filing a joint return and surviving 
spouses; (2) $46,700 in the case of other unmarried 
individuals; and (3) $35,475 in the case of married individuals 
filing separate returns.
    For taxable years beginning in 2009, the provision 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 
2009.

                     B. Tax Incentives for Business


1. Special allowance for certain property acquired during 2009 and 
        extension of election to accelerate AMT and research credits in 
        lieu of bonus depreciation (sec. 1201 of the Act and sec. 
        168(k) of the Code)

                              Present Law

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
placed in service during 2008 (and 2009 for certain longer-
lived and transportation property).\60\ 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.\61\ 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. 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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    \60\ Sec. 168(k). 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.
    \61\ 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.\62\ 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 is $500. The 
remaining $500 of the cost of the property is deductible under 
the rules applicable to 5-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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    \62\ 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)).\63\ Second, the 
original use \64\ of the property must commence with the 
taxpayer after December 31, 2007.\65\ Third, the taxpayer must 
acquire 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 ten 
years or longer and certain transportation property.\66\ 
Transportation property is defined as tangible personal 
property used in the trade or business of transporting persons 
or property.
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    \63\ 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.
    \64\ 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).
    \65\ 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, 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.
    \66\ 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.\67\ 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.\68\
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    \67\ 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.
    \68\ 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.
    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 and before 
December 31, 2008.\69\ 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.\70\ 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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    \69\ Sec. 168(k)(4). 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 section 168(k) does not apply 
to any eligible qualified property and the straight line method is used 
to calculate depreciation of such property.
    \70\ Special rules apply to an applicable partnership.
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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 \71\ 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,\72\ or (b) pursuant to a binding written 
contract which was entered into after March 31, 2008, and 
before January 1, 2009;\73\ 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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    \71\ 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)(1) 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.
    \72\ In the case of passenger aircraft, the written binding 
contract limitation does not apply.
    \73\ 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) are treated as one taxpayer for purposes of 
the limitation, as well as for electing the application of this 
provision.

                           Reasons for Change

    Congress believes that allowing additional first-year 
depreciation will accelerate purchases of equipment and other 
assets, and promote capital investment, modernization, and 
growth.

                      Explanation of Provision\74\

    The provision extends the additional first-year 
depreciation deduction for one year, generally through 2009 
(through 2010 for certain longer-lived and transportation 
property).
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    \74\ The additional first year depreciation deduction was 
subsequently extended for one year generally through 2010 (through 2011 
for certain longer-lived and transportation property) by section 2022 
of the Small Business Jobs Act of 2010, Pub. L. No. 111-240, described 
in Part Fourteen. The provision was temporarily expanded and extended 
generally through 2012 (through 2013 for certain longer-lived and 
transportation property) by section 401 of the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 
111-312, described in Part Sixteen of this document.
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    The provision generally permits corporations to increase 
the research credit or minimum tax credit limitation by the 
bonus depreciation amount with respect to certain property 
placed in service in 2009 (2010 in the case of certain longer-
lived and transportation property).\75\ The provision applies 
with respect to extension property, which is defined as 
property that is eligible qualified property solely because it 
meets the requirements under the extension of the special 
allowance for certain property acquired during 2009.
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    \75\ The provision allowing a taxpayer to claim certain credits in 
lieu of bonus depreciation was subsequently modified and extended 
generally through 2012 by section 401 of the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 
111-312, described in Part Sixteen of this document.
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    Under the provision, a taxpayer that has made an election 
to increase the research credit or minimum tax credit 
limitation for eligible qualified property for its first 
taxable year ending after March 31, 2008, may choose not to 
make this election for extension property. Further, the 
provision allows a taxpayer that has not made an election for 
eligible qualified property for its first taxable year ending 
after March 31, 2008, to make the election for extension 
property for its first taxable year ending after December 31, 
2008, and for each subsequent year. In the case of a taxpayer 
electing to increase the research or minimum tax credit for 
both eligible qualified property and extension property, a 
separate bonus depreciation amount, maximum amount, and maximum 
increase amount is computed and applied to each group of 
property.\76\
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    \76\ In computing the maximum amount, the maximum increase amount 
for extension property is reduced by bonus depreciation amounts for 
preceding taxable years only with respect to extension property.
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                             Effective Date

    The extension of the additional first-year depreciation 
deduction is generally effective for property placed in service 
after December 31, 2008.
    The extension of the election to accelerate AMT and 
research credits in lieu of bonus depreciation is effective for 
taxable years ending after December 31, 2008.

2. Temporary increase in limitations on expensing of certain 
        depreciable business assets (sec. 1202 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.\77\ 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. For taxable years beginning in 2009 and 2010, 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 in 2009 and 2010.
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    \77\ 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), qualified section 179 Gulf Opportunity Zone property 
(sec. 1400N(e)), qualified Recovery Assistance property placed in 
service in the Kansas disaster area, Pub. L. No. 110-234, sec. 15345 
(2008), and qualified disaster assistance property (sec. 179(e)).
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    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179. An expensing 
election is made under rules prescribed by the Secretary.\78\
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    \78\ Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to 
property placed in service in taxable years beginning after 2002 and 
before 2008, a taxpayer is permitted to make or revoke an election 
under section 179 without the consent of the Commissioner on an amended 
Federal tax return for that taxable year. This amended return must be 
filed within the time prescribed by law for filing an amended return 
for the taxable year. T.D. 9209, July 12, 2005.
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    For taxable years beginning in 2011 and thereafter (or 
before 2003), the following rules apply. A taxpayer with a 
sufficiently small amount of annual investment may elect to 
deduct up to $25,000 of the cost of qualifying property placed 
in service for the taxable year. The $25,000 amount is reduced 
(but not below zero) by the amount by which the cost of 
qualifying property placed in service during the taxable year 
exceeds $200,000. The $25,000 and $200,000 amounts are not 
indexed for inflation. In general, qualifying property is 
defined as depreciable tangible personal property that is 
purchased for use in the active conduct of a trade or business 
(not including off-the-shelf computer software). An expensing 
election may be revoked only with consent of the 
Commissioner.\79\
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    \79\ Sec. 179(c)(2).
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                           Reasons for Change

    Congress believes that section 179 expensing provides two 
important benefits. First, it lowers the cost of capital for 
property used in a trade or business. With a lower cost of 
capital, Congress believes businesses will invest in more 
equipment and employ more workers. Second, expensing eliminates 
depreciation recordkeeping requirements with respect to 
expensed property. Congress believes that the higher limitation 
amounts available during 2008 will continue to provide 
important benefits if extended, and the bill therefore extends 
the higher limitation amounts for an additional year. 
Furthermore, Congress believes that the higher dollar limits on 
expensing further lower the cost of capital, and make this 
benefit available for a greater number of taxpayers.

                     Explanation of Provision \80\

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    \80\ The provision was subsequently amended by section 402 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    The provision extends the $250,000 and $800,000 amounts to 
taxable years beginning in 2009.\81\
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    \81\ The provision was extended to taxable years beginning after 
2009 and before 2011 by section 201 of the Hiring Incentives to Restore 
Employment Act of 2010, Pub. L. No. 111-147, described in Part Seven. 
Additionally, the provision was temporarily expanded and extended for 
taxable years beginning in 2010 and 2011 by section 2021 of the Small 
Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part 
Fourteen, and modified and extended for taxable years beginning in 2012 
by section 402 of the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 
described in Part Sixteen of this document.
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                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2008.

3. Five-year carryback of operating losses (sec. 1211 of the Act and 
        sec. 172 of the Code)

                              Present Law

    Under present law, a net operating loss (``NOL'') generally 
means 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.\82\ NOLs offset taxable income in the order of the 
taxable years to which the NOL may be carried.\83\
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    \82\ Sec. 172(b)(1)(A).
    \83\ Sec. 172(b)(2).
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    The alternative minimum tax rules provide that a taxpayer's 
NOL deduction cannot reduce the taxpayer's alternative minimum 
taxable income (``AMTI'') by more than 90 percent of the AMTI.
    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), (2) 
certain amounts related to Hurricane Katrina, Gulf Opportunity 
Zone, and Midwestern Disaster Area, or (3) qualified disaster 
losses.\84\ 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.
---------------------------------------------------------------------------
    \84\ Sec. 172(b)(1)(J).
---------------------------------------------------------------------------
    In the case of a life insurance company, present law allows 
a deduction for the operations loss carryovers and carrybacks 
to the taxable year, in lieu of the deduction for net operation 
losses allowed to other corporations.\85\ A life insurance 
company is permitted to treat a loss from operations (as 
defined under section 810(c)) for any taxable year as an 
operations loss carryback to each of the three taxable years 
preceding the loss year and an operations loss carryover to 
each of the 15 taxable years following the loss year.\86\ 
Special rules apply to new life insurance companies.
---------------------------------------------------------------------------
    \85\ Secs. 810, 805(a)(5).
    \86\ Sec. 810(b)(1).
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                           Reasons for Change

    The NOL carryback and carryover rules are designed to allow 
taxpayers to smooth out swings in business income (and Federal 
income taxes thereon) that result from business cycle 
fluctuations. The recent economic conditions have resulted in 
many taxpayers incurring significant financial losses. Congress 
is concerned about the severity of the current economic 
downturn. A temporary extension of the NOL carryback period 
provides taxpayers in all sectors of the economy that 
experience such losses with the ability to obtain refunds of 
income taxes paid in prior years. These refunds can be used to 
fund capital investment or other expenses.

                        Explanation of Provision

    The Act provides an eligible small business with an 
election \87\ to increase the present-law carryback period for 
an applicable 2008 NOL from two years to any whole number of 
years elected by the taxpayer that is more than two and less 
than six.\88\ An eligible small business is a taxpayer meeting 
a $15,000,000 gross receipts test.\89\ An applicable NOL is the 
taxpayer's NOL for any taxable year ending in 2008, or if 
elected by the taxpayer, the NOL for any taxable year beginning 
in 2008. However, any election under this provision may be made 
only with respect to one taxable year.
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    \87\ For all elections under this provision, the common parent of a 
group of corporations filing a consolidated return makes the election, 
which is binding on all such corporations.
    \88\ The provision was modified and extended by section 13 of the 
Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 
111-92, described in Part Five of this document.
    \89\ For this purpose, the gross receipt test of section 448(c) is 
applied by substituting $15,000,000 for $5,000,000 each place it 
appears.
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                             Effective Date

    The provision is effective for NOLs arising in taxable 
years ending after December 31, 2007.
    For an NOL for a taxable year ending before the enactment 
of the provision (i.e., before February 17, 2009), the 
provision includes the following transition rules: (1) any 
election to waive the carryback period under either section 
172(b)(3) with respect to such loss may be revoked before the 
applicable date; (2) any election to increase the carryback 
period under this provision is treated as timely made if made 
before the applicable date; and (3) any application for a 
tentative carryback adjustment under section 6411(a) with 
respect to such loss is treated as timely filed if filed before 
the applicable date. For purposes of the transition rules, the 
applicable date is the date which is 60 days after the date of 
the enactment of the provision (i.e., 60 days after February 
17, 2009).

4. Estimated tax payments (sec. 1212 of the Act and sec. 6654 of the 
        Code)

                              Present Law

    Under present law, the income tax system is designed to 
ensure that taxpayers pay taxes throughout the year based on 
their income and deductions. To the extent that tax is not 
collected through withholding, taxpayers are required to make 
quarterly estimated payments of tax, the amount of which is 
determined by reference to the required annual payment. The 
required annual payment is the lesser of 90 percent of the tax 
shown on the return or 100 percent of the tax shown on the 
return for the prior taxable year (110 percent if the adjusted 
gross income for the preceding year exceeded $150,000). An 
underpayment results if the required payment exceeds the amount 
(if any) of the installment paid on or before the due date of 
the installment. The period of the underpayment runs from the 
due date of the installment to the earlier of (1) the 15th day 
of the fourth month following the close of the taxable year or 
(2) the date on which each portion of the underpayment is made. 
If a taxpayer fails to pay the required estimated tax payments 
under the rules, a penalty is imposed in an amount determined 
by applying the underpayment interest rate to the amount of the 
underpayment for the period of the underpayment. The penalty 
for failure to pay estimated tax is the equivalent of interest, 
which is based on the time value of money.
    Taxpayers are not liable for a penalty for the failure to 
pay estimated tax in certain circumstances. The statute 
provides exceptions for U.S. persons who did not have a tax 
liability the preceding year, if the tax shown on the return 
for the taxable year (or, if no return is filed, the tax), 
reduced by withholding, is less than $1,000, or the taxpayer is 
a recently retired or disabled person who satisfies the 
reasonable cause exception.

                        Explanation of Provision

    The Act provides that the required annual estimated tax 
payments of a qualified individual for taxable years beginning 
in 2009 is not greater than 90 percent of the tax liability 
shown on the tax return for the preceding taxable year. A 
qualified individual means any individual if the adjusted gross 
income shown on the tax return for the preceding taxable year 
is less than $500,000 ($250,000 if married filing separately) 
and the individual certifies that at least 50 percent of the 
gross income shown on the return for the preceding taxable year 
was income from a small trade or business. For purposes of this 
provision, a small trade or business means any trade or 
business that employed no more than 500 persons, on average, 
during the calendar year ending in or with the preceding 
taxable year.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

5. Modification of work opportunity tax credit (sec. 1221 of the Act 
        and sec. 51 of the Code)

                              Present Law


In general

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

Targeted groups eligible for the credit

    Generally, an employer is eligible for the credit only for 
qualified wages paid to members of a targeted group.
            (1) Families receiving TANF
    An eligible recipient is an individual certified by a 
designated local employment agency (e.g., a State employment 
agency) as being a member of a family eligible to receive 
benefits under the Temporary Assistance for Needy Families 
Program (``TANF'') for a period of at least nine months part of 
which is 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
    There are two subcategories of qualified veterans related 
to eligibility for food stamps and compensation for a service-
connected disability.
                Food stamps
    A qualified veteran is a veteran who is certified by the 
designated local agency as 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 three months part of which is 
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.
                Entitled to compensation for a service-connected 
                    disability
    A qualified veteran also includes 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.
                Definitions
    For these purposes, being entitled to compensation for a 
service-connected disability is defined with reference to 
section 101 of Title 38, U.S. Code, which means having a 
disability rating of 10 percent or higher for service connected 
injuries.
    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 the date of conviction.
            (4) Designated community residents
    A designated community resident is an individual certified 
as being at least age 18 but not yet age 40 on the hiring date 
and as having a principal place of abode within an empowerment 
zone, enterprise community, renewal community or a rural 
renewal community. For these purposes, a rural renewal county 
is a county outside a metropolitan statistical area (as defined 
by the Office of Management and Budget) which had a net 
population loss during the five-year periods 1990-1994 and 
1995-1999. Qualified wages do not include wages paid or 
incurred for services performed after the individual moves 
outside an empowerment zone, enterprise community, renewal 
community or a rural 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; (b) under a rehabilitation plan 
for veterans carried out under Chapter 31 of Title 38, U.S. 
Code; or (c) an individual work plan developed and implemented 
by an employment network pursuant to subsection (g) of section 
1148 of the Social Security Act. 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 with designated community 
residents, 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 at least 
age 18 but not yet age 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) \90\ 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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    \90\ The welfare-to-work tax credit was consolidated into the work 
opportunity tax credit in the Tax Relief and Health Care Act of 2006, 
Pub. L. No. 109-432, 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).
    In the case of a qualified veteran who is entitled to 
compensation for a service-connected disability, the credit 
equals 40 percent of $12,000 of qualified first-year wages. 
This 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.

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.

                           Reasons for Change

    The Congress believes that the work opportunity tax credit 
can be used to improve employment opportunities for broader 
categories of qualified veterans and young people whose 
employment opportunities may have been significantly eroded by 
the present economic downturn.

                     Explanation of Provision \91\

    The provision creates a new targeted group for the work 
opportunity tax credit. That new category is unemployed 
veterans and disconnected youth who begin work for the employer 
in 2009 or 2010.
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    \91\ For further discussion of the Work Opportunity Tax Credit see 
section 757 of the Tax Relief, Unemployment Insurance Reauthorization, 
and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part 
Sixteen of this document.
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    An unemployed veteran is defined as an individual certified 
by the designated local agency as someone who: (1) 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; (2) has been discharged or released from active 
duty in the Armed Forces during the five-year period ending on 
the hiring date; and (3) has received unemployment compensation 
under State or Federal law for not less than four weeks during 
the one-year period ending on the hiring date.
    A disconnected youth is defined as an individual certified 
by the designated local agency as someone: (1) at least age 16 
but not yet age 25 on the hiring date; (2) not regularly 
attending any secondary, technical, or post-secondary school 
during the six-month period preceding the hiring date; (3) not 
regularly employed during the six-month period preceding the 
hiring date; and (4) not readily employable by reason of 
lacking a sufficient number of skills.
    For purposes of the disconnected youths, it is intended 
that a low-level of formal education may satisfy the 
requirement that an individual is not readily employable by 
reason of lacking a sufficient number of skills. Further, it is 
intended that the Internal Revenue Service, when providing 
general guidance regarding the various new criteria, shall take 
into account the administrability of the program by the State 
agencies.

                             Effective Date

    The provisions are effective for individuals who begin work 
for an employer after December 31, 2008.

6. Clarification of regulations related to limitations on certain 
        built-in losses following an ownership change (sec. 1261 of the 
        Act and sec. 382 of the Code)

                              Present Law

    Section 382 limits the extent to which a ``loss 
corporation'' that experiences an ``ownership change'' may 
offset taxable income in any post-change taxable year by pre-
change net operating losses, certain built-in losses, and 
deductions attributable to the pre-change period.\92\ In 
general, the amount of income in any post-change year that may 
be offset by such net operating losses, built-in losses and 
deductions is limited to an amount (referred to as the 
``section 382 limitation'') determined by multiplying the value 
of the loss corporation immediately before the ownership change 
by the long-term tax-exempt interest rate.\93\
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    \92\ Sec. 383 imposes similar limitations, under regulations, on 
the use of carryforwards of general business credits, alternative 
minimum tax credits, foreign tax credits, and net capital loss 
carryforwards. Sec. 383 generally refers to section 382 for the 
meanings of its terms, but requires appropriate adjustments to take 
account of its application to credits and net capital losses.
    \93\ If the loss corporation had a ``net unrealized built-in gain'' 
(or NUBIG) at the time of the ownership change, then the section 382 
limitation for any taxable year may be increased by the amount of the 
``recognized built-in gains'' (discussed further below) for that year. 
A NUBIG is defined as the amount by which the fair market value of the 
assets of the corporation immediately before an ownership change 
exceeds the aggregate adjusted basis of such assets at such time. 
However, if the amount of the NUBIG does not exceed the lesser of (i) 
15 percent of the fair market value of the corporation's assets or (ii) 
$10,000,000, then the amount of the NUBIG is treated as zero. Sec. 
382(h)(1).
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    A ``loss corporation'' is defined as a corporation entitled 
to use a net operating loss carryover or having a net operating 
loss carryover for the taxable year in which the ownership 
change occurs. Except to the extent provided in regulations, 
such term includes any corporation with a ``net unrealized 
built-in loss'' (or NUBIL),\94\ defined as the amount by which 
the fair market value of the assets of the corporation 
immediately before an ownership change is less than the 
aggregate adjusted basis of such assets at such time. However, 
if the amount of the NUBIL does not exceed the lesser of (i) 15 
percent of the fair market value of the corporation's assets or 
(ii) $10,000,000, then the amount of the NUBIL is treated as 
zero.\95\
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    \94\ Sec. 382(k)(1).
    \95\ Sec. 382(h)(3).
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    An ownership change is defined generally as an increase by 
more than 50-percentage points in the percentage of stock of a 
loss corporation that is owned by any one or more five-percent 
(or greater) shareholders (as defined) within a three-year 
period.\96\ Treasury regulations provide generally that this 
measurement is to be made as of any ``testing date,'' which is 
any date on which the ownership of one or more persons who were 
or who become five-percent shareholders increases.\97\
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    \96\ Determinations of the percentage of stock of any corporation 
held by any person are made on the basis of value. Sec. 382(k)(6)(C).
    \97\ See Treas. Reg. sec. 1.382-2(a)(4) (providing that ``a loss 
corporation is required to determine whether an ownership change has 
occurred immediately after any owner shift, or issuance or transfer 
(including an issuance or transfer described in Treas. Reg. sec. 1.382-
4(d)(8)(i) or (ii)) of an option with respect to stock of the loss 
corporation that is treated as exercised under Treas. Reg. sec. 1.382-
4(d)(2)'' and defining a ``testing date'' as ``each date on which a 
loss corporation is required to make a determination of whether an 
ownership change has occurred'') and Temp. Treas. Reg. sec. 1.382-
2T(e)(1) (defining an ``owner shift'' as ``any change in the ownership 
of the stock of a loss corporation that affects the percentage of such 
stock owned by any 5-percent shareholder''). Treasury regulations under 
section 382 provide that, in computing stock ownership on specified 
testing dates, certain unexercised options must be treated as exercised 
if certain ownership, control, or income tests are met. These tests are 
met only if ``a principal purpose of the issuance, transfer, or 
structuring of the option (alone or in combination with other 
arrangements) is to avoid or ameliorate the impact of an ownership 
change of the loss corporation.'' Treas. Reg. sec. 1.382-4(d). Compare 
prior temporary regulations, Temp. Treas. Reg. sec. 1.382-2T(h)(4) 
(``Solely for the purpose of determining whether there is an ownership 
change on any testing date, stock of the loss corporation that is 
subject to an option shall be treated as acquired on any such date, 
pursuant to an exercise of the option by its owner on that date, if 
such deemed exercise would result in an ownership change.''). Notice 
2008-76, I.R.B. 2008-39 (September 29, 2008), released September 7, 
2008, provides that the Treasury Department intends to issue 
regulations modifying the term ``testing date'' under section 382 to 
exclude any date on or after which the United States acquires stock or 
options to acquire stock in certain corporations with respect to which 
there is a ``Housing Act Acquisition'' pursuant to the Housing and 
Economic Recovery Act of 2008, Pub. L. No. 110-289. The Notice states 
that the regulations will apply on and after September 7, 2008, unless 
and until there is additional guidance. Notice 2008-84, I.R.B. 2008-41 
(October 14, 2008), provides that the Treasury Department intends to 
issue regulations modifying the term ``testing date'' under section 382 
to exclude any date as of the close of which the United States owns, 
directly or indirectly, a more than 50-percent interest in a loss 
corporation, which regulations will apply unless and until there is 
additional guidance. Notice 2008-100, 2008-14 I.R.B. 1081 (released 
October 15, 2008) provides that the Treasury Department intends to 
issue regulations providing, among other things, that certain 
instruments acquired by the Treasury Department under the Capital 
Purchase Program (CPP) pursuant to the Emergency Economic Stabilization 
Act of 2008, Pub. L. No. 100-343, (``EESA'') shall not be treated as 
stock for certain purposes. The Notice also provides that certain 
capital contributions made by Treasury pursuant to the CPP shall not be 
considered to have been made as part of a plan the principal purpose of 
which was to avoid or increase any section 382 limitation (for purposes 
of section 382(l)(1)). The Notice states that taxpayers may rely on the 
rules described unless and until there is further guidance; and that 
any contrary guidance will not apply to instruments (i) held by 
Treasury that were acquired pursuant to the CCP prior to publication of 
that guidance, or (ii) issued to Treasury pursuant to the CCP under 
written binding contracts entered into prior to the publication of that 
guidance. Notice 2009-14, 2009-7 I.R.B. 516 (January 30, 2009) 
amplifies and supersedes Notice 2008-100, and provides additional 
guidance regarding the application of section 382 and other provisions 
of law to corporations whose instruments are acquired by the Treasury 
Department under certain programs pursuant to EESA.
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    Section 382(h) governs the treatment of certain built-in 
losses and built-in gains recognized with respect to assets 
held by the loss corporation at the time of the ownership 
change. In the case of a loss corporation that has a NUBIL 
(measured immediately before an ownership change), section 
382(h)(1) provides that any ``recognized built-in loss'' (or 
RBIL) for any taxable year during a ``recognition period'' 
(consisting of the five years beginning on the ownership change 
date) is subject to the section 382 limitation in the same 
manner as if it were a pre-change net operating loss.\98\ An 
RBIL is defined for this purpose as any loss recognized during 
the recognition period on the disposition of any asset held by 
the loss corporation immediately before the ownership change 
date, to the extent that such loss is attributable to an excess 
of the adjusted basis of the asset on the change date over its 
fair market value on that date.\99\ An RBIL also includes any 
amount allowable as depreciation, amortization or depletion 
during the recognition period, to the extent that such amount 
is attributable to the excess of the adjusted basis of the 
asset over its fair market value on the ownership change 
date.\100\ In addition, any amount that is allowable as a 
deduction during the recognition period (determined without 
regard to any carryover) but which is attributable to periods 
before the ownership change date is treated as an RBIL for the 
taxable year in which it is allowable as a deduction.\101\
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    \98\ Sec. 382(h)(2). The total amount of the loss corporation's 
RBILs that are subject to the section 382 limitation cannot exceed the 
amount of the corporation's NUBIL.
    \99\ Sec. 382(h)(2)(B).
    \100\ Ibid.
    \101\ Sec. 382(h)(6)(B).
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    As indicated above, section 382(h)(1) provides in the case 
of a loss corporation that has a NUBIG that the section 382 
limitation may be increased for any taxable year during the 
recognition period by the amount of recognized built-in gains 
(or RBIGs) for such taxable year.\102\ An RBIG is defined for 
this purpose as any gain recognized during the recognition 
period on the disposition of any asset held by the loss 
corporation immediately before the ownership change date, to 
the extent that such gain is attributable to an excess of the 
fair market value of the asset on the change date over its 
adjusted basis on that date.\103\ In addition, any item of 
income that is properly taken into account during the 
recognition period but which is attributable to periods before 
the ownership change date is treated as an RBIG for the taxable 
year in which it is properly taken into account.\104\
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    \102\ The total amount of such increases cannot exceed the amount 
of the corporation's NUBIG.
    \103\ Sec. 382(h)(2)(A).
    \104\ Sec. 382(h)(6)(A).
---------------------------------------------------------------------------
    Notice 2003-65 \105\ provides two alternative safe harbor 
approaches for the identification of built-in items for 
purposes of section 382(h): the ``1374 approach'' and the ``338 
approach.''
---------------------------------------------------------------------------
    \105\ 2003-2 C.B. 747.
---------------------------------------------------------------------------
    Under the 1374 approach,\106\ NUBIG or NUBIL is the net 
amount of gain or loss that would be recognized in a 
hypothetical sale of the assets of the loss corporation 
immediately before the ownership change.\107\ The amount of 
gain or loss recognized during the recognition period on the 
sale or exchange of an asset held at the time of the ownership 
change is RBIG or RBIL, respectively, to the extent it is 
attributable to a difference between the adjusted basis and the 
fair market value of the asset on the change date, as described 
above. However, the 1374 approach generally relies on the 
accrual method of accounting to identify items of income or 
deduction as RBIG or RBIL, respectively. Generally, items of 
income or deduction properly included in income or allowed as a 
deduction during the recognition period are considered 
attributable to period before the change date (and thus are 
treated as RBIG or RBIL, respectively), if a taxpayer using an 
accrual method of accounting would have included the item in 
income or been allowed a deduction for the item before the 
change date. However, the 1374 approach includes a number of 
exceptions to this general rule, including a special rule 
dealing with bad debt deductions under section 166. Under this 
special rule, any deduction item properly taken into account 
during the first 12 months of the recognition period as a bad 
debt deduction under section 166 is treated as RBIL if the item 
arises from a debt owed to the loss corporation at the 
beginning of the recognition period (and deductions for such 
items properly taken into account after the first 12 months of 
the recognition period are not RBILs).\108\
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    \106\ The 1374 approach generally incorporates rules similar to 
those of section 1374(d) and the Treasury regulations thereunder in 
calculating NUBIG and NUBIL and identifying RBIG and RBIL.
    \107\ More specifically, NUBIG or NUBIL is calculated by 
determining the amount that would be realized if immediately before the 
ownership change the loss corporation had sold all of its assets, 
including goodwill, at fair market value to a third party that assumed 
all of its liabilities, decreased by the sum of any deductible 
liabilities of the loss corporation that would be included in the 
amount realized on the hypothetical sale and the loss corporation's 
aggregate adjusted basis in all of its assets, increased or decreased 
by the corporation's section 481 adjustments that would be taken into 
account on a hypothetical sale, and increased by any RBIL that would 
not be allowed as a deduction under section 382, 383 or 384 on the 
hypothetical sale.
    \108\ Notice 2003-65, section III.B.2.b.
---------------------------------------------------------------------------
    The 338 approach identifies items of RBIG and RBIL 
generally by comparing the loss corporation's actual items of 
income, gain, deduction and loss with those that would have 
resulted if a section 338 election had been made with respect 
to a hypothetical purchase of all of the outstanding stock of 
the loss corporation on the change date. Under the 338 
approach, NUBIG or NUBIL is calculated in the same manner as it 
is under the 1374 approach.\109\ The 338 approach identifies 
RBIG or RBIL by comparing the loss corporation's actual items 
of income, gain, deduction and loss with the items of income, 
gain, deduction and loss that would result if a section 338 
election had been made for the hypothetical purchase. The loss 
corporation is treated for this purpose as using those 
accounting methods that the loss corporation actually uses. The 
338 approach does not include any special rule with regard to 
bad debt deductions under section 166.
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    \109\ Accordingly, unlike the case in which a section 338 election 
is actually made, contingent consideration (including a contingent 
liability) is taken into account in the initial calculation of NUBIG or 
NUBIL, and no further adjustments are made to reflect subsequent 
changes in deemed consideration.
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    Section 166 generally allows a deduction in respect of any 
debt that becomes worthless, in whole or in part, during the 
taxable year.\110\ The determination of whether a debt is 
worthless, in whole or in part, is a question of fact. However, 
in the case of a bank or other corporation that is subject to 
supervision by Federal authorities, or by State authorities 
maintaining substantially equivalent standards, the Treasury 
regulations under section 166 provide a presumption of 
worthlessness to the extent that a debt is charged off during 
the taxable year pursuant to a specific order of such an 
authority or in accordance with established policies of such an 
authority (and in the latter case, the authority confirms in 
writing upon the first subsequent audit of the bank or other 
corporation that the charge-off would have been required if the 
audit had been made at the time of the charge-off). The 
presumption does not apply if the taxpayer does not claim the 
amount so charged off as a deduction for the taxable year in 
which the charge-off takes place. In that case, the charge-off 
is treated as having been involuntary; however, in order to 
claim the section 166 deduction in a later taxable year, the 
taxpayer must produce sufficient evidence to show that the debt 
became partially worthless in the later year or became 
recoverable only in part subsequent to the taxable year of the 
charge-off, as the case may be, and to the extent that the 
deduction claimed in the later year for a partially worthless 
debt was not involuntarily charged off in prior taxable years, 
it was charged off in the later taxable year.\111\
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    \110\ Section 166 does not apply, however, to a debt which is 
evidenced by a security, defined for this purpose (by cross-reference 
to section 165(g)(2)(C)) as a bond, debenture, note or certificate or 
other evidence of indebtedness issued by a corporation or by a 
government or political subdivision thereof, with interest coupons or 
in registered form. Sec. 166(e).
    \111\ See Treas. Reg. sec. 1.166-2(d)(1) and (2).
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    The Treasury regulations also permit a bank (generally as 
defined for purposes of section 581, with certain 
modifications) that is subject to supervision by Federal 
authorities, or State authorities maintaining substantially 
equivalent standards, to make a ``conformity election'' under 
which debts charged off for regulatory purposes during a 
taxable year are conclusively presumed to be worthless for tax 
purposes to the same extent, provided that the charge-off 
results from a specific order of the regulatory authority or 
corresponds to the institution's classification of the debt as 
a ``loss asset'' pursuant to loan loss classification standards 
that are consistent with those of certain specified bank 
regulatory authorities. The conformity election is treated as 
the adoption of a method of accounting.\112\
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    \112\ See Treas. Reg. sec. 1.166-2(d)(3); cf. Priv. Ltr. Rul. 
9248048 (July 7, 1992); Tech. Adv. Mem. 9122001 (Feb. 8, 1991).
---------------------------------------------------------------------------
    Notice 2008-83,\113\ released on October 1, 2008, provides 
that ``[f]or purposes of section 382(h), any deduction properly 
allowed after an ownership change (as defined in section 
382(g)) to a bank with respect to losses on loans or bad debts 
(including any deduction for a reasonable addition to a reserve 
for bad debts) shall not be treated as a built-in loss or a 
deduction that is attributable to periods before the change 
date.'' \114\ The Notice further states that the Internal 
Revenue Service and the Treasury Department are studying the 
proper treatment under section 382(h) of certain items of 
deduction or loss allowed after an ownership change to a 
corporation that is a bank (as defined in section 581) both 
immediately before and after the change date, and that any such 
corporation may rely on the treatment set forth in Notice 2008-
83 unless and until there is additional guidance.
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    \113\ 2008-42 I.R.B. 2008-42 (Oct. 20, 2008).
    \114\ Notice 2008-83, section 2.
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                           Reasons for Change

    The Congress believes that: (1) the delegation of authority 
to the Secretary of the Treasury, or his delegate, under 
section 382(m) \115\ does not authorize the Secretary to 
provide exemptions or special rules that are restricted to 
particular industries or classes of taxpayers, (2) Notice 2008-
83 is inconsistent with the congressional intent in enacting 
section 382(m), and (3) the legal authority to prescribe Notice 
2008-83 is doubtful, but that (4) as taxpayers should generally 
be able to rely on guidance issued by the Secretary of the 
Treasury, legislation is necessary to clarify the force and 
effect of Notice 2008-83 and restore the proper application 
under the Internal Revenue Code of the limitation on built-in 
losses following an ownership change of a bank.
---------------------------------------------------------------------------
    \115\ Section 382(m) authorizes the Secretary to prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of sections 382 and 383.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision states that Congress finds as follows: (1) 
The delegation of authority to the Secretary of the Treasury, 
or his delegate, under section 382(m) does not authorize the 
Secretary to provide exemptions or special rules that are 
restricted to particular industries or classes of taxpayers; 
(2) Notice 2008-83 is inconsistent with the congressional 
intent in enacting such section 382(m); (3) the legal authority 
to prescribe Notice 2008-83 is doubtful; (4) however, as 
taxpayers should generally be able to rely on guidance issued 
by the Secretary of the Treasury, legislation is necessary to 
clarify the force and effect of Notice 2008-83 and restore the 
proper application under the Internal Revenue Code of the 
limitation on built-in losses following an ownership change of 
a bank.
    Under the provision, Notice 2008-83 shall be deemed to have 
the force and effect of law with respect to any ownership 
change (as defined in section 382(g)) occurring on or before 
January 16, 2009, and with respect to any ownership change (as 
so defined) which occurs after January 16, 2009, if such change 
(1) is pursuant to a written binding contract entered into on 
or before such date or (2) is pursuant to a written agreement 
entered into on or before such date and such agreement was 
described on or before such date in a public announcement or in 
a filing with the Securities and Exchange Commission required 
by reason of such ownership change, but shall otherwise have no 
force or effect with respect to any ownership change after such 
date.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

7. Treatment of certain ownership changes for purposes of limitations 
        on net operating loss carryforwards and certain built-in losses 
        (sec. 1262 of the Act and sec. 382 of the Code)

                              Present Law

    Section 382 limits the extent to which a ``loss 
corporation'' that experiences an ``ownership change'' may 
offset taxable income in any post-change taxable year by pre-
change net operating losses, certain built-in losses, and 
deductions attributable to the pre-change period.\116\ In 
general, the amount of income in any post-change year that may 
be offset by such net operating losses, built-in losses and 
deductions is limited to an amount (referred to as the 
``section 382 limitation'') determined by multiplying the value 
of the loss corporation immediately before the ownership change 
by the long-term tax-exempt interest rate.\117\
---------------------------------------------------------------------------
    \116\ Section 383 imposes similar limitations, under regulations, 
on the use of carryforwards of general business credits, alternative 
minimum tax credits, foreign tax credits, and net capital loss 
carryforwards. Section 383 generally refers to section 382 for the 
meanings of its terms, but requires appropriate adjustments to take 
account of its application to credits and net capital losses.
    \117\ If the loss corporation had a ``net unrealized built in 
gain'' (or NUBIG) at the time of the ownership change, then the section 
382 limitation for any taxable year may be increased by the amount of 
the ``recognized built-in gains'' (discussed further below) for that 
year. A NUBIG is defined as the amount by which the fair market value 
of the assets of the corporation immediately before an ownership change 
exceeds the aggregate adjusted basis of such assets at such time. 
However, if the amount of the NUBIG does not exceed the lesser of (i) 
15 percent of the fair market value of the corporation's assets or (ii) 
$10,000,000, then the amount of the NUBIG is treated as zero. Sec. 
382(h)(1).
---------------------------------------------------------------------------
    A ``loss corporation'' is defined as a corporation entitled 
to use a net operating loss carryover or having a net operating 
loss carryover for the taxable year in which the ownership 
change occurs. Except to the extent provided in regulations, 
such term includes any corporation with a ``net unrealized 
built-in loss'' (or NUBIL),\118\ defined as the amount by which 
the fair market value of the assets of the corporation 
immediately before an ownership change is less than the 
aggregate adjusted basis of such assets at such time. However, 
if the amount of the NUBIL does not exceed the lesser of (i) 15 
percent of the fair market value of the corporation's assets or 
(ii) $10,000,000, then the amount of the NUBIL is treated as 
zero.\119\
---------------------------------------------------------------------------
    \118\ Sec. 382(k)(1).
    \119\ Sec. 382(h)(3).
---------------------------------------------------------------------------
    An ownership change is defined generally as an increase by 
more than 50-percentage points in the percentage of stock of a 
loss corporation that is owned by any one or more five-percent 
(or greater) shareholders (as defined) within a three year 
period.\120\ Treasury regulations provide generally that this 
measurement is to be made as of any ``testing date,'' which is 
any date on which the ownership of one or more persons who were 
or who become five-percent shareholders increases.\121\
---------------------------------------------------------------------------
    \120\ Determinations of the percentage of stock of any corporation 
held by any person are made on the basis of value. Sec. 382(k)(6)(C).
    \121\ See Treas. Reg. sec. 1.382-2(a)(4) (providing that ``a loss 
corporation is required to determine whether an ownership change has 
occurred immediately after any owner shift, or issuance or transfer 
(including an issuance or transfer described in Treas. Reg. sec. 1.382-
4(d)(8)(i) or (ii)) of an option with respect to stock of the loss 
corporation that is treated as exercised under Treas. Reg. sec. 1.382-
4(d)(2)'' and defining a ``testing date'' as ``each date on which a 
loss corporation is required to make a determination of whether an 
ownership change has occurred'') and Temp. Treas. Reg. sec. 1.382-
2T(e)(1) (defining an ``owner shift'' as ``any change in the ownership 
of the stock of a loss corporation that affects the percentage of such 
stock owned by any 5-percent shareholder''). Treasury regulations under 
section 382 provide that, in computing stock ownership on specified 
testing dates, certain unexercised options must be treated as exercised 
if certain ownership, control, or income tests are met. These tests are 
met only if ``a principal purpose of the issuance, transfer, or 
structuring of the option (alone or in combination with other 
arrangements) is to avoid or ameliorate the impact of an ownership 
change of the loss corporation.'' Treas. Reg. sec. 1.382-4(d). Compare 
prior temporary regulations, Temp. Treas. Reg. sec. 1.382-2T(h)(4) 
(``Solely for the purpose of determining whether there is an ownership 
change on any testing date, stock of the loss corporation that is 
subject to an option shall be treated as acquired on any such date, 
pursuant to an exercise of the option by its owner on that date, if 
such deemed exercise would result in an ownership change.''). Notice 
2008-76, I.R.B. 2008-39 (September 29, 2008), released September 7, 
2008, provides that the Treasury Department intends to issue 
regulations modifying the term ``testing date'' under section 382 to 
exclude any date on or after which the United States acquires stock or 
options to acquire stock in certain corporations with respect to which 
there is a ``Housing Act Acquisition'' pursuant to the Housing and 
Economic Recovery Act of 2008, Pub. L. No. 110-289. The Notice states 
that the regulations will apply on and after September 7, 2008, unless 
and until there is additional guidance. Notice 2008-84, I.R.B. 2008-41 
(October 14, 2008), provides that the Treasury Department intends to 
issue regulations modifying the term ``testing date'' under section 382 
to exclude any date as of the close of which the United States owns, 
directly or indirectly, a more than 50 percent interest in a loss 
corporation, which regulations will apply unless and until there is 
additional guidance. Notice 2008-100, 2008-14 I.R.B. 1081 (released 
October 15, 2008) provides that the Treasury Department intends to 
issue regulations providing, among other things, that certain 
instruments acquired by the Treasury Department under the Capital 
Purchase Program (CPP) pursuant to the Emergency Economic Stabilization 
Act of 2008, Pub. L. No. 100-343, (``EESA'') shall not be treated as 
stock for certain purposes. The Notice also provides that certain 
capital contributions made by Treasury pursuant to the CPP shall not be 
considered to have been made as part of a plan the principal purpose of 
which was to avoid or increase any section 382 limitation (for purposes 
of section 382(l)(1)). The Notice states that taxpayers may rely on the 
rules described unless and until there is further guidance; and that 
any contrary guidance will not apply to instruments (i) held by 
Treasury that were acquired pursuant to the CCP prior to publication of 
that guidance, or (ii) issued to Treasury pursuant to the CCP under 
written binding contracts entered into prior to the publication of that 
guidance. Notice 2009-14, 2009-7 I.R.B. 516 (January 30, 2009) 
amplifies and supersedes Notice 2008-100, and provides additional 
guidance regarding the application of section 382 and other provisions 
of law to corporations whose instruments are acquired by the Treasury 
Department under certain programs pursuant to EESA.
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act amends section 382 of the Code to provide an 
exception from the application of the section 382 limitation. 
Under the provision, the section 382 limitation that would 
otherwise arise as a result of an ownership change shall not 
apply in the case of an ownership change that occurs pursuant 
to a restructuring plan of a taxpayer which is required under a 
loan agreement or commitment for a line of credit entered into 
with the Department of the Treasury under the Emergency 
Economic Stabilization Act of 2008, and is intended to result 
in a rationalization of the costs, capitalization, and capacity 
with respect to the manufacturing workforce of, and suppliers 
to, the taxpayer and its subsidiaries.\122\
---------------------------------------------------------------------------
    \122\ This exception shall not apply in the case of any subsequent 
ownership change unless such subsequent ownership change also meets the 
requirements of the exception.
---------------------------------------------------------------------------
    However, an ownership change that would otherwise be 
excepted from the section 382 limitation under the provision 
will instead remain subject to the section 382 limitation if, 
immediately after such ownership change, any person (other than 
a voluntary employees' beneficiary association within the 
meaning of section 501(c)(9)) owns stock of the new loss 
corporation possessing 50 percent or more of the total combined 
voting power of all classes of stock entitled to vote or of the 
total value of the stock of such corporation. For purposes of 
this rule, persons who bear a relationship to one another 
described in section 267(b) or 707(b)(1), or who are members of 
a group of persons acting in concert, are treated as a single 
person.
    The exception from the application of the section 382 
limitation under the provision does not change the fact that an 
ownership change has occurred for other purposes of section 
382.\123\
---------------------------------------------------------------------------
    \123\ For example, an ownership change has occurred for purposes of 
determining the testing period under section 382(i)(2).
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to ownership changes after the date 
of enactment (February 17, 2009).

8. Deferral of certain income from the discharge of indebtedness (sec. 
        1231 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, certain real property business indebtedness, and 
certain qualified principal residence indebtedness.\124\ In 
cases involving discharges of indebtedness that are excluded 
from gross income under the exceptions to the general rule, 
taxpayers generally are required to reduce certain tax 
attributes, including net operating losses, general business 
credits, minimum tax credits, capital loss carryovers, and 
basis in property, by the amount of the discharge of 
indebtedness.\125\
---------------------------------------------------------------------------
    \124\ See sections 61(a)(12) and 108. But see section 102 (a debt 
cancellation which constitutes a gift or bequest is not treated as 
income to the donee debtor).
    \125\ Sec. 108(b).
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    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.\126\
---------------------------------------------------------------------------
    \126\ Sec. 1017.
---------------------------------------------------------------------------
    For all taxpayers, the amount of discharge of indebtedness 
generally is equal to the excess of the adjusted issue price of 
the indebtedness being satisfied over the amount paid (or 
deemed paid) to satisfy such indebtedness.\127\ This rule 
generally applies to (1) the acquisition by the debtor of its 
debt instrument in exchange for cash, (2) the issuance of a 
debt instrument by the debtor in satisfaction of its 
indebtedness, including a modification of indebtedness that is 
treated as an exchange (a debt-for-debt exchange), (3) the 
transfer by a debtor corporation of stock, or a debtor 
partnership of a capital or profits interest in such 
partnership, in satisfaction of its indebtedness (an equity-
for-debt exchange), and (4) the acquisition by a debtor 
corporation of its indebtedness from a shareholder as a 
contribution to capital.
---------------------------------------------------------------------------
    \127\ Treas. Reg. sec. 1.61-12(c)(2)(ii). Treas. Reg. sec. 1.1275-
1(b) defines ``adjusted issue price.''
---------------------------------------------------------------------------
            Debt-for-debt exchanges
    If a debtor issues a debt instrument in satisfaction of its 
indebtedness, the debtor is treated as having satisfied the 
indebtedness with an amount of money equal to the issue price 
of the newly issued debt instrument.\128\ The issue price of 
such newly issued debt instrument generally is determined under 
sections 1273 and 1274.\129\ Similarly, a ``significant 
modification'' of a debt instrument, within the meaning of 
Treas. Reg. sec. 1.1001-3, results in an exchange of the 
original debt instrument for a modified instrument. In such 
cases, where the issue price of the modified debt instrument is 
less than the adjusted issue price of the original debt 
instrument, the debtor will have income from the cancellation 
of indebtedness.
---------------------------------------------------------------------------
    \128\ Sec. 108(e)(10)(A).
    \129\ Sec. 108(e)(10)(B).
---------------------------------------------------------------------------
    If any new debt instrument is issued (including as a result 
of a significant modification to a debt instrument), such debt 
instrument will have original issue discount equal to the 
excess (if any) of such debt instrument's stated redemption 
price at maturity over its issue price.\130\ In general, an 
issuer of a debt instrument with original issue discount may 
deduct for any taxable year, with respect to such debt 
instrument, an amount of original issue discount equal to the 
aggregate daily portions of the original issue discount for 
days during such taxable year.\131\
---------------------------------------------------------------------------
    \130\ Sec. 1273.
    \131\ Sec. 163(e).
---------------------------------------------------------------------------
            Equity-for-debt exchanges
    If a corporation transfers stock, or a partnership 
transfers a capital or profits interest in such partnership, to 
a creditor in satisfaction of its indebtedness, then such 
corporation or partnership is treated as having satisfied its 
indebtedness with an amount of money equal to the fair market 
value of the stock or interest.\132\
---------------------------------------------------------------------------
    \132\ Sec. 108(e)(8).
---------------------------------------------------------------------------
            Related party acquisitions
    Indebtedness directly or indirectly acquired by a person 
who bears a relationship to the debtor described in section 
267(b) or section 707(b) is treated as if it were acquired by 
the debtor.\133\ Thus, where a debtor's indebtedness is 
acquired for less than its adjusted issue price by a person 
related to the debtor (within the meaning of section 267(b) or 
707(b)), the debtor recognizes income from the cancellation of 
indebtedness. Regulations under section 108 provide that the 
indebtedness acquired by the related party is treated as new 
indebtedness issued by the debtor to the related holder on the 
acquisition date (the deemed issuance).\134\ The new 
indebtedness is deemed issued with an issue price equal to the 
amount used under regulations to compute the amount of 
cancellation of indebtedness income realized by the debtor 
(i.e., either the holder's adjusted basis or the fair market 
value of the indebtedness, as the case may be).\135\ The 
indebtedness deemed issued pursuant to the regulations has 
original issue discount to the extent its stated redemption 
price at maturity exceeds its issue price.
---------------------------------------------------------------------------
    \133\ Sec. 108(e)(4).
    \134\ Treas. Reg. sec. 1.108-2(g).
    \135\ Ibid.
---------------------------------------------------------------------------
    In the case of a deemed issuance under Treas. Reg. sec. 
1.108-2(g), the related holder does not recognize any gain or 
loss, and the related holder's adjusted basis in the 
indebtedness remains the same as it was immediately before the 
deemed issuance.\136\ The deemed issuance is treated as a 
purchase of the indebtedness by the related holder for purposes 
of section 1272(a)(7) (pertaining to reduction of original 
issue discount where a subsequent holder pays acquisition 
premium) and section 1276 (pertaining to acquisitions of debt 
at a market discount).\137\
---------------------------------------------------------------------------
    \136\ Treas. Reg. sec. 1.108-2(g)(2).
    \137\ Ibid.
---------------------------------------------------------------------------
            Contribution of a debt instrument to capital of a 
                    corporation
    Where a debtor corporation acquires its indebtedness from a 
shareholder as a contribution to capital, section 118 \138\ 
does not apply, but the corporation is treated as satisfying 
such indebtedness with an amount of money equal to the 
shareholder's adjusted basis in the indebtedness.
---------------------------------------------------------------------------
    \138\ Section 118 provides, in general, that in the case of a 
corporation, gross income does not include any contribution to the 
capital of the taxpayer.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision permits a taxpayer to elect to defer 
cancellation of indebtedness income arising from a 
``reacquisition'' of ``an applicable debt instrument'' after 
December 31, 2008, and before January 1, 2011. Income deferred 
pursuant to the election must be included in the gross income 
of the taxpayer ratably in the five taxable years beginning 
with (1) for repurchases in 2009, the fifth taxable year 
following the taxable year in which the repurchase occurs or 
(2) for repurchases in 2010, the fourth taxable year following 
the taxable year in which the repurchase occurs.
    An ``applicable debt instrument'' is any debt instrument 
issued by (1) a C corporation or (2) any other person in 
connection with the conduct of a trade or business by such 
person. For purposes of the provision, a ``debt instrument'' is 
broadly defined to include any bond, debenture, note, 
certificate or any other instrument or contractual arrangement 
constituting indebtedness (within the meaning of section 
1275(a)(1)).
    A ``reacquisition'' is any ``acquisition'' of an applicable 
debt instrument by (1) the debtor that issued (or is otherwise 
the obligor under) such debt instrument or (2) any person 
related to the debtor within the meaning of section 108(e)(4). 
For purposes of the provision, an ``acquisition'' includes, 
without limitation, (1) an acquisition of a debt instrument for 
cash, (2) the exchange of a debt instrument for another debt 
instrument (including an exchange resulting from a modification 
of a debt instrument), (3) the exchange of corporate stock or a 
partnership interest for a debt instrument, (4) the 
contribution of a debt instrument to the capital of the issuer, 
and (5) the complete forgiveness of a debt instrument by a 
holder of such instrument.
            Special rules for debt-for-debt exchanges
    If a taxpayer makes the election provided by the provision 
for a debt-for-debt exchange in which the newly issued debt 
instrument issued (or deemed issued, including by operation of 
the rules in Treas. Reg. sec. 1.108-2(g)) in satisfaction of an 
outstanding debt instrument of the debtor has original issue 
discount, then any otherwise allowable deduction for original 
issue discount with respect to such newly issued debt 
instrument that (1) accrues before the first year of the five-
taxable-year period in which the related, deferred discharge of 
indebtedness income is included in the gross income of the 
taxpayer and (2) does not exceed such related, deferred 
discharge of indebtedness income, is deferred and allowed as a 
deduction ratably over the same five-taxable-year period in 
which the deferred discharge of indebtedness income is included 
in gross income.
    This rule can apply also in certain cases when a debtor 
reacquires its debt for cash. If the taxpayer issues a debt 
instrument and the proceeds of such issuance are used directly 
or indirectly to reacquire a debt instrument of the taxpayer, 
the provision treats the newly issued debt instrument as if it 
were issued in satisfaction of the retired debt instrument. If 
the newly issued debt instrument has original issue discount, 
the rule described above applies. Thus, all or a portion of the 
interest deductions with respect to original issue discount on 
the newly issued debt instrument are deferred into the five-
taxable-year period in which the discharge of indebtedness 
income is recognized. Where only a portion of the proceeds of a 
new issuance are used by a taxpayer to satisfy outstanding 
debt, then the deferral rule applies to the portion of the 
original issue discount on the newly issued debt instrument 
that is equal to the portion of the proceeds of such newly 
issued instrument used to retire outstanding debt of the 
taxpayer.
            Acceleration of deferred items
    Cancellation of indebtedness income and any related 
deduction for original issue discount that is deferred by an 
electing taxpayer (and has not previously been taken into 
account) generally is accelerated and taken into income in the 
taxable year in which the taxpayer: (1) dies, (2) liquidates or 
sells substantially all of its assets (including in a title 11 
or similar case), (3) ceases to do business, or (4) or is in 
similar circumstances. In a case under title 11 or a similar 
case, any deferred items are taken into income as of the day 
before the petition is filed. Deferred items are accelerated in 
a case under Title 11 where the taxpayer liquidates, sells 
substantially all of its assets, or ceases to do business, but 
not where a taxpayer reorganizes and emerges from the Title 11 
case. In the case of a pass-thru entity, this acceleration rule 
also applies to the sale, exchange, or redemption of an 
interest in the entity by a holder of such interest.
            Special rule for partnerships
    In the case of a partnership, any income deferred under the 
provision is allocated to the partners in the partnership 
immediately before the discharge of indebtedness in the manner 
such amounts would have been included in the distributive 
shares of such partners under section 704 if such income were 
recognized at the time of the discharge. Any decrease in a 
partner's share of liabilities as a result of such discharge is 
not taken into account for purposes of section 752 at the time 
of the discharge to the extent the deemed distribution under 
section 752 would cause the partner to recognize gain under 
section 731. Thus, the deemed distribution under section 752 is 
deferred with respect to a partner to the extent it exceeds 
such partner's basis. Amounts so deferred are taken into 
account at the same time, and to the extent remaining in the 
same amount, as income deferred under the provision is 
recognized by the partner.
            Coordination with section 108(a) and procedures for 
                    election
    Where a taxpayer makes the election provided by the 
provision, the exclusions provided by section 108(a)(1)(A), 
(B), (C), and (D) shall not apply to the income from the 
discharge of indebtedness for the year in which the taxpayer 
makes the election or any subsequent year. Thus, for example, 
an insolvent taxpayer may elect under the provision to defer 
income from the discharge of indebtedness rather than excluding 
such income and reducing tax attributes by a corresponding 
amount. The election is to be made on an instrument by 
instrument basis; once made, the election is irrevocable. A 
taxpayer makes an election with respect to a debt instrument by 
including with its return for the taxable year in which the 
reacquisition of the debt instrument occurs a statement that 
(1) clearly identifies the debt instrument and (2) includes the 
amount of deferred income to which the provision applies and 
such other information as may be prescribed by the Secretary. 
The Secretary is authorized to require reporting of the 
election (and other information with respect to the 
reacquisition) for years subsequent to the year of the 
reacquisition.
            Regulatory authority
    The provision authorizes the Secretary of the Treasury to 
prescribe such regulations as may be necessary or appropriate 
for purposes of applying the provision, including rules 
extending the acceleration provisions to other circumstances 
where appropriate, rules requiring reporting of the election 
and such other information as the Secretary may require on 
returns of tax for subsequent taxable years, rules for the 
application of the provision to partnerships, S corporations, 
and other pass-thru entities, including for the allocation of 
deferred deductions.

                             Effective Date

    The provision is effective for discharges in taxable years 
ending after December 31, 2008.

9. Modifications of rules for original issue discount on certain high 
        yield obligations (sec. 1232 of the Act and sec. 163 of the 
        Code)

                              Present Law

    In general, the issuer of a debt instrument with original 
issue discount may deduct the portion of such original issue 
discount equal to the aggregate daily portions of the original 
issue discount for days during the taxable year.\139\ However, 
in the case of an applicable high-yield discount obligation (an 
``AHYDO'') issued by a corporate issuer: (1) no deduction is 
allowed for the ``disqualified portion'' of the original issue 
discount on such obligation, and (2) the remainder of the 
original issue discount on any such obligation is not allowable 
as a deduction until paid by the issuer.\140\
---------------------------------------------------------------------------
    \139\ Sec. 163(e)(1). For purposes of section 163(e)(1), the daily 
portion of the original issue discount for any day is determined under 
section 1272(a) (without regard to paragraph (7) thereof and without 
regard to section 1273(a)(3)).
    \140\ Sec. 163(e)(5).
---------------------------------------------------------------------------
    An AHYDO is any debt instrument if (1) the maturity date on 
such instrument is more than five years from the date of issue; 
(2) the yield to maturity on such instrument exceeds the sum of 
(a) the applicable Federal rate in effect under section 1274(d) 
for the calendar month in which the obligation is issued and 
(b) five percentage points, and (3) such instrument has 
``significant original issue discount.'' \141\ An instrument is 
treated as having ``significant original issue discount'' if 
the aggregate amount of interest that would be includible in 
the gross income of the holder with respect to such instrument 
for periods before the close of any accrual period (as defined 
in section 1272(a)(5)) ending after the date five years after 
the date of issue, exceeds the sum of (1) the aggregate amount 
of interest to be paid under the instrument before the close of 
such accrual period, and (2) the product of the issue price of 
such instrument (as defined in sections 1273(b) and 1274(a)) 
and its yield to maturity.\142\
---------------------------------------------------------------------------
    \141\ Sec. 163(i)(1).
    \142\ Sec. 163(i)(2).
---------------------------------------------------------------------------
    The disqualified portion of the original issue discount on 
an AHYDO is the lesser of (1) the amount of original issue 
discount with respect to such obligation or (2) the portion of 
the ``total return'' on such obligation which bears the same 
ratio to such total return as the ``disqualified yield'' (i.e., 
the excess of the yield to maturity on the obligation over the 
applicable Federal rate plus six percentage points) on such 
obligation bears to the yield to maturity on such 
obligation.\143\ The term ``total return'' means the amount 
which would have been the original issue discount of the 
obligation if interest described in section 1273(a)(2) were 
included in the stated redemption to maturity.\144\ A corporate 
holder treats the disqualified portion of original issue 
discount as a stock distribution for purposes of the dividend 
received deduction.\145\
---------------------------------------------------------------------------
    \143\ Sec. 163(e)(5)(C).
    \144\ Sec. 163(e)(5)(C)(ii).
    \145\ Sec. 163(e)(5)(B).
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act adds a provision that suspends the rules in section 
163(e)(5) for certain obligations issued in a debt-for-debt 
exchange, including an exchange resulting from a significant 
modification of a debt instrument, after August 31, 2008, and 
before January 1, 2010.
    In general, the suspension does not apply to any newly 
issued debt instrument (including any debt instrument issued as 
a result of a significant modification of a debt instrument) 
that is issued for an AHYDO. However, any newly issued debt 
instrument (including any debt instrument issued as a result of 
a significant modification of a debt instrument) for which the 
AHYDO rules are suspended under the provision is not treated as 
an AHYDO for purposes of a subsequent application of the 
suspension rule. Thus, for example, if a new debt instrument 
that would be an AHYDO under present law is issued in exchange 
for a debt instrument that is not an AHYDO, and the provision 
suspends application of section 163(e)(5), another new debt 
instrument, issued during the suspension period in exchange for 
the instrument with respect to which the rule in section 
163(e)(5) was suspended, would be eligible for the relief 
provided by the provision despite the fact that it is issued 
for an instrument that is an AHYDO under present law.
    In addition, the suspension does not apply to any newly 
issued debt instrument (including any debt instrument issued as 
a result of a significant modification of a debt instrument) 
that is (1) described in section 871(h)(4) (without regard to 
subparagraph (D) thereof) (i.e., certain contingent debt) or 
(2) issued to a person related to the issuer (within the 
meaning of section 108(e)(4)).
    The provision provides authority to the Secretary to apply 
the suspension rule to periods after December 31, 2009, where 
the Secretary determines that such application is appropriate 
in light of distressed conditions in the debt capital markets. 
In addition, the provision grants authority to the Secretary to 
use a rate that is higher than the applicable Federal rate for 
purposes of applying section 163(e)(5) for obligations issued 
after December 31, 2009, in taxable years ending after such 
date if the Secretary determines that such higher rate is 
appropriate in light of distressed conditions in the debt 
capital markets.

                             Effective Date

    The temporary suspension of section 163(e)(5) applies to 
obligations issued after August 31, 2008, in taxable years 
ending after such date. The additional authority granted to the 
Secretary to use a rate higher than the applicable Federal rate 
for purposes of applying section 163(e)(5) applies to 
obligations issued after December 31, 2009, in taxable years 
ending after such date.

10. Special rules applicable to qualified small business stock for 2009 
        and 2010 (sec. 1241 of the Act and sec. 1202 of the Code)

                              Present Law

    Under present law, individuals may exclude 50 percent (60 
percent for certain empowerment zone businesses) of the gain 
from the sale of certain small business stock acquired at 
original issue and held for at least five years.\146\ The 
portion of the gain includible in taxable income is taxed at a 
maximum rate of 28 percent under the regular tax.\147\ A 
percentage of the excluded gain is an alternative minimum tax 
preference;\148\ the portion of the gain includible in 
alternative minimum taxable income is taxed at a maximum rate 
of 28 percent under the alternative minimum tax.
---------------------------------------------------------------------------
    \146\ Sec. 1202.
    \147\ Sec. 1(h).
    \148\ Sec. 57(a)(7). In the case of qualified small business stock, 
the percentage of gain excluded from gross income which is an 
alternative minimum tax preference is (i) seven percent in the case of 
stock disposed of in a taxable year beginning before 2011; (ii) 42 
percent in the case of stock acquired before January 1, 2001, and 
disposed of in a taxable year beginning after 2010; and (iii) 28 
percent in the case of stock acquired after December 31, 2000, and 
disposed of in a taxable year beginning after 2010.
---------------------------------------------------------------------------
    Thus, under present law, gain from the sale of qualified 
small business stock is taxed at effective rates of 14 percent 
under the regular tax\149\ and (i) 14.98 percent under the 
alternative minimum tax for dispositions before January 1, 
2011; (ii) 19.88 percent under the alternative minimum tax for 
dispositions after December 31, 2010, in the case of stock 
acquired before January 1, 2001; and (iii) 17.92 percent under 
the alternative minimum tax for dispositions after December 31, 
2010, in the case of stock acquired after December 31, 
2000.\150\
---------------------------------------------------------------------------
    \149\ The 50 percent of gain included in taxable income is taxed at 
a maximum rate of 28 percent.
    \150\ The amount of gain included in alternative minimum tax is 
taxed at a maximum rate of 28 percent. The amount so included is the 
sum of (i) 50 percent (the percentage included in taxable income) of 
the total gain and (ii) the applicable preference percentage of the 
one-half gain that is excluded from taxable income.
---------------------------------------------------------------------------
    The amount of gain eligible for the exclusion by an 
individual with respect to any corporation is the greater of 
(1) ten times the taxpayer's basis in the stock or (2) $10 
million. In order to qualify as a small business, when the 
stock is issued, the gross assets of the corporation may not 
exceed $50 million. The corporation also must meet certain 
active trade or business requirements.

                     Explanation of Provision\151\

---------------------------------------------------------------------------
    \151\ The provision was subsequently modified to provide a 100-
percent exclusion for stock issued after September 27, 2010, and before 
January 1, 2011 by section 2011 of the Small Business Jobs Act of 2010, 
Pub. L. No. 111-240, described in Part Fourteen. The provision was 
subsequently extended to stock issued during 2011 by section 760 of Tax 
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 
2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
---------------------------------------------------------------------------
    Under the Act, the percentage exclusion for qualified small 
business stock sold by an individual is increased from 50 
percent (60 percent for certain empowerment zone businesses) to 
75 percent.
    As a result of the increased exclusion, gain from the sale 
of qualified small business stock to which the provision 
applies is taxed at effective rates of seven percent under the 
regular tax \152\ and 12.88 percent under the alternative 
minimum tax.\153\
---------------------------------------------------------------------------
    \152\ The 25 percent of gain included in taxable income is taxed at 
a maximum rate of 28 percent.
    \153\ The 46 percent of gain included in alternative minimum tax is 
taxed at a maximum rate of 28 percent. Forty-six percent is the sum of 
25 percent (the percentage of total gain included in taxable income) 
plus 21 percent (the percentage of total gain which is an alternative 
minimum tax preference).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for stock issued after the date 
of enactment (February 17, 2009) and before January 1, 2011.

11. Temporary reduction in recognition period for S corporation built-
        in gains tax (sec. 1251 of the Act and sec. 1374 of the Code)

                              Present Law

    A ``small business corporation'' (as defined in section 
1361(b)) may elect to be treated as an S corporation. Unlike C 
corporations, S corporations generally pay no corporate-level 
tax. Instead, items of income and loss of an S corporation pass 
through to its shareholders. Each shareholder takes into 
account separately its share of these items on its individual 
income tax return.\154\
---------------------------------------------------------------------------
    \154\ Sec. 1366.
---------------------------------------------------------------------------
    A corporate level tax, at the highest marginal rate 
applicable to corporations (currently 35 percent) is imposed on 
an S corporation's gain that arose prior to the conversion of 
the C corporation to an S corporation and is recognized by the 
S corporation during the recognition period, i.e., the first 10 
taxable years that the S election is in effect.\155\
---------------------------------------------------------------------------
    \155\ Sec. 1374.
---------------------------------------------------------------------------
    Gains recognized in the recognition period are not built-in 
gains to the extent they are shown to have arisen while the S 
election was in effect or are offset by recognized built-in 
losses. The built-in gains tax also applies to gains with 
respect to net recognized built-in gain attributable to 
property received by an S corporation from a C corporation in a 
carryover basis transaction.\156\ The amount of the built-in 
gains tax is treated as a loss taken into account by the 
shareholders in computing their individual income tax.\157\
---------------------------------------------------------------------------
    \156\ Sec. 1374(d)(8). With respect to such assets, the recognition 
period runs from the day on which such assets were acquired (in lieu of 
the beginning of the first taxable year for which the corporation was 
an S corporation). Sec. 1374(d)(8)(B).
    \157\ Sec. 1366(f)(2).
---------------------------------------------------------------------------

                     Explanation of Provision \158\

---------------------------------------------------------------------------
    \158\ The provision was subsequently modified and extended by 
section 2011 of the Small Business Jobs Act of 2010, Pub. L. No. 111-
240, described in Part Fourteen of this document.
---------------------------------------------------------------------------
    The Act provides that, for any taxable year beginning in 
2009 and 2010, no tax is imposed on an S corporation under 
section 1374 if the seventh year in the corporation's 
recognition period preceded such taxable year. Thus, with 
respect to gain that arose prior to the conversion of a C 
corporation to an S corporation, no tax will be imposed under 
section 1374 after the seventh taxable year the S corporation 
election is in effect. In the case of built-in gain 
attributable to an asset received by an S corporation from a C 
corporation in a carryover basis transaction, no tax will be 
imposed under section 1374 if such gain is recognized after the 
date that is seven years following the date on which such asset 
was acquired.\159\
---------------------------------------------------------------------------
    \159\ Shareholders will continue to take into account all items of 
gain and loss under section 1366.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2008.

            C. Fiscal Relief for State and Local Governments


1. De minimis safe harbor exception for tax-exempt interest expense of 
        financial institutions and modification of small issuer 
        exception to tax-exempt interest expense allocation rules for 
        financial institutions (secs. 1501 and 1502 of the Act and sec. 
        265 of the Code)

                              Present Law

    Present law disallows a deduction for interest on 
indebtedness incurred or continued to purchase or carry 
obligations the interest on which is exempt from tax.\160\ In 
general, an interest deduction is disallowed only if the 
taxpayer has a purpose of using borrowed funds to purchase or 
carry tax-exempt obligations; a determination of the taxpayer's 
purpose in borrowing funds is made based on all of the facts 
and circumstances.\161\
---------------------------------------------------------------------------
    \160\ Sec. 265(a).
    \161\ See Rev. Proc. 72-18, 1972-1 C.B. 740.
---------------------------------------------------------------------------
            Two-percent rule for individuals and certain nonfinancial 
                    corporations
    In the absence of direct evidence linking an individual 
taxpayer's indebtedness with the purchase or carrying of tax-
exempt obligations, the Internal Revenue Service takes the 
position that it ordinarily will not infer that a taxpayer's 
purpose in borrowing money was to purchase or carry tax-exempt 
obligations if the taxpayer's investment in tax-exempt 
obligations is ``insubstantial.''\162\ An individual's holdings 
of tax-exempt obligations are presumed to be insubstantial if 
during the taxable year the average adjusted basis of the 
individual's tax-exempt obligations is two percent or less of 
the average adjusted basis of the individual's portfolio 
investments and assets held by the individual in the active 
conduct of a trade or business.
---------------------------------------------------------------------------
    \162\ Ibid.
---------------------------------------------------------------------------
    Similarly, in the case of a corporation that is not a 
financial institution or a dealer in tax-exempt obligations, 
where there is no direct evidence of a purpose to purchase or 
carry tax-exempt obligations, the corporation's holdings of 
tax-exempt obligations are presumed to be insubstantial if the 
average adjusted basis of the corporation's tax-exempt 
obligations is two percent or less of the average adjusted 
basis of all assets held by the corporation in the active 
conduct of its trade or business.
            Financial institutions
    In the case of a financial institution, the Code generally 
disallows that portion of the taxpayer's interest expense that 
is allocable to tax-exempt interest.\163\ The amount of 
interest that is disallowed is an amount which bears the same 
ratio to such interest expense as the taxpayer's average 
adjusted bases of tax-exempt obligations acquired after August 
7, 1986, bears to the average adjusted bases for all assets of 
the taxpayer.
---------------------------------------------------------------------------
    \163\ Sec. 265(b)(1). A ``financial institution'' is any person 
that (1) accepts deposits from the public in the ordinary course of 
such person's trade or business and is subject to Federal or State 
supervision as a financial institution or (2) is a corporation 
described by section 585(a)(2). Sec. 265(b)(5).
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            Exception for certain obligations of qualified small 
                    issuers
    The general rule in section 265(b), denying financial 
institutions' interest expense deductions allocable to tax-
exempt obligations, does not apply to ``qualified tax-exempt 
obligations.'' \164\ Instead, as discussed in the next section, 
only 20 percent of the interest expense allocable to 
``qualified tax-exempt obligations'' is disallowed.\165\ A 
``qualified tax-exempt obligation'' is a tax-exempt obligation 
that (1) is issued after August 7, 1986, by a qualified small 
issuer, (2) is not a private activity bond, and (3) is 
designated by the issuer as qualifying for the exception from 
the general rule of section 265(b).
---------------------------------------------------------------------------
    \164\ Sec. 265(b)(3).
    \165\ Secs. 265(b)(3)(A), 291(a)(3) and 291(e)(1).
---------------------------------------------------------------------------
    A ``qualified small issuer'' is an issuer that reasonably 
anticipates that the amount of tax-exempt obligations that it 
will issue during the calendar year will be $10 million or 
less.\166\ The Code specifies the circumstances under which an 
issuer and all subordinate entities are aggregated.\167\ For 
purposes of the $10 million limitation, an issuer and all 
entities that issue obligations on behalf of such issuer are 
treated as one issuer. All obligations issued by a subordinate 
entity are treated as being issued by the entity to which it is 
subordinate. An entity formed (or availed of) to avoid the $10 
million limitation and all entities benefiting from the device 
are treated as one issuer.
---------------------------------------------------------------------------
    \166\ Sec. 265(b)(3)(C).
    \167\ Sec. 265(b)(3)(E).
---------------------------------------------------------------------------
    Composite issues (i.e., combined issues of bonds for 
different entities) qualify for the ``qualified tax-exempt 
obligation'' exception only if the requirements of the 
exception are met with respect to (1) the composite issue as a 
whole (determined by treating the composite issue as a single 
issue) and (2) each separate lot of obligations that is part of 
the issue (determined by treating each separate lot of 
obligations as a separate issue).\168\ Thus a composite issue 
may qualify for the exception only if the composite issue 
itself does not exceed $10 million, and if each issuer 
benefitting from the composite issue reasonably anticipates 
that it will not issue more than $10 million of tax-exempt 
obligations during the calendar year, including through the 
composite arrangement.
---------------------------------------------------------------------------
    \168\ Sec. 265(b)(3)(F).
---------------------------------------------------------------------------
            Treatment of financial institution preference items
    Section 291(a)(3) reduces by 20 percent the amount 
allowable as a deduction with respect to any financial 
institution preference item. Financial institution preference 
items include interest on debt to carry tax-exempt obligations 
acquired after December 31, 1982, and before August 8, 
1986.\169\ Section 265(b)(3) treats qualified tax-exempt 
obligations as if they were acquired on August 7, 1986. As a 
result, the amount allowable as a deduction by a financial 
institution with respect to interest incurred to carry a 
qualified tax-exempt obligation is reduced by 20 percent.
---------------------------------------------------------------------------
    \169\ Sec. 291(e)(1).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that the creation of a de minimis 
safe harbor to permit financial institutions to hold a limited 
amount of tax-exempt obligations issued in 2009 and 2010 
without full reduction of their attributable interest expense 
deductions will stimulate demand for tax-exempt obligations 
issued by State and local governments in 2009 and 2010. This 
additional demand should increase the volume of tax-exempt bond 
issuances by State and local governments in 2009 and 2010 while 
reducing the interest costs with respect to such issuances. In 
addition, the Congress believes that it is appropriate to 
increase temporarily the volume limitation for qualified small 
issuers, from $10 million to $30 million, and make other 
modifications to allow additional issuers to qualify under the 
provision.

                        Explanation of Provision

            Two-percent safe harbor for financial institutions
    The provision provides that tax-exempt obligations issued 
during 2009 or 2010 and held by a financial institution, in an 
amount not to exceed two percent of the adjusted basis of the 
financial institution's assets, are not taken into account for 
the purpose of determining the portion of the financial 
institution's interest expense subject to the pro rata interest 
disallowance rule of section 265(b). For purposes of this rule, 
a refunding bond (whether a current or advance refunding) is 
treated as issued on the date of the issuance of the refunded 
bond (or in the case of a series of refundings, the original 
bond).
    The provision also amends section 291(e) to provide that 
tax-exempt obligations issued during 2009 and 2010, and not 
taken into account for purposes of the calculation of a 
financial institution's interest expense subject to the pro 
rata interest disallowance rule, are treated as having been 
acquired on August 7, 1986. As a result, such obligations are 
financial institution preference items, and the amount 
allowable as a deduction by a financial institution with 
respect to interest incurred to carry such obligations is 
reduced by 20 percent.
            Modifications to qualified small issuer exception
    With respect to tax-exempt obligations issued during 2009 
and 2010, the provision increases from $10 million to $30 
million the annual limit for qualified small issuers.
    In addition, in the case of a ``qualified financing issue'' 
issued in 2009 or 2010, the provision applies the $30 million 
annual volume limitation at the borrower level (rather than at 
the level of the pooled financing issuer). Thus, for the 
purpose of applying the requirements of the section 265(b)(3) 
qualified small issuer exception, the portion of the proceeds 
of a qualified financing issue that are loaned to a ``qualified 
borrower'' that participates in the issue are treated as a 
separate issue with respect to which the qualified borrower is 
deemed to be the issuer.
    A ``qualified financing issue'' is any composite, pooled or 
other conduit financing issue the proceeds of which are used 
directly or indirectly to make or finance loans to one or more 
ultimate borrowers all of whom are qualified borrowers. A 
``qualified borrower'' means (1) a State or political 
subdivision of a State or (2) an organization described in 
section 501(c)(3) and exempt from tax under section 501(a). 
Thus, for example, a $100 million pooled financing issue that 
was issued in 2009 could qualify for the section 265(b)(3) 
exception if the proceeds of such issue were used to make four 
equal loans of $25 million to four qualified borrowers. 
However, if (1) more than $30 million were loaned to any 
qualified borrower, (2) any borrower were not a qualified 
borrower, or (3) any borrower would, if it were the issuer of a 
separate issue in an amount equal to the amount loaned to such 
borrower, fail to meet any of the other requirements of section 
265(b)(3), the entire $100 million pooled financing issue would 
fail to qualify for the exception.
    For purposes of determining whether an issuer meets the 
requirements of the small issuer exception, qualified 501(c)(3) 
bonds issued in 2009 or 2010 are treated as if they were issued 
by the 501(c)(3) organization for whose benefit they were 
issued (and not by the actual issuer of such bonds). In 
addition, in the case of an organization described in section 
501(c)(3) and exempt from taxation under section 501(a), 
requirements for ``qualified financing issues'' shall be 
applied as if the section 501(c)(3) organization were the 
issuer. Thus, in any event, an organization described in 
section 501(c)(3) and exempt from taxation under section 501(a) 
shall be limited to the $30 million per issuer cap for 
qualified tax exempt obligations described in section 
265(b)(3).

                             Effective Date

    The provisions are effective for obligations issued after 
December 31, 2008.

2. Temporary modification of alternative minimum tax limitations on 
        tax-exempt bonds (sec. 1503 of the Act and secs. 56 and 57 of 
        the Code)

                              Present Law

    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. 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)).

                           Reasons for Change

    The Congress believes that the AMT treatment of interest on 
tax-exempt bonds restricts the number of persons willing to 
hold tax-exempt bonds, resulting in higher financing costs. 
This problem has become more acute as a result of the current 
economic downturn. Accordingly, in light of current economic 
circumstances, the Act eliminates the AMT adjustments for 
interest on tax-exempt bonds issued in 2009 and 2010.

                        Explanation of Provision

    The Act provides that tax-exempt interest on private 
activity bonds issued in 2009 and 2010 is not an item of tax 
preference for purposes of the alternative minimum tax and 
interest on tax exempt bonds issued in 2009 and 2010 is not 
included in the corporate adjustment based on current earnings. 
For these purposes, a refunding bond is treated as issued on 
the date of the issuance of the refunded bond (or in the case 
of a series of refundings, the original bond).
    The Act also provides that tax-exempt interest on private 
activity bonds issued in 2009 and 2010 to currently refund a 
private activity bond issued after December 31, 2003, and 
before January 1, 2009, is not an item of tax preference for 
purposes of the alternative minimum tax. Also tax-exempt 
interest on bonds issued in 2009 and 2010 to currently refund a 
bond issued after December 31, 2003, and before January 1, 
2009, is not included in the corporate adjustment based on 
current earnings.

                             Effective Date

    The provision applies to interest on bonds issued after 
December 31, 2008.

3. Temporary expansion of availability of industrial development bonds 
        to facilities creating intangible property and other 
        modifications (sec. 1301 of the Act and sec. 144(a) of the 
        Code)

                              Present Law

    Qualified small issue bonds (commonly referred to as 
``industrial development bonds'' or ``small issue IDBs'') 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 farmers. In both 
instances, these bonds are subject to limits on the amount of 
financing that may be provided, both for a single borrowing and 
in the aggregate. In general, no more than $1 million of small-
issue bond financing may be outstanding at any time for 
property of a business (including related parties) located in 
the same municipality or county. Generally, this $1 million 
limit may be increased to $10 million if, in addition to 
outstanding bonds, all other capital expenditures of the 
business (including related parties) in the same municipality 
or county are counted toward the limit over a six-year period 
that begins three years before the issue date of the bonds and 
ends three years after such date. Outstanding aggregate 
borrowing is limited to $40 million per borrower (including 
related parties) regardless of where the property is located.
    The Code permits up to $10 million of capital expenditures 
to be disregarded, in effect increasing from $10 million to $20 
million the maximum allowable amount of total capital 
expenditures by an eligible business in the same municipality 
or county. However, no more than $10 million of bond financing 
may be outstanding at any time for property of an eligible 
business (including related parties) located in the same 
municipality or county. Other limits (e.g., the $40 million per 
borrower limit) also continue to apply.
    A manufacturing facility is any facility which is used in 
the manufacturing or production of tangible personal property 
(including the processing resulting in a change in the 
condition of such property). Manufacturing facilities include 
facilities that are directly related and ancillary to a 
manufacturing facility (as described in the previous sentence) 
if (1) such facilities are located on the same site as the 
manufacturing facility and (2) not more than 25 percent of the 
net proceeds of the issue are used to provide such 
facilities.\170\
---------------------------------------------------------------------------
    \170\ The 25 percent restriction was enacted by the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, because of 
concern over the scope of the definition of manufacturing facility. See 
H.R. Rpt. No. 100-795 (1988). The amendment was intended to clarify 
that while the manufacturing facility definition does not preclude the 
financing of ancillary activities, the 25 percent restriction was 
intended to limit the use of bond proceeds to finance facilities other 
than for ``core manufacturing.'' The conference agreement followed the 
House bill, which the conference report described as follows: ``The 
House bill clarifies that up to 25 percent of the proceeds of a 
qualified small issue may be used to finance ancillary activities which 
are carried out at the manufacturing site. All such ancillary 
activities must be subordinate and integral to the manufacturing 
process.''
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    For bonds issued after the date of enactment and before 
January 1, 2011, the provision expands the definition of 
manufacturing facilities to mean any facility that is used in 
the manufacturing, creation, or production of tangible property 
or intangible property (within the meaning of section 
197(d)(1)(C)(iii)). For this purpose, intangible property means 
any patent, copyright, formula, process, design, knowhow, 
format, or other similar item. It is intended to include among 
other items, the creation of computer software, and 
intellectual property associated bio-tech and pharmaceuticals.
    In lieu of the directly related and ancillary test of 
present law, the provision provides a special rule for bonds 
issued after the date of enactment and before January 1, 2011. 
For these bonds, the provision provides that facilities that 
are functionally related and subordinate to the manufacturing 
facility are treated as a manufacturing facility and the 25 
percent of net proceeds restriction does not apply to such 
facilities.\171\ Functionally related and subordinate 
facilities must be located on the same site as the 
manufacturing facility.
---------------------------------------------------------------------------
    \171\ The provision is based in part on a similar rule applicable 
to exempt facility bonds. Treas. Reg. sec. 1.103-8(a)(3) provides: 
``(3) Functionally related and subordinate. An exempt facility includes 
any land, building, or other property functionally related and 
subordinate to such facility. Property is not functionally related and 
subordinate to a facility if it is not of a character and size 
commensurate with the character and size of such facility.''
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment and before January 1, 2011.

4. Qualified school construction bonds (sec. 1521 of the Act and new 
        sec. 54F 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.\172\ An issuer must 
file with the Internal Revenue Service certain information 
about the bonds issued in order for that bond issue to be tax-
exempt.\173\ 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.
---------------------------------------------------------------------------
    \172\ Sec. 103.
    \173\ Sec. 149(e).
---------------------------------------------------------------------------
    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\174\ 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.\175\ 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.
---------------------------------------------------------------------------
    \174\ Sec. 103(a) and (b)(2).
    \175\ 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.'' \176\ A total of $400 million 
of qualified zone academy bonds is authorized to be issued 
annually in calendar years 1998 through 2009. 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.
---------------------------------------------------------------------------
    \176\ Sec. 1397E.
---------------------------------------------------------------------------
    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.\177\ 
The Secretary determines credit rates for tax credit bonds 
based on general assumptions about credit quality of the class 
of potential eligible issuers and such other factors as the 
Secretary deems appropriate. The Secretary may determine credit 
rates based on general credit market yield indexes and credit 
ratings. 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.
---------------------------------------------------------------------------
    \177\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
    ``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 arbitrage requirements which generally apply to 
interest-bearing tax-exempt bonds also generally apply to 
qualified zone academy bonds. In addition, an issuer of 
qualified zone academy bonds must reasonably expect to and 
actually spend 100 percent of the proceeds of such bonds on 
qualified zone academy property within the three-year period 
that begins on the date of issuance. To the extent less than 
100 percent of the proceeds are used to finance qualified zone 
academy property during the three-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 
three years period to redeem any nonqualified bonds. The three-
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.
    Two special arbitrage rules apply to qualified zone academy 
bonds. First, 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). Available project proceeds are 
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. 
Second, 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.
    Issuers of qualified zone academy bonds are required to 
report issuance to the Internal Revenue Service in a manner 
similar to the information returns required for tax-exempt 
bonds.

                           Reasons for Change

    The Congress believes that this new category of tax credit 
bonds will provide an efficient mechanism to encourage the 
construction, rehabilitation, or repair of public school 
facilities and the acquisition of land on which such bond-
financed facilities are to be constructed.

                     Explanation of Provision \178\

---------------------------------------------------------------------------
    \178\ Section 301 of the Hiring Incentives to Restore Employment 
Act, Pub. L. No. 111-147, added a provision to section 6431, allowing 
the issuer of the bonds to elect to receive a direct payment from the 
Treasury in lieu of providing a tax credit to the holders of the bonds. 
For further discussion, see Part Seven of this document.
---------------------------------------------------------------------------

In general

    The provision creates a new category of tax-credit bonds: 
qualified school construction bonds. Qualified school 
construction bonds must meet three requirements: (1) 100 
percent of the available project proceeds of the bond issue is 
used for the construction, rehabilitation, or repair of a 
public school facility or for the acquisition of land on which 
such a bond-financed facility is to be constructed; (2) the 
bond is issued by a State or local government within which such 
school is located; and (3) the issuer designates such bonds as 
a qualified school construction bond.

National limitation

    There is a national limitation on qualified school 
construction bonds of $11 billion for calendar years 2009 and 
2010, respectively.

Allocation to the States

    The national limitation is tentatively allocated among the 
States in proportion to respective amounts each such State is 
eligible to receive under section 1124 of the Elementary and 
Secondary Education Act of 1965 for the most recent fiscal year 
ending before such calendar year. The amount each State is 
allocated under the above formula is then reduced by the amount 
received by any local large educational agency within the 
State.
    For allocation purposes, a State includes the District of 
Columbia and any possession of the United States. The provision 
provides a special allocation for possessions of the United 
States other than Puerto Rico under the national limitation for 
States. Under this special rule an allocation to a possession 
other than Puerto Rico is made on the basis of the respective 
populations of individuals below the poverty line (as defined 
by the Office of Management and Budget) rather than respective 
populations of children aged five through seventeen. This 
special allocation reduces the State allocation share of the 
national limitation otherwise available for allocation among 
the States. Under another special rule, the Secretary of the 
Interior may allocate $200 million of school construction bonds 
for 2009 and 2010, respectively, to Indian schools. This 
special allocation for Indian schools is to be used for 
purposes of the construction, rehabilitation, and repair of 
schools funded by the Bureau of Indian Affairs. For purposes of 
such allocations Indian tribal governments are qualified 
issuers. The special allocation for Indian schools does not 
reduce the State allocation share of the national limitation 
otherwise available for allocation among the States.
    If an amount allocated under this allocation to the States 
is unused for a calendar year it may be carried forward by the 
State to the next calendar year.

Allocation to large school districts

    Forty percent of the national limitation is allocated among 
large local educational agencies in proportion to the 
respective amounts each agency received under section 1124 of 
the Elementary and Secondary Education Act of 1965 for the most 
recent fiscal year ending before such calendar year. Any unused 
allocation of any agency within a State may be allocated by the 
agency to such State. With respect to a calendar year, the term 
large local educational agency means any local educational 
agency if such agency is: (1) among the 100 local educational 
agencies with the largest numbers of children aged 5 through 17 
from families living below the poverty level, or (2) one of not 
more than 25 local educational agencies (other than in (1), 
immediately above) that the Secretary of Education determines 
are in particular need of assistance, based on a low level of 
resources for school construction, a high level of enrollment 
growth, or other such factors as the Secretary of Education 
deems appropriate. If any amount allocated to large local 
educational agency is unused for a calendar year the agency may 
reallocate such amount to the State in which the agency is 
located.

Application of qualified tax credit bond rules

    The provision makes qualified school construction bonds a 
type of qualified tax credit bond for purposes of section 54A. 
In addition, qualified school construction bonds may be issued 
by Indian tribal governments only 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 school construction 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 purposes during the three-year 
spending period, bonds will continue to qualify as qualified 
school construction 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 school construction 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 school construction bonds are issued.
    The maturity of qualified school construction 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 school construction 
bonds are issued.
    As with present-law tax credit bonds, the taxpayer holding 
qualified school construction 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 100 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 in a manner similar to the manner in which 
interest coupons can be stripped from interest-bearing bonds.
    Issuers of qualified school construction bonds are required 
to certify that the financial disclosure requirements and 
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 school construction bonds.

                             Effective Date

    The provision is effective for obligations issued after the 
date of enactment (February 17, 2009).

5. Extend and expand qualified zone academy bonds (sec. 1522 of the Act 
        and 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.\179\ An issuer must 
file with the Internal Revenue Service certain information 
about the bonds issued in order for that bond issue to be tax-
exempt.\180\ 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.
---------------------------------------------------------------------------
    \179\ Sec. 103.
    \180\ Sec. 149(e).
---------------------------------------------------------------------------
    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\181\ 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.\182\ 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.
---------------------------------------------------------------------------
    \181\ Sec. 103(a) and (b)(2).
    \182\ 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.'' \183\ A total of $400 million 
of qualified zone academy bonds is authorized to be issued 
annually in calendar years 1998 through 2009. 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.
---------------------------------------------------------------------------
    \183\ See secs. 54E and 1397E.
---------------------------------------------------------------------------
    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.\184\ 
The Secretary determines credit rates for tax credit bonds 
based on general assumptions about credit quality of the class 
of potential eligible issuers and such other factors as the 
Secretary deems appropriate. The Secretary may determine credit 
rates based on general credit market yield indexes and credit 
ratings. 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.
---------------------------------------------------------------------------
    \184\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
    ``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 arbitrage requirements which generally apply to 
interest-bearing tax-exempt bonds also generally apply to 
qualified zone academy bonds. In addition, an issuer of 
qualified zone academy bonds must reasonably expect to and 
actually spend 100 percent or more of the proceeds of such 
bonds on qualified zone academy property within the three-year 
period that begins on the date of issuance. To the extent less 
than 100 percent of the proceeds are used to finance qualified 
zone academy property during the three-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 three-year period to redeem any nonqualified bonds. The 
three-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.
    Two special arbitrage rules apply to qualified zone academy 
bonds. First, 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). Available project proceeds are 
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. 
Second, 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.
    Issuers of qualified zone academy bonds are required to 
report issuance to the Internal Revenue Service in a manner 
similar to the information returns required for tax-exempt 
bonds.

                           Reasons for Change

    The Congress wishes to expand and extend the qualified zone 
academy bond program. The Congress believes that this category 
of tax credit bonds will continue to provide an efficient 
mechanism for renovating, providing equipment to, developing 
course materials for use at, or training teachers and other 
school personnel in a ``qualified zone academy.''

                     Explanation of Provision \185\

---------------------------------------------------------------------------
    \185\ Section 301 of the Hiring Incentives to Restore Employment 
Act, Pub. L. No. 111-147, added a provision to section 6431, allowing 
the issuer of the bonds to elect to receive a direct payment from the 
Treasury in lieu of providing a tax credit to the holders of the bonds. 
For further discussion, see Part Seven of this document. Also qualified 
zone academy bonds were further amended in section 758 of the Tax 
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 
2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
---------------------------------------------------------------------------

In general

    The provision extends and expands the present-law qualified 
zone academy bond program. The provision authorizes issuance of 
up to $1.4 billion of qualified zone academy bonds annually for 
2009 and 2010, respectively.

                             Effective Date

    The provision applies to obligations issued after December 
31, 2008.

6. Build America bonds (sec. 1531 of the Act and new secs. 54AA and 
        6431 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 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 (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'') and other Code 
requirements are met.

Private activity bonds

    The Code defines a private activity bond as any bond that 
satisfies (1) the private business use test and the private 
security or payment test (``the private business test''); or 
(2) ``the private loan financing test.'' \186\
---------------------------------------------------------------------------
    \186\ Sec. 141.
---------------------------------------------------------------------------
            Private business test
    Under the private business test, a bond is a private 
activity bond if it is part of an issue in which:
          1. More than 10 percent of the proceeds of the issue 
        (including use of the bond-financed property) are to be 
        used in the trade or business of any person other than 
        a governmental unit (``private business use''); and
          2. More than 10 percent of the payment of principal 
        or interest on the issue is, directly or indirectly, 
        secured by (a) property used or to be used for a 
        private business use or (b) to be derived from payments 
        in respect of property, or borrowed money, used or to 
        be used for a private business use (``private payment 
        test'').\187\
---------------------------------------------------------------------------
    \187\ The 10 percent private business test is reduced to five 
percent in the case of private business uses (and payments with respect 
to such uses) that are unrelated to any governmental use being financed 
by the issue.
---------------------------------------------------------------------------
    A bond is not a private activity bond unless both parts of 
the private business test (i.e., the private business use test 
and the private payment test) are met. Thus, a facility that is 
100 percent privately used does not cause the bonds financing 
such facility to be private activity bonds if the bonds are not 
secured by or paid with private payments. For example, land 
improvements that benefit a privately-owned factory may be 
financed with governmental bonds if the debt service on such 
bonds is not paid by the factory owner or other private 
parties.
            Private loan financing test
    A bond issue satisfies the private loan financing test if 
proceeds exceeding the lesser of $5 million or five percent of 
such proceeds are used directly or indirectly to finance loans 
to one or more nongovernmental 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.
            Arbitrage restrictions
    The exclusion from income for interest on State and local 
bonds does not apply to any arbitrage bond.\188\ 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.\189\ 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.
---------------------------------------------------------------------------
    \188\ Sec. 103(a) and (b)(2).
    \189\ Sec. 148.
---------------------------------------------------------------------------

Qualified tax credit bonds

    In lieu of interest, holders of qualified tax credit bonds 
receive a tax credit that accrues quarterly. The following 
bonds are qualified tax credit bonds: qualified forestry 
conservation bonds, new clean renewable energy bonds, qualified 
energy conservation bonds, and qualified zone academy 
bonds.\190\
---------------------------------------------------------------------------
    \190\ See sections 54B, 54C, 54D, and 54E.
---------------------------------------------------------------------------
    Section 54A of the Code sets forth general rules applicable 
to qualified tax credit bonds. These rules include requirements 
regarding credit allowance dates, the expenditure of available 
project proceeds, reporting, arbitrage, maturity limitations, 
and financial conflicts of interest, among other special rules.
    A taxpayer who holds a qualified tax credit bond on one or 
more credit allowance dates of the bond during the taxable year 
shall be allowed a credit against the taxpayer's income tax for 
the taxable year. In general, the credit amount for any credit 
allowance date is 25 percent of the annual credit determined 
with respect to the bond. The annual credit is determined by 
multiplying the applicable credit rate by the outstanding face 
amount of the bond. The applicable credit rate for the bond is 
the rate that the Secretary estimates will permit the issuance 
of the qualified tax credit bond with a specified maturity or 
redemption date without discount and without interest cost to 
the qualified issuer.\191\ The Secretary determines credit 
rates for tax credit bonds based on general assumptions about 
credit quality of the class of potential eligible issuers and 
such other factors as the Secretary deems appropriate. The 
Secretary may determine credit rates based on general credit 
market yield indexes and credit ratings.
---------------------------------------------------------------------------
    \191\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
    The credit is included in gross income and, under 
regulations prescribed by the Secretary, may be stripped (a 
separation (including at issuance) of the ownership of a 
qualified tax credit bond and the entitlement to the credit 
with respect to such bond).
    Section 54A of the Code requires that 100 percent of the 
available project proceeds of qualified tax credit bonds 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 
qualified tax credit 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 tax credit 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 
tax credit bonds are issued.
    The maturity of qualified tax credit 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 tax credit bonds are issued.

                           Reasons for Change

    The Congress notes that borrowing by State and local 
governments is critically important to financing the nation's 
infrastructure. The Congress has observed that over the past 
several years, yield spreads between tax-exempt debt issued by 
State and local governments and approximately comparable 
taxable debt issued by corporations has narrowed, so that tax-
exempt yields are now generally less than 25 percent below 
taxable yields.\192\ The Congress further observes that not all 
of the benefit of the tax-exemption of interest on State and 
local bonds redounds to the issuing government because the 
exclusion of qualifying interest income is more valuable to 
bondholders in the highest tax brackets than to those 
bondholders in the lower tax brackets. The Congress, therefore, 
believes that the provision offers a more revenue efficient 
financing tool and lower net interest costs to State and local 
issuers.
---------------------------------------------------------------------------
    \192\ Joint Committee on Taxation, Present Law and Issues Related 
to Infrastructure Finance (JCX 83-08), October 24, 2008. pp. 23-28.
---------------------------------------------------------------------------
    In addition, the Congress recognizes that many States are 
suffering from declines in revenues and tight budgets while the 
need for infrastructure is great. Therefore the Congress 
believes it is appropriate to offer to issuers, on a temporary 
basis, the ability to receive a refundable credit for bonds 
used to fund capital expenditures in lieu of providing a tax 
credit to bondholders.

                        Explanation of Provision


In general

    The provision permits an issuer to elect to have an 
otherwise tax-exempt bond treated as a ``Build America Bond.'' 
A ``Build America Bond'' is any obligation (other than a 
private activity bond) if the interest on such obligation would 
be (but for this provision) excludable from gross income under 
section 103 and the issuer makes an irrevocable election to 
have the provision apply. In determining if an obligation would 
be tax-exempt under section 103, the credit (or the payment 
discussed below for qualified bonds) is not treated as a 
Federal guarantee. Further, the yield on a taxable governmental 
bond is determined without regard to the credit. A taxable 
governmental bond does not include any bond if the issue price 
has more than a de minimis amount of premium over the stated 
principal amount of the bond.
    The holder of a taxable governmental bond will accrue a tax 
credit in the amount of 35 percent of the interest paid on the 
interest payment dates of the bond during the calendar 
year.\193\ The interest payment date is any date on which the 
holder of record of the taxable governmental bond is entitled 
to a payment of interest under such bond. The sum of the 
accrued credits is allowed against regular and alternative 
minimum tax. Unused credit may be carried forward to succeeding 
taxable years. The credit, as well as the interest paid by the 
issuer, is included in gross income and the credit may be 
stripped under rules similar to those provided in section 54A 
regarding qualified tax credit bonds. Rules similar to those 
that apply for S corporations, partnerships and regulated 
investment companies with respect to qualified tax credit bonds 
also apply to the credit.
---------------------------------------------------------------------------
    \193\ Original issue discount (OID) is not treated as a payment of 
interest for purposes of determining the credit under the provision. 
OID is the excess of an obligation's stated redemption price at 
maturity over the obligation's issue price (section 1273(a)).
---------------------------------------------------------------------------
    Unlike the tax credit for bonds issued under section 54A, 
the credit rate would not be calculated by the Secretary, but 
rather would be set by law at 35 percent. The actual credit 
that a taxpayer may claim is determined by multiplying the 
interest payment that the taxpayer receives from the issuer 
(i.e., the bond coupon payment) by 35 percent. Because the 
credit that the taxpayer claims is also included in income, the 
Congress anticipates that State and local issuers will issue 
bonds paying interest at rates approximately equal to 74.1 
percent of comparable taxable bonds. The Congress anticipates 
that if an issuer issues a taxable governmental bond with 
coupons at 74.1 percent of a comparable taxable bond's coupon 
that the issuer's bond should sell at par. For example, if a 
taxable bond of comparable risk pays a $1,000 coupon and sells 
at par, then if a State or local issuer issues an equal-sized 
bond with coupon of $741.00, such a bond should also sell at 
par. The taxpayer who acquires the latter bond will receive an 
interest payment of $741 and may claim a credit of $259 (35 
percent of $741). The credit and the interest payment are both 
included in the taxpayer's income. Thus, the taxpayer's taxable 
income from this instrument would be $1,000. This is the same 
taxable income that the taxpayer would recognize from holding 
the comparable taxable bond. Consequently the issuer's bond 
should sell at the same price as would the taxable bond.

Special rule for qualified bonds issued during 2009 and 2010

    A ``qualified bond'' is any taxable governmental bond 
issued as part of an issue if 100 percent of the available 
project proceeds of such issue are to be used for capital 
expenditures.\194\ The Act also allows a reasonably required 
reserve fund to be funded from bond proceeds.\195\ The bond 
must be issued after the date of enactment of the provision and 
before January 1, 2011. The issuer must make an irrevocable 
election to have the special rule for qualified bonds apply.
---------------------------------------------------------------------------
    \194\ Under Treas. Reg. sec. 150-1(b), capital expenditure means 
any cost of a type that is properly chargeable to capital account (or 
would be so chargeable with a proper election or with the application 
of the definition of placed in service under Treas. Reg. sec. 1.150-
2(c)) under general Federal income tax principles. For purposes of 
applying the ``general Federal income tax principles'' standard, an 
issuer should generally be treated as if it were a corporation subject 
to taxation under subchapter C of chapter 1 of the Code. An example of 
a capital expenditure would include expenditures made for the purchase 
of fiber-optic cable to provide municipal broadband service.
    \195\ Under section 148(d)(2), a bond is an arbitrage bond if the 
amount of the proceeds from the sale of such issue that is part or any 
reserve or replacement fund exceeds 10 percent of the proceeds. As such 
the interest on such bond would not be tax-exempt under section 103 and 
thus would not be a qualified bond for purposes of the provision.
---------------------------------------------------------------------------
    Under the special rule for qualified bonds, in lieu of the 
tax credit to the holder, the issuer is allowed a credit equal 
to 35 percent of each interest payment made under such 
bond.\196\ If in 2009 or 2010, the issuer elects to receive the 
credit, in the example above, for the State or local issuer's 
bond to sell at par, the issuer would have to issue the bond 
with a $1,000 interest coupon. The taxpayer who holds such a 
bond would include $1,000 on interest in his or her income. 
From the taxpayer's perspective the bond is the same as the 
taxable bond in the example above and the taxpayer would be 
willing to pay par for the bond. However, under the provision 
the State or local issuer would receive a payment of $350 for 
each $1,000 coupon paid to bondholders. (The net interest cost 
to the issuer would be $650.)
---------------------------------------------------------------------------
    \196\ Original issue discount (OID) is not treated as a payment of 
interest for purposes of calculating the refundable credit under the 
provision.
---------------------------------------------------------------------------
    The payment by the Secretary is to be made 
contemporaneously with the interest payment made by the issuer, 
and may be made either in advance or as reimbursement. In lieu 
of payment to the issuer, the payment may be made to a person 
making interest payments on behalf of the issuer. For purposes 
of the arbitrage rules, the yield on a qualified bond is 
reduced by the amount of the credit/payment.

Transitional coordination with State law

    As noted above, interest on a taxable governmental bond and 
the related credit are includible in gross income to the holder 
for Federal tax purposes. The provision provides that until a 
State provides otherwise, the interest on any taxable 
governmental bond and the amount of any credit determined with 
respect to such bond shall be treated as being exempt from 
Federal income tax for purposes of State income tax laws.

                             Effective Date

    The provision is effective for obligations issued after the 
date of enactment (February 17, 2009).

7. Recovery zone bonds (sec. 1401 of the Act and new secs. 1400U-1, 
        1400U-2, and 1400U-3 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 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 (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'') and other Code 
requirements are met.

Private activity bonds

    The Code defines a private activity bond as any bond that 
satisfies (1) the private business use test and the private 
security or payment test (``the private business test''); or 
(2) ``the private loan financing test.''\197\
---------------------------------------------------------------------------
    \197\ Sec. 141.
---------------------------------------------------------------------------
            Private business test
    Under the private business test, a bond is a private 
activity bond if it is part of an issue in which:
          1. More than 10 percent of the proceeds of the issue 
        (including use of the bond-financed property) are to be 
        used in the trade or business of any person other than 
        a governmental unit (``private business use''); and
          2. More than 10 percent of the payment of principal 
        or interest on the issue is, directly or indirectly, 
        secured by (a) property used or to be used for a 
        private business use or (b) to be derived from payments 
        in respect of property, or borrowed money, used or to 
        be used for a private business use (``private payment 
        test'').\198\
---------------------------------------------------------------------------
    \198\ The 10 percent private business test is reduced to five 
percent in the case of private business uses (and payments with respect 
to such uses) that are unrelated to any governmental use being financed 
by the issue.
---------------------------------------------------------------------------
    A bond is not a private activity bond unless both parts of 
the private business test (i.e., the private business use test 
and the private payment test) are met. Thus, a facility that is 
100 percent privately used does not cause the bonds financing 
such facility to be private activity bonds if the bonds are not 
secured by or paid with private payments. For example, land 
improvements that benefit a privately-owned factory may be 
financed with governmental bonds if the debt service on such 
bonds is not paid by the factory owner or other private parties 
and such bonds are not secured by the property.
            Private loan financing test
    A bond issue satisfies the private loan financing test if 
proceeds exceeding the lesser of $5 million or five percent of 
such proceeds are used directly or indirectly to finance loans 
to one or more nongovernmental persons. Private loans include 
both business and other (e.g., personal) uses and payments to 
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.
            Arbitrage restrictions
    The exclusion from income for interest on State and local 
bonds does not apply to any arbitrage bond.\199\ 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.\200\ 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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    \199\ Sec. 103(a) and (b)(2).
    \200\ Sec. 148.
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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 an 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 qualified private 
activity bonds is restricted by annual aggregate volume limits 
imposed on bonds issued by issuers within each State (``State 
volume cap''). 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. Exceptions to the State 
volume cap are provided for bonds for certain governmentally 
owned facilities (e.g., airports, ports, high-speed intercity 
rail, and solid waste disposal) and bonds which are subject to 
separate local, State, or national volume limits (e.g., public/
private educational facility bonds, enterprise zone facility 
bonds, qualified green building bonds, and qualified highway or 
surface freight transfer facility bonds).
    Qualified private activity bonds generally are subject to 
restrictions on the use of proceeds for the acquisition of land 
and existing property. In addition, qualified private activity 
bonds generally are subject to restrictions on the use of 
proceeds to finance certain specified facilities (e.g., 
airplanes, skyboxes, other luxury boxes, health club 
facilities, gambling facilities, and liquor stores), and use of 
proceeds to pay costs of issuance (e.g., bond counsel and 
underwriter fees). Small issue and redevelopment bonds also are 
subject to additional restrictions on the use of proceeds for 
certain facilities (e.g., golf courses and massage parlors).
    Moreover, the term of qualified private activity bonds 
generally may not exceed 120 percent of the economic life of 
the property being financed and certain public approval 
requirements (similar to requirements that typically apply 
under State law to issuance of governmental debt) apply under 
Federal law to issuance of private activity bonds.

Qualified tax credit bonds

    In lieu of interest, holders of qualified tax credit bonds 
receive a tax credit that accrues quarterly. The following 
bonds are qualified tax credit bonds: qualified forestry 
conservation bonds, new clean renewable energy bonds, qualified 
energy conservation bonds, and qualified zone academy 
bonds.\201\
---------------------------------------------------------------------------
    \201\ See sections 54B, 54C, 54D, and 54E.
---------------------------------------------------------------------------
    Section 54A of the Code sets forth general rules applicable 
to qualified tax credit bonds. These rules include requirements 
regarding the expenditure of available project proceeds, 
reporting, arbitrage, maturity limitations, and financial 
conflicts of interest, among other special rules.
    A taxpayer who holds a qualified tax credit bond on one or 
more credit allowance dates of the bond during the taxable year 
shall be allowed a credit against the taxpayer's income tax for 
the taxable year. In general, the credit amount for any credit 
allowance date is 25 percent of the annual credit determined 
with respect to the bond. The annual credit is determined by 
multiplying the applicable credit rate by the outstanding face 
amount of the bond. The applicable credit rate for the bond is 
the rate that the Secretary estimates will permit the issuance 
of the qualified tax credit bond with a specified maturity or 
redemption date without discount and without interest cost to 
the qualified issuer.\202\ The Secretary determines credit 
rates for tax credit bonds based on general assumptions about 
credit quality of the class of potential eligible issuers and 
such other factors as the Secretary deems appropriate. The 
Secretary may determine credit rates based on general credit 
market yield indexes and credit ratings. The credit is included 
in gross income and, under regulations prescribed by the 
Secretary, may be stripped.
---------------------------------------------------------------------------
    \202\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
    Section 54A of the Code requires that 100 percent of the 
available project proceeds of qualified tax credit bonds 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 
qualified tax credit 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 tax credit 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 
tax credit bonds are issued.
    The maturity of qualified tax credit 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 tax credit bonds are issued.

                           Reasons for Change

    Many communities have seen a significant decline in the 
number of individuals employed and are struggling with high 
concentrations of poverty and foreclosed homes. The Congress 
believes that additional incentives are needed to assist those 
communities most affected by the current economic crisis. The 
Congress also believes that State and local governments often 
are in the best position to assess economic development needs. 
Thus, the Congress believes it is appropriate to provide State 
and local governments with access to subsidized financing in 
order to promote economic development in communities affected 
by job losses and to provide needed infrastructure.

                        Explanation of Provision


In general

    The provision permits an issuer to designate one or more 
areas as recovery zones. The area must: (1) have significant 
poverty, unemployment, general distress, or home foreclosures; 
(2) be an area for which a designation as an empowerment zone 
or renewal community is in effect or; (3) be an area designated 
by the issuer as economically distressed by reason of the 
closure or realignment of a military installation pursuant to 
the Defense Base Closure and Realignment Act of 1990. Issuers 
may issue recovery zone economic development bonds and recovery 
zone facility bonds with respect to these zones.
    There is a national recovery zone economic development bond 
limitation of $10 billion. In addition, there is a separate 
national recovery zone facility bond limitation of $15 billion. 
Under the Act the national recovery zone economic development 
bond limitation and national recovery zone facility bond 
limitation are allocated among the States in the proportion 
that each State's employment decline bears to the national 
decline in employment (the aggregate 2008 State employment 
declines for all States).\203\ The Secretary is to adjust each 
State's allocation for a calendar year such that no State 
receives less than 0.9 percent of the national recovery zone 
economic development bond limitation and no less than 0.9 
percent of the national recovery zone facility bond limitation. 
The Act also permits a county or large municipality to waive 
all or part of its allocation of the State bond limitations to 
allow further allocation within that State. In calculating the 
local employment decline with respect to a county, the portion 
of such decline attributable to a large municipality is 
disregarded for purposes of determining the county's portion of 
the State employment decline and is attributable to the large 
municipality only.
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    \203\ The Bureau of Labor Statistics prepares data on regional and 
State employment and unemployment. See, e.g., Bureau of Labor 
Statistics, USDL 09-0093, Regional and State Employment and 
Unemployment: December 2008 (January 27, 2009), .
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    For purposes of the provision ``2008 State employment 
decline'' means, with respect to any State, the excess (if any) 
of (i) the number of individuals employed in such State as 
determined for December 2007, over (ii) the number of 
individuals employed in such State as determined for December 
2008. The term ``large municipality'' means a municipality with 
a population of more than 100,000.

Recovery Zone Economic Development Bonds

    New section 54AA(h) of the Act creates a special rule for 
qualified bonds (a type of taxable governmental bond) issued 
before January 1, 2011, that entitles the issuer of such bonds 
to receive an advance tax credit equal to 45 percent of the 
interest payable on an interest payment date. For taxable 
governmental bonds that are designated recovery zone economic 
development bonds, the applicable percentage is 55 percent.
    A recovery zone economic development bond is a taxable 
governmental bond issued as part of an issue if 100 percent of 
the available project proceeds of such issue are to be used for 
one or more qualified economic development purposes and the 
issuer designates such bond for purposes of this section. 
However, the Act allows for a reasonably required reserve fund 
to be funded from the proceeds of a recovery zone economic 
development bond. A qualified economic development purpose 
means expenditures for purposes of promoting development or 
other economic activity in a recovery zone, including (1) 
capital expenditures paid or incurred with respect to property 
located in such zone, (2) expenditures for public 
infrastructure and construction of public facilities located in 
a recovery zone.
    The aggregate face amount of bonds which may be designated 
by any issuer cannot exceed the amount of the recovery zone 
economic development bond limitation allocated to such issuer.

Recovery Zone Facility Bonds

    The provision creates a new category of exempt facility 
bonds, ``recovery zone facility bonds.'' A recovery zone 
facility bond means any bond issued as part of an issue if: (1) 
95 percent or more of the net proceeds of such issue are to be 
used for recovery zone property and (2) such bond is issued 
before January 1, 2011, and (3) the issuer designates such bond 
as a recovery zone facility bond. The aggregate face amount of 
bonds which may be designated by any issuer cannot exceed the 
amount of the recovery zone facility bond limitation allocated 
to such issuer.
    Under the provision, the term ``recovery zone property'' 
means any property subject to depreciation to which section 168 
applies (or would apply but for section 179) if (1) such 
property was acquired, constructed, reconstructed, or renovated 
by the taxpayer after the date on which the designation of the 
recovery zone took effect; (2) the original use of such 
property in the recovery zone commences with the taxpayer; and 
(3) substantially all of the use of such property is in the 
recovery zone and is in the active conduct of a qualified 
business by the taxpayer in such zone. The term ``qualified 
business'' means any trade or business except that the rental 
to others of real property located in a recovery zone shall be 
treated as a qualified business only if the property is not 
residential rental property (as defined in section 168(e)(2)) 
and does not include any trade or business consisting of the 
operation of any facility 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).
    Subject to the following exceptions and modifications, 
issuance of recovery zone facility bonds is subject to the 
general rules applicable to issuance of qualified private 
activity bonds:
          1. Issuance of the bonds is not subject to the 
        aggregate annual State private activity bond volume 
        limits (sec. 146);
          2. The restriction on acquisition of existing 
        property does not apply (sec. 147(d));

                             Effective Date

    The provision is effective for obligations issued after the 
date of enactment (February 17, 2009).

8. Tribal economic development bonds (sec. 1402 of the Act and new sec. 
        7871(f) of the Code)

                              Present Law

    Under present law, gross income does not include interest 
on State or local bonds.\204\ State and local bonds are 
classified generally as either governmental bonds or private 
activity bonds. Governmental bonds are bonds the proceeds of 
which are primarily used to finance governmental facilities or 
the debt is repaid with governmental funds. Private activity 
bonds are bonds in which the State or local government serves 
as a conduit providing financing to nongovernmental persons. 
For these purposes, the term ``nongovernmental person'' 
includes the Federal government and all other individuals and 
entities other than States or local governments.\205\ Interest 
on private activity bonds is taxable, unless the bonds are 
issued for certain purposes permitted by the Code and other 
requirements are met.\206\
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    \204\ Sec. 103.
    \205\ Sec. 141(b)(6); Treas. Reg. sec. 1.141-1(b).
    \206\ Secs. 103(b)(1) and 141.
---------------------------------------------------------------------------
    Although not States or subdivisions of States, Indian 
tribal governments are provided with a tax status similar to 
State and local governments for specified purposes under the 
Code.\207\ Among the purposes for which a tribal government is 
treated as a State is the issuance of tax-exempt bonds. Under 
section 7871(c), tribal governments are authorized to issue 
tax-exempt bonds only if substantially all of the proceeds are 
used for essential governmental functions.\208\ The term 
essential governmental function does not include any function 
that is not customarily performed by State and local 
governments with general taxing powers. Section 7871(c) further 
prohibits Indian tribal governments from issuing tax-exempt 
private activity bonds (as defined in section 141(a) of the 
Code) with the exception of certain bonds for manufacturing 
facilities.
---------------------------------------------------------------------------
    \207\ Sec. 7871.
    \208\ Sec. 7871(c).
---------------------------------------------------------------------------

                           Reasons for Change

    State and local governments use tax-exempt financing for 
both public purposes and qualified private activities. Indian 
tribes, however, are restricted to issuing tax-exempt bonds for 
essential governmental functions. In general, Indian tribes 
cannot issue tax-exempt private activity bonds, except for 
certain manufacturing facilities. The Congress believes that in 
the current economic crisis, tribes should be afforded 
flexibility in using tax-exempt financing for economic 
development. Therefore, the provision permits Indian tribes to 
issue tax-exempt bonds for purposes not currently permitted by 
present law, if the bonds would have been tax-exempt if issued 
by a State.

                        Explanation of Provision


Tribal Economic Development Bonds

    The provision allows Indian tribal governments to issue 
``tribal economic development bonds.'' There is a national bond 
limitation of $2 billion, to be allocated as the Secretary 
determines appropriate, in consultation with the Secretary of 
the Interior. Tribal economic development bonds issued by an 
Indian tribal government are treated as if such bond were 
issued by a State except that section 146 (relating to State 
volume limitations) does not apply.
    The Act defines a tribal economic development bond as any 
bond issued by an Indian tribal government (1) the interest on 
which would be tax-exempt if issued by a State or local 
government, and (2) that is designated by the Indian tribal 
government as a tribal economic development bond. The aggregate 
face amount of bonds that may be designated by any Indian 
tribal government cannot exceed the amount of national tribal 
economic development bond limitation allocated to such 
government.
    Tribal economic development bonds cannot be used to finance 
any portion of a building in which class II or class III gaming 
(as defined in section 4 of the Indian Gaming Regulatory Act) 
is conducted, or housed, or any other property used in the 
conduct of such gaming. Nor can tribal economic development 
bonds be used to finance any facility located outside of the 
Indian reservation.
    The Act also clarifies that for purposes of section 141 of 
the Code, use of bond proceeds by an Indian tribe, or 
instrumentality thereof, is treated as use by a State.

Treasury study

    The provision requires that the Treasury Department study 
the effects of tribal economic development bonds. One year 
after the date of enactment, a report is to be submitted to 
Congress providing the results of such study along with any 
recommendations, including whether the restrictions of section 
7871(c) should be eliminated or otherwise modified.

                             Effective Date

    The provision applies to obligations issued after the date 
of enactment (February 17, 2009).

9. Pass-through of credits on tax credit bonds held by regulated 
        investment companies (sec. 1541 of the Act and new sec. 853A of 
        the Code)

                              Present Law

    In lieu of interest, holders of qualified tax credit bonds 
receive a tax credit that accrues quarterly. The credit is 
treated as interest that is includible in gross income. The 
following bonds are qualified tax credit bonds: qualified 
forestry conservation bonds, new clean renewable energy bonds, 
qualified energy conservation bonds, and qualified zone academy 
bonds.\209\ The Code provides that in the case of a qualified 
tax credit bond held by a regulated investment company, the 
credit is allowed to shareholders of such company (and any 
gross income included with respect to such credit shall be 
treated as distributed to such shareholders) under procedures 
prescribed by the Secretary.\210\ The Secretary has not 
prescribed procedures for the pass through of the credit to 
regulated investment company shareholders.
---------------------------------------------------------------------------
    \209\ See sections 54B, 54C, 54D, and 54E.
    \210\ See section 54A(h), which also covers real estate investment 
trusts.
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act provides procedures for passing though credits on 
``tax credit bonds'' to the shareholders of an electing 
regulated investment company. In general, an electing regulated 
investment company is not allowed any credits with respect to 
any tax credit bonds it holds during any year for which an 
election is in effect. The company is treated as having an 
amount of interest included in its gross income (and earnings 
and profits) in an amount equal that which would have been 
included if no election were in effect, and having made 
distributions of money equal to the amount of the credits. Each 
shareholder of the electing regulated investment company is (1) 
required to include in gross income an amount equal to the 
shareholder's proportional share of the interest attributable 
to its credits and (2) allowed such proportional share as a 
credit against such shareholder's Federal income tax.\211\
---------------------------------------------------------------------------
    \211\ A technical correction may be necessary so that the statute 
reflects this intent.
---------------------------------------------------------------------------
    In order to pass through tax credits to a shareholder, a 
regulated investment company is required to mail a written 
notice to such shareholder not later than 60 days after the 
close of the regulated investment company's taxable year, 
designating the shareholder's proportionate share of passed-
through credits and the shareholder's gross income in respect 
of such credits.\212\ The provision gives the Secretary 
authority to prescribe the time and manner in which a regulated 
investment company makes the election to pass through credits 
on tax credit bonds. In addition, the provision requires the 
Secretary to prescribe such guidance as may be necessary to 
carry out the provision, including prescribing methods for 
determining a shareholder's proportionate share of tax credits.
---------------------------------------------------------------------------
    \212\ The provision was subsequently amended by section 301(d) of 
the Regulated Investment Company Modernization Act of 2010, Pub. L. 
111-325, described in Part Seventeen of this document.
---------------------------------------------------------------------------
    A tax credit bond means a qualified tax credit bond as 
defined in section 54A(d), a Build America Bond (as defined in 
section 54AA(d)), and any other bond for which a credit is 
allowable under subpart H of part IV of subchapter A of the 
Code.

                             Effective Date

    The provision is applicable to taxable years ending after 
the date of enactment (February 17, 2009).

10. Delay in implementation of withholding tax on government 
        contractors (sec. 1511 of the Act and sec. 3402(t) of the Code)

                              Present Law

    For payments made after December 31, 2010, the Code imposes 
a withholding requirement at a three-percent rate on certain 
payments to persons providing property or services made by the 
Government of the United States, every State, every political 
subdivision thereof, and every instrumentality of the foregoing 
(including multi-State agencies). The withholding requirement 
applies regardless of whether the government entity making such 
payment is the recipient of the property or services. Political 
subdivisions of States (or any instrumentality thereof) with 
less than $100 million of annual expenditures for property or 
services that would otherwise be subject to withholding are 
exempt from the withholding requirement.
    Payments subject to the three-percent withholding 
requirement include any payment made in connection with a 
government voucher or certificate program which functions as a 
payment for property or services. For example, payments to a 
commodity producer under a government commodity support program 
are subject to the withholding requirement. Present law also 
imposes information reporting requirements on the payments that 
are subject to withholding requirement.
    The three-percent withholding requirement does not apply to 
any payments made through a Federal, State, or local government 
public assistance or public welfare program for which 
eligibility is determined by a needs or income test. The three-
percent withholding requirement also does not apply to payments 
of wages or to any other payment with respect to which 
mandatory (e.g., U.S.-source income of foreign taxpayers) or 
voluntary (e.g., unemployment benefits) withholding applies 
under present law. Although the withholding requirement applies 
to payments that are potentially subject to backup withholding 
under section 3406, it does not apply to those payments from 
which amounts are actually being withheld under backup 
withholding rules.
    The three-percent withholding requirement also does not 
apply to the following: payments of interest; payments for real 
property; payments to tax-exempt entities or foreign 
governments; intra-governmental payments; payments made 
pursuant to a classified or confidential contract (as defined 
in section 6050M(e)(3)), and payments to government employees 
that are not otherwise excludable from the new withholding 
proposal with respect to the employees' services as employees.

                           Reasons for Change

    The Congress believes that the three-percent withholding 
requirement was not appropriately targeted to the noncompliant 
taxpayers for whom it was originally intended and may impose 
significant and costly administrative burdens on State and 
local governments.

                        Explanation of Provision

    The provision delays the implementation of the three 
percent withholding requirement by one year to apply to 
payments after December 31, 2011.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

11. Extend and modify the new markets tax credit (sec. 1403 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'').\213\ 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 qualified equity investment, 
the issuing entity ceases to be a qualified CDE, the proceeds 
of the investment cease to be used as required, or the equity 
investment is redeemed.
---------------------------------------------------------------------------
    \213\ 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 providing them with 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.\214\ 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.
---------------------------------------------------------------------------
    \214\ 12 U.S.C. sec. 4702(17) (defines ``low-income'' for purposes 
of 12 U.S.C. sec. 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 $3.5 billion per year for calendar years 2006 
through 2009. Lower caps applied for calendar years 2001 
through 2005.

                     Explanation of Provision \215\

---------------------------------------------------------------------------
    \215\ The provision was subsequently amended by section 733 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    For calendar years 2008 and 2009, the Act increases the 
maximum amount of qualified equity investments by $1.5 billion 
(to $5 billion for each year). The Act requires that the 
additional amount for 2008 be allocated to qualified CDEs that 
submitted an allocation application with respect to calendar 
year 2008 and either (1) did not receive an allocation for such 
calendar year, or (2) received an allocation for such calendar 
year in an amount less than the amount requested in the 
allocation application.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

                          D. Energy Incentives


1. Extension of the renewable electricity production credit (sec. 1101 
        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 ``renewable electricity production 
credit'').\216\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
solar energy, small irrigation power, municipal solid waste, 
qualified hydropower production, and marine and hydrokinetic 
renewable energy. 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.
---------------------------------------------------------------------------
    \216\ Sec. 45. In addition to the renewable electricity production 
credit, section 45 also provides income tax credits for the production 
of Indian coal and refined coal at qualified facilities.
---------------------------------------------------------------------------

Credit amounts and credit period

            In general
    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 exceeds certain threshold 
levels. The electricity production credit is reduced over a 3-
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 8 cents 
(adjusted for inflation; 11.8 cents for 2008).
            Reduced credit periods and credit amounts
    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 section 45(d)(3)(A)(i) that uses 
agricultural livestock waste nutrients) placed in service 
before October 22, 2004, the five-year period commences on 
January 1, 2005. In the case of a closed-loop biomass facility 
modified to co-fire with coal, to co-fire with other biomass, 
or to co-fire with coal and other biomass, the credit period 
begins no earlier than October 22, 2004.
    In the case of open-loop biomass facilities (including 
agricultural livestock waste nutrient facilities), small 
irrigation power facilities, landfill gas facilities, trash 
combustion facilities, and qualified hydropower facilities the 
otherwise allowable credit amount is 0.75 cent per kilowatt-
hour, indexed for inflation measured after 1992 (1 cent per 
kilowatt-hour for 2008).
            Other limitations on credit claimants and credit amounts
    In general, in order to claim the credit, a taxpayer must 
own the qualified facility and sell the electricity produced by 
the facility 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 credit by reason of grants, tax-exempt 
bonds, subsidized energy financing, and other credits.
    The credit for electricity produced from renewable 
resources is a component of the general business credit.\217\ 
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.\218\ Excess credits may be carried back one 
year and forward up to 20 years.
---------------------------------------------------------------------------
    \217\ Sec. 38(b)(8).
    \218\ Sec. 38(c)(4)(B)(iii).
---------------------------------------------------------------------------

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, 2010.
            Closed-loop biomass facility
    A closed-loop biomass facility is a facility that uses any 
organic material from a plant which is planted exclusively for 
the purpose of being used at a qualifying facility to produce 
electricity. In addition, a facility can be a closed-loop 
biomass facility if it is a facility that is modified to use 
closed-loop biomass to co-fire with coal, with other biomass, 
or with both coal and other biomass, but only if the 
modification is approved under the Biomass Power for Rural 
Development Programs or is part of a pilot project of the 
Commodity Credit Corporation.
    To be a qualified facility, a closed-loop biomass facility 
must be placed in service after December 31, 1992, and before 
January 1, 2011. 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, 2011.
    A qualified facility includes a new power generation unit 
placed in service after October 3, 2008, at an existing closed-
loop biomass facility, but only to the extent of the increased 
amount of electricity produced at the existing facility by 
reason of such new unit.
            Open-loop biomass (including agricultural livestock waste 
                    nutrients) facility
    An open-loop biomass facility is a facility that uses open-
loop biomass to produce electricity. For purposes of the 
credit, open-loop biomass is defined as (1) any agricultural 
livestock waste nutrients or (2) any solid, nonhazardous, 
cellulosic waste material or any lignin material that is 
segregated from other waste materials and which is derived 
from:
           forest-related resources, including mill and 
        harvesting residues, precommercial thinnings, slash, 
        and brush;
           solid wood waste materials, including waste 
        pallets, crates, dunnage, manufacturing and 
        construction wood wastes, 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 which is commonly recycled do not 
qualify as open-loop biomass. Open-loop biomass does not 
include closed-loop biomass or any biomass burned in 
conjunction with fossil fuel (co-firing) beyond such fossil 
fuel required for start up and flame stabilization.
    In the case of an open-loop biomass facility that uses 
agricultural livestock waste nutrients, a qualified facility is 
one that was originally placed in service after October 22, 
2004, and before January 1, 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, 2011. A 
qualified facility includes a new power generation unit placed 
in service after October 3, 2008, at an existing open-loop 
biomass facility, but only to the extent of the increased 
amount of electricity produced at the existing facility by 
reason of such new unit.
            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, 
2011.
            Solar facility
    A solar facility is a facility that uses solar energy to 
produce electricity. To be a qualified facility, a solar 
facility must be placed in service after October 22, 2004, and 
before January 1, 2006.
            Small irrigation facility
    A small irrigation power facility is a facility that 
generates electric power through an irrigation system canal or 
ditch without any dam or impoundment of water. The installed 
capacity of a qualified facility must be 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 October 3, 2008. Marine and 
hydrokinetic renewable energy facilities, described below, 
subsume small irrigation power facilities after October 2, 
2008.
            Landfill gas facility
    A landfill gas facility is a facility that uses landfill 
gas to produce electricity. Landfill gas is defined as methane 
gas derived from the biodegradation of municipal solid waste. 
To be a qualified facility, a landfill gas facility must be 
placed in service after October 22, 2004, and before January 1, 
2011.
            Trash combustion facility
    Trash combustion facilities are facilities that use 
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, 2011. 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, 2011, 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, 2011.
    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.
    Nonhydroelectric dams converted to produce electricity must 
be licensed by the Federal Energy Regulatory Commission and 
meet all other applicable environmental, licensing, and 
regulatory requirements.
    For a nonhydroelectric dam converted to produce electric 
power before January 1, 2009, 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.
    For a nonhydroelectric dam converted to produce electric 
power after December 31, 2008, the nonhydroelectric dam must 
(1) have been placed in service before October 3, 2008, (2) 
have been operated for flood control, navigation, or water 
supply purposes and (3) not have produced hydroelectric power 
on October 3, 2008. In addition, the hydroelectric project must 
be operated so that the water surface elevation at any given 
location and time that would have occurred in the absence of 
the hydroelectric project is maintained, subject to any license 
requirements imposed under applicable law that change the water 
surface elevation for the purpose of improving environmental 
quality of the affected waterway. The Secretary, in 
consultation with the Federal Energy Regulatory Commission, 
shall certify if a hydroelectric project licensed at a 
nonhydroelectric dam meets these criteria.
            Marine and hydrokinetic renewable energy facility
    A qualified marine and hydrokinetic renewable energy 
facility is any facility that produces electric power from 
marine and hydrokinetic renewable energy, has a nameplate 
capacity rating of at least 150 kilowatts, and is placed in 
service after October 2, 2008, and before January 1, 2012. 
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.

                            TABLE 1.--SUMMARY OF SECTION 45 CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Credit period for facilities   Credit period for facilities
                                                             Credit amount for 2008 (cents     placed in service on or        placed in service after
          Eligible electricity production activity                 per kilowatt-hour)        before August 8, 2005 (years    August 8, 2005 (years from
                                                                                             from placed-in-service date)     placed-in-service date)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Wind.......................................................                           2.1                            10                              10
Closed-loop biomass........................................                           2.1                         10 \1\                             10
Open-loop biomass (including agricultural livestock waste                             1.0                          5 \2\                             10
 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 landfill gas facilities                              1.0                              5                             10
 and trash combustion facilities)..........................
Qualified hydropower.......................................                           1.0                            N/A                             10
Marine and hydrokinetic....................................                           1.0                            N/A                            10
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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.

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 \219\ 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.\220\ 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.
---------------------------------------------------------------------------
    \219\ Secs. 1381-1383.
    \220\ Sec. 1382.
---------------------------------------------------------------------------
    Eligible cooperatives may elect to pass any portion of the 
credit through to their patrons. An eligible cooperative is 
defined as a cooperative organization that is owned more than 
50 percent by agricultural producers or entities owned by 
agricultural producers. The credit may be apportioned among 
patrons eligible to share in patronage dividends on the basis 
of the quantity or value of business done with or for such 
patrons for the taxable year. The election must be made on a 
timely filed return for the taxable year and, once made, is 
irrevocable for such taxable year.

                           Reasons for Change

    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 a multi-year extension of the present-law electricity 
production credit will encourage the development of renewable 
energy projects that will create new jobs for workers.

                        Explanation of Provision

    The provision extends for three years (generally, through 
2013; through 2012 for wind facilities) the period during which 
qualified facilities producing electricity from wind, closed-
loop biomass, open-loop biomass, geothermal energy, municipal 
solid waste, and qualified hydropower may be placed in service 
for purposes of the electricity production credit. The 
provision extends for two years (through 2013) the placed-in-
service period for marine and hydrokinetic renewable energy 
resources.
    The provision also makes a technical amendment to the 
definition of small irrigation power facility to clarify its 
integration into the definition of marine and hydrokinetic 
renewable energy facility.

                             Effective Date

    The extension of the electricity production credit is 
effective for property placed in service after the date of 
enactment (February 17, 2009). The technical amendment is 
effective as if included in section 102 of the Energy 
Improvement and Extension Act of 2008.

2. Election of investment credit in lieu of production tax credits 
        (sec. 1102 of the Act and secs. 45 and 48 of the Code)

                              Present Law


Renewable electricity credit

    An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities.\221\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
solar energy, small irrigation power, municipal solid waste, 
qualified hydropower production, and marine and hydrokinetic 
renewable energy. 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. The credit 
amounts, credit periods, definitions of qualified facilities, 
and other rules governing this credit are described more fully 
in section D.1 of this document.
---------------------------------------------------------------------------
    \221\ Sec. 45. In addition to the electricity production credit, 
section 45 also provides income tax credits for the production of 
Indian coal and refined coal at qualified facilities.
---------------------------------------------------------------------------

Energy credit

    An income tax credit is also allowed for certain energy 
property placed in service. Qualifying property includes 
certain fuel cell property, solar property, geothermal power 
production property, small wind energy property, combined heat 
and power system property, and geothermal heat pump 
property.\222\ The amounts of credit, definitions of qualifying 
property, and other rules governing this credit are described 
more fully in section D.3 of this document.
---------------------------------------------------------------------------
    \222\ Sec. 48.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that current economic circumstances 
are constraining investments in facilities that ordinarily 
would utilize the production tax credit, and wishes to give 
maximum flexibility to taxpayers to choose the tax incentive 
that will deliver the greatest benefit to them.

                        Explanation of Provision

    The Act allows the taxpayer to make an irrevocable election 
to have certain qualified facilities be treated as energy 
property eligible for a 30 percent investment credit under 
section 48. For this purpose, qualified facilities are 
facilities otherwise eligible for the section 45 production tax 
credit (other than refined coal, Indian coal, and solar 
facilities) with respect to which no credit under section 45 
has been allowed. A taxpayer electing to treat a facility as 
energy property may not claim the production credit under 
section 45. Under the Act, facilities are eligible if placed in 
service during the extension period of section 45 as provided 
(generally, through 2013; through 2012 for wind facilities),
    Property eligible for the credit is tangible personal or 
other tangible property (not including a building or its 
structural components), and with respect to which depreciation 
or amortization is allowable, but only if such property is used 
as an integral part of the qualified facility. For example, in 
the case of a wind facility, the conferees intend that only 
property eligible for five-year depreciation under section 
168(e)(3)(b)(vi) is treated as credit-eligible energy property 
under the election.

                             Effective Date

    The provision applies to facilities placed in service after 
December 31, 2008.

3. Modification of energy credit \223\ (sec. 1103 of the Act and sec. 
        48 of the Code)

                              Present Law


In general

    A nonrefundable, 10-percent business energy credit \224\ 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 purposes of 
heating a swimming pool is not eligible solar energy property.
---------------------------------------------------------------------------
    \223\ Additional provisions that (1) allow section 45 facilities to 
elect to be treated as section 48 energy property, and (2) allow 
section 45 and 48 facilities to elect to receive a grant from the 
Department of the Treasury rather than the section 45 production credit 
or the section 48 energy credit, are described by sections D.2 and D.4 
of Part Two of this document.
    \224\ Sec. 48.
---------------------------------------------------------------------------
    The energy credit is a component of the general business 
credit.\225\ An unused general business credit generally may be 
carried back one year and carried forward 20 years.\226\ 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 is allowed against the alternative minimum tax for 
credits determined in taxable years beginning after October 3, 
2008.
---------------------------------------------------------------------------
    \225\ Sec. 38(b)(1).
    \226\ Sec. 39.
---------------------------------------------------------------------------
    Property financed by subsidized energy financing or with 
proceeds from private activity bonds is subject to a reduction 
in basis for purposes of claiming the credit. The basis 
reduction is proportional to the share of the basis of the 
property that is financed by the subsidized financing or 
proceeds. The term ``subsidized energy financing'' means 
financing provided under a Federal, State, or local program a 
principal purpose of which is to provide subsidized financing 
for projects designed to conserve or produce energy.

Special rules for solar energy property

    The credit for solar energy property is increased to 30 
percent in the case of periods prior to January 1, 2017. 
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 energy credit applies to qualified fuel cell power 
plants, but only for periods prior to January 1, 2017. 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 $1,500 
for each 0.5 kilowatt of capacity.
    The energy credit applies to qualifying stationary 
microturbine power plants for periods prior to January 1, 2017. 
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 than 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts.

Geothermal heat pump property

    The energy credit applies to qualified geothermal heat pump 
property placed in service prior to January 1, 2017. The credit 
rate is 10 percent. Qualified 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 energy credit applies to qualified small wind energy 
property placed in service prior to January 1, 2017. The credit 
rate is 30 percent. 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 energy credit applies to combined heat and power 
(``CHP'') property placed in service prior to January 1, 2017. 
The credit rate is 10 percent.
    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, 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, is permitted a credit 
equal to one-half of the otherwise allowable credit (i.e., a 5-
percent credit).

                           Reasons for Change

    The Congress believes the cap on the availability of the 
investment credit with respect to wind energy property is 
inconsistent with the objective of stimulating greater 
investment in such property. Therefore, the Congress believes 
it is appropriate to remove the cap on the amount of credit 
that may be claimed for wind energy property.
    In order to protect the efficacy of both the energy credit 
and subsidized financing as means of stimulating investment in 
renewable technologies, the Congress believes taxpayers 
utilizing subsidized energy financing should not be required to 
reduce their otherwise allowable credit.

                        Explanation of Provision

    The Act eliminates the credit cap applicable to qualified 
small wind energy property. The Act also removes the rule that 
reduces the basis of the property for purposes of claiming the 
credit if the property is financed in whole or in part by 
subsidized energy financing or with proceeds from private 
activity bonds.

                             Effective Date

    The provision applies to periods after December 31, 2008, 
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).

4. Grants for specified energy property in lieu of tax credits (secs. 
        1104 and 1603 of the Act and secs. 45 and 48 of the Code)

                              Present Law


Renewable electricity production credit

    An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities (the ``renewable electricity production 
credit'').\227\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
solar energy, small irrigation power, municipal solid waste, 
qualified hydropower production, and marine and hydrokinetic 
renewable energy. 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. The credit 
amounts, credit periods, definitions of qualified facilities, 
and other rules governing this credit are described more fully 
in section D.1 of this document.
---------------------------------------------------------------------------
    \227\ Sec. 45. In addition to the renewable electricity production 
credit, section 45 also provides income tax credits for the production 
of Indian coal and refined coal at qualified facilities.
---------------------------------------------------------------------------

Energy credit

    An income tax credit is also allowed for certain energy 
property placed in service. Qualifying property includes 
certain fuel cell property, solar property, geothermal power 
production property, small wind energy property, combined heat 
and power system property, and geothermal heat pump 
property.\228\ The amounts of credit, definitions of qualifying 
property, and other rules governing this credit are described 
more fully in section D.3 of this document.
---------------------------------------------------------------------------
    \228\ Sec. 48.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that 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 understands that 
some investors in renewable energy projects have suffered 
economic losses that prevent them from benefitting from the 
renewable electricity production credit and the energy credit. 
The Congress further believes that this situation, combined 
with current economic conditions, has the potential to 
jeopardize investment in renewable energy facilities. The 
Congress therefore believes that, in the short term, allowing 
renewable energy developers to elect to receive direct grants 
in lieu of the renewable electricity production credit and the 
energy credit is necessary for continued growth in this 
important industry.

                     Explanation of Provision \229\

    The provision authorizes the Secretary of the Treasury to 
provide a grant to each person who places in service energy 
property that is either (1) part of an electricity production 
facility otherwise eligible for the renewable electricity 
production credit or (2) qualifying property otherwise eligible 
for the energy credit. In general, the grant amount is 30 
percent of the basis of the property that would (1) be eligible 
for credit under section 48 or (2) be part of a section 45 
credit-eligible facility. For qualified microturbine, combined 
heat and power system, and geothermal heat pump property, the 
amount is 10 percent of the basis of the property.
---------------------------------------------------------------------------
    \229\ The provision was subsequently amended by section 707 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    Qualifying property must be depreciable or amortizable to 
be eligible for a grant. In addition, the property must be 
originally placed in service in 2009 or 2010 or construction of 
the property must begin in 2009 or 2010 and be completed prior 
to 2013 (in the case of wind facility property), 2014 (in the 
case of other renewable power facility property eligible for 
credit under section 45), or 2017 (in the case of any specified 
energy property described in section 48).
    It is intended that the grant provision mimic the operation 
of the credit under section 48. For example, the amount of the 
grant is not includable in gross income. However, the basis of 
the property is reduced by fifty percent of the amount of the 
grant. In addition, some or all of each grant is subject to 
recapture if the grant eligible property is disposed of by the 
grant recipient within five years of being placed in service.
    Nonbusiness property and property that would not otherwise 
be eligible for credit under section 48 or part of a facility 
that would be eligible for credit under section 45 is not 
eligible for a grant under the provision. The grant may be paid 
to whichever party would have been entitled to a credit under 
section 48 or section 45, as the case may be.
    Under the provision, if a grant is paid, no renewable 
electricity credit or energy credit may be claimed with respect 
to the grant eligible property. In addition, no grant may be 
awarded to any Federal, State, or local government (or any 
political subdivision, agency, or instrumentality thereof) or 
any section 501(c) tax-exempt entity.
    The provision appropriates to the Secretary of Energy the 
funds necessary to make the grants. No grant may be made unless 
the application for the grant has been received before October 
1, 2011.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

5. Expand new clean renewable energy bonds (sec. 1111 of the Act and 
        sec. 54C of the Code)

                              Present Law


New Clean Renewable Energy Bonds

    New clean renewable energy bonds (``New CREBs'') may be 
issued by qualified issuers to finance qualified renewable 
energy facilities.\230\ Qualified renewable energy facilities 
are facilities that: (1) 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) are owned by a public 
power provider, governmental body, or cooperative electric 
company.
---------------------------------------------------------------------------
    \230\ Sec. 54C.
---------------------------------------------------------------------------
    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. 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.
    New CREBs are 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.
    As with other tax credit bonds, a taxpayer holding New 
CREBs on a credit allowance date is entitled to a tax credit. 
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.\231\ The Secretary determines credit rates for tax 
credit bonds based on general assumptions about credit quality 
of the class of potential eligible issuers and such other 
factors as the Secretary deems appropriate. The Secretary may 
determine credit rates based on general credit market yield 
indexes and credit ratings.\232\
---------------------------------------------------------------------------
    \231\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
    \232\ See Notice 2009-15, 2009-6 I.R.B. 449 (January 22, 2009).
---------------------------------------------------------------------------
    The amount of the tax credit is determined by multiplying 
the bond's credit rate by the face amount of 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.

                           Reasons for Change

    The Congress believes that the New CREBs program provides 
an efficient mechanism to finance qualified renewable energy 
facilities. Therefore, the Congress wishes to expand the New 
CREBs program by increasing the amount of the national bond 
volume limitation.

                     Explanation of Provision \233\

---------------------------------------------------------------------------
    \233\ Section 301 of the Hiring Incentives to Restore Employment 
Act, Pub. L. No. 111-147, added a provision to section 6431, allowing 
the issuer of the bonds to elect to receive a direct payment from the 
Treasury in lieu of providing a tax credit to the holders of the bonds. 
For further discussion, see Part Seven of this document.
---------------------------------------------------------------------------

In general

    The provision expands the New CREBs program. The provision 
authorizes issuance of up to an additional $1.6 billion of New 
CREBs.

                             Effective Date

    The provision applies to obligations issued after the date 
of enactment (February 17, 2009).

6. Expand qualified energy conservation bonds (sec. 1112 of the Act and 
        sec. 54D of the Code)

                              Present Law

    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).
    Qualified energy conservations bonds are 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).
    Under present law, 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 other 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.\234\ The Secretary determines 
credit rates for tax credit bonds based on general assumptions 
about credit quality of the class of potential eligible issuers 
and such other factors as the Secretary deems appropriate. The 
Secretary may determine credit rates based on general credit 
market yield indexes and credit ratings.\235\ 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.
---------------------------------------------------------------------------
    \234\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
    \235\ See Notice 2009-15, 2009-6 I.R.B. 449 (January 22, 2009).
---------------------------------------------------------------------------
    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.

                           Reasons for Change

    The Congress believes that an increase in the volume 
limitation for qualified energy conservation bonds is needed to 
help move the nation toward more energy-efficient policies. The 
Congress is aware that a number of communities have initiated 
low-interest loan and grant programs to encourage the adoption 
of energy conserving products as part of their green community 
programs. The Congress believes that incentives for the 
purchase and installation of energy-efficient property and 
energy-efficient improvements to residences are desirable to 
help reduce energy consumption in the household sector. 
Therefore, the Congress believes it is appropriate to allow the 
proceeds of qualified energy conservation bonds to be used for 
loans and grants to implement green community programs.

                     Explanation of Provision \236\

---------------------------------------------------------------------------
    \236\ Section 301 of the Hiring Incentives to Restore Employment 
Act, Pub. L. No. 111-147, added a provision to section 6431, allowing 
the issuer of the bonds to elect to receive a direct payment from the 
Treasury in lieu of providing a tax credit to the holders of the bonds. 
For further discussion, see Part Seven of this document.
---------------------------------------------------------------------------
    The provision expands the present-law qualified energy 
conservation bond program. The provision authorizes issuance of 
an additional $2.4 billion of qualified energy conservation 
bonds. Also, the provision clarifies that capital expenditures 
to implement green community programs include grants, loans and 
other repayment mechanisms to implement such programs. For 
example, this expansion will enable States to issue these tax 
credit bonds to finance retrofits of existing private buildings 
through loans and/or grants to individual homeowners or 
businesses, or through other repayment mechanisms. Other 
repayment mechanisms can include periodic fees assessed on a 
government bill or utility bill that approximates the energy 
savings of energy efficiency or conservation retrofits. 
Retrofits can include heating, cooling, lighting, water-saving, 
storm water-reducing, or other efficiency measures.
    Finally, the provision clarifies that any bond used for the 
purpose of providing grants, loans or other repayment 
mechanisms for capital expenditures to implement green 
community programs is not treated as a private activity bond 
for purposes of determining whether the requirement that not 
less than 70 percent of allocations within a State or large 
local government be used to designate bonds that are not 
private activity bonds (sec. 54D(e)(3)) has been satisfied.

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment (February 17, 2009).

7. Modification to high-speed intercity rail facility bonds (sec. 1504 
        of the Act and sec. 142(i) 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 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 (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'') and other Code 
requirements are met.

High-speed rail

    An exempt facility bond is a type of qualified private 
activity bond. Exempt facility bonds can be issued for high-
speed intercity rail facilities. A facility qualifies as a 
high-speed intercity rail facility if it is a facility (other 
than rolling stock) for fixed guideway rail transportation of 
passengers and their baggage between metropolitan statistical 
areas. The facilities must use vehicles that are reasonably 
expected to operate at speeds in excess of 150 miles per hour 
between scheduled stops and the facilities must be made 
available to members of the general public as passengers. If 
the bonds are to be issued for a nongovernmental owner of the 
facility, such owner must irrevocably elect not to claim 
depreciation or credits with respect to the property financed 
by the net proceeds of the issue.
    The Code imposes a special redemption requirement for these 
types of bonds. Any proceeds not used within three years of the 
date of issuance of the bonds must be used within the following 
six months to redeem such bonds.
    Seventy-five percent of the principal amount of the bonds 
issued for high-speed rail facilities is exempt from the volume 
limit. If all the property to be financed by the net proceeds 
of the issue is to be owned by a governmental unit, then such 
bonds are completely exempt from the volume limit.

                        Explanation of Provision


In general

    The provision modifies the requirement that high-speed 
intercity rail transportation facilities use vehicles that are 
reasonably expected to operate at speeds in excess of 150 miles 
per hour. Instead, under the provision such facilities must use 
vehicles capable of attaining a maximum speed in excess of 150 
miles per hour.

                             Effective Date

    The provision is effective for obligations issued after the 
date of enactment (February 17, 2009).

8. Extension and modification of credit for nonbusiness energy property 
        (sec. 1121 of the Act and sec. 25C of the Code)

                              Present Law

    Section 25C provides a 10-percent credit for the purchase 
of 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 or 
asphalt roofs with appropriate pigmented coatings or cooling 
granules that are specifically and primarily designed to reduce 
the heat gain for a dwelling.
    Additionally, section 25C provides specified credits for 
the purchase of specific energy efficient property. The 
allowable credit for the purchase of certain property is (1) 
$50 for each advanced main air circulating fan, (2) $150 for 
each qualified natural gas, propane, or oil furnace or hot 
water boiler, and (3) $300 for each item of energy-efficient 
building 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.
    Energy-efficient building 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 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 \237\, (4) a natural gas, propane, or oil water heater 
which has an energy factor of at least 0.80 or thermal 
efficiency of at least 90 percent, and (5) biomass fuel 
property.
---------------------------------------------------------------------------
    \237\ The highest tier in effect at this time was tier 2, requiring 
SEER of at least 15 and EER of at least 12.5 for split central air 
conditioning systems and SEER of at least 14 and EER of at least 12 for 
packaged central air conditioning systems.
---------------------------------------------------------------------------
    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.
    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 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.
    For purposes of determining the amount of expenditures made 
by any individual with respect to any dwelling unit, 
expenditures which are made from subsidized energy financing 
are not taken into account. The term ``subsidized energy 
financing'' means financing provided under a Federal, State, or 
local program a principal purpose of which is to provide 
subsidized financing for projects designed to conserve or 
produce energy.
    The credit applies to expenditures made after December 31, 
2008, for property placed in service after December 31, 2008, 
and prior to January 1, 2010.

                           Reasons for Change

    The Congress believes that an immediate increase in the 
credit rate and the amount of the maximum credit that may be 
claimed is warranted to encourage additional investments that 
will help reduce reliance on fossil fuels.

                     Explanation of Provision \238\

    The Act raises the 10 percent credit rate to 30 percent. 
Additionally, all energy property otherwise eligible for the 
$50, $100, or $150 credit is instead eligible for a 30 percent 
credit on expenditures for such property.
---------------------------------------------------------------------------
    \238\ The provision was subsequently amended by section 710 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    The credit is extended for one year, through December 31, 
2010. The $500 lifetime cap (and the $200 lifetime cap with 
respect to windows) is eliminated and replaced with an 
aggregate cap of $1,500 in the case of property placed in 
service after December 31, 2008 and prior to January 1, 2011. 
The present law rule related to subsidized energy financing is 
eliminated.
    The Act modifies the efficiency standards for qualifying 
property as follows.
    Building insulation must follow the prescriptive criteria 
of the 2009 International Energy Conservation Code. 
Additionally, qualifying exterior windows, doors, and skylights 
must have a U-factor at or below 0.30 and a seasonal heat gain 
coefficient (``SHGC'') at or below 0.30.
    Electric heat pumps must achieve the highest efficiency 
tier of Consortium for Energy Efficiency, as in effect on 
January 1, 2009. These standards are a SEER greater than or 
equal to 15, EER greater than or equal to 12.5, and HSPF 
greater than or equal to 8.5 for split heat pumps, and SEER 
greater than or equal to 14, EER greater than or equal to 12, 
and HSPF greater than or equal to 8.0 for packaged heat pumps.
    Central air conditioners must achieve the highest 
efficiency tier of Consortium for Energy Efficiency, as in 
effect on January 1, 2009. These standards are a SEER greater 
than or equal to 16 and EER greater than or equal to 13 for 
split systems, and SEER greater than or equal to 14 and EER 
greater than or equal to 12 for packaged systems.
    Natural gas, propane, or oil water heaters must have an 
energy factor greater than or equal to 0.82 or a thermal 
efficiency of greater than or equal to 90 percent. Natural gas, 
propane, or oil water boilers must achieve an annual fuel 
utilization efficiency rate of at least 90. Qualified oil 
furnaces must achieve an annual fuel utilization efficiency 
rate of at least 90.
    Lastly, the requirement that biomass fuel property have a 
thermal efficiency rating of at least 75 percent is modified to 
be a thermal efficiency rating of at least 75 percent as 
measured using a lower heating value.

                             Effective Date

    The provision is generally effective for taxable years 
beginning after December 31, 2008. The provisions that alter 
the efficiency standards of qualifying property, other than 
biomass fuel property, apply to property placed in service 
after the date of enactment, February 17, 2009. The 
modification with respect to biomass fuel property is effective 
for taxable years beginning after December 31, 2008.

9. Credit for residential energy efficient property (sec. 1122 of the 
        Act and sec. 25D of the Code)

                              Present Law

    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 
of $2,000 with respect to qualified solar water heating 
property. There is no cap with respect to qualified solar 
electric property.
    Section 25D also provides a 30 percent credit for the 
purchase of qualified geothermal heat pump property, qualified 
small wind energy property, and qualified fuel cell power 
plants. The credit for geothermal heat pump property is capped 
at $2,000, the credit for qualified small wind energy property 
is limited to $500 with respect to each half kilowatt of 
capacity, not to exceed $4,000, and the credit for any fuel 
cell may not exceed $500 for each 0.5 kilowatt of capacity.
    The credit with respect to all qualifying property may be 
claimed against the alternative minimum tax.
    Qualified solar electric property is property that uses 
solar energy to generate electricity for use in a dwelling 
unit. Qualifying solar water heating property is property used 
to heat water for use in a dwelling unit located in the United 
States and used as a residence if at least half of the energy 
used by such property for such purpose is derived from the sun.
    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 has a 
nameplate capacity of at least 0.5 kilowatt. 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.
    Qualified small wind energy property is property that uses 
a wind turbine to generate electricity for use in a dwelling 
unit located in the U.S. 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, (2) meets the requirements of the 
Energy Star program which are in effect at the time that the 
expenditure for such equipment is made, and (3) is installed on 
or in connection with a dwelling unit located in the United 
States and used as a residence by the taxpayer.
    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.
    For purposes of determining the amount of expenditures made 
by any individual with respect to any dwelling unit, there 
shall not be taken into account expenditures which are made 
from subsidized energy financing. The term ``subsidized energy 
financing'' means financing provided under a Federal, State, or 
local program a principal purpose of which is to provide 
subsidized financing for projects designed to conserve or 
produce energy.
    The credit applies to property placed in service prior to 
January 1, 2017.

                           Reasons for Change

    The Congress believes that an increase in the maximum 
credit that may be claimed for solar hot water, geothermal, and 
wind property is warranted to encourage additional investments 
that will help reduce reliance on fossil fuels. For the same 
reasons, the Congress believes it is appropriate to eliminate 
the rules that reduce available credits for property using 
subsidized energy financing.

                        Explanation of Provision

    The Act eliminates the credit caps for solar hot water, 
geothermal, and wind property and eliminates the reduction in 
credits for property using subsidized energy financing.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2008.

10. Temporary increase in credit for alternative fuel vehicle refueling 
        property (sec. 1123 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.\239\ 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.
---------------------------------------------------------------------------
    \239\ 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 or electricity into the fuel 
tank or battery of a motor vehicle propelled by such fuel or 
electricity, but only if the storage or dispensing of the fuel 
or electricity is at the point of delivery into the fuel tank 
or battery 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, 2011. In the case of 
hydrogen refueling property, the property must be placed in 
service before January 1, 2015.

                           Reasons for Change

    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 \240\

    For property placed in service in 2009 or 2010, the 
provision increases the maximum credit available for business 
property to $200,000 for qualified hydrogen refueling property 
and to $50,000 for other qualified refueling property. For 
nonbusiness property, the maximum credit is increased to 
$2,000. In addition, the credit rate is increased from 30 
percent to 50 percent, except in the case of hydrogen refueling 
property.
---------------------------------------------------------------------------
    \240\ The provision was subsequently amended by section 711 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2008.

11. Modification of credit for carbon dioxide sequestration (sec. 1131 
        of the Act and sec. 45Q of the Code)

                              Present Law

    A credit of $20 per metric ton is available for qualified 
carbon dioxide captured by a 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).\241\ In addition, a credit of $10 per metric ton is 
available for qualified carbon dioxide that is captured by the 
taxpayer at a qualified facility and used by such taxpayer as a 
tertiary injectant (including carbon dioxide augmented 
waterflooding and immiscible carbon dioxide displacement) in a 
qualified enhanced oil or natural gas recovery project. Both 
credit amounts are adjusted for inflation after 2009.
---------------------------------------------------------------------------
    \241\ Sec. 45Q.
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    Qualified carbon dioxide is defined 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 enhanced oil recovery project under section 43, if 
natural gas projects were included within that definition.
    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 \242\ or one of its possessions.\243\
---------------------------------------------------------------------------
    \242\ Sec. 638(1).
    \243\ Sec. 638(2).
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    Except as provided in regulations, credits are attributable 
to the person that captures and physically or contractually 
ensures the disposal, or use as a tertiary injectant, of the 
qualified carbon dioxide. Credits are subject to recapture, as 
provided by regulation, with respect to any qualified carbon 
dioxide that 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.

                        Explanation of Provision

    The provision requires that carbon dioxide used as a 
tertiary injectant and otherwise eligible for a $10 per metric 
ton credit must be sequestered by the taxpayer in permanent 
geological storage in order to qualify for such credit. The 
provision also clarifies that the term permanent geological 
storage includes oil and gas reservoirs in addition to 
unminable coal seams and deep saline formations. In addition, 
the provision requires that the Secretary of the Treasury 
consult with the Secretary of Energy and the Secretary of the 
Interior, in addition to the Administrator of the Environmental 
Protection Agency, in promulgating regulations relating to the 
permanent geological storage of carbon dioxide.

                             Effective Date

    The provision is effective for carbon dioxide captured 
after the date of enactment (February 17, 2009).

12. Modification of the plug-in electric drive motor vehicle credit 
        (secs. 1141-1144 of the Act and secs. 30, 30B, and 30D of the 
        Code)

                              Present Law


Alternative motor vehicle credit

    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.\244\ 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. The alternative motor vehicle credit is not allowed 
against the alternative minimum tax.
---------------------------------------------------------------------------
    \244\ Sec. 30B.
---------------------------------------------------------------------------

Plug-in electric drive motor vehicle credit

    A credit is available 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 has at 
least four wheels, is manufactured for use on public roads, 
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. Regardless of the phase-out 
limitation, no credit is available for vehicles purchased after 
2014.
    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 over the alternative minimum tax (reduced by 
certain other credits) for the taxable year.

                        Explanation of Provision


Credit for electric drive low-speed vehicles, motorcycles, and three-
        wheeled vehicles

    The provision creates a new 10-percent credit for low-speed 
vehicles, motorcycles, and three-wheeled vehicles that would 
otherwise meet the criteria of a qualified plug-in electric 
drive motor vehicle but for the fact that they are low-speed 
vehicles or do not have at least four wheels. The maximum 
credit for such vehicles is $2,500. Basis reduction and other 
rules similar to those found in section 30 apply under the 
provision. In the case of vehicles of a character subject to an 
allowance for depreciation, the new credit is part of the 
general business credit. The new credit is not available for 
vehicles sold after December 31, 2011.

Credit for converting a vehicle into a plug-in electric drive motor 
        vehicle

    The provision also creates a new 10-percent credit, up to 
$4,000, for the cost of converting any motor vehicle into a 
qualified plug-in electric drive motor vehicle. To be eligible 
for the credit, a qualified plug-in traction battery module 
must have a capacity of at least four kilowatt-hours. The 
credit is not available for conversions made after December 31, 
2011.

Modification of the plug-in electric drive motor vehicle credit

    The provision modifies the plug-in electric drive motor 
vehicle credit by limiting the maximum credit to $7,500 
regardless of vehicle weight. The provision also eliminates the 
credit for low speed plug-in vehicles and for plug-in vehicles 
weighing 14,000 pounds or more.
    The provision replaces the 250,000 total plug-in vehicle 
limitation with a 200,000 plug-in vehicles per manufacturer 
limitation. The credit phases out over four calendar quarters 
beginning in the second calendar quarter following the quarter 
in which the manufacturer limit is reached.

Treatment of alternative motor vehicle credit as a personal credit 
        allowed against the alternative minimum tax

    The provision provides that the alternative motor vehicle 
credit for nondepreciable property is a personal credit allowed 
against the alternative minimum tax.

                             Effective Date

    The new 10-percent credit for low-speed vehicles, 
motorcycles, and three-wheeled vehicles is effective for 
vehicles acquired after February 17, 2009. The credit for 
converting a vehicle into a plug-in electric drive motor 
vehicle is effective for property placed in service after 
February 17, 2009. The modification of the plug-in electric 
drive motor vehicle credit is effective for vehicles acquired 
after December 31, 2009. The allowance of the treatment of the 
alternative motor vehicle credit against the alternative 
minimum tax is effective for taxable years beginning after 
December 31, 2008.

13. Parity for qualified transportation fringe benefits (sec. 1151 of 
        the Act and sec. 132 of the Code)

                              Present Law

    Qualified transportation fringe benefits provided by an 
employer are excluded from an employee's gross income for 
income tax purposes and from an employee's wages for payroll 
tax purposes.\245\ Qualified transportation fringe benefits 
include parking, transit passes, vanpool benefits, and 
qualified bicycle commuting reimbursements. Up to $230 (for 
2009) per month of employer-provided parking is excludable from 
income. Up to $120 (for 2009) 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. No amount is includible in the 
income of an employee merely because the employer offers the 
employee a choice between cash and qualified transportation 
fringe benefits. Qualified transportation fringe benefits also 
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.
---------------------------------------------------------------------------
    \245\ Secs. 132(f), 3121(b)(2), 3306(b)(16), and 3401(a)(19).
---------------------------------------------------------------------------

                     Explanation of Provision \246\

---------------------------------------------------------------------------
    \246\ The provision was subsequently amended by section 727 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this 
document.
---------------------------------------------------------------------------
    The provision increases the monthly exclusion for employer-
provided transit and vanpool benefits to the same level as the 
exclusion for employer-provided parking.

                             Effective Date

    The provision is effective for months beginning on or after 
date of enactment (February 17, 2009). The provision does not 
apply to tax years beginning after December 31, 2010.

14. Credit for investment in advanced energy property (sec. 1302 of the 
        Act and new sec. 48C of the Code)

                              Present Law

    An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities.\247\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
solar energy, small irrigation power, municipal solid waste, 
qualified hydropower production, and marine and hydrokinetic 
renewable energy. Qualified facilities are, generally, 
facilities that generate electricity using qualified energy 
resources.
---------------------------------------------------------------------------
    \247\ Sec. 45. In addition to the electricity production credit, 
section 45 also provides income tax credits for the production of 
Indian coal and refined coal at qualified facilities.
---------------------------------------------------------------------------
    An income tax credit is also allowed for certain energy 
property placed in service. Qualifying property includes 
certain fuel cell property, solar property, geothermal power 
production property, small wind energy property, combined heat 
and power system property, and geothermal heat pump 
property.\248\
---------------------------------------------------------------------------
    \248\ Sec. 48.
---------------------------------------------------------------------------
    In addition to these, numerous other credits are available 
to taxpayers to encourage renewable energy production and 
energy conservation, including, among others, credits for 
certain biofuels, plug-in electric vehicles, and energy 
efficient appliances, and for improvements to heating, air 
conditioning, and insulation.
    No credit is specifically designed under present law to 
encourage the development of a domestic manufacturing base to 
support the industries described above.

                        Explanation of Provision

    The provision establishes a 30-percent allocated credit for 
investment in qualified property used in a qualified advanced 
energy manufacturing project. The provision authorizes the 
Secretary of the Treasury to allocate up to $2.3 billion of 
credits.
    A qualified advanced energy project is a project that re-
equips, expands, or establishes a manufacturing facility for 
the production of: (1) property designed to be used to produce 
energy from the sun, wind, or geothermal deposits (within the 
meaning of section 613(e)(2)), or other renewable resources; 
(2) fuel cells, microturbines, or an energy storage system for 
use with electric or hybrid-electric motor vehicles; (3) 
electric grids to support the transmission of intermittent 
sources of renewable energy, including storage of such energy; 
(4) property designed to capture and sequester carbon dioxide; 
(5) property designed to refine or blend renewable fuels (but 
not fossil fuels) or to produce energy conservation 
technologies (including energy-conserving lighting technologies 
and smart grid technologies); (6) property designed to 
manufacture any new qualified plug-in electric drive motor 
vehicle (as defined by section 30D(c)), any qualified plug-in 
electric vehicle (as defined by section 30(d)), or any 
component which is designed specifically for use with such 
vehicles, including any electric motor, generator, or power 
control unit; or (7) other advanced energy property designed to 
reduce greenhouse gas emissions as may be determined by the 
Secretary.
    Qualified property must be depreciable (or amortizable) 
property used in a qualified advanced energy project and must 
consist of tangible personal property or other tangible 
property (not including building or its structural components). 
Qualified property does not include property designed to 
manufacture equipment for use in the refining or blending of 
any transportation fuel other than renewable fuels. The basis 
of qualified property must be reduced by the amount of credit 
received.
    Credits are available only for projects certified by the 
Secretary of the Treasury, in consultation with the Secretary 
of Energy. The Secretary of the Treasury must establish a 
certification program no later than 180 days after date of 
enactment, and may allocate up to $2.3 billion in credits.
    In selecting projects, the Secretary may consider only 
those projects where there is a reasonable expectation of 
commercial viability. In addition, the Secretary must consider 
other selection criteria, including which projects (1) will 
provide the greatest domestic job creation; (2) will provide 
the greatest net impact in avoiding or reducing air pollutants 
or anthropogenic emissions of greenhouse gases; (3) have the 
greatest potential for technological innovation or commercial 
deployment; (4) have the lowest levelized cost of generated or 
stored energy, or of measured reduction in energy consumption 
or greenhouse gas emission; and (5) have the shortest project 
time from certification to completion.
    Each project application must be submitted during the two-
year period beginning on the date such certification program is 
established. An applicant for certification has one year 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 three 
years from the date of issuance of the certification to place 
the project in service. Not later than four years after the 
date of enactment of the credit, the Secretary is required to 
review the credit allocations and redistribute any credits that 
were not used either because of a revoked certification or 
because of an insufficient quantity of credit applications.

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

                           E. Other Provision


1. Application of certain labor standards to projects financed with 
        certain tax-favored bonds (sec. 1601 of the Act)

                              Present Law

    The United States Code (Subchapter IV of Chapter 31 of 
Title 40) applies a prevailing wage requirement to certain 
contracts to which the Federal Government is a party.

                           Reasons for Change

    The Congress believes that it is appropriate to apply the 
prevailing wage requirement to a broader class of contracts 
including those financed with tax-favored bonds.

                        Explanation of Provision

    The provision provides that Subchapter IV of Chapter 31 of 
Title 40 of the U.S. Code shall apply to projects financed with 
the proceeds of:
          1. any new clean renewable energy bond (as defined in 
        sec. 54C of the Code) issued after the date of 
        enactment;
          2. any qualified energy conservation bond (as defined 
        in sec. 54D of the Code) issued after the date of 
        enactment;
          3. any qualified zone academy bond (as defined in 
        sec. 54E of the Code) issued after the date of 
        enactment;
          4. any qualified school construction bond (as defined 
        in sec. 54F of the Code); and
          5. any recovery zone economic development bond (as 
        defined in sec. 1400U-2 of the Code).

                             Effective Date

    The provision is effective on the date of enactment 
(February 17, 2009).

                 TITLE III--HEALTH INSURANCE ASSISTANCE


A. Assistance for COBRA Continuation Coverage (sec. 3001 of the Act and 
  new sec. 139C, sec. 4980B, and new secs. 6432 and 6720C of the Code)


                              Present Law


In general

    The Code contains rules that require certain group health 
plans to offer certain individuals (``qualified 
beneficiaries'') the opportunity to continue to participate for 
a specified period of time in the group health plan 
(``continuation coverage'') after the occurrence of certain 
events that otherwise would have terminated such participation 
(``qualifying events'').\249\ These continuation coverage rules 
are often referred to as ``COBRA continuation coverage'' or 
``COBRA,'' which is a reference to the acronym for the law that 
added the continuation coverage rules to the Code.\250\
---------------------------------------------------------------------------
    \249\ Sec. 4980B.
    \250\ The COBRA rules were added to the Code by the Consolidated 
Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272. The 
rules were originally added as Code sections 162(i) and (k). The rules 
were later restated as Code section 4980B, pursuant to the Technical 
and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647.
---------------------------------------------------------------------------
    The Code imposes an excise tax on a group health plan if it 
fails to comply with the COBRA continuation coverage rules with 
respect to a qualified beneficiary. The excise tax with respect 
to a qualified beneficiary generally is equal to $100 for each 
day in the noncompliance period with respect to the failure. A 
plan's noncompliance period generally begins on the date the 
failure first occurs and ends when the failure is corrected. 
Special rules apply that limit the amount of the excise tax if 
the failure would not have been discovered despite the exercise 
of reasonable diligence or if the failure is due to reasonable 
cause and not willful neglect.
    In the case of a multiemployer plan, the excise tax 
generally is imposed on the group health plan. A multiemployer 
plan is a plan to which more than one employer is required to 
contribute, that is maintained pursuant to one or more 
collective bargaining agreements between one or more employee 
organizations and more than one employer, and that satisfies 
such other requirements as the Secretary of Labor may prescribe 
by regulation. In the case of a plan other than a multiemployer 
plan (a ``single employer plan''), the excise tax generally is 
imposed on the employer.

Plans subject to COBRA

    A group health plan is defined as a 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, 
and others associated or formerly associated with the employer 
in a business relationship, or their families. A group health 
plan includes a self-insured plan. The term group health plan 
does not, however, include a plan under which substantially all 
of the coverage is for qualified long-term care services.
    The following types of group health plans are not subject 
to the Code's COBRA rules: (1) a plan established and 
maintained for its employees by a church or by a convention or 
association of churches which is exempt from tax under section 
501 (a ``church plan''); (2) a plan established and maintained 
for its employees by the Federal government, the government of 
any State or political subdivision thereof, or by any 
instrumentality of the foregoing (a ``governmental plan''); 
\251\ and (3) a plan maintained by an employer that normally 
employed fewer than 20 employees on a typical business day 
during the preceding calendar year \252\ (a ``small employer 
plan'').
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    \251\ A governmental plan also includes certain plans established 
by an Indian tribal government.
    \252\ If the plan is a multiemployer plan, then each of the 
employers contributing to the plan for a calendar year must normally 
employ fewer than 20 employees during the preceding calendar year.
---------------------------------------------------------------------------

Qualifying events and qualified beneficiaries

    A qualifying event that gives rise to COBRA continuation 
coverage includes, with respect to any covered employee, the 
following events which would result in a loss of coverage of a 
qualified beneficiary under a group health plan (but for COBRA 
continuation coverage): (1) death of the covered employee; (2) 
the termination (other than by reason of such employee's gross 
misconduct), or a reduction in hours, of the covered employee's 
employment; (3) divorce or legal separation of the covered 
employee; (4) the covered employee becoming entitled to 
Medicare benefits under title XVIII of the Social Security Act; 
(5) a dependent child ceasing to be a dependent child under the 
generally applicable requirements of the plan; and (6) a 
proceeding in a case under the U.S. Bankruptcy Code commencing 
on or after July 1, 1986, with respect to the employer from 
whose employment the covered employee retired at any time.
    A ``covered employee'' is an individual who is (or was) 
provided coverage under the group health plan on account of the 
performance of services by the individual for one or more 
persons maintaining the plan and includes a self-employed 
individual. A ``qualified beneficiary'' means, with respect to 
a covered employee, any individual who on the day before the 
qualifying event for the employee is a beneficiary under the 
group health plan as the spouse or dependent child of the 
employee. The term qualified beneficiary also includes the 
covered employee in the case of a qualifying event that is a 
termination of employment or reduction in hours.

Continuation coverage requirements

    Continuation coverage that must be offered to qualified 
beneficiaries pursuant to COBRA must consist of coverage which, 
as of the time coverage is being provided, is identical to the 
coverage provided under the plan to similarly situated non-
COBRA beneficiaries under the plan with respect to whom a 
qualifying event has not occurred. If coverage under a plan is 
modified for any group of similarly situated non-COBRA 
beneficiaries, the coverage must also be modified in the same 
manner for qualified beneficiaries. Similarly situated non-
COBRA beneficiaries means the group of covered employees, 
spouses of covered employees, or dependent children of covered 
employees who (i) are receiving coverage under the group health 
plan for a reason other than pursuant to COBRA, and (ii) are 
the most similarly situated to the situation of the qualified 
beneficiary immediately before the qualifying event, based on 
all of the facts and circumstances.
    The maximum required period of continuation coverage for a 
qualified beneficiary (i.e., the minimum period for which 
continuation coverage must be offered) depends upon a number of 
factors, including the specific qualifying event that gives 
rise to a qualified beneficiary's right to elect continuation 
coverage. In the case of a qualifying event that is the 
termination, or reduction of hours, of a covered employee's 
employment, the minimum period of coverage that must be offered 
to the qualified beneficiary is coverage for the period 
beginning with the loss of coverage on account of the 
qualifying event and ending on the date that is 18 months \253\ 
after the date of the qualifying event. If coverage under a 
plan is lost on account of a qualifying event but the loss of 
coverage actually occurs at a later date, the minimum coverage 
period may be extended by the plan so that it is measured from 
the date when coverage is actually lost.
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    \253\ In the case of a qualified beneficiary who is determined, 
under Title II or XVI of the Social Security Act, to have been disabled 
during the first 60 days of continuation coverage, the 18 month minimum 
coverage period is extended to 29 months with respect to all qualified 
beneficiaries if notice is given before the end of the initial 18 month 
continuation coverage period.
---------------------------------------------------------------------------
    The minimum coverage period for a qualified beneficiary 
generally ends upon the earliest to occur of the following 
events: (1) the date on which the employer ceases to provide 
any group health plan to any employee, (2) the date on which 
coverage ceases under the plan by reason of a failure to make 
timely payment of any premium required with respect to the 
qualified beneficiary, and (3) the date on which the qualified 
beneficiary first becomes (after the date of election of 
continuation coverage) either (i) covered under any other group 
health plan (as an employee or otherwise) which does not 
include any exclusion or limitation with respect to any 
preexisting condition of such beneficiary or (ii) entitled to 
Medicare benefits under title XVIII of the Social Security Act. 
Mere eligibility for another group health plan or Medicare 
benefits is not sufficient to terminate the minimum coverage 
period. Instead, the qualified beneficiary must be actually 
covered by the other group health plan or enrolled in Medicare. 
Coverage under another group health plan or enrollment in 
Medicare does not terminate the minimum coverage period if such 
other coverage or Medicare enrollment begins on or before the 
date that continuation coverage is elected.

Election of continuation coverage

    The COBRA rules specify a minimum election period under 
which a qualified beneficiary is entitled to elect continuation 
coverage. The election period begins not later than the date on 
which coverage under the plan terminates on account of the 
qualifying event, and ends not earlier than the later of 60 
days or 60 days after notice is given to the qualified 
beneficiary of the qualifying event and the beneficiary's 
election rights.

Notice requirements

    A group health plan is required to give a general notice of 
COBRA continuation coverage rights to employees and their 
spouses at the time of enrollment in the group health plan.
    An employer is required to give notice to the plan 
administrator of certain qualifying events (including a loss of 
coverage on account of a termination of employment or reduction 
in hours) generally within 30 days of the qualifying event. A 
covered employee or qualified beneficiary is required to give 
notice to the plan administrator of certain qualifying events 
within 60 days after the event. The qualifying events giving 
rise to an employee or beneficiary notification requirement are 
the divorce or legal separation of the covered employee or a 
dependent child ceasing to be a dependent child under the terms 
of the plan. Upon receiving notice of a qualifying event from 
the employer, covered employee, or qualified beneficiary, the 
plan administrator is then required to give notice of COBRA 
continuation coverage rights within 14 days to all qualified 
beneficiaries with respect to the event.

Premiums

    A plan may require payment of a premium for any period of 
continuation coverage. The amount of such premium generally may 
not exceed 102 percent \254\ of the ``applicable premium'' for 
such period and the premium must be payable, at the election of 
the payor, in monthly installments.
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    \254\ In the case of a qualified beneficiary whose minimum coverage 
period is extended to 29 months on account of a disability 
determination, the premium for the period of the disability extension 
may not exceed 150 percent of the applicable premium for the period.
---------------------------------------------------------------------------
    The applicable premium for any period of continuation 
coverage means the cost to the plan for such period of coverage 
for similarly situated non-COBRA beneficiaries with respect to 
whom a qualifying event has not occurred, and is determined 
without regard to whether the cost is paid by the employer or 
employee. The determination of any applicable premium is made 
for a period of 12 months (the ``determination period'') and is 
required to be made before the beginning of such 12 month 
period.
    In the case of a self-insured plan, the applicable premium 
for any period of continuation coverage of qualified 
beneficiaries is equal to a reasonable estimate of the cost of 
providing coverage during such period for similarly situated 
non-COBRA beneficiaries which is determined on an actuarial 
basis and takes into account such factors as the Secretary of 
the Treasury prescribes in regulations. A self-insured plan may 
elect to determine the applicable premium on the basis of an 
adjusted cost to the plan for similarly situated non-COBRA 
beneficiaries during the preceding determination period.
    A plan may not require payment of any premium before the 
day which is 45 days after the date on which the qualified 
beneficiary made the initial election for continuation 
coverage. A plan is required to treat any required premium 
payment as timely if it is made within 30 days after the date 
the premium is due or within such longer period as applies to, 
or under, the plan.

Other continuation coverage rules

    Continuation coverage rules which are parallel to the 
Code's continuation coverage rules apply to group health plans 
under the Employee Retirement Income Security Act of 1974 
(ERISA).\255\ ERISA generally permits the Secretary of Labor 
and plan participants to bring a civil action to obtain 
appropriate equitable relief to enforce the continuation 
coverage rules of ERISA, and in the case of a plan 
administrator who fails to give timely notice to a participant 
or beneficiary with respect to COBRA continuation coverage, a 
court may hold the plan administrator liable to the participant 
or beneficiary in the amount of up to $110 a day from the date 
of such failure.
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    \255\ Secs. 601 to 608 of ERISA.
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    Although the Federal government and State and local 
governments are not subject to the Code and ERISA's 
continuation coverage rules, other laws impose similar 
continuation coverage requirements with respect to plans 
maintained by such governmental employers.\256\ In addition, 
many States have enacted laws or promulgated regulations that 
provide continuation coverage rights that are similar to COBRA 
continuation coverage rights in the case of a loss of group 
health coverage. Such State laws, for example, may apply in the 
case of a loss of coverage under a group health plan maintained 
by a small employer.
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    \256\ Continuation coverage rights similar to COBRA continuation 
coverage rights are provided to individuals covered by health plans 
maintained by the Federal government. 5 U.S.C. sec. 8905a. Group health 
plans maintained by a State that receives funds under Chapter 6A of 
Title 42 of the United States Code (the Public Health Service Act) are 
required to provide continuation coverage rights similar to COBRA 
continuation coverage rights for individuals covered by plans 
maintained by such State (and plans maintained by political 
subdivisions of such State and agencies and instrumentalities of such 
State or political subdivision of such State). 42 U.S.C. sec. 300bb-1.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress is aware that the majority of Americans with 
health insurance coverage obtain such coverage heavily 
subsidized through their employers. As a result of the current 
economic crisis, a significant number of Americans have been, 
and are expected to be, involuntarily terminated from their 
employment and thus will lose their income and their subsidy 
toward health insurance coverage. While present law permits a 
terminated employee to continue to participate in his or her 
former employer's group health coverage at a rate of 102% of 
the premium for current employees, the Congress is concerned 
that such coverage is particularly unaffordable in the case of 
an individual who has been involuntarily terminated from 
employment. The Congress believes that a temporary subsidy 
should be made available to make COBRA continuation coverage 
more affordable for employees who involuntarily lose their jobs 
on account of the current economic crisis. The subsidy provided 
under the provision is estimated to benefit approximately 7 
million people for some portion of 2009.\257\
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    \257\ Joint Committee on Taxation, Estimated Budget Effects of the 
Revenue Provisions contained in Title I and Title III of H.R. 598, the 
``American Recovery and Reinvestment Tax Act of 2009, Scheduled for 
Markup by the Committee on Ways and Means on January 22, 2009 (JCX-7-
09), January 21, 2009, footnote 9.
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                        Explanation of Provision


Reduced COBRA premium

    The provision provides that, for a period not exceeding 9 
months,\258\ an assistance eligible individual is treated as 
having paid any premium required for COBRA continuation 
coverage under a group health plan if the individual pays 35 
percent of the premium.\259\ Thus, if the assistance eligible 
individual pays 35 percent of the premium, the group health 
plan must treat the individual as having paid the full premium 
required for COBRA continuation coverage, and the individual is 
entitled to a subsidy for 65 percent of the premium. An 
assistance eligible individual is any qualified beneficiary who 
elects COBRA continuation coverage and satisfies three 
additional requirements. First, the qualifying event with 
respect to the covered employee for that qualified beneficiary 
must be a loss of group health plan coverage on account of an 
involuntary termination of the covered employee's 
employment.\260\ However, a termination of employment for gross 
misconduct does not qualify (since such a termination under 
present law does not qualify for COBRA continuation coverage). 
Second, the qualifying event must occur during the period 
beginning September 1, 2008 and ending with December 31, 2009, 
and the qualified beneficiary must be eligible for COBRA 
continuation coverage during that period and elect such 
coverage.\261\ Third, the assistance eligible individual must 
meet certain income threshold requirements.
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    \258\ This provision was subsequently extended in sec. 1010(b) of 
the Department of Defense Appropriations Act, Pub. L. No. 111-118, 
described in Part Twenty-One of this document.
    \259\ For this purpose, payment by an assistance eligible 
individual includes payment by another individual paying on behalf of 
the individual, such as a parent or guardian, or an entity paying on 
behalf of the individual, such as a State agency or charity. Further, 
the amount of the premium used to calculate the reduced premium is the 
premium amount that the employee would be required to pay for COBRA 
continuation coverage absent this premium reduction (e.g. 102 percent 
of the ``applicable premium'' for such period).
    \260\ The provision was subsequently clarified in sec. 3(b) of the 
Temporary Extension Act of 2010, Pub. L. No. 111-144, described in Part 
Twenty-One of this document.
    \261\ The provision was subsequently extended in sec. 1010(a) of 
the Department of Defense Appropriations Act, Pub. L. No. 111-118, sec. 
3(a) of the Temporary Extension Act of 2010, Pub. L. No. 111-144, and 
sec. 2(a) of the Continuing Extension Act of 2010, Pub. L. No. 111-157, 
described in Part Twenty-One of this document.
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    The income threshold applies based on the modified adjusted 
gross income for an individual income tax return for the 
taxable year in which the subsidy is received with respect to 
which the assistance eligible individual is the taxpayer, the 
taxpayer's spouse or a dependent of the taxpayer (within the 
meaning of section 152 of the Code, determined without regard 
to sections 152(b)(1), (b)(2) and (d)(1)(B)). Modified adjusted 
gross income for this purpose means adjusted gross income as 
defined in section 62 of the Code increased by any amount 
excluded from gross income under section 911, 931, or 933 of 
the Code. Under this income threshold, if the premium subsidy 
is provided with respect to any COBRA continuation coverage 
which covers the taxpayer, the taxpayer's spouse, or any 
dependent of the taxpayer during a taxable year and the 
taxpayer's modified adjusted gross income exceeds $145,000 (or 
$290,000 for joint filers), then the amount of the premium 
subsidy for all months during the taxable year must be repaid. 
The mechanism for repayment is an increase in the taxpayer's 
income tax liability for the year equal to such amount. For 
taxpayers with adjusted gross income between $125,000 and 
$145,000 (or $250,000 and $290,000 for joint filers), the 
amount of the premium subsidy for the taxable year that must be 
repaid is reduced proportionately.
    Under this income threshold, for example, an assistance 
eligible individual who is eligible for Federal COBRA 
continuation coverage based on the involuntary termination of a 
covered employee in August 2009 but who is not entitled to the 
premium subsidy for the periods of coverage during 2009 due to 
having income above the threshold, may nevertheless be entitled 
to the premium subsidy for any periods of coverage in the 
remaining period during 2010 to which the subsidy applies if 
the modified adjusted gross income for 2010 of the relevant 
taxpayer is not above the income threshold.
    Under the provision an individual is allowed to make a 
permanent election (at such time and in such form as the 
Secretary of the Treasury may prescribe) to waive the right to 
the premium subsidy for all periods of coverage. For the 
election to take effect, the individual must notify the entity 
(to which premiums are reimbursed under section 6432(a) of the 
Code) of the election. This waiver provision allows an 
assistance eligible individual who is certain that the modified 
adjusted gross income limit prevents the individual from being 
entitled to any premium subsidy for any coverage period to 
decline the subsidy for all coverage periods and avoid being 
subject to the recapture tax. However, this waiver applies to 
all periods of coverage (regardless of the tax year of the 
coverage) for which the individual might be entitled to the 
subsidy. The premium subsidy for any period of coverage cannot 
later be claimed as a tax credit or otherwise be recovered, 
even if the individual later determines that the income 
threshold was not exceeded for a relevant tax year. This waiver 
is made separately by each qualified beneficiary (who could be 
an assistance eligible individual) with respect to a covered 
employee.
    An assistance eligible individual can be any qualified 
beneficiary associated with the relevant covered employee 
(e.g., a dependent of an employee who is covered immediately 
prior to a qualifying event), and such qualified beneficiary 
can independently elect COBRA (as provided under present law 
COBRA rules) and independently receive a subsidy. Thus, the 
subsidy for an assistance eligible individual continues after 
an intervening death of the covered employee.
    Under the provision, any subsidy provided is excludible 
from the gross income of the covered employee and any 
assistance eligible individuals. However, for purposes of 
determining the gross income of the employer and any welfare 
benefit plan of which the group health plan is a part, the 
amount of the premium reduction is intended to be treated as an 
employee contribution to the group health plan. Finally, under 
the provision, notwithstanding any other provision of law, the 
subsidy is not permitted to be considered as income or 
resources in determining eligibility for, or the amount of 
assistance or benefits under, any public benefit provided under 
Federal or State law (including the law of any political 
subdivision).

Eligible COBRA continuation coverage

    Under the provision, continuation coverage that qualifies 
for the subsidy is not limited to coverage required to be 
offered under the Code's COBRA rules but also includes 
continuation coverage required under State law that requires 
continuation coverage comparable to the continuation coverage 
required under the Code's COBRA rules for group health plans 
not subject to those rules (e.g., a small employer plan) and 
includes continuation coverage requirements that apply to 
health plans maintained by the Federal government or a State 
government. Comparable continuation coverage under State law 
does not include every State law right to continue health 
coverage, such as a right to continue coverage with no rules 
that limit the maximum premium that can be charged with respect 
to such coverage. To be comparable, the right generally must be 
to continue substantially similar coverage as was provided 
under the group health plan (or substantially similar coverage 
as is provided to similarly situated beneficiaries) at a 
monthly cost that is based on a specified percentage of the 
group health plan's cost of providing such coverage.
    The cost of coverage under any group health plan that is 
subject to the Code's COBRA rules (or comparable State 
requirements or continuation coverage requirement under health 
plans maintained by the Federal government or any State 
government) is eligible for the subsidy, except contributions 
to a health flexible spending account offered under a cafeteria 
plan within the meaning of section 125 of the Code.
    A group health plan is permitted to provide a special 
enrollment right to assistance-eligible individuals to allow 
them to change coverage options under the plan in conjunction 
with electing COBRA continuation coverage. Under this special 
enrollment right, the assistance eligible individual must only 
be offered the option to change to any coverage option offered 
to employed workers that provides the same or lower health 
insurance premiums than the individual's group health plan 
coverage as of the date of the covered employee's qualifying 
event. If the individual elects a different coverage option 
under this special enrollment right in conjunction with 
electing COBRA continuation coverage, this is the coverage that 
must be provided for purposes of satisfying the COBRA 
continuation coverage requirement. However the coverage plan 
option into which the individual must be given the opportunity 
to enroll under this special enrollment right does not include 
the following: a coverage option providing only dental, vision, 
counseling, or referral services (or a combination of the 
foregoing); a health flexible spending account or health 
reimbursement arrangement; or coverage for treatment that is 
furnished in an on-site medical facility maintained by the 
employer and that consists primarily of first-aid services, 
prevention and wellness care, or similar care (or a combination 
of such care).
    This special enrollment right only allows a group health 
plan to offer additional coverage options to assistance 
eligible individuals and does not change the basic requirement 
under Federal COBRA continuation coverage requirements that a 
group health plan must allow an assistance eligible individual 
to choose to continue with the coverage in which the individual 
is enrolled as of the qualifying event.\262\ However, once the 
election of the other coverage is made, it becomes COBRA 
continuation coverage under the applicable COBRA continuation 
provisions. Thus, for example, under the Federal COBRA 
continuation coverage provisions, if a covered employee chooses 
different coverage pursuant to being provided this option, the 
different coverage elected must generally be permitted to be 
continued for the applicable required period (generally 18 
months or 36 months, absent an event that permits coverage to 
be terminated under the Federal COBRA continuation provisions) 
even though the premium subsidy is only for nine months.
---------------------------------------------------------------------------
    \262\ All references to ``Federal COBRA continuation coverage'' 
mean the COBRA continuation coverage provisions of the Code, ERISA, and 
PHSA.
---------------------------------------------------------------------------

Termination of eligibility for reduced premiums

    The assistance eligible individual's eligibility for the 
subsidy terminates with the first month beginning on or after 
the earlier of (1) the date which is 9 months after the first 
day of the first month for which the subsidy applies,\263\ (2) 
the end of the maximum required period of continuation coverage 
for the qualified beneficiary under the Code's COBRA rules or 
the relevant State or Federal law (or regulation), or (3) the 
date that the assistance eligible individual becomes eligible 
for Medicare benefits under title XVIII of the Social Security 
Act or health coverage under another group health plan 
(including, for example, a group health plan maintained by the 
new employer of the individual or a plan maintained by the 
employer of the individual's spouse). However, eligibility for 
coverage under another group health plan does not terminate 
eligibility for the subsidy if the other group health plan 
provides only dental, vision, counseling, or referral services 
(or a combination of the foregoing), is a health flexible 
spending account or health reimbursement arrangement, or is 
coverage for treatment that is furnished in an on-site medical 
facility maintained by the employer and that consists primarily 
of first-aid services, prevention and wellness care, or similar 
care (or a combination of such care).
---------------------------------------------------------------------------
    \263\ The provision was subsequently extended in sec. 101(b) of the 
Department of Defense Appropriations Act, Pub. L. No. 111-118, 
described in Part Twenty-One of this document.
---------------------------------------------------------------------------
    If a qualified beneficiary paying a reduced premium for 
COBRA continuation coverage under this provision becomes 
eligible for coverage under another group health plan or 
Medicare, the provision requires the qualified beneficiary to 
notify, in writing, the group health plan providing the COBRA 
continuation coverage with the reduced premium of such 
eligibility under the other plan or Medicare. The notification 
by the assistance eligible individual must be provided to the 
group health plan in the time and manner as is specified by the 
Secretary of Labor. If an assistance eligible individual fails 
to provide this notification at the required time and in the 
required manner, and as a result the individual's COBRA 
continuation coverage continues to be subsidized after the 
termination of the individual's eligibility for such subsidy, a 
penalty is imposed on the individual equal to 110 percent of 
the subsidy provided after termination of eligibility.
    This penalty only applies if the subsidy in the form of the 
premium reduction is actually provided to a qualified 
beneficiary for a month that the beneficiary is not eligible 
for the reduction. Thus, for example, if a qualified 
beneficiary becomes eligible for coverage under another group 
health plan and stops paying the reduced COBRA continuation 
premium, the penalty generally will not apply. As discussed 
below, under the provision, the group health plan is reimbursed 
for the subsidy for a month (65 percent of the amount of the 
premium for the month) only after receipt of the qualified 
beneficiary's portion (35 percent of the premium amount). Thus, 
the penalty generally will only arise when the qualified 
beneficiary continues to pay the reduced premium and does not 
notify the group health plan providing COBRA continuation 
coverage of the beneficiary's eligibility under another group 
health plan or Medicare.

Special COBRA election opportunity

    The provision provides a special 60 day election period for 
a qualified beneficiary who is eligible for a reduced premium 
and who has not elected COBRA continuation coverage as of the 
date of enactment. The 60 day election period begins on the 
date that notice is provided to the qualified beneficiary of 
the special election period. However, this special election 
period does not extend the period of COBRA continuation 
coverage beyond the original maximum required period (generally 
18 months after the qualifying event) and any COBRA 
continuation coverage elected pursuant to this special election 
period begins on the date of enactment and does not include any 
period prior to that date. Thus, for example, if a covered 
employee involuntarily terminated employment on September 10, 
2008, but did not elect COBRA continuation coverage and was not 
eligible for coverage under another group health plan, the 
employee would have 60 days after date of notification of this 
new election right to elect the coverage and receive the 
subsidy. If the employee made the election, the coverage would 
begin with the date of enactment and would not include any 
period prior to that date. However, the coverage would not be 
required to last for 18 months. Instead the maximum required 
COBRA continuation coverage period would end not later than 18 
months after September 10, 2008. This special COBRA election 
opportunity includes a qualified beneficiary who elected COBRA 
coverage but who is no longer enrolled on the date of 
enactment, for example, because the beneficiary was unable to 
continue paying the premium.
    The special enrollment provision applies to a group health 
plan that is subject to the COBRA continuation coverage 
requirements of the Code, ERISA, Title 5 of the United States 
Code (relating to plans maintained by the Federal government), 
or the Public Health Service Act (``PHSA'').
    With respect to an assistance eligible individual who 
elects coverage pursuant to the special election period, the 
period beginning on the date of the qualifying event and ending 
with the day before the date of enactment is disregarded for 
purposes of the rules that limit the group health plan from 
imposing pre-existing condition limitations with respect to the 
individual's coverage.\264\
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    \264\ Section 9801 provides that a group health plan may impose a 
pre-existing condition exclusion for no more than 12 months after a 
participant or beneficiary's enrollment date. Such 12-month period must 
be reduced by the aggregate period of creditable coverage (which 
includes periods of coverage under another group health plan). A period 
of creditable coverage can be disregarded if, after the coverage period 
and before the enrollment date, there was a 63-day period during which 
the individual was not covered under any creditable coverage. Similar 
rules are provided under ERISA and PHSA.
---------------------------------------------------------------------------

Reimbursement of group health plans

    The provision provides that the entity to which premiums 
are payable (determined under the applicable COBRA continuation 
coverage requirement) \265\ shall be reimbursed by the amount 
of the premium for COBRA continuation coverage that is not paid 
by an assistance eligible individual on account of the premium 
reduction. An entity is not eligible for subsidy reimbursement, 
however, until the entity has received the reduced premium 
payment from the assistance eligible individual. To the extent 
that such entity has liability for income tax withholding from 
wages \266\ or FICA taxes \267\ with respect to its employees, 
the entity is reimbursed by treating the amount that is 
reimbursable to the entity as a credit against its liability 
for these payroll taxes.\268\ To the extent that such amount 
exceeds the amount of the entity's liability for these payroll 
taxes, the Secretary shall reimburse the entity for the excess 
directly (i.e., a tax refund). The provision requires any 
entity entitled to such reimbursement to submit such reports as 
the Secretary of the Treasury may require, including an 
attestation of the involuntary termination of employment of 
each covered employee on the basis of whose termination 
entitlement to reimbursement of premiums is claimed, and a 
report of the amount of payroll taxes offset for a reporting 
period and the estimated offsets of such taxes for the next 
reporting period. This report is required to be provided at the 
same time as the deposits of the payroll taxes would have been 
required, absent the offset, or such times as the Secretary 
specifies.
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    \265\ Applicable continuation coverage that qualifies for the 
subsidy and thus for reimbursement is not limited to coverage required 
to be offered under the Code's COBRA rules but also includes 
continuation coverage required under State law that requires 
continuation coverage comparable to the continuation coverage required 
under the Code's COBRA rules for group health plans not subject to 
those rules (e.g., a small employer plan) and includes continuation 
coverage requirements that apply to health plans maintained by the 
Federal government or a State government. The person to whom the 
reimbursement is payable is either (1) the multiemployer group health 
plan, (2) the employer maintaining the group health plan subject to 
Federal COBRA continuation coverage requirements, and (3) the insurer 
providing coverage under an insured plan.
    \266\ Sec. 3401.
    \267\ Sec. 3102 (relating to FICA taxes applicable to employees) 
and sec. 3111 (relating to FICA taxes applicable to employers).
    \268\ In determining any amount transferred or appropriated to any 
fund under the Social Security Act, amounts credited against an 
employer's payroll tax obligations pursuant to the provision shall not 
be taken into account.
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    Overstatement of reimbursement is a payroll tax violation. 
For example, IRS can assert appropriate penalties for failing 
to truthfully account for the reimbursement. However, it is not 
intended that any portion of the reimbursement is taken into 
account when determining the amount of any penalty to be 
imposed against any person, required to collect, truthfully 
account for, and pay over any tax under section 6672 of the 
Code.
    It is intended that reimbursement not be mirrored in the 
U.S. possessions that have mirror income tax codes (the 
Commonwealth of the Northern Mariana Islands, Guam, and the 
Virgin Islands). Rather, the intent of Congress is that 
reimbursement will have direct application to persons in those 
possessions. Moreover, it is intended that income tax 
withholding payable to the government of any possession 
(American Samoa, the Commonwealth of the Northern Mariana 
Islands, the Commonwealth of Puerto Rico, Guam, or the Virgin 
Islands) (in contrast with FICA withholding payable to the U.S. 
Treasury) will not be reduced as a result of the application of 
this provision. A person liable for both FICA withholding 
payable to the U.S. Treasury and income tax withholding payable 
to a possession government will be credited or refunded any 
excess of (1) the amount of FICA taxes treated as paid under 
the reimbursement rule of the provision over (2) the amount of 
the person's liability for those FICA taxes.

Notice requirements

    The notice of COBRA continuation coverage that a plan 
administrator is required to provide to qualified beneficiaries 
with respect to a qualifying event under present law must 
contain, under the provision, additional information including, 
for example, information about the qualified beneficiary's 
right to the premium reduction (and subsidy) and the conditions 
on the subsidy, and a description of the obligation of the 
qualified beneficiary to notify the group health plan of 
eligibility under another group health plan or eligibility for 
Medicare benefits under title XVIII of the Social Security Act, 
and the penalty for failure to provide this notification. The 
provision also requires a new notice to be given to qualified 
beneficiaries entitled to a special election period after 
enactment. A violation of the new notice requirements is also a 
violation of the notice requirements of the underlying COBRA 
provision. The new notice must be provided to all individuals 
who terminated employment during the applicable time period, 
and not just to individuals who were involuntarily terminated.
    In the case of group health plans that are not subject to 
the COBRA continuation coverage requirements of the Code, 
ERISA, Title 5 of the United States Code (relating to plans 
maintained by the Federal government), or PHSA, the provision 
requires that notice be given to the relevant employees and 
beneficiaries as well, as specified by the Secretary of Labor. 
Within 30 days after enactment, the Secretary of Labor is 
directed to provide model language for the additional 
notification required under the provision.
    The provision also provides an expedited 15-day review 
process by the Secretary of Labor or Health or the Secretary of 
Health and Human Services (both in consultation with the 
Secretary of the Treasury), under which an individual may 
request review of a denial of treatment as an assistance 
eligible individual by a group health plan. It is the intent of 
Congress to give the Secretaries the flexibility necessary to 
make determinations within 15 business days based upon evidence 
they believe, in their discretion, to be appropriate. 
Additionally, if an individual is denied treatment as an 
assistance eligible individual and also submits a claim for 
benefits to the plan that would be denied by reason of not 
being eligible for Federal COBRA continuation coverage (or 
failure to pay full premiums), the individual is eligible to 
proceed with expedited review irrespective of any claims for 
benefits that may be pending or subject to review under the 
provisions of ERISA 503. Either Secretary's determination upon 
review is de novo and is the final determination of such 
Secretary.

Regulatory authority

    The provision provides authority to the Secretary of the 
Treasury to issue regulations or other guidance as may be 
necessary or appropriate to carry out the provision, including 
any reporting requirements or the establishment of other 
methods for verifying the correct amounts of payments and 
credits under the provision. For example, the Secretary of the 
Treasury might require verification on the return of an 
assistance eligible individual who is the covered employee that 
the individual's termination of employment was involuntary. The 
provision directs the Secretary of the Treasury to issue 
guidance or regulations addressing the reimbursement of the 
subsidy in the case of a multiemployer group health plan. The 
provision also provides authority to the Secretary of the 
Treasury to promulgate rules, procedures, regulations, and 
other guidance as is necessary and appropriate to prevent fraud 
and abuse in the subsidy program, including the employment tax 
offset mechanism.

Reports

    The provision requires the Secretary of the Treasury to 
submit an interim and a final report regarding the 
implementation of the premium reduction provision. The interim 
report is to include information about the number of 
individuals receiving assistance, and the total amount of 
expenditures incurred, as of the date of the report. The final 
report, to be issued as soon as practicable after the last 
period of COBRA continuation coverage for which premiums are 
provided, is to include similar information as provided in the 
interim report, with the addition of information about the 
average dollar amount (monthly and annually) of premium 
reductions provided to such individuals. The reports are to be 
given to the Committee on Ways and Means, the Committee on 
Energy and Commerce, the Committee on Health Education, Labor 
and Pensions and the Committee on Finance.

                             Effective Date

    The provision is effective for periods of coverage 
beginning after the date of enactment (February 17, 2009). In 
addition, specific rules are provided in the case of an 
assistance eligible individual who pays 100 percent of the 
premium required for COBRA continuation coverage for any 
coverage period during the 60-day period beginning on the first 
day of the first coverage period after the date of enactment.

 B. Modify the Health Coverage Tax Credit (secs. 1899-1899L of the Act 
            and secs. 35, 4980B, 7527, and 9801 of the Code)


                              Present Law


In general

    Under the Trade Act of 2002,\269\ in the case of taxpayers 
who are eligible individuals, a refundable tax credit is 
provided for 65 percent of the taxpayer's premiums for 
qualified health insurance of the taxpayer and qualifying 
family members for each eligible coverage month beginning in 
the taxable year. The credit is commonly referred to as the 
health coverage tax credit (``HCTC''). The credit is available 
only with respect to amounts paid by the taxpayer. The credit 
is available on an advance basis.\270\
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    \269\ Pub. L. No. 107-210 (2002).
    \270\ An individual is eligible for the advance payment of the 
credit once a qualified health insurance costs credit eligibility 
certificate is in effect. Sec. 7527.
---------------------------------------------------------------------------
    Qualifying family members are the taxpayer's spouse and any 
dependent of the taxpayer with respect to whom the taxpayer is 
entitled to claim a dependency exemption. Any individual who 
has other specified coverage is not a qualifying family member.

Persons eligible for the credit

    Eligibility for the credit is determined on a monthly 
basis. In general, an eligible coverage month is any month if, 
as of the first day of the month, the taxpayer (1) is an 
eligible individual, (2) is covered by qualified health 
insurance, (3) does not have other specified coverage, and (4) 
is not imprisoned under Federal, State, or local 
authority.\271\ In the case of a joint return, the eligibility 
requirements are met if at least one spouse satisfies the 
requirements.
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    \271\ An eligible month must begin after November 4, 2002. This 
date is 90 days after the date of enactment of the Trade Act of 2002, 
Pub. L. No. 107-210, which was August 6, 2002.
---------------------------------------------------------------------------
    An eligible individual is an individual who is (1) an 
eligible Trade Adjustment Assistance (``TAA'') recipient, (2) 
an eligible alternative TAA recipient, or (3) an eligible 
Pension Benefit Guaranty Corporation (``PBGC'') pension 
recipient.
    An individual is an eligible TAA recipient during any month 
if the individual (1) is receiving for any day of such month a 
trade readjustment allowance \272\ or who would be eligible to 
receive such an allowance but for the requirement that the 
individual exhaust unemployment benefits before being eligible 
to receive an allowance and (2) with respect to such allowance, 
is covered under a certification issued under subchapter A or D 
of chapter 2 of title II of the Trade Act of 1974. An 
individual is treated as an eligible TAA recipient during the 
first month that such individual would otherwise cease to be an 
eligible TAA recipient.
---------------------------------------------------------------------------
    \272\ The eligibility rules and conditions for such an allowance 
are specified in chapter 2 of title II of the Trade Act of 1974. Among 
other requirements, payment of a trade readjustment allowance is 
conditioned upon the individual enrolling in certain training programs 
or receiving a waiver of training requirements.
---------------------------------------------------------------------------
    An individual is an eligible alternative TAA recipient 
during any month if the individual (1) is a worker described in 
section 246(a)(3)(B) of the Trade Act of 1974 who is 
participating in the program established under section 
246(a)(1) of such Act, and (2) is receiving a benefit for such 
month under section 246(a)(2) of such Act. An individual is 
treated as an eligible alternative TAA recipient during the 
first month that such individual would otherwise cease to be an 
eligible TAA recipient.
    An individual is a PBGC pension recipient for any month if 
he or she (1) is age 55 or over as of the first day of the 
month, and (2) is receiving a benefit any portion of which is 
paid by the PBGC. The IRS has interpreted the definition of 
PBGC pension recipient to also include certain alternative 
recipients and recipients who have received certain lump-sum 
payments on or after August 6, 2002. A person is not an 
eligible individual if he or she may be claimed as a dependent 
on another person's tax return.
    An otherwise eligible taxpayer is not eligible for the 
credit for a month if, as of the first day of the month, the 
individual has other specified coverage. Other specified 
coverage is (1) coverage under any insurance which constitutes 
medical care (except for insurance substantially all of the 
coverage of which is for excepted benefits) \273\ maintained by 
an employer (or former employer) if at least 50 percent of the 
cost of the coverage is paid by an employer \274\ (or former 
employer) of the individual or his or her spouse or (2) 
coverage under certain governmental health programs. 
Specifically, an individual is not eligible for the credit if, 
as of the first day of the month, the individual is (1) 
entitled to benefits under Medicare Part A, enrolled in 
Medicare Part B, or enrolled in Medicaid or SCHIP, (2) enrolled 
in a health benefits plan under the Federal Employees Health 
Benefit Plan, or (3) entitled to receive benefits under chapter 
55 of title 10 of the United States Code (relating to military 
personnel). An individual is not considered to be enrolled in 
Medicaid solely by reason of receiving immunizations.
---------------------------------------------------------------------------
    \273\ Excepted benefits are: (1) coverage only for accident or 
disability income or any combination thereof; (2) coverage issued as a 
supplement to liability insurance; (3) liability insurance, including 
general liability insurance and automobile liability insurance; (4) 
worker's compensation or similar insurance; (5) automobile medical 
payment insurance; (6) credit-only insurance; (7) coverage for on-site 
medical clinics; (8) other insurance coverage similar to the coverages 
in (1)-(7) specified in regulations under which benefits for medical 
care are secondary or incidental to other insurance benefits; (9) 
limited scope dental or vision benefits; (10) benefits for long-term 
care, nursing home care, home health care, community-based care, or any 
combination thereof; and (11) other benefits similar to those in (9) 
and (10) as specified in regulations; (12) coverage only for a 
specified disease or illness; (13) hospital indemnity or other fixed 
indemnity insurance; and (14) Medicare supplemental insurance.
    \274\ An amount is considered paid by the employer if it is 
excludable from income. Thus, for example, amounts paid for health 
coverage on a salary reduction basis under an employer plan are 
considered paid by the employer. A rule aggregating plans of the same 
employer applies in determining whether the employer pays at least 50 
percent of the cost of coverage.
---------------------------------------------------------------------------
    A special rule applies with respect to alternative TAA 
recipients. For eligible alternative TAA recipients, an 
individual has other specified coverage if the individual is 
(1) eligible for coverage under any qualified health insurance 
(other than coverage under a COBRA continuation provision, 
State-based continuation coverage, or coverage through certain 
State arrangements) under which at least 50 percent of the cost 
of coverage is paid or incurred by an employer of the taxpayer 
or the taxpayer's spouse or (2) covered under any such 
qualified health insurance under which any portion of the cost 
of coverage is paid or incurred by an employer of the taxpayer 
or the taxpayer's spouse.

Qualified health insurance

    Qualified health insurance eligible for the credit is: (1) 
COBRA continuation \275\ coverage; (2) State-based continuation 
coverage provided by the State under a State law that requires 
such coverage; (3) coverage offered through a qualified State 
high risk pool; (4) coverage under a health insurance program 
offered to State employees or a comparable program; (5) 
coverage through an arrangement entered into by a State and a 
group health plan, an issuer of health insurance coverage, an 
administrator, or an employer; (6) coverage offered through a 
State arrangement with a private sector health care coverage 
purchasing pool; (7) coverage under a State-operated health 
plan that does not receive any Federal financial participation; 
(8) coverage under a group health plan that is available 
through the employment of the eligible individual's spouse; and 
(9) coverage under individual health insurance if the eligible 
individual was covered under individual health insurance during 
the entire 30-day period that ends on the date the individual 
became separated from the employment which qualified the 
individual for the TAA allowance, the benefit for an eligible 
alternative TAA recipient, or a pension benefit from the PBGC, 
whichever applies.\276\
---------------------------------------------------------------------------
    \275\ COBRA continuation is defined by section 9832(d)(1).
    \276\ For this purpose, ``individual health insurance'' means any 
insurance which constitutes medical care offered to individuals other 
than in connection with a group health plan. Such term does not include 
Federal- or State-based health insurance coverage.
---------------------------------------------------------------------------
    Qualified health insurance does not include any State-based 
coverage (i.e., coverage described in (2)-(7) in the preceding 
paragraph), unless the State has elected to have such coverage 
treated as qualified health insurance and such coverage meets 
certain requirements.\277\ Such State coverage must provide 
that each qualifying individual is guaranteed enrollment if the 
individual pays the premium for enrollment or provides a 
qualified health insurance costs eligibility certificate and 
pays the remainder of the premium. In addition, the State-based 
coverage cannot impose any pre-existing condition limitation 
with respect to qualifying individuals. State-based coverage 
cannot require a qualifying individual to pay a premium or 
contribution that is greater than the premium or contribution 
for a similarly situated individual who is not a qualified 
individual. Finally, benefits under the State-based coverage 
must be the same as (or substantially similar to) benefits 
provided to similarly situated individuals who are not 
qualifying individuals.
---------------------------------------------------------------------------
    \277\ For guidance on how a State elects a health program to be 
qualified health insurance for purposes of the credit, see Rev. Proc. 
2004-12, 2004-1 C.B. 528.
---------------------------------------------------------------------------
    A qualifying individual is an eligible individual who seeks 
to enroll in the State-based coverage and who has aggregate 
periods of creditable coverage \278\ of three months or longer, 
does not have other specified coverage, and who is not 
imprisoned. In general terms, creditable coverage includes 
health care coverage without a gap of more than 63 days. 
Therefore, if an individual's qualifying coverage were 
terminated more than 63 days before the individual enrolled in 
the State-based coverage, the individual would not be a 
qualifying individual and would not be entitled to the State-
based protections. A qualifying individual also includes 
qualified family members of such an eligible individual.
---------------------------------------------------------------------------
    \278\ Creditable coverage is determined under section 9801(c) of 
the Health Insurance Portability and Accountability Act, Pub. L. No. 
104-191.
---------------------------------------------------------------------------
    Qualified health insurance does not include coverage under 
a flexible spending or similar arrangement or any insurance if 
substantially all of the coverage is for excepted benefits.

Other rules

    Amounts taken into account in determining the credit may 
not be taken into account in determining the amount allowable 
under the itemized deduction for medical expenses or the 
deduction for health insurance expenses of self-employed 
individuals. Amounts distributed from a medical savings account 
or health savings accounts are not eligible for the credit. The 
amount of the credit available through filing a tax return is 
reduced by any credit received on an advance basis. Married 
taxpayers filing separate returns are eligible for the credit; 
however, if both spouses are eligible individuals and the 
spouses file separate returns, then the spouse of the taxpayer 
is not a qualifying family member.
    The Secretary of the Treasury is authorized to prescribe 
such regulations and other guidance as may be necessary or 
appropriate to carry out the credit provision.

COBRA

    The Consolidated Omnibus Reconciliation Act of 1985 
(``COBRA'') requires that a group health plan must offer 
continuation coverage to qualified beneficiaries in the case of 
a qualifying event. An excise tax under the Code applies on the 
failure of a group health plan to meet the requirement.\279\ 
Qualifying events include the death of the covered employee, 
termination of the covered employee's employment, divorce or 
legal separation of the covered employee, and certain 
bankruptcy proceedings of the employer. In the case of 
termination from employment, the coverage must be extended for 
a period of not less than 18 months. In certain other cases, 
coverage must be extended for a period of not less than 36 
months. Under such period of continuation coverage, the plan 
may require payment of a premium by the beneficiary of up to 
102 percent of the applicable premium for the period.
---------------------------------------------------------------------------
    \279\ Sec. 4980B.
---------------------------------------------------------------------------

                     Explanation of Provision \280\

---------------------------------------------------------------------------
    \280\ The provision was subsequently amended by sections 111-118 of 
the Omnibus Trade Act of 2010, Pub. L. No. 111-344, described in Part 
Eighteen of this document.
---------------------------------------------------------------------------

Increase in credit percentage amount

    The provision increases the amount of the HCTC to 80 
percent of the taxpayer's premiums for qualified health 
insurance of the taxpayer and qualifying family members.
    Effective date.--The provision is effective for coverage 
months beginning on or after the first day of the first month 
beginning 60 days after date of enactment. The increased credit 
rate does not apply to months beginning after December 31, 
2010.

Payment for monthly premiums paid prior to commencement of advance 
        payment of credit

    The provision provides that the Secretary of the Treasury 
shall make one or more retroactive payments on behalf of 
certified individuals equal to 80 percent of the premiums for 
coverage of the taxpayer and qualifying family members for 
qualified health insurance for eligible coverage months 
occurring prior to the first month for which an advance payment 
is made on behalf of such individual. The amount of the payment 
must be reduced by the amount of any payment made to the 
taxpayer under a national emergency grant pursuant to section 
173(f) of the Workforce Investment Act of 1998 for a taxable 
year including such eligible coverage months.
    Effective date.--The provision is effective for eligible 
coverage months beginning after December 31, 2008. The 
Secretary of the Treasury, however, is not required to make any 
payments under the provision until after the date that is six 
months after the date of enactment. The provision does not 
apply to months beginning after December 31, 2010.

TAA recipients not enrolled in training programs eligible for credit

    The provision modifies the definition of an eligible TAA 
recipient to eliminate the requirement that an individual be 
enrolled in training in the case of an individual receiving 
unemployment compensation. In addition, the provision clarifies 
that the definition of an eligible TAA recipient includes an 
individual who would be eligible to receive a trade 
readjustment allowance except that the individual is in a break 
in training that exceeds the period specified in section 233(e) 
of the Trade Act of 1974, but is within the period for 
receiving the allowance.
    Effective date.--The provision is effective for months 
beginning after the date of enactment in taxable years ending 
after such date. The provision does not apply to months 
beginning after December 31, 2010.

TAA pre-certification period rule for purposes of determining whether 
        there is a 63-day lapse in creditable coverage

    Under the provision, in determining if there has been a 63-
day lapse in coverage (which determines, in part, if the State-
based consumer protections apply), in the case of a TAA-
eligible individual, the period beginning on the date the 
individual has a TAA-related loss of coverage and ending on the 
date which is seven days after the date of issuance by the 
Secretary (or by any person or entity designated by the 
Secretary) of a qualified health insurance costs credit 
eligibility certificate (under section 7527) for such 
individual is not taken into account.
    Effective date.--The provision is effective for plan years 
beginning after the date of enactment. The provision does not 
apply to plan years beginning after December 31, 2010.

Continued qualification of family members after certain events

    The provision provides continued eligibility for the credit 
for family members after certain events. The rule applies in 
the case of (1) the eligible individual becoming entitled to 
Medicare, (2) divorce, and (3) death.
    In the case of a month which would be an eligible coverage 
month with respect to an eligible individual except that the 
individual is entitled to benefits under Medicare Part A or 
enrolled in Medicare Part B, the month is treated as an 
eligible coverage month with respect to the individual solely 
for purposes of determining the amount of the credit with 
respect to qualifying family members (i.e., the credit is 
allowed for expenses paid for qualifying family members after 
the eligible individual is eligible for Medicare). Such 
treatment applies only with respect to the first 24 months 
after the eligible individual is first entitled to benefits 
under Medicare Part A or enrolled in Medicare Part B.
    In the case of the finalization of a divorce between an 
eligible individual and the individual's spouse, the spouse is 
treated as an eligible individual for a period of 24 months 
beginning with the date of the finalization of the divorce. 
Under such rule, the only family members that may be taken into 
account with respect to the spouse as qualifying family members 
are those individuals who were qualifying family members 
immediately before such divorce finalization.
    In the case of the death of an eligible individual, the 
spouse of such individual (determined at the time of death) is 
treated as an eligible individual for a period of 24 months 
beginning with the date of death. Under such rule, the only 
qualifying family members that may be taken into account with 
respect to the spouse are those individuals who were qualifying 
family members immediately before such death. In addition, any 
individual who was a qualifying family member of the decedent 
immediately before such death \281\ is treated as an eligible 
individual for a period of 24 months beginning with the date of 
death, except that in determining the amount of the HCTC only 
such qualifying family member may be taken into account.
---------------------------------------------------------------------------
    \281\ In the case of a dependent, the rule applies to the taxpayer 
to whom the personal exemption deduction under section 151 is 
allowable.
---------------------------------------------------------------------------
    Effective date.--The provision is effective for months 
beginning after December 31, 2009. The provision does not apply 
to months that begin after December 31, 2010.

Alignment of COBRA coverage

    The maximum required COBRA continuation coverage period is 
modified by the provision with respect to certain individuals 
whose qualifying event is a termination of employment or a 
reduction in hours. First, in the case of such a qualifying 
event with respect to a covered employee who has a 
nonforfeitable right to a benefit any portion of which is paid 
by the PBGC, the maximum coverage period must end not earlier 
than the date of death of the covered employee (or in the case 
of the surviving spouse or dependent children of the covered 
employee, not earlier than 24 months after the date of death of 
the covered employee). Second, in the case of such a qualifying 
event where the covered employee is a TAA eligible individual 
as of the date that the maximum coverage period would otherwise 
terminate, the maximum coverage period must extend during the 
period that the individual is a TAA eligible individual.
    Effective date.--The provision is effective for periods of 
coverage that would, without regard to the provision, end on or 
after the date of enactment, provided that the provision does 
not extend any periods of coverage beyond December 31, 2010.

Addition of coverage through voluntary employees' beneficiary 
        associations

    The provision expands the definition of qualified health 
insurance by including coverage under an employee benefit plan 
funded by a voluntary employees' beneficiary association 
(``VEBA,'' as defined in section 501(c)(9)) established 
pursuant to an order of a bankruptcy court, or by agreement 
with an authorized representative, as provided in section 1114 
of title 11, United States Code.
    Effective date.--The provision is effective on the date of 
enactment. The provision does not apply with respect to 
certificates of eligibility issued after December 31, 2010.

Notice requirements

    The provision requires that the qualified health insurance 
costs credit eligibility certificate provided in connection 
with the advance payment of the HCTC must include (1) the name, 
address, and telephone number of the State office or offices 
responsible for providing the individual with assistance with 
enrollment in qualified health insurance, (2) a list of 
coverage options that are treated as qualified health insurance 
by the State in which the individual resides, (3) in the case 
of a TAA-eligible individual, a statement informing the 
individual that the individual has 63 days from the date that 
is seven days after the issuance of such certificate to enroll 
in such insurance without a lapse in creditable coverage, and 
(4) such other information as the Secretary may provide.
    Effective date.--The provision is effective for 
certificates issued after the date that is six months after the 
date of enactment. The provision does not apply to months 
beginning after December 31, 2010.

Survey and report on enhanced health coverage tax credit program

            Survey
    The provision requires that the Secretary of the Treasury 
must conduct a biennial survey of eligible individuals 
containing the following information:
          1. In the case of eligible individuals receiving the 
        HCTC (including those participating in the advance 
        payment program (the ``HCTC program'')) (A) demographic 
        information of such individuals, including income and 
        education levels, (B) satisfaction of such individuals 
        with the enrollment process in the HCTC program, (C) 
        satisfaction of such individuals with available health 
        coverage options under the credit, including level of 
        premiums, benefits, deductibles, cost-sharing 
        requirements, and the adequacy of provider networks, 
        and (D) any other information that the Secretary 
        determines is appropriate.
          2. In the case of eligible individuals not receiving 
        the HCTC (A) demographic information on each 
        individual, including income and education levels, (B) 
        whether the individual was aware of the HCTC or the 
        HCTC program, (C) the reasons the individual has not 
        enrolled in the HCTC program, including whether such 
        reasons include the burden of process of enrollment and 
        the affordability of coverage, (D) whether the 
        individual has health insurance coverage, and, if so, 
        the source of such coverage, and (E) any other 
        information that the Secretary determines is 
        appropriate.
    Not later than December 31 of each year in which a survey 
described above is conducted (beginning in 2010), the Secretary 
of the Treasury must report to the Committee on Finance and the 
Committee on Health, Education, Labor, and Pensions of the 
Senate and the Committee on Ways and Means and the Committee on 
Education and Labor of the House of Representatives the 
findings of the most recent survey.
            Report
    Not later than October 1 of each year (beginning in 2010), 
the Secretary of the Treasury must report to the Committee on 
Finance and the Committee on Health, Education, Labor, and 
Pensions of the Senate and the Committee on Ways and Means and 
the Committee on Education and Labor of the House of 
Representatives the following information with respect to the 
most recent taxable year ending before such date:
          1. In each State and nationally (A) the total number 
        of eligible individuals and the number of eligible 
        individuals receiving the HCTC, (B) the total number of 
        such eligible individuals who receive an advance 
        payment of the HCTC through the HCTC program, (C) the 
        average length of the time period of participation of 
        eligible individuals in the HCTC program, and (D) the 
        total number of participating eligible individuals in 
        the HCTC program who are enrolled in each category of 
        qualified health insurance with respect to each 
        category of eligible individuals.
          2. In each State and nationality, an analysis of (A) 
        the range of monthly health insurance premiums, for 
        self-only coverage and for family coverage, for 
        individuals receiving the benefit of the HCTC and (B) 
        the average and median monthly health insurance 
        premiums, for self-only coverage and for family 
        coverage, for individuals receiving the HCTC with 
        respect to each category of qualified health insurance.
          3. In each State and nationally, an analysis of the 
        following information with respect to the health 
        insurance coverage of individuals receiving the HCTC 
        who are enrolled in State-based coverage: (A) 
        deductible amounts, (B) other out-of-pocket cost-
        sharing amounts, and (C) a description of any annual or 
        lifetime limits on coverage or any other significant 
        limits on coverage services or benefits. The 
        information must be reported with respect to each 
        category of coverage.
          4. In each State and nationally, the gender and 
        average age of eligible individuals who receive the 
        HCTC in each category of qualified health insurance 
        with respect to each category of eligible individuals.
          5. The steps taken by the Secretary of the Treasury 
        to increase the participation rates in the HCTC program 
        among eligible individuals, including outreach and 
        enrollment activities.
          6. The cost of administering the HCTC program by 
        function, including the cost of subcontractors, and 
        recommendations on ways to reduce the administrative 
        costs, including recommended statutory changes.
          7. After consultation with the Secretary of Labor, 
        the number of States applying for and receiving 
        national emergency grants under section 173(f) of the 
        Workforce Investment Act of 1998, the activities funded 
        by such grants on a State-by-State basis, and the time 
        necessary for application approval of such grants.

Other non-revenue provisions

    The provision also authorizes appropriations for 
implementation of the revenue provisions of the provision and 
provides grants under the Workforce Investment Act of 1998 for 
purposes related to the HCTC.

GAO study

    The provision requires the Comptroller General of the 
United States to conduct a study regarding the HCTC to be 
submitted to Congress no later than March 31, 2010. The study 
is to include an analysis of (1) the administrative costs of 
the Federal government with respect to the credit and the 
advance payment of the credit and of providers of qualified 
health insurance with respect to providing such insurance to 
eligible individuals and their families, (2) the health status 
and relative risk status of eligible individuals and qualified 
family members covered under such insurance, (3) participation 
in the credit and the advance payment of the credit by eligible 
individuals and their qualifying family members, including the 
reasons why such individuals did or did not participate and the 
effects of the provision on participation, and (4) the extent 
to which eligible individuals and their qualifying family 
members obtained health insurance other than qualifying 
insurance or went without insurance coverage. The provision 
provides the Comptroller General access to the records within 
the possession or control of providers of qualified health 
insurance if determined relevant to the study. The Comptroller 
General may not disclose the identity of any provider of 
qualified health insurance or eligible individual in making 
information available to the public.

                             Effective Date

    The provision is generally effective upon the date of 
enactment (February 17, 2009), except as otherwise noted above.

 PART THREE: AIRPORT AND AIRWAY TRUST FUND EXTENSIONS (PUBLIC LAWS 111-
  12,\282\ 111-69,\283\ 111-116,\284\ 111-153,\285\ 111-161,\286\ 111-
        197,\287\ 111-216,\288\ 111-249,\289\ AND 111-329 \290\)
---------------------------------------------------------------------------

    \282\ H.R. 1512. The House passed H.R. 1512 on March 18, 2009. The 
bill passed the Senate without amendment on March 18, 2009. The 
President signed the bill on March 30, 2009.
    \283\ H.R. 3607. The House passed H.R. 3607 on September 23, 2009. 
The bill passed the Senate without amendment on September 24, 2009. the 
President signed the bill on October 1, 2009.
    \284\ H.R. 4217. The House passed H.R. 4217 on December 8, 2009. 
The bill passed the Senate without amendment on December 10, 2009. The 
President signed the bill on December 16, 2009.
    \285\ H.R. 4957. The House passed H.R. 4957 on March 25, 2010. The 
bill passed the Senate without amendment on March 26, 2010. The 
President signed the bill on March 31, 2010.
    \286\ H.R. 5147. The House passed H.R. 5147 on April 28, 2010. The 
bill passed the Senate without amendment on April 28, 2010. The 
President signed the bill on April 30, 2010.
    \287\ H.R. 5611. The House passed H.R. 5611 on June 29, 2010. The 
bill passed the Senate without amendment on June 30, 2010. The 
President signed the bill on July 2, 2010.
    \288\ H.R. 5900. The House passed H.R. 5900 on July 29, 2010. The 
bill passed the Senate without amendment on July 30, 2010. The 
President signed the bill on August 1, 2010.
    \289\ H.R. 6190. The House passed H.R. 6190 on September 23, 2010. 
The bill passed the Senate without amendment on September 24, 2010. The 
President signed the bill on September 30, 2010.
    \290\ H.R. 6473. The House passed H.R. 6473 on December 2, 2010. 
The bill passed the Senate without amendment on December 18, 2010. The 
President signed the bill on December 22, 2010.
---------------------------------------------------------------------------

                              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:
           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 did 
not apply after March 31, 2009. Expenditure authority for the 
Airport and Airway Trust Fund was scheduled to terminate after 
March 31, 2009.

                       Explanation of Provisions

Pub. L. No. 111-12 (the ``Federal Aviation Administration Extension Act 
        of 2009'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through September 30, 
2009.
Pub. L. No. 111-69 (``Fiscal Year 2010 Federal Aviation Administration 
        Extension Act'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through December 31, 
2009.
Pub. L. No. 111-116 (``Fiscal Year 2010 Federal Aviation Administration 
        Extension Act, Part II'')
    The provisions extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through March 31, 2010.
Pub. L. No. 111-153 (the ``Federal Aviation Administration Extension 
        Act of 2010'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through April 30, 2010.
Pub. L. No. 111-161 (the ``Airport and Airway Extension Act of 2010'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through July 3, 2010.
Pub. L. No. 111-197 (the ``Airport and Airway Extension Act of 2010, 
        Part II'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through August 1, 2010.
Pub. L. No. 111-216 (the ``Airline Safety and Federal Aviation 
        Administration Extension Act of 2010'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through September 30, 
2010.
Pub. L. No. 111-249 (the ``Airport and Airway Extension Act of 2010, 
        Part III'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through December 31, 
2010.
Pub. L. No. 111-329 (the ``Airport and Airway Extension Act of 2010, 
        Part IV'')
    The provision extended the Airport and Airway Trust Fund 
excise taxes and expenditure authority through March 31, 2011.

 PART FOUR: HIGHWAY TRUST FUND (PUBLIC LAWS 111-46,\291\ 111-68,\292\ 
      111-118,\293\ 111-144,\294\ 111-147,\295\ AND 111-322 \296\)
---------------------------------------------------------------------------

    \291\ H.R. 3357. The bill passed the House on July 29, 2009. The 
Senate passed the bill on July 30, 2009, without amendment. The 
President signed the bill on August 7, 2009.
    \292\ H.R. 2918. The bill passed the House on June 19, 2009. The 
Senate passed the bill with an amendment on July 6, 2009. A conference 
report was filed on September 24, 2009 (H.R. Rep. No. 111-265) and 
passed the House on September 25, 2009, and the Senate on September 30, 
2009. The President signed the bill on October 1, 2009.
    \293\ H.R. 3326. The bill passed the House on July 30, 2009. The 
Senate passed the bill with an amendment on October 6, 2009. The House 
agreed to the Senate amendment with an amendment on December 16, 2009. 
The Senate concurred in the House amendment to the Senate amendment on 
December 19, 2009. The President signed the bill on December 19, 2009.
    \294\ H.R. 4691. The bill passed the House on February 25, 2010. 
The Senate passed the bill without amendment on March 2, 2010. The 
President signed the bill on March 2, 2010.
    \295\ H.R. 2847. The bill passed the House on June 18, 2009. The 
Senate passed the bill with an amendment on November 5, 2009. The House 
agreed to the Senate amendment with an amendment on December 16, 2009. 
The Senate concurred in the House amendment to the Senate amendment 
with an amendment on February 24, 2010. The House agreed to the Senate 
amendment with an amendment to the House amendment to the Senate 
amendment on March 4, 2010. The Senate concurred in the House amendment 
to the Senate amendment to the House amendment to the Senate amendment 
on March 17, 2010. The President signed the bill on March 18, 2010.
    \296\ H.R. 3082. The bill passed the House on July 10, 2009. The 
Senate passed the bill with an amendment on November 17, 2009. The 
House agreed to the Senate Amendment with an amendment on December 8, 
2010. The Senate concurred in the House amendment to the Senate 
amendment with an amendment on December 21, 2010. The House agreed to 
the Senate amendment to the House amendment to the Senate amendment on 
December 21, 2010. The President signed the bill on December 22, 2010.
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    A. Extension of Surface Transportation Act Expenditure Authority

                              Present Law

    Under present law, the Internal Revenue Code (sec. 9503) 
authorized expenditures (subject to appropriations) to be made 
from the Highway Trust Fund generally through September 30, 
2009, for purposes provided in specified authorizing 
legislation as in effect on the date of enactment of the most 
recent authorizing Act (the Safe, Accountable, Flexible, 
Efficient Transportation Equity Act: A Legacy for Users 
(``SAFETEA-LU'')).

                       Explanation of Provisions

Pub. L. No. 111-68 (the ``Continuing Appropriations Resolution of 
        2010'')
    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund through 
October 31, 2009. The Act also updates the cross-references to 
authorizing legislation to include expenditure purposes in this 
Act as in effect on the date of enactment. It also extends the 
expenditure authority for the Sport Fish Restoration and 
Boating Trust Fund through October 31, 2009.

                             Effective Date

    The provision is effective October 1, 2009.
Pub. L. No. 111-118 (the ``Department of Defense Appropriations Act of 
        2010'')
    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund) through February 
28, 2010.

                             Effective Date

    The provision is effective October 1, 2009.
Pub. L. No. 111-144 (the ``Temporary Extension Act of 2010'')
    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund) through March 
28, 2010.

                             Effective Date

    The provision is effective October 1, 2009.
Pub. L. No. 111-147 (the ``Hiring Incentives to Restore Employment 
        Act'') (sec. 445)
    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund) through December 
31, 2010. The Act also updates the cross-references to 
authorizing legislation to include expenditure purposes in this 
Act as in effect on the date of enactment.

                             Effective Date

    The provision is effective September 30, 2009.
Pub. L. No. 111-322 (the ``Continuing Appropriations and Surface 
        Transportation Extensions Act, 2011'') (sec. 2401)
    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund) through March 4, 
2011. The Act also updates the cross-references to authorizing 
legislation to include expenditure purposes in this Act as in 
effect on the date of enactment.

                             Effective Date

    The provision is effective December 31, 2010.

                   B. Highway Trust Fund Restoration

                              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.

                        Explanation of Provision

Pub. L. No. 111-46
    The Act to restore funds to the Highway Trust Fund provided 
that out of the money in the Treasury not otherwise 
appropriated, $7,000,000,000 is appropriated to the Highway 
Trust Fund.

                             Effective Date

    The provision is effective on the date of enactment (August 
7, 2009).
Pub. L. No. 111-147 (the ``Hiring Incentives to Restore Employment 
        Act'') (sec. 441, 442, 443, and 444)
    The provision repeals the requirement that obligations held 
by the Highway Trust Fund not be interest-bearing. The 
provision permits amounts in the Trust Fund to be invested in 
interest-bearing obligations of the United States and have the 
interest be credited to, and form a part of, the Highway Trust 
Fund. Thus, the Highway Trust Fund will accrue interest under 
the provision. The Act also provides that out of money in the 
Treasury not otherwise appropriated, $14,700,000,000 is 
appropriated to the Highway Account in the Highway Trust Fund 
and $4,800,000,000 is appropriated to the Mass Transit Account 
in the Highway Trust Fund, and makes those amounts available 
without fiscal year limitation. The Act terminated required 
transfers from the Highway Trust Fund into the general fund for 
certain repayments and credits, relating to amounts paid in 
respect of gasoline used on farms, amounts paid in respect of 
gasoline used for certain non-highway purposes or by local 
transit systems, amounts relating to fuels not used for taxable 
purposes, and income tax credits for certain uses of fuels.

                             Effective Date

    The provision is generally effective on the date of 
enactment (March 18, 2010). The provision terminating transfers 
from the Highway Trust Fund is effective for transfers relating 
to amounts paid and credits allowed after the date of 
enactment.

    PART FIVE: REVENUE PROVISIONS OF THE WORKER, HOMEOWNERSHIP, AND 
       BUSINESS ASSISTANCE ACT OF 2009 (PUBLIC LAW 111-92) \297\
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    \297\ H.R. 3548. The bill passed the House on the suspension 
calendar on September 22, 2009. The Senate passed the bill with an 
amendment on November 4, 2009. The House agreed to the Senate amendment 
on the suspension calendar on November 5, 2009. The President signed 
the bill on November 6, 2009. For a technical explanation of the bill 
prepared by the staff of the Joint Committee on Taxation, see Technical 
Explanation of Certain Revenue Provisions of the ``Worker, 
Homeownership, and Business Assistance Act of 2009'' (JCX 44-09), 
November 3, 2009.
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A. Extension and Modification of First-Time Homebuyer Credit (secs. 11 
               and 12 of the Act and sec. 36 of the Code)

                              Present Law

In general
    An individual who is a first-time homebuyer is allowed a 
refundable tax credit equal to the lesser of $8,000 ($4,000 for 
a married individual filing separately) or 10 percent of the 
purchase price of a principal residence. The credit is allowed 
for qualifying home purchases on or after April 9, 2008, and 
before December 1, 2009.\298\
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    \298\ For purchases before January 1, 2009, the dollar limits are 
$7,500 ($3,750 for a married individual filing separately).
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    The credit phases out for individual taxpayers with 
modified adjusted gross income between $75,000 and $95,000 
($150,000 and $170,000 for joint filers) for the year of 
purchase.
    An individual is considered a first-time homebuyer if the 
individual had no ownership interest in a principal residence 
in the United States during the 3-year period prior to the 
purchase of the home.
    An election is provided to treat a residence purchased 
after December 31, 2008, and before December 1, 2009, as 
purchased on December 31, 2008, so that the credit may be 
claimed on the 2008 income tax return.
    No District of Columbia first-time homebuyer credit \299\ 
is allowed to any taxpayer with respect to the purchase of a 
residence after December 31, 2008, and before December 1, 2009, 
if the national first-time homebuyer credit is allowable to 
such taxpayer (or the taxpayer's spouse) with respect to such 
purchase.
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    \299\ Sec. 1400C.
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Recapture
    For homes purchased on or before December 31, 2008, 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 an 
individual purchases a home in 2008, recapture commences with 
the 2010 tax return. If the individual sells the home (or the 
home ceases to be used as the principal residence of the 
individual or the individual's spouse) prior to complete 
recapture of the credit, the amount of any credit not 
previously recaptured is due on the tax return for the year in 
which the home is sold (or ceases to be used as the principal 
residence).\300\ However, in the case of a sale to an unrelated 
person, the amount recaptured may not exceed the amount of gain 
from the sale of the residence. 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 an individual. 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. Recapture does not apply 
to a home purchased after December 31, 2008 that is treated (at 
the election of the taxpayer) as purchased on December 31, 
2008.
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    \300\ If the individual sells the home (or the home ceases to be 
used as the principal residence of the individual and the individual's 
spouse) in the same taxable year the home is purchased, no credit is 
allowed.
---------------------------------------------------------------------------
    For homes purchased after December 31, 2008, and before 
December 1, 2009, the credit is recaptured only if the taxpayer 
disposes of the home (or the home otherwise ceases to be the 
principal residence of the taxpayer) within 36 months from the 
date of purchase.

                     Explanation of Provision \301\
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    \301\ This provision was subsequently amended by section 2 of the 
Homebuyer Assistance and Improvement Act of 2010, Pub. L. No. 111-98, 
described in Part Ten of this document.
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Extension of application period
    In general, the credit is extended to apply to a principal 
residence purchased by the taxpayer before May 1, 2010. The 
credit applies to the purchase of a principal residence before 
July 1, 2010 by any taxpayer who enters into a written binding 
contract before May 1, 2010, to close on the purchase of a 
principal residence before July 1, 2010.
    The waiver of recapture, except in the case of disposition 
of the home (or the home otherwise ceases to be the principal 
residence of the taxpayer) within 36 months from the date of 
purchase, is extended to any purchase of a principal residence 
after December 31, 2008.
    The election to treat a purchase as occurring in a prior 
year is modified. In the case of a purchase of a principal 
residence after December 31, 2008, a taxpayer may elect to 
treat the purchase as made on December 31 of the calendar year 
preceding the purchase for purposes of claiming the credit on 
the prior year's tax return.
    No District of Columbia first-time homebuyer credit \302\ 
is allowed to any taxpayer with respect to the purchase of a 
residence after December 31, 2008, if the national first-time 
homebuyer credit is allowable to such taxpayer (or the 
taxpayer's spouse) with respect to such purchase.
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    \302\ Sec. 1400C.
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Long-time residents of the same principal residence
    An individual (and, if married, the individual's spouse) 
who has maintained the same principal residence for any five-
consecutive year period during the eight-year period ending on 
the date of the purchase of a subsequent principal residence is 
treated as a first-time homebuyer. The maximum allowable credit 
for such taxpayers is $6,500 ($3,250 for a married individual 
filing separately).
Limitations
    The Act raises the income limitations to qualify for the 
credit. The credit phases out for individual taxpayers with 
modified adjusted gross income between $125,000 and $145,000 
($225,000 and $245,000 for joint filers) for the year of 
purchase.
    No credit is allowed for the purchase of any residence if 
the purchase price exceeds $800,000.
    No credit is allowed unless the taxpayer is 18 years of age 
as of the date of purchase. A taxpayer who is married is 
treated as meeting the age requirement if the taxpayer or the 
taxpayer's spouse meets the age requirement.
    The definition of purchase excludes property acquired from 
a person related to the person acquiring such property or the 
spouse of the person acquiring the property, if married.
    No credit is allowed to any taxpayer if the taxpayer is a 
dependent of another taxpayer.
    No credit is allowed unless the taxpayer attaches to the 
relevant tax return a properly executed copy of the settlement 
statement used to complete the purchase.
Waiver of recapture for individuals on qualified official extended duty
    In the case of a disposition of principal residence by an 
individual (or a cessation of use of the residence that 
otherwise would cause recapture) after December 31, 2008, in 
connection with Government orders received by the individual 
(or the individual's spouse) for qualified official extended 
duty service, no recapture applies by reason of the disposition 
of the residence,\303\ and any 15-year recapture with respect 
to a home acquired before January 1, 2009, ceases to apply in 
the taxable year the disposition occurs.
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    \303\ If the individual sells the home (or the home ceases to be 
used as the principal residence of the individual and the individual's 
spouse) in connection with such orders in the same taxable year the 
home is purchased, the credit is allowable.
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    Qualified official extended duty service means service on 
official extended duty as a member of the uniformed services, a 
member of the Foreign Service of the United States, or an 
employee of the intelligence community.\304\
---------------------------------------------------------------------------
    \304\ These terms have the same meaning as under the provision for 
exclusion of gain on the sale of certain principal residences (Sec. 
121).
---------------------------------------------------------------------------
    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 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.
    The term ``member of the Foreign Service of the United 
States'' includes: (1) chiefs of mission; (2) ambassadors at 
large; (3) members of the Senior Foreign Service; (4) Foreign 
Service officers; and (5) Foreign Service personnel.
    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.

Extension of the first-time homebuyer credit for individuals on 
        qualified official extended duty outside of the United States

    In the case of any individual (and, if married, the 
individual's spouse) who serves on qualified official extended 
duty service outside of the United States for at least 90 days 
during the period beginning after December 31, 2008, and ending 
before May 1, 2010, the expiration date of the first-time 
homebuyer credit is extended for one year, through May 1, 2011 
(July 1, 2011, in the case of an individual who enters into a 
written binding contract before May 1, 2011, to close on the 
purchase of a principal residence before July 1, 2011).

Mathematical error authority

    The Act makes a number of changes to expand the definition 
of mathematical or clerical error for purposes of 
administration of the credit by the Internal Revenue Service 
(``IRS''). The IRS may assess additional tax without issuance 
of a notice of deficiency as otherwise required \305\ in the 
case of: an omission of any increase in tax required by the 
recapture provisions of the credit; information from the person 
issuing the taxpayer identification number of the taxpayer that 
indicates that the taxpayer does not meet the age requirement 
of the credit; information provided to the Secretary by the 
taxpayer on an income tax return for at least one of the two 
preceding taxable years that is inconsistent with eligibility 
for such credit; or, failure to attach to the return a properly 
executed copy of the settlement statement used to complete the 
purchase.
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    \305\ Sec. 6213.
---------------------------------------------------------------------------

                             Effective Date

    The extension of the first-time homebuyer credit and 
coordination with the first-time homebuyer credit for the 
District of Columbia apply to residences purchased after 
November 30, 2009.
    Provisions relating to long-time residents of the same 
principal residence, and income, purchase price, age, related 
party, dependent, and documentation limitations apply for 
purchases after the date of enactment.
    The waiver of recapture provision applies to dispositions 
and cessations after December 31, 2008.
    The expansion of mathematical and clerical error authority 
applies to returns for taxable years ending on or after April 
9, 2008.

B. Five-Year Carryback of Operating Losses (sec. 13 of the Act and sec. 
                            172 of the Code)


                              Present Law


In general

    Under present law, a net operating loss (``NOL'') generally 
means 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.\306\ NOLs offset taxable income in the order of the 
taxable years to which the NOL may be carried.\307\
---------------------------------------------------------------------------
    \306\ Sec. 172(b)(1)(A). Different carryback periods apply with 
respect to NOLs arising in certain special circumstances.
    \307\ Sec. 172(b)(2).
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    For purposes of computing the alternative minimum tax 
(``AMT''), a taxpayer's NOL deduction cannot reduce the 
taxpayer's alternative minimum taxable income (``AMTI'') by 
more than 90 percent of the AMTI.\308\
---------------------------------------------------------------------------
    \308\ Sec. 56(d).
---------------------------------------------------------------------------
    In the case of a life insurance company, present law allows 
a deduction for the operations loss carryovers and carrybacks 
to the taxable year, in lieu of the deduction for net operation 
losses allowed to other corporations.\309\ A life insurance 
company is permitted to treat a loss from operations (as 
defined under section 810(c)) for any taxable year as an 
operations loss carryback to each of the three taxable years 
preceding the loss year and an operations loss carryover to 
each of the 15 taxable years following the loss year.\310\
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    \309\ Secs. 810, 805(a)(5).
    \310\ Sec. 810(b)(1).
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Temporary rule for small business

    Present law provides an eligible small business with an 
election \311\ to increase the present-law carryback period for 
an ``applicable 2008 NOL'' from two years to any whole number 
of years elected by the taxpayer that is more than two and less 
than six. An eligible small business is a taxpayer meeting a 
$15,000,000 gross receipts test. An applicable 2008 NOL is the 
taxpayer's NOL for any taxable year ending in 2008, or if 
elected by the taxpayer, the NOL for any taxable year beginning 
in 2008. However, any election under this provision may be made 
only with respect to one taxable year.
---------------------------------------------------------------------------
    \311\ Sec. 172(b)(1)(H).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides an election \312\ to increase the 
present-law carryback period for an applicable NOL from two 
years to any whole number of years elected by the taxpayer 
which is more than two and less than six. An applicable NOL is 
the taxpayer's NOL for a taxable year beginning or ending in 
either 2008 or 2009. Generally, a taxpayer may elect an 
extended carryback period for only one taxable year.
---------------------------------------------------------------------------
    \312\ For all elections under this provision, the common parent of 
a group of corporations filing a consolidated return makes the 
election, which is binding on all such corporations.
---------------------------------------------------------------------------
    The amount of an NOL that may be carried back to the fifth 
taxable year preceding the loss year is limited to 50 percent 
of taxable income for such taxable year (computed without 
regard to the NOL for the loss year or any taxable year 
thereafter).\313\ The limitation does not apply to the 
applicable 2008 NOL of an eligible small business with respect 
to which an election is made (either before or after the date 
of enactment of the Act (November 6, 2009)) under the provision 
as presently in effect. The amount of the NOL otherwise carried 
to taxable years subsequent to such fifth taxable year is to be 
adjusted to take into account that the NOL could offset only 50 
percent of the taxable income in such year. Thus, in 
determining the excess of the applicable NOL over the sum of 
the taxpayer's taxable income for each of the prior taxable 
years to which the loss may be carried, only 50 percent of the 
taxable income for the taxable year for which the limitation 
applies is to be taken into account.
---------------------------------------------------------------------------
    \313\ The taxable income limitation only applies to that portion of 
an applicable NOL that is carried back to the fifth preceding taxable 
year under subparagraph (H) of section 172(b)(1). The limitation does 
not apply to the portion of the loss carried back under another 
subparagraph of section 172(b)(1), such as a specified liability loss, 
farming loss, or qualified disaster loss.
---------------------------------------------------------------------------
    The provision also suspends the 90-percent limitation on 
the use of any alternative tax NOL deduction attributable to 
carrybacks of the applicable NOL for which an extended 
carryback period is elected.\314\
---------------------------------------------------------------------------
    \314\ It is intended that in applying the 50-percent taxable income 
limitation with respect to the carryback of an alternative tax NOL 
deduction to the fifth preceding taxable year, the limitation is 
applied separately based on alternative minimum taxable income.
---------------------------------------------------------------------------
    For life insurance companies, the provision provides an 
election to increase the present-law carryback period for an 
applicable loss from operations from three years to four or 
five years. An applicable loss from operations is the 
taxpayer's loss from operations for any taxable year beginning 
or ending in either 2008 or 2009. A 50-percent of taxable 
income limitation applies to the fifth taxable year preceding 
the loss year.
    A taxpayer must make the election by the extended due date 
for filing the return for the taxpayer's last taxable year 
beginning in 2009, and in such manner as may be prescribed by 
the Secretary.\315\ An election, once made, is irrevocable.
---------------------------------------------------------------------------
    \315\ It is anticipated that the procedures for making the election 
will be substantially similar to those prescribed for eligible small 
businesses under present law. See Rev. Proc. 2009-26, 2009-19 I.R.B. 
935.
---------------------------------------------------------------------------
    An eligible small business that timely made (or timely 
makes) an election under the provision as in effect on the day 
before the enactment of the Act to carry back its applicable 
2008 NOL may also elect to carry back a 2009 NOL under the 
amended provision.\316\ It is intended that an eligible small 
business may continue to make the present-law election under 
procedures prescribed in Rev. Proc. 2009-26 following the 
enactment of the Act.
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    \316\ Present law section 172(b)(1)(H)(iii) provides that an 
eligible small business must make the election by the extended due date 
for filing its return for the taxable year of the NOL. An eligible 
small business that did not (or does not) timely elect to carryback its 
applicable 2008 NOL under present law is subject to the general 
provision (i.e., election available for either 2008 or 2009 NOL and 50 
percent of taxable income limitation applies for the fifth taxable year 
preceding the loss year).
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    The provision generally does not apply to: (1) any taxpayer 
if (a) the Federal government acquired or acquires, at any 
time,\317\ an equity interest in the taxpayer pursuant to the 
Emergency Economic Stabilization Act of 2008,\318\ or (b) the 
Federal government acquired or acquires, at any time, any 
warrant (or other right) to acquire any equity interest with 
respect to the taxpayer pursuant to such Act; (2) the Federal 
National Mortgage Association and the Federal Home Loan 
Mortgage Corporation; and (3) any taxpayer that in 2008 or 2009 
\319\ is a member of the same affiliated group (as defined in 
section 1504 without regard to subsection (b) thereof) as a 
taxpayer to which the provision does not otherwise apply. An 
equity interest (or right to acquire an equity interest) is 
disregarded for this purpose if acquired by the Federal 
government after the date of enactment from a financial 
institution \320\ pursuant to a program established by the 
Secretary for the stated purpose of increasing the availability 
of credit to small businesses using funding made available 
under the Emergency Economic Stabilization Act of 2008.
---------------------------------------------------------------------------
    \317\ For example, if the Federal government acquires an equity 
interest in the taxpayer during 2010, or in later years, the taxpayer 
is not entitled to the extended carryback rules under this provision. 
If the carryback has previously been claimed, amended filings may be 
necessary to reflect this disallowance. Additionally, if the Federal 
government acquired an equity interest in the taxpayer pursuant to the 
Emergency Economic Stabilization Act of 2008 and the taxpayer has 
repaid that investment, it is not entitled to the extended carryback 
rules under this provision.
    \318\ Pub. L. No. 110-343.
    \319\ For example, a taxpayer with an NOL in 2008 that in 2009 
joins an affiliated group with a member in which the Federal government 
has acquired an equity interest pursuant to the Emergency Economic 
Stabilization Act of 2008 may not utilize the extended carryback rules 
under this provision with regard to the 2008 NOL. The taxpayer is 
required to amend prior filings to reflect the permitted carryback 
period.
    \320\ As defined in section 3 of the Emergency Economic 
Stabilization Act of 2008.
---------------------------------------------------------------------------

                             Effective Date

    The provision is generally effective for net operating 
losses arising in taxable years ending after December 31, 2007. 
The modification to the alternative tax NOL deduction applies 
to taxable years ending after December 31, 2002. The 
modification with respect to operating loss deductions of life 
insurance companies applies to losses from operations arising 
in taxable years ending after December 31, 2007.
    Under transition rules, a taxpayer may revoke any election 
to waive the carryback period under either section 172(b)(3) or 
section 810(b)(3) with respect to an applicable NOL or an 
applicable loss from operations for a taxable year ending 
before the date of enactment (November 6, 2009) by the extended 
due date for filing the tax return for the taxpayer's last 
taxable year beginning in 2009. Similarly, any application for 
a tentative carryback adjustment under section 6411(a) with 
respect to such loss is treated as timely filed if filed by the 
extended due date for filing the tax return for the taxpayer's 
last taxable year beginning in 2009.

 C. Exclusion from Gross Income of Qualified Military Base Realignment 
    and Closure Fringe (sec. 14 of the Act and sec. 132 of the Code)


                              Present Law


Homeowners Assistance Program payment

    The Department of Defense Homeowners Assistance Program 
(``HAP'') provides payments to certain employees and members of 
the Armed Forces to offset the adverse effects on housing 
values that result from a military base realignment or closure.
    In general, under the HAP, eligible individuals receive 
either: (1) a cash payment as compensation for losses that may 
be or have been sustained in a private sale, in an amount not 
to exceed the difference between (a) 95 percent of the fair 
market value of their property prior to public announcement of 
intention to close all or part of the military base or 
installation and (b) the fair market value of such property at 
the time of the sale; or (2) as the purchase price for their 
property, an amount not to exceed 90 percent of the prior fair 
market value as determined by the Secretary of Defense, or the 
amount of the outstanding mortgages.
    The American Recovery and Reinvestment Act of 2009 \321\ 
expands the HAP in various ways. It amends the Demonstration 
Cities and Metropolitan Development Act of 1966 \322\ to allow, 
under the HAP under such Act, the Secretary of Defense to 
provide assistance or reimbursement for certain losses in the 
sale of family dwellings by members of the Armed Forces living 
on or near a military installation in situations where: (1) 
there was a base closure or realignment; (2) the property was 
purchased before July 1, 2006, and sold between that date and 
September 30, 2012; (3) the property is the owner's primary 
residence; and (4) the owner has not previously received 
benefits under the HAP. Further, it authorizes similar HAP 
assistance or reimbursement with respect to: (1) wounded 
members and wounded civilian Department of Defense and Coast 
Guard employees (and their spouses); and (2) members 
permanently reassigned from an area at or near a military 
installation to a new duty station more than 50 miles away 
(with similar purchase and sale date, residence, and no-
previous-benefit requirements as above). It allows the 
Secretary to provide compensation for losses from home sales by 
such individuals to ensure the realization of at least 90 
percent (in some cases, 95 percent) of the pre-mortgage-crisis 
assessed value of such property.
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    \321\ Pub. L. No. 111-5.
    \322\ Pub. L. No. 89-754, 42 U.S.C. 3374.
---------------------------------------------------------------------------

Tax treatment

    Present law generally excludes from gross income amounts 
received under the HAP (as in effect on November 11, 
2003).\323\ Amounts received under the program also are not 
considered wages for FICA tax purposes (including Medicare). 
The excludable amount is limited to the reduction in the fair 
market value of property.
---------------------------------------------------------------------------
    \323\ Sec. 132(n).
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                        Explanation of Provision

    The Act expands the exclusion to HAP payments authorized 
under the American Recovery and Reinvestment Tax Act of 2009.

                             Effective Date

    The provision is effective for payments made after February 
17, 2009 (the date of enactment of the American Recovery and 
Reinvestment Tax Act of 2009).

D. Delay in Application of Worldwide Allocation of Interest (sec. 15 of 
                   the Act and sec. 864 of the Code)


                              Present Law


In general

    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.\324\ 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.
---------------------------------------------------------------------------
    \324\ However, exceptions to the fungibility principle are provided 
in particular cases, some of which are described below.
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    For consolidation purposes, the term ``affiliated group'' 
means one or more chains of includible corporations connected 
through stock ownership with a common parent corporation that 
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.\325\ 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.
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    \325\ One such exception is that the affiliated group for interest 
allocation purposes includes section 936 corporations (certain electing 
domestic corporations that have income from the active conduct of a 
trade or business in Puerto Rico or another U.S. possession) that are 
excluded from the consolidated group.
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            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.'' \326\ A financial 
corporation includes 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 that is not a financial institution.\327\ 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.\328\
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    \326\ Temp. Treas. Reg. sec. 1.861-11T(d)(4).
    \327\ Sec. 864(e)(5)(C).
    \328\ Sec. 864(e)(5)(D).
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    A financial corporation is not treated as a member of the 
regular affiliated group for purposes of applying the one-
taxpayer rule to other nonfinancial 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'') \329\ 
modified 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 that the foreign assets of the 
worldwide affiliated group bears to the total assets of the 
worldwide affiliated group,\330\ 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.\331\
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    \329\ Pub. L. No. 108-357, sec. 401.
    \330\ 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.
    \331\ Although the interest expense of a foreign subsidiary is 
taken into account for purposes of allocating the interest expense of 
the domestic members of the electing worldwide affiliated group for 
foreign tax credit limitation purposes, the interest expense incurred 
by a foreign subsidiary is not deductible on a U.S. return.
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    For purposes of the new elective rules based on worldwide 
fungibility, the worldwide affiliated group means all 
corporations in an affiliated group as well as all controlled 
foreign corporations that, in the aggregate, either directly or 
indirectly,\332\ would be members of such an affiliated group 
if section 1504(b)(3) did not apply (i.e., in which at least 80 
percent of the vote and value of the stock of such corporations 
is owned by one or more other corporations included in the 
affiliated group). Thus, if an affiliated group makes this 
election, the taxable income from sources outside the United 
States of domestic group members generally is determined by 
allocating and apportioning interest expense of the domestic 
members of the worldwide affiliated group as if all of the 
interest expense and assets of 80-percent or greater owned 
domestic corporations (i.e., corporations that are part of the 
affiliated group, as modified to include insurance companies) 
and certain controlled foreign corporations were attributable 
to a single corporation.
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    \332\ 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.
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            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.\333\ 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.
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    \333\ See Treas. Reg. sec. 1.904-4(e)(2).
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    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
    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, 2010, 
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.\334\ The common 
parent of the pre-election worldwide affiliated group must make 
the election for the first taxable year beginning after 
December 31, 2010, in which a worldwide affiliated group 
includes a financial corporation. Once either election is made, 
it applies to the common parent and all other members of the 
worldwide affiliated group or to all members of the financial 
institution group, as applicable, for the taxable year for 
which the election is made and all subsequent taxable years, 
unless revoked with the consent of the Secretary of the 
Treasury.
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    \334\ As originally enacted under AJCA, the worldwide interest 
allocation rules were effective for taxable years beginning after 
December 31, 2008. However, section 3093 of the Housing and Economic 
Recovery Act of 2008, Pub. L. No. 110-289, delayed the implementation 
of the worldwide interest allocation rules for two years, until taxable 
years beginning after December 31, 2010.
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            Phase-in rule
    HERA also provided 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. For that year, the amount of the 
taxpayer's taxable income from domestic sources is increased by 
a corresponding amount. 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.

                     Explanation of Provision \335\

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    \335\ The effective date of the worldwide interest allocation rules 
was subsequently further delayed by section 551 of the Hiring 
Incentives to Restore Employment Act of 2010, Pub. L. No. 111-147, 
described in Part Seven of this document.
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    The provision delays the effective date of the worldwide 
interest allocation rules for seven years, until taxable years 
beginning after December 31, 2017. The required dates for 
making the worldwide affiliated group election and the 
financial institution group election are changed accordingly.
    The provision also eliminates the special phase-in rule 
that applies in the case of the first taxable year to which the 
worldwide interest allocation rules apply.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

    E. Modification of Penalty for Failure to File Partnership or S 
Corporation Returns (sec. 16 of the Act and secs. 6698 and 6699 of the 
                                 Code)


                              Present Law

    Both partnerships and S corporations are generally treated 
as pass-through entities that do not incur an income tax at the 
entity level. 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). An S corporation generally is not subject to 
corporate-level income tax on its items of income and loss. 
Instead, the 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, both partnerships and S corporations are 
required to file tax returns for each taxable year.\336\ 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. 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.
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    \336\ Secs. 6031 and 6037, respectively.
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    In addition to applicable criminal penalties, present law 
imposes assessable civil penalties for both the failure to file 
a partnership return and the failure to file an S corporation 
return.\337\ Each of these penalties is currently $89 times the 
number of shareholders or partners 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 31, 
2008.
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    \337\ Secs. 6698 and 6699, respectively.
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                        Explanation of Provision

    Under the provision, the base amount on which a penalty is 
computed for a failure with respect to filing either a 
partnership or S corporation return is increased to $195 per 
partner or shareholder.

                             Effective Date

    The provision applies to returns for taxable years 
beginning after December 31, 2009.

 F. Expansion of Electronic Filing by Return Preparers (sec. 17 of the 
                   Act and sec. 6011(e) of the Code)


                              Present Law

    The Internal Revenue Service Restructuring and Reform Act 
of 1998 \338\ (``RRA 1998'') states a Congressional policy to 
promote the paperless filing of Federal tax returns. Section 
2001(a) of RRA 1998 sets a goal for the IRS to have at least 80 
percent of all Federal tax and information returns filed 
electronically by 2007. Section 2001(b) of RRA 1998 requires 
the IRS to establish a 10-year strategic plan to eliminate 
barriers to electronic filing.
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    \338\ Pub. L. No. 105-206.
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    The Secretary has limited authority to issue regulations 
specifying which returns must be filed electronically.\339\ 
First, it can apply only to persons required to file at least 
250 returns during the calendar year.\340\ Second, the 
Secretary is prohibited from requiring that income tax returns 
of individuals, estates, and trusts be submitted in any format 
other than paper (although these returns may be filed 
electronically by choice). Third, the Secretary, in determining 
which returns must be filed on magnetic media, must take into 
account relevant factors, including the ability of a taxpayer 
to comply with magnetic media filing at reasonable cost.\341\ 
Finally, a failure to comply with the regulations mandating 
electronic filing cannot in itself establish the basis for 
assertion of a penalty for failure to file an information 
return, with certain exceptions for corporations and 
partnerships.\342\
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    \339\ Sec. 6011(e).
    \340\ Partnerships with more than 100 partners are required to file 
electronically. Sec. 6011(e)(2).
    \341\ Sec. 6011(e).
    \342\ Sec. 6724(c). If a corporation fails to comply with the 
electronic filing requirements for more than 250 returns that it is 
required to file, it may be subject to the penalty for failure to file 
information returns under section 6721. For partnerships, the penalty 
may be imposed only if the failure extends to more than 100 returns.
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    Accordingly, the Secretary requires corporations and tax-
exempt organizations that have assets of $10 million or more 
and file at least 250 returns during a calendar year, including 
income tax, information, excise tax, and employment tax 
returns, to file electronically their Form 1120/1120S income 
tax returns and Form 990 information returns for tax years 
ending on or after December 31, 2006.\343\ Private foundations 
and charitable trusts that file at least 250 returns during a 
calendar year are required to file electronically their Form 
990-PF information returns for tax years ending on or after 
December 31, 2006, regardless of their asset size. Taxpayers 
can request waivers of the electronic filing requirement if 
they cannot meet that requirement due to technological 
constraints, or if compliance with the requirement would result 
in undue financial burden on the taxpayer.
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    \343\ Treas. Reg. secs. 301.6011-5, 301.6033-4, 301.6037-2.
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                        Explanation of Provision

    The provision generally maintains the current rule that 
regulations may not require any person to file electronically 
unless the person files at least 250 tax returns during the 
calendar year. However, the proposal provides an exception to 
this rule and mandates that the Secretary require electronic 
filing by specified tax return preparers. ``Specified tax 
return preparers'' are all return preparers except those who 
neither file nor reasonably expect to file more than ten 
individual income tax returns on behalf of clients in a 
calendar year. The term ``individual income tax return'' is 
defined to include returns for estates and trusts as well as 
individuals.

                             Effective Date

    The provision is effective for tax returns filed after 
December 31, 2010.

 G. Time for Payment of Corporate Estimated Taxes (sec. 18 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.\344\ 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. In the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding tax year), payments due in July, August, or 
September, 2014, are increased to 100.25 percent of the payment 
otherwise due and the next required payment is reduced 
accordingly.\345\
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    \344\ Sec. 6655.
    \345\ Joint resolution approving the renewal of import restrictions 
contained in the Burmese Freedom and Democracy Act of 2003, and for 
other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
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                     Explanation of Provision \346\

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    \346\ All the public laws enacted in the 111th Congress affecting 
this provision are described in Part Twenty-One of this document.
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    The provision increases the required payment of estimated 
tax otherwise due in July, August, or September, 2014, by 33.00 
percentage points.

                             Effective Date

    The provision is effective on the date of the enactment 
(November 6, 2009).

         PART SIX: HAITI TAX RELIEF (PUBLIC LAW 111-126) \347\
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    \347\ H.R. 4462. The bill passed the House on the suspension 
calendar on January 20, 2010. The Senate passed the bill by unanimous 
consent on January 21, 2010. The President signed the bill on January 
22, 2010. For a technical explanation of the bill prepared by the staff 
of the Joint Committee on Taxation, see Technical Explanation of H.R. 
4462: A Bill to Accelerate the Income Tax Benefits for Charitable Cash 
Contributions for the Relief of Victims of the Earthquake in Haiti 
(JCX-2-10), January 20, 2010.
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A. Accelerate the Income Tax Benefits for Charitable Cash Contributions 
  for the Relief of Victims of the Earthquake in Haiti (sec. 1 of the 
                                  Act)

                              Present Law

    In general, under present law, taxpayers may claim an 
income tax deduction for charitable contributions. The 
charitable deduction generally is available for the taxable 
year in which the contribution is made. For taxpayers whose 
taxable year is the calendar year, the tax benefit of a 
charitable contribution made in January or February often is 
not realized until the following calendar year when the tax 
return is filed.
    A donor who claims a charitable deduction for a charitable 
contribution of money, regardless of amount, must maintain as a 
record of the contribution a bank record or a written 
communication from the donee showing the name of the donee 
organization, the date of the contribution, and the amount of 
the contribution.\348\ In addition to the foregoing 
recordkeeping requirements, substantiation requirements apply 
in the case of charitable contributions with a value of $250 or 
more. No charitable deduction is allowed for any contribution 
of $250 or more unless the taxpayer substantiates the 
contribution by a contemporaneous written acknowledgment of the 
contribution by the donee organization.
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    \348\ Sec. 170(f)(17).
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                        Explanation of Provision

    The provision permits taxpayers to treat charitable 
contributions of cash made after January 11, 2010, and before 
March 1, 2010, as contributions made on December 31, 2009, if 
such contributions were for the purpose of providing relief to 
victims in areas affected by the earthquake in Haiti that 
occurred on January 12, 2010. Thus, the effect of the provision 
is to give calendar-year taxpayers who make Haitian earthquake-
related charitable contributions of cash after January 11, 
2010, and before March 1, 2010, the opportunity to accelerate 
their tax benefit. Under the provision, such taxpayers may 
realize the tax benefit of such contributions by taking a 
deduction on their 2009 tax return.
    The provision also clarifies the recordkeeping requirement 
for monetary contributions eligible for the accelerated income 
tax benefits described above. With respect to such 
contributions, a telephone bill will also satisfy the 
recordkeeping requirement if it shows the name of the donee 
organization, the date of the contribution, and the amount of 
the contribution. Thus, for example, in the case of a 
charitable contribution made by text message and chargeable to 
a telephone or wireless account, a bill from the 
telecommunications company containing the relevant information 
will satisfy the recordkeeping requirement.

                             Effective Date

    The provision is effective on the date of enactment 
(January 22, 2010).

  PART SEVEN: REVENUE PROVISIONS OF THE HIRING INCENTIVES TO RESTORE 
               EMPLOYMENT ACT (PUBLIC LAW 111-147) \349\

    TITLE I--INCENTIVES FOR HIRING AND RETAINING UNEMPLOYED WORKERS

 A. Payroll Tax Forgiveness for Hiring Unemployed Workers (sec. 101 of 
                 the Act and new sec. 3111 of the Code)

                              Present Law

In general
    Social security benefits and certain Medicare benefits are 
financed primarily by payroll taxes on wages.
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    \349\ H.R. 2847. The bill originated as an appropriations bill and 
passed the House on June 18, 2009. The bill passed the Senate with an 
amendment on November 5, 2009. On December 16, 2009, the House agreed 
to the Senate amendment with an amendment containing revenue 
provisions. On February 24, 2010, the Senate concurred in the House 
amendment to the Senate amendment with an amendment substituting the 
text of the Hiring Incentives to Restore Employment Act. On March 4, 
2010, the House agreed to the Senate amendment with an amendment. On 
March 17, 2010, the Senate concurred in the House amendment. The 
President signed the bill on March 18, 2010.
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Federal Insurance Contributions Act (``FICA'') tax
    The FICA tax applies to employers based on the amount of 
covered wages paid to an employee during the year. Generally, 
covered wages means all remuneration for employment, including 
the cash value of all remuneration (including benefits) paid in 
any medium other than cash. Certain exceptions from covered 
wages are also provided. The tax imposed is composed of two 
parts: (1) the old age, survivors, and disability insurance 
(``OASDI'') tax equal to 6.2 percent of covered wages up to the 
taxable wage base ($106,800 in 2010); and (2) the Medicare 
hospital insurance (``HI'') tax amount equal to 1.45 percent of 
covered wages. In addition to the tax on employers, each 
employee is subject to FICA taxes equal to the amount of tax 
imposed on the employer (the ``employee portion''). The 
employee portion generally must be withheld and remitted to the 
Federal government by the employer.
Self-Employment Contributions Act (``SECA'') tax
    As a parallel to FICA taxes, the SECA tax applies to the 
net income from self-employment of self-employed individuals. 
The rate of the OASDI portion of SECA taxes is equal to the 
combined employee and employer OASDI FICA tax rates and applies 
to self-employment income up to the FICA taxable wage base. 
Similarly, the rate of the HI portion is the same as the 
combined employer and employee HI rates and there is no cap on 
the amount of self-employment income to which the rate 
applies.\350\
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    \350\ For purposes of computing net earnings from self employment, 
taxpayers are permitted a deduction equal to the product of the 
taxpayer's earnings (determined without regard to this deduction) and 
one-half of the sum of the rates for OASDI tax (12.4 percent) and HI 
tax (2.9 percent), i.e., 7.65 percent of net earnings. This deduction 
reflects the fact that the FICA rates apply to an employee's wages, 
which do not include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent to an 
employee's wages plus the employer share of FICA taxes.
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Railroad retirement tax
    The Railroad Retirement System has two main components. 
Tier I of the system is financed by taxes on employers and 
employees equal to the Social Security payroll tax and provides 
qualified railroad retirees (and their qualified spouses, 
dependents, widows, or widowers) with benefits that are roughly 
equal to Social Security. Covered railroad workers and their 
employers pay the Tier I tax instead of the Social Security 
payroll tax, and most railroad retirees collect Tier I benefits 
instead of Social Security. Tier II of the system replicates a 
private pension plan, with employers and employees contributing 
a certain percentage of pay toward the system to finance 
defined benefits to eligible railroad retirees (and qualified 
spouses, dependents, widows, or widowers) upon retirement; 
however, the Federal Government collects the Tier II payroll 
contribution and pays out the benefits.

                        Explanation of Provision

In general
    The provision provides relief from the employer share of 
OASDI taxes (or railroad retirement taxes, if applicable) on 
wages paid by a qualified employer with respect to certain 
employment. The provision applies to wages paid beginning on 
the day after enactment (March 18, 2010) and ending on December 
31, 2010. Under a special rule for the first calendar quarter 
of 2010, the exemption does not apply, but the amount by which 
the tax would have been reduced but for the special rule is 
credited to the employer in the second calendar quarter of 
2010. The special rule was included in order to ease 
implementation of the payroll tax exemption.
    Covered employment is limited to service performed by a 
qualified individual: (1) in a trade or business of a qualified 
employer; or (2) in furtherance of the activities related to 
the purpose or function constituting the basis of the 
employer's exemption under sec. 501 (in the case of a qualified 
employer that is exempt from tax under sec. 501(a)).
Qualified employer
    A qualified employer is any employer other than the United 
States, any State, any local government, or any instrumentality 
of the foregoing. Notwithstanding the forgoing, a qualified 
employer includes any employer that is a public higher 
education institution (as defined in sec. 101(b) of the Higher 
Education Act of 1965).
Qualified individual
    A qualified individual is any individual who: (1) begins 
work for a qualified employer after February 3, 2010 and before 
January 1, 2011; (2) certifies by signed affidavit (under 
penalties of perjury) that he or she was employed for a total 
of 40 hours or less during the 60-day period ending on the date 
such employment begins; (3) is not employed to replace another 
employee of the employer unless such employee separated from 
employment voluntarily or for cause; \351\ and (4) is not a 
related party (as defined under rules similar to sec. 51(i)) of 
the employer).
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    \351\ It is intended that an employer may qualify for the credit 
when it hires an otherwise qualified individual to replace an 
individual whose employment was terminated, for cause or due to other 
facts and circumstances. For example, an employer may qualify for the 
credit with respect to wages paid pursuant to the reopening of a 
factory which had been previously closed due to lack of demand for the 
product being produced (i.e., the employer may qualify by rehiring 
qualified individuals who had in the past worked for the employer but 
were terminated when the factory was closed or by hiring qualified 
individuals who had not previously worked for the employer). In 
contrast, an employer who terminates the employment of an individual 
not for cause, but rather to claim the credit with respect to the 
hiring of the same or another individual is not eligible for the credit 
under this rule.
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Employer election
    A qualified employer may elect to not have payroll tax 
forgiveness apply. The election is made in the manner required 
by the Secretary of the Treasury.
Coordination with work opportunity tax credit
    Under the provision, a qualified employer may not receive 
the work opportunity tax credit on any wages paid to a 
qualified individual during the one-year period beginning on 
the hiring date of such individual, if those wages qualify the 
employer for payroll tax forgiveness under this provision 
unless the employer makes an election not to have payroll tax 
forgiveness apply with respect to that individual.
Social Security trust funds
    The Federal Old-Age and Survivors Trust Fund and the 
Federal Disability Insurance Trust Fund will receive transfers 
from the General Fund of the United States Treasury equal to 
any reduction in payroll taxes attributable to the payroll tax 
forgiveness provided under the provision. The amounts will be 
transferred from the General Fund at such times and in such a 
manner as to replicate to the extent possible the transfers 
which would have occurred to the Trust Funds had the provision 
not been enacted.

                             Effective Date

    The provision applies to wages paid after the date of 
enactment (March 18, 2010).

B. Business Credit for Retention of Certain Newly Hired Individuals in 
         2010 (sec. 102 of the Act and sec. 38(b) of the Code)


                              Present Law

    Present law does not provide a tax credit specifically for 
the retention of new employees.
    However, present law provides for a general business credit 
consisting of various business tax credits.\352\ The general 
business credit, to the extent it exceeds the relevant tax 
liability for the taxable year, may be carried back one year 
(but, in the case of a new credit, not to a taxable year before 
that credit is first allowable) and carried forward 20 
years.\353\
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    \352\ Sec. 38.
    \353\ Sec. 39.
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                        Explanation of Provision


In general

    Under the provision, an employer's general business credit 
is increased by the lesser of $1,000 or 6.2 percent of wages 
for each retained worker that satisfies a minimum employment 
period. Generally, a retained worker is an individual who is a 
qualified individual as defined under the payroll tax 
forgiveness provision, above (new Code sec. 3111(d)). However, 
the credit is available only with respect to such an 
individual, if the individual: (1) is employed by the employer 
on any date during the taxable year; (2) continues to be 
employed by the employer for a period of not less than 52 
consecutive weeks; and (3) receives wages for such employment 
during the last 26 weeks of such period that are least 80-
percent of such wages during the first 26 weeks of such period.
    The portion of the general business credit attributable to 
the retention credit may not be carried back to a taxable year 
that begins prior to the date of enactment of this provision 
(March 18, 2010).

Treatment of the U.S. possessions

            Mirror code possessions \354\
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    \354\ 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 \355\
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    \355\ 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.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment (March 18, 2010).

                          TITLE II--EXPENSING


 A. Increase in Expensing of Certain Depreciable Business Assets (sec. 
                201 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.\356\ For taxable years 
beginning in 2009, the maximum amount that a taxpayer may 
expense is $250,000 of the cost of qualifying property placed 
in service for the taxable year. 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.\357\ For taxable years beginning in 2010, the 
maximum amount that a taxpayer may expense 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 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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    \356\ 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)).
    \357\ The temporary $250,000 and $800,000 amounts were enacted in 
the Economic Stimulus Act of 2008, Pub. L. No. 110-185, and extended 
for taxable years beginning in 2009 by the American Recovery and 
Reinvestment Act of 2009, Pub. L. No. 111-5.
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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.\358\ 
An election under section 179 generally is revocable only with 
prior consent of the Secretary.\359\
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    \358\ 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.
    \359\ Section 179(c)(2) provides that with respect to any taxable 
year beginning after 2002 and before 2011, a taxpayer may revoke its 
section 179 election with respect to any property, and such revocation, 
once made is irrevocable.
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    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).

                     Explanation of Provision \360\

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    \360\ The provision was temporarily expanded and extended for 
taxable years beginning in 2010 and 2011 by section 2021 of the Small 
Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part 
Fourteen. The provision was further modified and extended through 2012 
by section 402 of the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 
described in Part Sixteen of this document.
---------------------------------------------------------------------------
    The Act increases for one year the amount a taxpayer may 
deduct under section 179. The Act provides that the maximum 
amount a taxpayer may expense, for taxable years beginning 
after 2009 and before 2011, is $250,000 of the cost of 
qualifying property placed in service for the taxable year. 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.

                             Effective Date

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

                  TITLE III--QUALIFED TAX CREDIT BONDS


 A. Refundable Credit for Certain Qualified Tax Credit Bonds (sec. 301 
             of the Act and secs. 54F and 6431 of the Code)


                              Present Law


Build America Bonds

    Section 54AA, added to the Code by the American Recovery 
and Reinvestment Act of 2009 (``ARRA''),\361\ permits an issuer 
to elect to have an otherwise tax-exempt bond, issued prior to 
January 1, 2011, treated as a ``build America bond.'' \362\ In 
general, build America bonds are taxable governmental bonds, 
the interest on which is subsidized by the Federal government 
by means of a tax credit to the holder (``tax-credit build 
America bonds'') or, in the case of certain qualified bonds, a 
direct payment to the issuer (``direct-pay build America 
bonds'').
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    \361\ Pub. L. No. 111-5.
    \362\ Sec. 54AA.
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            Definition and general requirements
    A build America bond is any obligation (other than a 
private activity bond) if the interest on such obligation would 
be (but for section 54AA) excludable from gross income under 
section 103, and the issuer makes an irrevocable election to 
have the rules in section 54AA apply.\363\ In determining if an 
obligation would be tax-exempt under section 103, the credit 
(or the payment discussed below for direct-pay build America 
bonds) is not treated as a Federal guarantee.\364\ Further, for 
purposes of the restrictions on arbitrage in section 148, the 
yield on a tax-credit build America bond is determined without 
regard to the credit; \365\ the yield on a direct-pay build 
America bond is reduced by the payment made pursuant to section 
6431.\366\ A build America bond does not include any bond if 
the issue price has more than a de minimis amount of premium 
over the stated principal amount of the bond.\367\
---------------------------------------------------------------------------
    \363\ Sec. 54AA(d). Subject to updated IRS reporting forms or 
procedures, an issuer of build America bonds makes the election 
required by 54AA on its books and records on or before the issue date 
of such bonds. Notice 2009-26, 2009-16 I.R.B. 833.
    \364\ Sec. 54AA(d)(2)(A). Section 149(b) provides that section 
103(a) shall not apply to any State or local bond if such bond is 
federally guaranteed.
    \365\ Sec. 54AA(d)(2)(B).
    \366\ Sec. 6431(c).
    \367\ Sec. 54AA(d)(2)(C).
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            Treatment of holders of tax-credit build America bonds
    The holder of a tax-credit build America bond accrues a tax 
credit in the amount of 35 percent of the interest paid on the 
interest payment dates of the bond during the calendar 
year.\368\ The interest payment date is any date on which the 
holder of record of the build America bond is entitled to a 
payment of interest under such bond.\369\ The sum of the 
accrued credits is allowed against regular and alternative 
minimum tax; unused credit may be carried forward to succeeding 
taxable years.\370\ The credit, as well as the interest paid by 
the issuer, is included in gross income, and the credit may be 
stripped under rules similar to those provided in section 54A 
regarding qualified tax credit bonds.\371\ Rules similar to 
those that apply for S corporations, partnerships and regulated 
investment companies with respect to qualified tax credit bonds 
also apply to the credit.\372\
---------------------------------------------------------------------------
    \368\ Sec. 54AA(a) and (b). Original issue discount (``OID'') is 
not treated as a payment of interest for purposes of determining the 
credit under the provision. OID is the excess of an obligation's stated 
redemption price at maturity over the obligation's issue price (section 
1273(a)).
    \369\ Sec. 54AA(e).
    \370\ Sec. 54AA(c).
    \371\ Sec. 54AA(f).
    \372\ Ibid.
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            Special rules for direct-pay build America bonds
    Under the special rule for qualified bonds, in lieu of the 
tax credit to the holder, the issuer is allowed a credit equal 
to 35 percent of each interest payment made under such 
bond.\373\ A ``qualified bond,'' that is, a direct-pay build 
America bond, is any build America bond issued as part of an 
issue if 100 percent of the excess of available project 
proceeds of such issue over the amounts in a reasonably 
required reserve with respect to such issue are to be used for 
capital expenditures.\374\ Direct-pay build America bonds also 
must be issued before January 1, 2011. The issuer must make an 
irrevocable election to have the special rule for qualified 
bonds apply.\375\
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    \373\ Sec. 54AA(g)(1). OID is not treated as a payment of interest 
for purposes of calculating the refundable credit under the provision.
    \374\ Sec. 54AA(g). Under Treas. Reg. sec. 150-1(b), capital 
expenditure means any cost of a type that is properly chargeable to 
capital account (or would be so chargeable with a proper election or 
with the application of the definition of placed in service under 
Treas. Reg. sec. 1.150-2(c)) under general Federal income tax 
principles. For purposes of applying the ``general Federal income tax 
principles'' standard, an issuer should generally be treated as if it 
were a corporation subject to taxation under subchapter C of chapter 1 
of the Code. An example of a capital expenditure would include 
expenditures made for the purchase of fiber-optic cable to provide 
municipal broadband service.
    \375\ Sec. 54AA(g)(2)(B). Subject to updated IRS reporting forms or 
procedures, an issuer of direct-pay build America bonds makes the 
election required by section 54AA(g)(2)(B) on its books and records on 
or before the issue date of such bonds. Notice 2009-26, 2009-16 I.R.B. 
833.
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    The payment by the Secretary is to be made 
contemporaneously with the interest payment made by the issuer, 
and may be made either in advance or as reimbursement.\376\ In 
lieu of payment to the issuer, the payment may be made to a 
person making interest payments on behalf of the issuer.\377\
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    \376\ Sec. 6431.
    \377\ Sec. 6431(b)
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Qualified Tax Credit Bonds

    Qualified tax credit bonds include qualified forestry 
conservation bonds, new clean renewable energy bonds (``New 
CREBs''), qualified energy conservation bonds (``QECs''), 
qualified zone academy bonds issued after the date of enactment 
of the Tax Extenders and Alternative Minimum Tax Relief Act of 
2008 (``QZABs''), and qualified school construction bonds 
(``QSCBs'').\378\ Qualified tax credit bonds generally are not 
interest-bearing obligations. Rather, the taxpayer holding a 
qualified tax credit bond on a credit allowance date is 
entitled to a tax credit.\379\ The annual amount of the credit 
is determined by multiplying the bond's applicable credit rate 
by the outstanding face amount of the bond.\380\ The credit 
rate for an issue of qualified tax credit bonds is determined 
by the Secretary and is estimated to be a rate that permits 
issuance of the qualified tax credit bonds without discount and 
interest cost to the qualified issuer.\381\ The Secretary 
determines credit rates for tax credit bonds based on general 
assumptions about credit quality of the class of potential 
eligible issuers and such other factors as the Secretary deems 
appropriate. The Secretary may determine credit rates based on 
general credit market yield indices and credit ratings.\382\ 
The credit accrues quarterly,\383\ is includible in gross 
income (as if it were an interest payment on the bond),\384\ 
and can be claimed against regular income tax liability and 
alternative minimum tax liability.\385\ Unused credits may be 
carried forward to succeeding taxable years.\386\ In addition, 
under regulations prescribed by the Secretary, credits may be 
stripped.\387\
---------------------------------------------------------------------------
    \378\ Sec. 54A(d).
    \379\ Sec. 54A(a).
    \380\ Sec. 54A(b)(2).
    \381\ Sec. 54A(b)(3). However, for New CREBs and QECs, the 
applicable credit rate is 70 percent of the otherwise applicable rate.
    \382\ See Notice 2009-15, 2009-6 I.R.B. 449 (January 22, 2009). 
Given the differences in credit quality and other characteristics of 
individual issuers, the Secretary cannot set credit rates in a manner 
that will allow each issuer to issue tax credit bonds at par.
    \383\ Sec. 54(A)(b)(1).
    \384\ Sec. 54A(f).
    \385\ Sec. 54A(c).
    \386\ Ibid.
    \387\ Sec. 54A(i).
---------------------------------------------------------------------------
    Qualified tax credit bonds 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 qualified tax credit 
bond being equal to 50 percent of the face amount of such 
bond.\388\ 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 qualified tax credit bonds are issued.
---------------------------------------------------------------------------
    \388\ Sec. 54A(d)(5).
---------------------------------------------------------------------------
    For qualified tax credit bonds, 100 percent of the 
available project proceeds must be used within the three-year 
period that begins on the date of issuance.\389\ Available 
project proceeds are the sum of (1) the excess of the proceeds 
from the sale of the bond issue over issuance costs (not to 
exceed two percent) and (2) any investment earnings on such 
sale proceeds.\390\ 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 qualified tax credit 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 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.
---------------------------------------------------------------------------
    \389\ Sec. 54A(d)(2).
    \390\ Sec. 54A(e)(4).
---------------------------------------------------------------------------
    Qualified tax credit bonds also are subject to the 
arbitrage requirements of section 148 that apply to traditional 
tax-exempt bonds.\391\ Principles under section 148 and the 
regulations thereunder apply for purposes of determining the 
yield restriction and arbitrage rebate requirements applicable 
to qualified tax credit bonds. 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 tax credit 
bonds are issued.
---------------------------------------------------------------------------
    \391\ Sec. 54A(d)(4).
---------------------------------------------------------------------------
    Issuers of qualified tax credit bonds are required to 
report issuance to the IRS in a manner similar to the 
information returns required for tax-exempt bonds.\392\ In 
addition, issuers of qualified tax credit bonds are required to 
certify that applicable State and local law requirements 
governing conflicts of interest are satisfied with respect to 
an issue, and if the Secretary prescribes additional conflicts 
of interest rules governing the appropriate Members of 
Congress, Federal, State, and local officials, and their 
spouses, the issuer must certify compliance with such 
additional rules with respect to an issue.\393\
---------------------------------------------------------------------------
    \392\ Sec. 54A(d)(3).
    \393\ Sec. 54A(d)(6).
---------------------------------------------------------------------------
            New CREBs
    A New CREB is any bond issued as part of an issue if: (1) 
100 percent of the available project proceeds of such issue are 
to be used for capital expenditures incurred by governmental 
bodies, public power providers, or cooperative electric 
companies for one or more qualified renewable energy 
facilities; (2) the bond is issued by a qualified issuer; and 
(3) the issuer designates such bond as a New CREB.\394\ 
Qualified renewable energy facilities are facilities that: (1) 
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) are owned by a public power provider, governmental body, or 
cooperative electric company.\395\
---------------------------------------------------------------------------
    \394\ Sec. 54C(a).
    \395\ Sec. 54C(d)(1).
---------------------------------------------------------------------------
    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; \396\ and (5) clean renewable energy bond lenders.\397\ 
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 \398\ (as in effect on the date of the 
enactment of this paragraph (March 18, 2010)).\399\ A 
``governmental body'' means any State or Indian tribal 
government, or any political subdivision thereof.\400\ The term 
``cooperative electric company'' means a mutual or cooperative 
electric company (described in section 501(c)(12) or section 
1381(a)(2)(C)).\401\ 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).\402\
---------------------------------------------------------------------------
    \396\ Pub. L. No. 74-605.
    \397\ Sec. 54C(d)(6).
    \398\ 16 U.S.C. 791a et seq.
    \399\ Sec. 54C(d)(2).
    \400\ Sec. 54C(d)(3).
    \401\ Sec. 54C(d)(4). A mutual or cooperative electric company can 
be tax exempt under section 501(c)(12) only if 85 percent or more of 
its income consists of amounts collected from members for the sole 
purpose of meeting losses and expenses (the ``85-percent income 
test''). Certain types of income, e.g., income from qualified pole 
rentals, are not taken into account for purposes of the 85-percent 
income test. Sec. 501(c)(12)(C).
    \402\ Sec. 54C(d)(5).
---------------------------------------------------------------------------
    There is a national limitation for New CREBs of $2.4 
billion.\403\ No more than one third of the national limit may 
be allocated to projects of public power providers, 
governmental bodies, or cooperative electric companies.\404\ 
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.\405\
---------------------------------------------------------------------------
    \403\ Section 54C(c)(4) increases the original $800 million 
allocation by $1.6 billion for a total of $2.4 billion.
    \404\ Secs. 54C(c)(2) and (c)(4).
    \405\ Sec. 54C(c)(3).
---------------------------------------------------------------------------
    As with other qualified tax credit bonds, a taxpayer 
holding New CREBs on a credit allowance date is entitled to a 
tax credit. 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.\406\
---------------------------------------------------------------------------
    \406\ Sec. 54C(b).
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            QECs
    A QEC is any bond issued as part of an issue if: (1) 100 
percent of the available project proceeds of such issue are to 
be used for one or more qualified conservation purposes; (2) 
the bond is issued by a State or local government; and (3) the 
issuer designates such bond as a QEC.\407\
---------------------------------------------------------------------------
    \407\ Sec. 54D(a).
---------------------------------------------------------------------------
    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 (including the use of loans, grants, or other 
        repayment mechanisms to implement such programs); \408\ 
        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); \409\
---------------------------------------------------------------------------
    \408\ For example, States may issue QECs to finance retrofits of 
existing private buildings through loans and/or grants to individual 
homeowners or businesses, or through other repayment mechanisms. Other 
repayment mechanisms can include periodic fees assessed on a government 
bill or utility bill that approximates the energy savings of energy 
efficiency or conservation retrofits. Retrofits can include heating, 
cooling, lighting, water-saving, storm water-reducing, or other 
efficiency measures.
    \409\ Sec. 54D(f)(1)(A).
---------------------------------------------------------------------------
          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; or (e) technologies 
        to reduce energy use in buildings; \410\
---------------------------------------------------------------------------
    \410\ Sec. 54D(f)(1)(B).
---------------------------------------------------------------------------
          3. Mass commuting facilities and related facilities 
        that reduce the consumption of energy, including 
        expenditures to reduce pollution from vehicles used for 
        mass commuting; \411\
---------------------------------------------------------------------------
    \411\ Sec. 54D(f)(1)(C).
---------------------------------------------------------------------------
          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; or (e) technologies for the 
        capture and sequestration of carbon dioxide emitted 
        from combusting fossil fuels in order to produce 
        electricity; \412\ and
          5. Public education campaigns to promote energy 
        efficiency (other than movies, concerts, and other 
        events held primarily for entertainment purposes).\413\
---------------------------------------------------------------------------
    \412\ Sec. 54D(f)(1)(D).
    \413\ Sec. 54D(f)(1)(E).
---------------------------------------------------------------------------
    There is a national limitation on QECs of $3.2 
billion.\414\ Allocations of QECs are made to the States with 
sub-allocations to large local governments.\415\ 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 
QEC 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).
---------------------------------------------------------------------------
    \414\ Sec. 54D(d).
    \415\ Sec. 54D(e).
---------------------------------------------------------------------------
    Each State or large local government receiving an 
allocation of QECs 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 QECs 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).\416\
---------------------------------------------------------------------------
    \416\ Sec. 54D(e)(3). In the case of any bond used for the purpose 
of providing grants, loans or other repayment mechanisms for capital 
expenditures to implement green community programs, such bond shall not 
be treated as a private activity bond for purposes of determining 
whether this requirement is met. Sec. 54D(e)(4).
---------------------------------------------------------------------------
    As with other qualified tax credit bonds, the taxpayer 
holding QECs on a credit allowance date is entitled to a tax 
credit. However, 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.\417\
---------------------------------------------------------------------------
    \417\ Sec. 54D(b).
---------------------------------------------------------------------------
            QZABs
    A QZAB is any bond issued as part of an issue if: (1) 100 
percent of the available project proceeds of such issue are to 
be used for a qualified purpose with respect to a qualified 
zone academy established by an eligible local education agency; 
(2) the bond is issued by a State or local government within 
the jurisdiction of which such academy is located; (3) the 
issuer designates such bond as a QZAB and certifies that (a) 
the private business contribution requirement will be met and 
(b) it has the written approval of the eligible local education 
agency for such bond issuance.\418\
---------------------------------------------------------------------------
    \418\ Sec. 54E(a).
---------------------------------------------------------------------------
    A ``qualified purpose'' is: (1) rehabilitating or repairing 
the public school facility in which the qualified zone academy 
is established; (2) providing equipment for use at such 
academy; (3) developing course materials for education to be 
provided at such academy; and (4) training teachers and other 
school personnel in such academy.\419\
---------------------------------------------------------------------------
    \419\ Sec. 54E(d)(3).
---------------------------------------------------------------------------
    A public school (or academic program within a public 
school) is a ``qualified zone academy'' if: (1) the public 
school or program provides education and training below the 
college level; (2) the public school or program is designed in 
cooperation with business to enhance the academic curriculum, 
increase graduation and employment rates, and better prepare 
students for the rigors of college and the workforce; (3) 
students in such public school or program will be subject to 
the same academic standards and assessments as other students 
educated by the eligible local education agency; (4) the 
comprehensive education plan of such public school or program 
is approved by the eligible local education agency; and (5) 
either (a) the public 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.\420\
---------------------------------------------------------------------------
    \420\ Sec. 54E(d)(1); Pub. L. No. 79-396.
---------------------------------------------------------------------------
    In general, the private business contribution requirement 
is met where 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 present value (as of the date of the issue) 
equal to at least 10 percent of the bond proceeds.\421\
---------------------------------------------------------------------------
    \421\ Sec. 54E(b).
---------------------------------------------------------------------------
    There is a national QZAB limitation for each calendar year. 
For 2009 and 2010, the limitation is $1.4 billion.\422\ The 
limitation is allocated by the Secretary among the States on 
the basis of their respective populations of individuals below 
the poverty line; each State education agency then make an 
allocation of its shares of the national limitation to 
qualified zone academies in the State.\423\ Unused limitation 
may be carried only to the first two years following the unused 
limitation year.\424\ For this purpose, a limitation amount 
shall be treated as used on a first-in first-out basis.
---------------------------------------------------------------------------
    \422\ Sec. 54E(c)(1).
    \423\ Sec. 54E(c)(2).
    \424\ Sec. 54E(c)(4).
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            QSCBs
                In general
    QSCBs must meet three requirements: (1) 100 percent of the 
available project proceeds of the bond issue must be used for 
the construction, rehabilitation, or repair of a public school 
facility or for the acquisition of land on which such a bond-
financed facility is to be constructed; (2) the bond must be 
issued by a State or local government within the jurisdiction 
of which such school is located; and (3) the issuer must 
designate such bonds as a QSCB.\425\
---------------------------------------------------------------------------
    \425\ Sec. 54F(a).
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                National limitation
    There is a national limitation on qualified school 
construction bonds of $11 billion for calendar years 2009 and 
2010, respectively.\426\
---------------------------------------------------------------------------
    \426\ Sec. 54F(c).
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                Allocation to the States
    The national limitation is tentatively allocated among the 
States in proportion to respective amounts each such State is 
eligible to receive under section 1124 of the Elementary and 
Secondary Education Act of 1965 \427\ for the most recent 
fiscal year ending before such calendar year. Forty percent of 
the limitation is then allocated among the largest school 
districts, and the amount each State is allocated under the 
tentative allocation formula is then reduced by the amount 
received by any local large educational agency within the 
State.\428\ The limitation amount allocated to a State is 
allocated by the State to issuers within such State.
---------------------------------------------------------------------------
    \427\ Pub. L. No. 89-10.
    \428\ Sec. 54F(d).
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    For allocation purposes, a ``State'' includes the District 
of Columbia and any possession of the United States. The 
provision provides a special rule for allocation for 
possessions of the United States other than Puerto Rico under 
the national limitation for States.\429\ Under this special 
rule, an allocation to a possession other than Puerto Rico is 
made on the basis of the respective populations of individuals 
below the poverty line (as defined by the Office of Management 
and Budget) rather than respective populations of children aged 
five through seventeen. This special allocation reduces the 
State allocation share of the national limitation otherwise 
available for allocation among the States. Under another 
special rule, the Secretary of the Interior may allocate $200 
million of school construction bonds for 2009 and 2010, 
respectively, to Indian schools.\430\ This special allocation 
for Indian schools is to be used for purposes of the 
construction, rehabilitation, and repair of schools funded by 
the Bureau of Indian Affairs. For purposes of such allocations 
Indian tribal governments are qualified issuers. The special 
allocation for Indian schools does not reduce the State 
allocation share of the national limitation otherwise available 
for allocation among the States.
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    \429\ Sec. 54F(d)(3).
    \430\ Sec. 54F(d)(4).
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    If an amount allocated under this allocation to the States 
is unused for a calendar year it may be carried forward by the 
State to the next calendar year.\431\
---------------------------------------------------------------------------
    \431\ Sec. 54F(e).
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                Allocation to large school districts
    Forty percent of the national limitation is allocated among 
large local educational agencies in proportion to the 
respective amounts each agency received under section 1124 of 
the Elementary and Secondary Education Act of 1965 for the most 
recent fiscal year ending before such calendar year.\432\ With 
respect to a calendar year, the term large local educational 
agency means any local educational agency if such agency is: 
(1) among the 100 local educational agencies with the largest 
numbers of children aged five through 17 from families living 
below the poverty level, or (2) one of not more than 25 local 
educational agencies (other than in (1), immediately above) 
that the Secretary of Education determines are in particular 
need of assistance, based on a low level of resources for 
school construction, a high level of enrollment growth, or 
other such factors as the Secretary of Education deems 
appropriate. If any amount allocated to large local educational 
agency is unused for a calendar year the agency may reallocate 
such amount to the State in which the agency is located.
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    \432\ Sec. 54F(d)(2).
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                        Explanation of Provision

    For bonds originally issued after the date of enactment, 
the provision allows an issuer of New CREBS, QECs, QZABs, or 
QSCBs to make an irrevocable election on or before the issue 
date of such bonds to receive a payment under section 6431 in 
lieu of providing a tax credit to the holder of the bonds.\433\ 
The payment to the issuer on each payment date is equal to the 
lesser of (1) the amount of interest payable under such bond on 
such date, or (2) the amount of interest which would have been 
payable under such bond on such date if such interest were 
determined by the Secretary at the applicable credit rate under 
section 54A(b)(3) with respect to such bond. In the case of a 
New CREB or QEC, the amount determined pursuant to (2), 
immediately above, is 70 percent of such amount, without regard 
to sections 54C(b) and 54D(b). Bonds for which the election is 
made count against the national limitation in the same way that 
they would if no election were made.
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    \433\ It is anticipated that the election procedure will be similar 
to the procedure for making the election required under Sec. 54AA(g) 
for a direct-pay build America bond. See Notice 2009-26, 2009-16 I.R.B. 
833.
---------------------------------------------------------------------------
    The provision also adds a technical correction relating to 
QSCBs. The technical correction provides first that the 
limitation amount allocated to a State is to be allocated to 
issuers within such State by the State education agency (or 
such other agency as is authorized under State law to make such 
allocation). In addition, the technical correction provides 
that the rule in section 54F(e), permitting the carryover of 
unused QSCB limitation by a State or Indian tribal government, 
shall also apply to the 40 percent of QSCB limitation that is 
allocated among the largest school districts.

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment (March 18, 2010). The technical correction is 
effective as if it were included in section 1521 of ARRA.

     TITLE IV--EXTENSION OF CURRENT SURFACE TRANSPORTATON PROGRAMS


A. Revenue Provisions Relating to the Highway Trust Fund (secs. 441-445 
            of the Act and secs. 9503 and 9504 of the Code)


                              Present Law


Extension of expenditure authority

    The Highway Trust Fund was established in 1956. It is 
divided into two accounts, a Highway Account and a Mass Transit 
Account, each of which is the funding source for specific 
transportation programs. The Highway Trust Fund is funded by 
taxes on motor fuels (gasoline, kerosene, diesel fuel, and 
certain alternative fuels), a tax on heavy vehicle tires, a 
retail sales tax on certain trucks, trailers and tractors, and 
an annual use tax for heavy highway vehicles. The current 
expenditure authority for the Highway Trust Fund generally 
expires on March 1, 2010.\434\
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    \434\ The Department of Defense Appropriations Act of 2010, Pub. L. 
No. 111-118, Division B, sec. 1008 (2009).
---------------------------------------------------------------------------
    The Sport Fish Restoration and Boating Trust Fund is the 
funding source for certain coastal wetlands preservation, 
recreational boating safety, sport fish restoration and other 
programs. The current expenditure authority for the Sport Fish 
Restoration and Boating Trust Fund generally expires on March 
1, 2010.

Crediting of interest

    With respect to trust funds established by the Code, the 
Code requires that the Secretary invest the balances not needed 
to meet current withdrawals in interest-bearing obligations of 
the United States. The interest is credited to the respective 
Trust Fund.\435\ However, as of September 30, 1998, the ability 
of the Highway Trust Fund to earn interest on its unexpended 
balances was terminated.\436\
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    \435\ Sec. 9602(b).
    \436\ Sec. 9503(f)(2).
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Transfers from the Highway Trust Fund to the General Fund for certain 
        payments and credits

    Under present law, revenues from the highway excise taxes 
generally are dedicated to the Highway Trust Fund. However, 
under section 9503(c)(2) of the Code, certain transfers are 
made from the Highway Trust Fund into the General Fund, 
relating to amounts paid in respect of gasoline used on farms, 
amounts paid in respect of gasoline used for certain nonhighway 
purposes or by local transit systems, amounts relating to fuels 
not used for taxable purposes, and income tax credits for 
certain uses of fuels.

                        Explanation of Provision


Extension of expenditure authority

    The provision extends expenditure authority for the Highway 
Trust Fund through December 31, 2010. It also extends the 
expenditure authority for the Sport Fish Restoration and 
Boating Trust Fund through December 31, 2010.

Crediting of interest

            Restoration of forgone interest
    The provision transfers $19.5 billion to the Highway Trust 
Fund, of that amount $14.7 billion is appropriated to the 
Highway Account of the Highway Trust Fund and $4.8 billion is 
appropriated to the Mass Transit Account. The amounts 
appropriated pursuant to this provision remain available 
without fiscal year limitation.
            Repeal of provision prohibiting the crediting of interest
    The provision repeals the requirement that obligations held 
by the Highway Trust Fund not be interest-bearing. The 
provision permits amounts in the Trust Fund to be invested in 
interest-bearing obligations of the United States and have the 
interest be credited to, and form a part of, the Highway Trust 
Fund. Thus, the Highway Trust Fund will accrue interest under 
the provision.

Termination of transfers from the Highway Trust Fund for certain 
        repayments and credits

    The provision repeals section 9503(c)(2), eliminating the 
requirement that the Highway Trust Fund reimburse the General 
Fund for credits and payments related to nontaxable uses.

                             Effective Date

    The provisions are generally effective on the date of 
enactment (March 18, 2010). The expenditure authority 
provisions are effective September 30, 2009. The provision 
terminating transfers from the Highway Trust Fund is effective 
for transfers relating to amounts paid and credits allowed 
after the date of enactment (March 18, 2010).

                       TITLE V--OFFSET PROVISIONS


                   A. Foreign Account Tax Compliance


1. Reporting on certain foreign accounts (sec. 501 of the Act and new 
        secs. 1471-1474 and sec. 6611 of the Code)

                              Present Law


Withholding on payments to foreign persons

    Payments of U.S.-source fixed or determinable annual or 
periodical (``FDAP'') income, including interest, dividends, 
and similar types of investment income, that are made to 
foreign persons are subject to U.S. withholding tax at a 30-
percent rate, unless the withholding agent can establish that 
the beneficial owner of the amount is eligible for an exemption 
from withholding or a reduced rate of withholding under an 
income tax treaty.\437\ The term ``FDAP income'' includes all 
items of gross income,\438\ except gains on sales of property 
(including market discount on bonds and option premiums).\439\
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    \437\ Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b). For 
purposes of the withholding tax rules applicable to payments to 
nonresident alien individuals and foreign corporations, a withholding 
agent is defined broadly to include any U.S. or foreign person that has 
the control, receipt, custody, disposal, or payment of an item of 
income of a foreign person subject to withholding. Treas. Reg. sec. 
1.1441-7(a).
    \438\ Although technically insurance premiums paid to a foreign 
insurer or reinsurer are FDAP income, they are exempt from withholding 
under Treas. Reg. sec. 1.1441-2(a)(7) if the insurance contract is 
subject to the excise tax under section 4371.
    \439\ Treas. Reg. sec. 1.1441-2(b)(1)(i), -2(b)(2). However, gain 
on a sale or exchange of section 306 stock of a domestic corporation is 
FDAP income to the extent section 306(a) treats the gain as ordinary 
income. Treas. Reg. sec. 1.306-3(h).
---------------------------------------------------------------------------
    Interest is derived from U.S. sources if it is paid by the 
United States or any agency or instrumentality thereof, a State 
or any political subdivision thereof, or the District of 
Columbia. Interest is also from U.S. sources if it is paid by a 
resident or a domestic corporation on a bond, note, or other 
interest-bearing obligation.\440\ Dividend income is sourced by 
reference to the payor's place of incorporation.\441\ Thus, 
dividends paid by a domestic corporation are generally treated 
as entirely U.S.-source income. Similarly, dividends paid by a 
foreign corporation are generally treated as entirely foreign-
source income. Rental income is sourced by reference to the 
location or place of use of the leased property.\442\ The 
nationality or the country of residence of the lessor or lessee 
does not affect the source of rental income. Rental income from 
property located or used in the United States (or from any 
interest in such property) is U.S.-source income, regardless of 
whether the property is real or personal, intangible or 
tangible. Royalties are sourced in the place of use (or the 
privilege of use) of the property for which the royalties are 
paid.\443\ This source rule applies to royalties for the use of 
either tangible or intangible property, including patents, 
copyrights, secret processes, formulas, goodwill, trademarks, 
trade names, and franchises.
---------------------------------------------------------------------------
    \440\ Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1). Interest paid 
by the U.S. branch of a foreign corporation is also treated as U.S.-
source interest under section 884(f)(1).
    \441\ Secs. 861(a)(2), 862(a)(2).
    \442\ Sec. 861(a)(4).
    \443\ Ibid.
---------------------------------------------------------------------------
    The principal statutory exemptions from the 30-percent 
withholding tax apply to interest on bank deposits, portfolio 
interest, and gains derived from the sale of property. Since 
1984, the United States has not imposed withholding tax on 
portfolio interest received by a nonresident individual or 
foreign corporation from sources within the United States.\444\ 
Portfolio interest includes, generally, any interest (including 
original issue discount) other than interest received by a 10-
percent shareholder,\445\ certain contingent interest,\446\ 
interest received by a controlled foreign corporation from a 
related person,\447\ and interest received by a bank on an 
extension of credit made pursuant to a loan agreement entered 
into in the ordinary course of its trade or business.\448\
---------------------------------------------------------------------------
    \444\ Secs. 871(h), 881(c). Congress believed that the imposition 
of a withholding tax on portfolio interest paid on debt obligations 
issued by U.S. persons might impair the ability of domestic 
corporations to raise capital in the Eurobond market (i.e., the global 
market for U.S. dollar-denominated debt obligations). Congress also 
anticipated that repeal of the withholding tax on portfolio interest 
would allow the Treasury Department direct access to the Eurobond 
market. See Joint Committee on Taxation, General Explanation of the 
Revenue Provisions of the Deficit Reduction Act of 1984 (JCS-41-84), 
December 31, 1984, pp. 391-92.
    \445\ Sec. 871(h)(3). A 10-percent shareholder includes any person 
who owns 10 percent or more of the total combined voting power of all 
classes of stock of the corporation (in the case of a corporate 
obligor), or 10 percent or more of the capital or profits interest of 
the partnership (in the case of a partnership obligor). The attribution 
rules of section 318 apply for this purpose, with certain 
modifications.
    \446\ Sec. 871(h)(4). Contingent interest generally includes any 
interest if the amount of such interest is determined by reference to 
any receipts, sales, or other cash flow of the debtor or a related 
person; any income or profits of the debtor or a related person; any 
change in value of any property of the debtor or a related person; any 
dividend, partnership distributions, or similar payments made by the 
debtor or a related person; and any other type of contingent interest 
identified by Treasury regulation. Certain exceptions also apply.
    \447\ Sec. 881(c)(3)(C). A related person includes, among other 
things, an individual owning more than 50 percent of the stock of the 
corporation by value, a corporation that is a member of the same 
controlled group (defined using a 50-percent common ownership test), a 
partnership if the same persons own more than 50 percent in value of 
the stock of the corporation and more than 50 percent of the capital 
interests in the partnership, any U.S. shareholder (as defined in 
section 951(b) and generally including any U.S. person who owns 10 
percent or more of the voting stock of the corporation), and certain 
persons related to such a U.S. shareholder.
    \448\ Sec. 881(c)(3)(A).
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    In the case of interest paid on a debt obligation that is 
in registered form,\449\ the portfolio interest exemption is 
available only to the extent that the U.S. person otherwise 
required to withhold tax (the ``withholding agent'') has 
received a statement made by the beneficial owner of the 
obligation (or a securities clearing organization, bank, or 
other financial institution that holds customers' securities in 
the ordinary course of its trade or business) that the 
beneficial owner is not a U.S. person.\450\
---------------------------------------------------------------------------
    \449\ An obligation is treated as in registered form if: (1) it is 
registered as to both principal and interest with the issuer (or its 
agent) and transfer of the obligation may be effected only by surrender 
of the old instrument and either the reissuance by the issuer of the 
old instrument to the new holder or the issuance by the issuer of a new 
instrument to the new holder; (2) the right to principal and stated 
interest on the obligation may be transferred only through a book entry 
system maintained by the issuer or its agent; or (3) the obligation is 
registered as to both principal and interest with the issuer or its 
agent and may be transferred through both of the foregoing methods. 
Treas. Reg. sec. 5f.103-1(c).
    \450\ Sec. 871(h)(2)(B), (5); Treas. Reg. sec. 1.871-14(e). This 
certification of non-U.S. ownership most commonly is made on an IRS 
Form W-8. This certification is not valid if the Secretary determines 
that statements from the person making the certification do not meet 
certain requirements.
---------------------------------------------------------------------------
    Interest on deposits with foreign branches of domestic 
banks and domestic savings and loan associations is not treated 
as U.S.-source income and is thus exempt from U.S. withholding 
tax (regardless of whether the recipient is a U.S. or foreign 
person).\451\ In addition, interest on bank deposits, deposits 
with domestic savings and loan associations, and certain 
amounts held by insurance companies are not subject to the U.S. 
withholding tax when paid to a foreign person, unless the 
interest is effectively connected with a U.S. trade or business 
of the recipient.\452\ Similarly, interest and original issue 
discount on certain short-term obligations is also exempt from 
U.S. withholding tax when paid to a foreign person.\453\ 
Additionally, there is no information reporting with respect to 
payments of such amounts.\454\
---------------------------------------------------------------------------
    \451\ Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
    \452\ Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-
1(b)(4)(ii). If the bank deposit interest is effectively connected with 
a U.S. trade or business, it is subject to regular U.S. income tax 
rather than withholding tax.
    \453\ Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441-
1(b)(4)(iv).
    \454\ Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A), (B). However, 
Treasury regulations require a bank to report interest if the recipient 
is a resident of Canada and the deposit is maintained at an office in 
the United States. Treas. Reg. secs. 1.6049-4(b)(5), 1.6049-8. This 
reporting is required to comply with the obligations of the United 
States under the U.S.-Canada income tax treaty. T.D. 8664, 1996-1 C.B. 
292. In 2001, the IRS and the Treasury Department issued proposed 
regulations that would require annual reporting to the IRS of U.S. bank 
deposit interest paid to any foreign individual. 66 Fed. Reg. 3925 
(Jan. 17, 2001). The 2001 proposed regulations were withdrawn in 2002 
and replaced with proposed regulations that would require reporting 
with respect to payments made only to residents of certain specified 
countries (Australia, Denmark, Finland, France, Germany, Greece, 
Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, 
Sweden, and the United Kingdom). 67 Fed. Reg. 50,386 (Aug. 2, 2002). 
The proposed regulations have not been finalized.
---------------------------------------------------------------------------
    Gains derived from the sale of property by a nonresident 
alien individual or foreign corporation generally are exempt 
from U.S. tax, unless they are or are treated as effectively 
connected with the conduct of a U.S. trade or business. Gains 
derived by a nonresident alien individual generally are subject 
to U.S. taxation only if the individual is present in the 
United States for 183 days or more during the taxable 
year.\455\ Foreign corporations are subject to tax with respect 
to certain gains on disposal of timber, coal, or domestic iron 
ore and certain gains from contingent payments made in 
connection with sales or exchanges of patents, copyrights, 
goodwill, trademarks, and similar intangible property.\456\ 
Gain from the disposition of certain U.S. real property 
interests (which include interests in U.S. real property 
holding corporations) are treated as effectively connected with 
a U.S. trade or business.\457\ Special rules apply in the case 
of interests in real estate investment trusts or interests in 
regulated investment companies that are or which would be, if 
not for certain exceptions, U.S. real property holding 
corporations.\458\ Most gains realized by foreign investors on 
the sale of portfolio investment securities thus are exempt 
from U.S. taxation.
---------------------------------------------------------------------------
    \455\ Sec. 871(a)(2). In most cases, however, an individual 
satisfying this presence test will be treated as a U.S. resident under 
section 7701(b)(3), and thus will be subject to full residence-based 
U.S. income taxation.
    \456\ Secs. 881(a), 631(b), (c).
    \457\ Sec. 897. Section 1445 imposes withholding requirements with 
respect to such dispositions.
    \458\ See sec. 897(h).
---------------------------------------------------------------------------
    The 30-percent withholding tax may be reduced or eliminated 
by a tax treaty between the United States and the country in 
which the recipient of income otherwise subject to withholding 
is resident. Most U.S. income tax treaties provide a zero rate 
of withholding tax on interest payments (other than certain 
interest the amount of which is determined by reference to 
certain income items or other amounts of the debtor or a 
related person). Most U.S. income tax treaties also reduce the 
rate of withholding on dividends to 15 percent (in the case of 
portfolio dividends) and to five percent (in the case of 
``direct investment'' dividends paid to a 10 percent-or-greater 
shareholder).\459\ For royalties, the U.S. withholding rate is 
typically reduced to five percent or to zero. In each case, the 
reduced withholding rate is available only to a beneficial 
owner who is treated as a resident of the treaty country within 
the meaning of the treaty and satisfies all other treaty 
requirements including any applicable limitation on benefits 
provisions of the treaty.
---------------------------------------------------------------------------
    \459\ A number of recent U.S. income tax treaties eliminate 
withholding tax on dividends paid to a majority (typically 80-percent 
or greater) shareholder, including the present treaties with Australia, 
Belgium, Denmark, Finland, Germany, Japan, Mexico, the Netherlands, 
Sweden, and the United Kingdom.
---------------------------------------------------------------------------

Refund or credits of taxes withheld from foreign persons

    A withholding agent that makes payments of U.S.-source 
amounts to a foreign person is required to report those 
payments, including any amounts of U.S. tax withheld, to the 
IRS on IRS Forms 1042 and 1042-S by March 15 of the calendar 
year following the year in which the payment is made.\460\ To 
the extent that the withholding agent deducts and withholds an 
amount, the withheld tax is credited to the recipient of the 
income.\461\ If the agent withholds more than is required, and 
results in an overpayment of tax, the excess may be refunded to 
the recipient of the income upon filing of a timely claim for 
refund.
---------------------------------------------------------------------------
    \460\ Treas. Reg. sec. 1.1461-1(b), (c). IRS Form 1042, ``Annual 
Withholding Tax Return for U.S. Source Income of Foreign Persons,'' is 
the IRS form on which a withholding agent reports a summary of the 
total U.S.-source income paid and withholding tax withheld on foreign 
persons for the year. IRS Form 1042-S, ``Foreign Person's U.S. Source 
Income Subject to Withholding,'' is the IRS form on which a withholding 
agent reports, to the foreign person and the IRS, a foreign person's 
U.S.-source income that is subject to reporting.
    \461\ Sec. 1462.
---------------------------------------------------------------------------
            Payment of tax
    The date an amount is paid is relevant for determining the 
limitations period in which to claim a refund, the amount of 
refund available,\462\ and the period for which interest may 
accrue on any overpayment.\463\ An amount that is withheld, 
paid or credited as an estimate or deposit of tax generally 
does not count as the payment of tax until applied to a 
specific tax liability. To the extent that amounts previously 
withheld, paid or credited as an estimate or deposit of tax are 
applied to the tax liability for a year, they are deemed to 
have been paid as of the last day prescribed for payment of the 
tax, for both the recipient of the income \464\ and the 
withholding agent.\465\ Amounts that are refunded, credited to 
other periods, or offset against other liabilities are not 
considered as paid for this purpose.\466\ Any amount that was 
previously paid but has been credited to a later year is 
considered credited on the last day prescribed for the payment 
of tax.\467\
---------------------------------------------------------------------------
    \462\ See secs. 6511(a) (prescribing the period within which a 
claim must be filed) and 6511(b)(2) (limiting the amount that can be 
recovered if a claim is not filed within three years of filing a 
return). If a return is not filed, a claim for refund of any tax paid 
must be filed within two years of payment.
    \463\ Ses. 6611(b)(2), (d).
    \464\ Sec. 6513(b)(3).
    \465\ Sec. 6513(c)(2).
    \466\ Sec. 6513(d).
    \467\ Sec. 6513(d).
---------------------------------------------------------------------------
            Interest on overpayments
    The IRS is generally required to pay interest to a taxpayer 
whenever there is an overpayment of tax.\468\ An overpayment of 
tax exists whenever more than the correct amount of tax is paid 
as of the last date prescribed for the payment of the tax. The 
last date prescribed for the payment of the income tax is the 
original due date of the return.\469\ However, no interest is 
required to be paid by the IRS if it refunds or credits the 
amount due within 45 days of the filing of the return.\470\ 
Notwithstanding these general rules, if a required return on 
which the payment should have been reported is either not 
filed, or is filed late, no interest on the overpayment accrues 
for any period prior to the filing of the return.\471\
---------------------------------------------------------------------------
    \468\ Sec. 6611.
    \469\ Sec. 6601(b).
    \470\ Sec. 6611(e).
    \471\ Sec. 6611(b)(3).
---------------------------------------------------------------------------
    Different interest rates are provided for the payment of 
interest depending upon the type of taxpayer, whether the 
interest relates to an underpayment or overpayment, and the 
size of the underpayment or overpayment. Interest on both 
underpayments and overpayments is compounded daily.\472\ A 
special net interest rate of zero applies in situations where 
interest is both payable and allowable on offsetting amounts of 
overpayment and underpayment.\473\ For individuals, interest on 
both underpayments and overpayments accrues at a rate equal to 
the short term applicable Federal rate (``AFR'') plus three 
percentage points.\474\ Interest on corporate overpayments 
generally accrues at a rate equal to the short term AFR plus 
two percentage points, unless the overpayment exceeds $10,000 
in which case interest accrues at a rate equal to the short 
term AFR plus one-half percentage point.
---------------------------------------------------------------------------
    \472\ Sec. 6622.
    \473\ Sec. 6621(d).
    \474\ Sec. 6621.
---------------------------------------------------------------------------
            Period of overpayment
    If the overpayment is to be refunded to the taxpayer, 
interest accrues on the overpayment from the later of the due 
date of the return or the date the payment is made until a date 
that is not more than 30 days before the date of the refund 
check.\475\ If the overpayment is to be credited or offset 
against some other liability, interest will accrue until the 
date it is so credited or offset.
---------------------------------------------------------------------------
    \475\ Sec. 6611(b)(2).
---------------------------------------------------------------------------
    A payment is not considered made by the taxpayer earlier 
than the time the taxpayer files a return showing the 
liability. However, in MNOPF Trustees, Ltd. v. United 
States,\476\ the Federal Circuit held that overpayment interest 
accrued on the taxes unnecessarily withheld from the date that 
the withholdings were paid to the Service, because MNOPF was a 
tax-exempt organization, and, therefore, was not required to 
file tax returns. As a result, the court rejected arguments by 
the government that interest commenced no earlier than the 
filing of the refund claims. The court reasoned that sections 
6611(d) and 6513(b)(3) did not apply because those sections 
only relate to taxable income and the taxpayer was exempt from 
Federal taxation. Instead, the court held that the 
organization's overpayment was deemed paid, pursuant to section 
6611(b)(2), on the date the withholding agent filed the returns 
reporting the withheld taxes.
---------------------------------------------------------------------------
    \476\ 123 F.3d 1460, 1465 (Fed. Cir. 1997).
---------------------------------------------------------------------------
    No interest accrues on an overpayment if the IRS makes the 
refund within 45 days of the later of the filing or the due 
date of the return showing the refund. If the IRS fails to make 
the refund within such 45-day period, interest is required to 
be paid for the entire period of the overpayment. For example, 
an individual taxpayer files his return on April 15, properly 
showing a refund due of $10,000. If the IRS pays the refund 
within 45 days, no interest on the overpayment will be 
required. However, if the IRS does not pay the refund until the 
46th day, interest will be required from April 15.

Certification of foreign status and reporting by U.S. withholding 
        agents

    The U.S. withholding tax rules are administered through a 
system of self-certification. Thus, a nonresident investor 
seeking to obtain withholding tax relief for U.S.-source 
investment income typically must provide a certification, on 
IRS Form W-8 to the withholding agent to establish foreign 
status and eligibility for an exemption or reduced rate. 
Provision of the IRS Form W-8 also establishes an exemption 
from the rules that apply to many U.S. persons governing 
information reporting on IRS Form 1099 and backup withholding 
(discussed below).\477\
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    \477\ See Treas. Reg. sec. 1.1441-1(b)(5).
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    There are four relevant types of IRS Forms W-8.\478\ Three 
of these forms are designed to be provided to the withholding 
agent by the beneficial owner of a payment of U.S.-source 
income: \479\ (1) the IRS Form W-8BEN, which is provided by a 
beneficial owner of U.S.-source non-effectively-connected 
income; (2) the IRS Form W-8ECI, which is provided by a 
beneficial owner of U.S.-source effectively-connected income; 
\480\ and (3) the IRS Form W-8EXP, which is provided by a 
beneficial owner of U.S.-source income that is an exempt 
organization or foreign government.\481\ Each of these forms 
requires that the beneficial owner provide its name and address 
and certify that the beneficial owner is not a U.S. person. The 
IRS Form W-8BEN also includes a certification of eligibility 
for treaty benefits (for completion where applicable). All 
certifications on IRS Forms W-8 are made under penalties of 
perjury.
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    \478\ A fifth type of IRS Form W-8, the W-8CE, is filed to provide 
the payor with notice of a taxpayer's expatriation.
    \479\ The United States imposes tax on the beneficial owner of 
income, not its formal recipient. For example, if a U.S. citizen owns 
securities that are held in ``street'' name at a brokerage firm, that 
U.S. citizen (and not the brokerage firm nominee) is treated as the 
beneficial owner of the securities. A corporation (and not its 
shareholders) ordinarily is treated as the beneficial owner of the 
corporation's income. Similarly, a foreign complex trust ordinarily is 
treated as the beneficial owner of income that it receives, and a U.S. 
beneficiary or grantor is not subject to tax on that income unless and 
until he receives a distribution.
    \480\ The IRS Form W-8ECI requires that the beneficial owner 
specify the items of income to which the form is intended to apply and 
certify that those amounts are effectively connected with the conduct 
of a trade or business in the United States and includible in the 
beneficial owner's gross income for the taxable year.
    \481\ The IRS Form W-8EXP requires that the beneficial owner 
certify as to its qualification as a foreign government, an 
international organization, a foreign central bank of issue or a 
foreign tax-exempt organization, in each case meeting certain 
requirements.
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    The fourth type of IRS Form W-8 is the IRS Form W-8IMY, 
which is provided by a payee that receives a payment of U.S.-
source income as an intermediary for the beneficial owner of 
that income. The intermediary's IRS Form W-8IMY must be 
accompanied by an IRS Form W-8BEN, W-8EXP, or W-8ECI, as 
applicable,\482\ furnished by the beneficial owner, unless the 
intermediary is a qualified intermediary (``QI''), a 
withholding foreign partnership, or a withholding foreign 
trust. The rules applicable to qualified intermediaries are 
discussed below. A withholding foreign partnership or trust is 
a foreign partnership or trust that has entered into an 
agreement with the IRS to collect appropriate IRS Forms W-8 
from its partners or beneficiaries and act as a U.S. 
withholding agent with respect to those persons.\483\
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    \482\ In limited cases, the intermediary may furnish documentary 
evidence, other than the IRS Form W-8, of the status of the beneficial 
owner.
    \483\ Rev. Proc. 2003-64, 2003-32 I.R.B. 306 (July 10, 2003), 
provides procedures for qualification as a withholding foreign 
partnership or withholding foreign trust in addition to providing model 
withholding agreements.
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Information reporting and backup withholding with respect to U.S. 
        persons

    Every person engaged in a trade or business must file with 
the IRS an information return on IRS Form 1099 (or, for wages 
or other compensation, on IRS Form W-2) for payments of certain 
amounts totaling at least $600 that it makes to another person 
in the course of its trade or business.\484\ Detailed rules are 
provided for the reporting of various types of investment 
income, including interest, dividends, and gross proceeds from 
brokered transactions (such as a sale of stock).\485\ In 
general, the requirement to file IRS Form 1099 applies with 
respect to amounts paid to U.S. persons and is linked to the 
backup withholding rules of section 3406. Thus, to avoid backup 
withholding, a U.S. payee (other than exempt recipients, 
including corporations and financial institutions) of interest, 
dividends, or gross proceeds generally must furnish to the 
payor an IRS Form W-9 providing that person's name and taxpayer 
identification number.\486\ That information is then used to 
complete the IRS Form 1099.
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    \484\ Sec. 6041; Treas. Reg. secs. 1.6041-1, 1.6041-2.
    \485\ See secs. 6042 (dividends), 6045 (broker reporting), 6049 
(interest), and the corresponding Treasury regulations.
    \486\ See Treas. Reg. secs. 31.3406(d)-1, 31.3406(h)-3.
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    If an IRS Form W-9 is not provided by a U.S. payee (other 
than payees exempt from reporting), the payor is required to 
impose a backup withholding tax of 28 percent of the gross 
amount of the payment.\487\ The backup withholding tax may be 
credited by the payee against regular income tax 
liability.\488\ This combination of reporting and backup 
withholding is designed to ensure that U.S. persons not exempt 
from reporting pay tax with respect to investment income, 
either by providing the IRS with the information that it needs 
to audit payment of the tax or, in the absence of such 
information, requiring collection of the tax on payment.
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    \487\ Sec. 3406(a)(1).
    \488\ Sec. 3406(h)(10).
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    As described above, amounts paid to foreign persons are 
generally exempt from information reporting on IRS Form 1099. 
Foreign persons are subject to a separate information reporting 
requirement linked to the nonresident withholding provisions of 
chapter 3 of the Code.
    In the case of U.S. source investment income, the 
information reporting, backup withholding and nonresident 
withholding rules apply broadly to any financial institution or 
other payor, including foreign financial institutions.\489\ As 
a practical matter, however, these reporting and withholding 
requirements are difficult to enforce with respect to foreign 
financial institutions, unless these institutions have some 
connection to the United States, e.g., the institution is a 
foreign subsidiary of a U.S. financial institution, or the 
foreign financial institution is doing business in the United 
States. Moreover, to the extent that these rules apply to 
foreign financial institutions, the rules may also be modified 
by QI agreements between the institutions and the IRS, as 
described below.
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    \489\ See Treas. Reg. secs. 1.1441-7(a) (definition of withholding 
agent includes foreign persons), 31.3406(a)-2 (payor for backup 
withholding purposes means the person (the payor) required to file 
information returns for payments of interest, dividends, and gross 
proceeds (and other amounts)), 1.6049-4(a)(2) (definition of payor for 
interest reporting purposes does not exclude foreign persons), 1.6042-
3(b)(2) (payor for dividend reporting purposes has the same meaning as 
for interest reporting purposes), 1.6045-1(a)(1) (brokers required to 
report include foreign persons). But see Treas. Reg. secs. 1.6049-5(b) 
(exception for interest from sources outside the U.S. paid outside the 
U.S. by a non-U.S. payor or a non-U.S. middleman), 1.6045-1(g)(1)(i) 
(exception for sales effected at an office outside the U.S. by a non-
U.S. payor or a non-U.S. middleman), 1.6042-3(b)(1)(iv) (exceptions for 
distributions from sources outside the U.S. by a non-U.S. payor or a 
non-U.S. middleman).
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The qualified intermediary program

    A QI is defined as a foreign financial institution or a 
foreign clearing organization, other than a U.S. branch or U.S. 
office of such institution or organization, or a foreign branch 
of a U.S. financial institution that has entered into a 
withholding and reporting agreement (a ``QI agreement'') with 
the IRS.\490\
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    \490\ The definition also includes: a foreign branch or office of a 
U.S. financial institution or U.S. clearing organization; a foreign 
corporation for purposes of presenting income tax treaty claims on 
behalf of its shareholders; and any other person acceptable to the IRS, 
in each case that such person has entered into a withholding agreement 
with the IRS. Treas. Reg. sec. 1.1441-1(e)(5)(ii).
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    A foreign financial institution that becomes a QI is not 
required to forward beneficial ownership information with 
respect to its customers to a U.S. financial institution or 
other withholding agent of U.S.-source investment-type income 
to establish the customer's eligibility for an exemption from, 
or reduced rate of, U.S. withholding tax.\491\ Instead, the QI 
is permitted to establish for itself the eligibility of its 
customers for an exemption or reduced rate, based on an IRS 
Form W-8 or W-9, or other specified documentary evidence, and 
information as to residence obtained under the know-your-
customer rules to which the QI is subject in its home 
jurisdiction as approved by the IRS or as specified in the QI 
agreement.\492\ The QI certifies as to eligibility on behalf of 
its customers, and provides withholding rate pool information 
to the U.S. withholding agent as to the portion of each payment 
that qualifies for an exemption or reduced rate of withholding.
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    \491\ U.S. withholding agents are allowed to rely on a QI's IRS 
Form W-8IMY without any underlying beneficial owner documentation. By 
contrast, nonqualified intermediaries are required both to provide an 
IRS Form W-8IMY to a U.S. withholding agent and to forward with that 
document IRS Forms W-8 or W-9 or other specified documentation for each 
beneficial owner.
    \492\ See Rev. Proc. 2000-12, 2000-1 C.B. 387, QI agreement secs. 
2.12, 5.03, 6.01.
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    The IRS has published a model QI agreement for foreign 
financial institutions.\493\ A prospective QI must submit an 
application to the IRS providing specified information, and any 
additional information and documentation requested by the IRS. 
The application must establish to the IRS's satisfaction that 
the applicant has adequate resources and procedures to comply 
with the terms of the QI agreement.
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    \493\ Rev. Proc. 2000-12, 2000-1 C.B. 387, supplemented by 
Announcement 2000-50, 2000-1 C.B. 998, and modified by Rev. Proc. 2003-
64, 2003-2 C.B. 306, and Rev. Proc. 2005-77, 2005-2 C.B. 1176. The QI 
agreement applies only to foreign financial institutions, foreign 
clearing organizations, and foreign branches or offices of U.S. 
financial institutions or U.S. clearing organizations. However, the 
principles of the QI agreement may be used to conclude agreements with 
other persons defined as QIs.
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    Before entering into a QI agreement that provides for the 
use of documentary evidence obtained under a country's know-
your-customer rules, the IRS must receive (1) that country's 
know-your-customer practices and procedures for opening 
accounts and (2) responses to 18 related items.\494\ If the IRS 
has already received this information, a particular prospective 
QI need not submit it again. The IRS has received such 
information and has approved know-your-customer rules in 59 
countries.
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    \494\ See Rev. Proc. 2000-12, 2000-1 C.B. 387, sec. 3.02.
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    A foreign financial institution or other eligible person 
becomes a QI by entering into an agreement with the IRS. Under 
the agreement, the financial institution acts as a QI only for 
accounts that the financial institution has designated as QI 
accounts. A QI is not required to act as a QI for all of its 
accounts; however, if a QI designates an account as one for 
which it will act as a QI, it must act as a QI for all payments 
made to that account.
    The model QI agreement describes in detail the QI's 
withholding and reporting obligations. Certain key aspects of 
the model agreement are described below.\495\
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    \495\ Additional detail can be found in Joint Committee on 
Taxation, Selected Issues Relating to Tax Compliance with Respect to 
Offshore Accounts and Entities (JCX-65-08), July 23, 2008.
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            Withholding and reporting responsibilities
    As a technical matter, all QIs are withholding agents for 
purposes of the nonresident withholding and reporting rules, 
and payors (who are required to withhold and report) for 
purposes of the backup withholding and IRS Form 1099 
information reporting rules. However, under the QI agreement, a 
QI may choose not to assume primary responsibility for 
nonresident withholding. In that case, the QI is not required 
to withhold on payments made to non-U.S. customers, or to 
report those payments on IRS Form 1042-S. Instead, the QI must 
provide a U.S. withholding agent with an IRS Form W-8IMY that 
certifies as to the status of its (unnamed) non-U.S. account 
holders and withholding rate pool information.
    Similarly, a QI may choose not to assume primary 
responsibility for IRS Form 1099 reporting and backup 
withholding. In that case, the QI is not required to backup 
withhold on payments made to U.S. customers or to file IRS 
Forms 1099. Instead, the QI must provide a U.S. payor with an 
IRS Form W-9 for each of its U.S. non-exempt recipient account 
holders (i.e., account holders that are U.S. persons not 
generally exempt from IRS Form 1099 reporting and backup 
withholding).\496\
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    \496\ Regardless of whether a QI assumes primary Form 1099 
reporting and backup withholding responsibility, the QI is responsible 
for IRS Form 1099 reporting and backup withholding on certain 
reportable payments that are not reportable amounts. See Rev. Proc. 
2000-12, 2001-1 C.B. 387, QI agreement secs. 2.43 (defining reportable 
amount), 2.44 (defining reportable payment), 3.05, 8.04. The reporting 
responsibility differs depending on whether the QI is a U.S. payor or a 
non-U.S. payor. Examples of payments for which the QI assumes primary 
IRS Form 1099 reporting and backup withholding responsibility include 
certain broker proceeds from the sale of certain assets owned by a U.S. 
non-exempt recipient and payments of certain foreign-source income to a 
U.S. non-exempt recipient if such income is paid in the United States 
or to an account maintained in the United States.
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    A QI may elect to assume primary nonresident withholding 
and reporting responsibility, primary backup withholding and 
IRS Form 1099 reporting responsibility, or both.\497\ A QI that 
assumes such responsibility is subject to all of the related 
obligations imposed by the Code on U.S. withholding agents or 
payors. The QI must also provide the U.S. withholding agent (or 
U.S. payor) additional information about the withholding rates 
to enable the withholding agent to appropriately withhold and 
report on payments made through the QI. These rates can be 
supplied with respect to withholding rate pools that aggregate 
payments of a single type of income (e.g., interest or 
dividends) that is subject to a single rate of withholding.
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    \497\ To the extent that a QI assumes primary responsibility for an 
account, it must do so for all payments made by the withholding agent 
to that account. See Rev. Proc. 2000-12, QI agreement sec. 3.
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    If a U.S. non-exempt recipient has not provided an IRS Form 
W-9, the QI must disclose the name, address, and taxpayer 
identification number (``TIN'') (if available) to the 
withholding agent (and the withholding agent must apply backup 
withholding). However, no such disclosure is necessary if the 
QI is, under local law, prohibited from making the disclosure 
and the QI has followed certain procedural requirements 
(including providing for backup withholding, as described 
further below).
            Documentation of account holders
    A QI agrees to use its best efforts to obtain documentation 
regarding the status of their account holders in accordance 
with the terms of its QI agreement.\498\ A QI must apply 
presumption rules \499\ unless a payment can be reliably 
associated with valid documentation from the account holder. 
The QI agrees to adhere to the know-your-customer rules set 
forth in the QI agreement with respect to the account holder 
from whom the evidence is obtained.
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    \498\ See Rev. Proc. 2000-12, QI agreement sec. 5.
    \499\ The QI agreement contains its own presumption rules. See Rev. 
Proc. 2000-12, QI agreement sec. 5.13(C). An amount subject to 
withholding that is paid outside the United States to an account 
maintained outside the United States is presumed made to an 
undocumented foreign account holder (i.e., subject to 30-percent 
withholding). Payments of U.S. source deposit interest and certain 
other U.S. source interest and original issue discount paid outside of 
the United States to an offshore account is presumed made to an 
undocumented U.S. non-exempt account holder (i.e., subject to backup 
withholding). For payments of foreign source income, broker proceeds 
and certain other amounts, the QI can assume such payments are made to 
an exempt recipient if the amounts are paid outside the United States 
to an account maintained outside the United States.
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    A QI may treat an account holder as a foreign beneficial 
owner of an amount if the account holder provides a valid IRS 
Form W-8 (other than an IRS Form W-8IMY) or valid documentary 
evidence that supports the account holder's status as a foreign 
person.\500\ With such documentation, a QI generally may treat 
an account holder as entitled to a reduced rate of withholding 
if all the requirements for the reduced rate are met and the 
documentation supports entitlement to a reduced rate. A QI may 
not reduce the rate of withholding if the QI knows that the 
account holder is not the beneficial owner of a payment to the 
account.
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    \500\ Documentary evidence is any documentation obtained under 
know-your-customer rules per the QI agreement, evidence sufficient to 
establish a reduced rate of withholding under Treas. Reg. sec. 1.1441-
6, and evidence sufficient to establish status for purposes of chapter 
61 under Treas. Reg. sec. 1.6049-5(c). See Rev. Proc. 2000-12, 2000-1 
C.B. 387, QI agreement sec. 2.12.
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    If a foreign account holder is the beneficial owner of a 
payment, then a QI may shield the account holder's identity 
from U.S. custodians and the IRS. If a foreign account holder 
is not the beneficial owner of a payment (for example, because 
the account holder is a nominee), the account holder must 
provide the QI with an IRS Form W-8IMY for itself along with 
specific information about each beneficial owner to which the 
payment relates. A QI that receives this information may shield 
the account holder's identity from a U.S. custodian, but not 
from the IRS.\501\
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    \501\ This rule restricts one of the principal benefits of the QI 
regime, nondisclosure of account holders, to financial institutions 
that have assumed the documentation and other obligations associated 
with QI status.
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    In general, if an account holder is a U.S. person, the 
account holder must provide the QI with an IRS Form W-9 or 
appropriate documentary evidence that supports the account 
holder's status as a U.S. person. However, if a QI does not 
have sufficient documentation to determine whether an account 
holder is a U.S. or foreign person, the QI must apply certain 
presumption rules detailed in the QI agreement. These 
presumption rules may not be used to grant a reduced rate of 
nonresident withholding; instead they merely determine whether 
a payment should be subject to full nonresident withholding (at 
a 30-percent rate), subject to backup withholding (at a 28-
percent rate), or treated as exempt from backup withholding.
    In general, under the QI agreement presumptions, U.S.-
source investment income that is paid outside the United States 
to an offshore account is presumed to be paid to an 
undocumented foreign account holder. A QI must treat such a 
payment as subject to withholding at a 30-percent rate and 
report the payment to an unknown account holder on IRS Form 
1042-S. However, most U.S.-source deposit interest and interest 
or original issue discount on short-term obligations that is 
paid outside the United States to an offshore account is 
presumed made to an undocumented U.S. non-exempt recipient 
account holder and thus is subject to backup withholding at a 
28-percent rate.\502\ Importantly, both foreign-source income 
and broker proceeds are presumed to be paid to a U.S. exempt 
recipient (and thus are exempt from both nonresident and backup 
withholding) when such amounts are paid outside the United 
States to an offshore account.
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    \502\ These amounts are statutorily exempt from nonresident 
withholding when paid to non-U.S. persons.
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            QI information return requirements
    A QI must file IRS Form 1042 by March 15 of the year 
following any calendar year in which the QI acts as a QI. A QI 
is not required to file IRS Forms 1042-S for amounts paid to 
each separate account holder, but instead files a separate IRS 
Form 1042-S for each type of reporting pool.\503\ A QI must 
file separate IRS Forms 1042-S for amounts paid to certain 
types of account holders, including: (1) other QIs which 
receive amounts subject to foreign withholding; (2) each 
foreign account holder of a nonqualified intermediary or other 
flow-through entity to the extent that the QI can reliably 
associate such amounts with valid documentation; and (3) 
unknown recipients of amounts subject to withholding paid 
through a nonqualified intermediary or other flow-through 
entity to the extent the QI cannot reliably associate such 
amounts with valid documentation. The IRS Form 1042 must also 
include an attachment setting forth the aggregate amounts of 
reportable payments paid to U.S. non-exempt recipient account 
holders, and the number of such account holders, whose identity 
is prohibited by foreign law (including by contract) from 
disclosure.\504\
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    \503\ A reporting pool consists of income that falls within a 
particular withholding rate and within a particular income code, 
exemption code, and recipient code as determined on IRS Form 1042-S.
    \504\ For undisclosed accounts, QIs must separately report each 
type of reportable payment (determined by reference to the types of 
income reported on IRS Forms 1099) and the number of undisclosed 
account holders receiving such payments.
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    A QI has specified IRS Form 1099 \505\ filing requirements 
including: (1) filing an aggregate IRS Form 1099 for each type 
of reportable amount paid to U.S. non-exempt recipient account 
holders whose identities are prohibited by law from being 
disclosed; (2) filing an aggregate IRS Form 1099 for reportable 
payments other than reportable amounts \506\ paid to U.S. non-
exempt recipient account holders whose identities are 
prohibited by law from being disclosed; (3) filing separate IRS 
Forms 1099 for reportable amounts paid to U.S. non-exempt 
recipient account holders for whom the QI has not provided an 
IRS Form W-9 or identifying information to a withholding agent; 
(4) filing separate IRS Forms 1099 for reportable payments 
other than reportable amounts paid to U.S. non-exempt recipient 
account holders; (5) filing separate IRS Forms 1099 for 
reportable amounts paid to U.S. non-exempt recipient account 
holders for which the QI has assumed primary IRS Form 1099 
reporting and backup withholding responsibility; and (6) filing 
separate IRS Forms 1099 for reportable payments to an account 
holder that is a U.S. person if the QI has applied backup 
withholding and the amount was not otherwise reported on an IRS 
Form 1099.
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    \505\ If the QI is required to file IRS Forms 1099, it must file 
the appropriate form for the type of income paid (e.g., IRS Form 1099-
DIV for dividends, IRS Form 1099-INT for interest, and IRS Form 1099-B 
for broker proceeds).
    \506\ The term reportable amount generally includes those amounts 
that would be reported on IRS Form 1042-S if the amount were paid to a 
foreign account holder. The term reportable payment generally refers to 
amounts subject to backup withholding, but it has a different meaning 
depending upon the status of the QI as a U.S. or non-U.S. payor.
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            Foreign law prohibition of disclosure
    The QI agreement includes procedures to address situations 
in which foreign law (including by contract) prohibits the QI 
from disclosing the identities of U.S. non-exempt recipients 
(such as individuals). Separate procedures are provided for 
accounts established with a QI prior to January 1, 2001, and 
for accounts established on or after January 1, 2001.
    Accounts established prior to January 1, 2001.--For 
accounts established prior to January 1, 2001, if the QI knows 
that the account holder is a U.S. non-exempt recipient, the QI 
must (1) request from the account holder the authority to 
disclose its name, address, TIN (if available), and reportable 
payments; (2) request from the account holder the authority to 
sell any assets that generate, or could generate, reportable 
payments; or (3) request that the account holder disclose 
itself by mandating the QI to provide an IRS Form W-9 completed 
by the account holder. The QI must make these requests at least 
two times during each calendar year and in a manner consistent 
with the QI's normal communications with the account holder (or 
at the time and in the manner that the QI is authorized to 
communicate with the account holder). Until the QI receives a 
waiver on all prohibitions against disclosure, authorization to 
sell all assets that generate, or could generate, reportable 
payments, or a mandate from the account holder to provide an 
IRS Form W-9, the QI must backup withhold on all reportable 
payments paid to the account holder and report those payments 
on IRS Form 1099 or, in certain cases, provide another 
withholding agent with all of the information required for that 
withholding agent to backup withhold and report the payments on 
IRS Form 1099.
    Accounts established on or after January 1, 2001.--For any 
account established by a U.S. non-exempt recipient on or after 
January 1, 2001, the QI must (1) request from the account 
holder the authority to disclose its name, address, TIN (if 
available), and reportable payments; (2) request from the 
account holder, prior to opening the account, the authority to 
exclude from the account holder's account any assets that 
generate, or could generate, reportable payments; or (3) 
request that the account holder disclose itself by mandating 
the QI to transfer an IRS Form W-9 completed by the account 
holder.
    If a QI is authorized to disclose the account holder's 
name, address, TIN, and reportable amounts, it must obtain a 
valid IRS Form W-9 from the account holder, and, to the extent 
the QI does not have primary IRS Form 1099 and backup 
withholding responsibility, provide the IRS Form W-9 to the 
appropriate withholding agent promptly after obtaining the 
form. If an IRS Form W-9 is not obtained, the QI must provide 
the account holder's name, address, and TIN (if available) to 
the withholding agents from whom the QI receives reportable 
amounts on behalf of the account holder, together with the 
withholding rate applicable to the account holder. If a QI is 
not authorized to disclose an account holder's name, address, 
TIN (if available), and reportable amounts, but is authorized 
to exclude from the account holder's account any assets that 
generate, or could generate, reportable payments, the QI must 
follow procedures designed to ensure that it will not hold any 
assets that generate, or could generate, reportable payments in 
the account holder's account.\507\
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    \507\ Under both of these procedures, if the QI is a non-U.S. 
payor, a U.S. non-exempt recipient may effectively avoid disclosure and 
backup withholding by investing in assets that generate solely non-
reportable payments such as foreign source income (such as bonds issued 
by a foreign government) paid outside of the United States.
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            External audit procedures
    The IRS generally does not audit a QI with respect to 
withholding and reporting obligations covered by a QI agreement 
if an approved external auditor conducts an audit of the QI. An 
external audit must be performed in the second and fifth full 
calendar years in which the QI agreement is in effect. In 
general, the IRS must receive the external auditor's report by 
June 30 of the year following the year being audited.
    Requirements for the external audit are provided in the QI 
agreement. In general, the QI must permit the external auditor 
to have access to all relevant records of the QI, including 
information regarding specific account holders. In addition, 
the QI must permit the IRS to communicate directly with the 
external auditor, review the audit procedures followed by the 
external auditor, and examine the external auditor's work 
papers and reports.
    In addition to the external audit requirements set forth in 
the QI agreement, the IRS has issued further guidance (the ``QI 
audit guidance'') for an external auditor engaged by a QI to 
verify the QI's compliance with the QI agreement.\508\ An 
external auditor must conduct its audit in accordance with the 
procedures described in the QI agreement. However, the QI audit 
guidance is intended to assist the external auditor in 
understanding and applying those procedures. The QI audit 
guidance does not amend, modify, or interpret the QI agreement.
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    \508\ Rev. Proc. 2002-55, 2002-2 C.B. 435.
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            Term of a QI agreement
    A QI agreement expires on December 31 of the fifth full 
calendar year after the year in which the QI agreement first 
takes effect, although it may be renewed. Either the IRS or the 
QI may terminate the QI agreement prior to its expiration by 
delivering a notice of termination to the other party. However, 
the IRS generally does not terminate a QI agreement unless 
there is a significant change in circumstances or an event of 
default occurs, and the IRS determines that the change in 
circumstance or event of default warrants termination. In the 
event that an event of default occurs, a QI is given an 
opportunity to cure it within a specified time.

Know-your-customer due diligence requirements

            United States
    The U.S. know-your-customer rules \509\ require financial 
institutions \510\ to develop and maintain a written customer 
identification program and anti-money laundering policies and 
procedures. Additionally, financial institutions must perform 
customer due diligence. The due diligence requirements are 
enhanced where the account or the financial institution has a 
higher risk profile.\511\
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    \509\ The U.S. know-your-customer rules are primarily found in the 
Bank Secrecy Act of 1970 and in Title III, The International Money 
Laundering Abatement and Anti-Terrorist Financing Act of 2001 of the 
USA PATRIOT Act.
    \510\ The term financial institution is broadly defined under 31 
U.S.C. sec. 5312(a)(2) or (c)(1) and includes U.S. banks and agencies 
or branches of foreign banks doing business in the United States, 
insurance companies, credit unions, brokers and dealers in securities 
or commodities, money services businesses, and certain casinos.
    \511\ Relevant risks include the types of accounts held at the 
financial institution, the methods available for opening accounts, the 
types of customer identification information available, and the size, 
location, and customer base of the financial institution. 31 C.F.R. 
sec. 103.121(b)(2).
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    A customer identification program at a minimum requires the 
financial institution to collect the name, date of birth (for 
individuals), address,\512\ and identification number \513\ for 
new customers. In fulfilling their customer due diligence 
requirements, financial institutions are required to verify 
enough customer information to enable the financial institution 
to form a ``reasonable belief that it knows the true identity 
of each customer.'' \514\
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    \512\ For a person other than an individual the address is the 
principal place of business, local office, or other physical location. 
31 C.F.R. sec. 103.121(b)(2)(i)(3)(iii).
    \513\ For a U.S. person the identification number is the TIN. For a 
non-U.S. person the identification number could be a TIN, passport 
number, alien identification number, or number and country of issuance 
of any other government-issued document evidencing nationality or 
residence and bearing a photograph or similar safeguard. 31 C.F.R. sec. 
103.121(b)(2)(i)(4).
    \514\ See 31 C.F.R. sec. 103.121(b)(2).
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    In many cases the know-your-customer rules do not require 
financial institutions to look through an entity to determine 
its ultimate ownership.\515\ However, based on the financial 
institution's risk assessment, the financial institution may 
need to obtain information about individuals with authority or 
control over such an account in order to verify the identity of 
the customer.\516\ A financial institution's customer due 
diligence must include gathering sufficient information on a 
business entity and its owners for the financial institution to 
understand and assess the risks of the account 
relationship.\517\
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    \515\ For example, a financial institution is not ``required to 
look through trust, escrow, or similar accounts to verify the 
identities of beneficiaries and instead will only be required to verify 
the identity of the named accountholder.'' See 68 Fed. Reg. 25,090, 
25,094 (May 9, 2003).
    \516\ See 31 sec. 103.121(b)(2)(ii)(C).
    \517\ In order to assess the risk of the account relationship, a 
financial institution may need to ascertain the type of business, the 
purpose of the account, the source of the account funds, and the source 
of the wealth of the owner or beneficial owner of the entity.
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    Enhanced due diligence is required if customers are deemed 
to be of higher risk, and is mandated for certain types of 
accounts including foreign correspondent accounts, private 
banking accounts, and accounts for politically exposed persons. 
Private banking accounts are considered to be of significant 
risk and enhanced due diligence requires identification of 
nominal and beneficial owners for these accounts.\518\
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    \518\ 31 C.F.R. sec. 103.178. A private banking account is an 
account that (1) requires a minimum deposit of not less than 1 million 
dollars; (2) is established for the benefit of one or more non-U.S. 
persons who are direct or beneficial owners of the account; and (3) is 
administered or managed by an officer, employee or agent of the 
financial institution. Beneficial owner for these purposes is defined 
as an individual who has a level of control over, or entitlement to the 
funds or assets in the account. 31 C.F.R. secs. 103.175(b), 103.175(o).
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    Financial institutions must maintain records for a minimum 
of five years after the account is closed or becomes dormant. 
They are required to monitor accounts including the frequency, 
size and ultimate destinations of transfers and must update 
customer due diligence and enhanced due diligence when there 
are significant changes to the customer's profile (for example, 
volume of transaction activity, risk level, or account type).
            European Union Third Money Laundering Directive
    The European Union (``EU'') Third Money Laundering 
Directive \519\ is also applicable to a broad range of persons 
including credit institutions and financial institutions as 
well as to persons acting in the exercise of certain 
professional activities.\520\ It requires systems, adequate 
policies and procedures for customer due diligence, reporting, 
record keeping, internal controls, risk assessment, risk 
management, compliance management, and communication. Required 
customer due diligence measures go further than the know-your-
customer rules in the United States in requiring identification 
and verification of the beneficial owner and an understanding 
of the ownership and control structure of the customer in 
addition to the basic customer identification program and 
customer due diligence requirements.
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    \519\ Directive 2005/60/EC of the European Parliament and of the 
Council, October 26, 2005 (``EU Third Money Laundering Directive'').
    \520\ The directive applies to auditors, accountants, tax advisors, 
notaries, legal professionals, real estate agents, certain persons 
trading in goods (cash transactions in excess of EUR 15,000), and 
casinos.
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    A beneficial owner is defined as the natural person who 
ultimately owns or controls the customer and/or the natural 
person on whose behalf a transaction or activity is being 
conducted. For corporations, beneficial owner includes: (1) the 
natural person or persons who ultimately owns or controls a 
legal entity through direct or indirect ownership or control 
over a sufficient percentage (25 percent plus one share) of the 
shares or voting rights in that legal entity; and 2) the 
natural person or persons who otherwise exercises control over 
the management of the legal entity.\521\ For foundations, 
trusts, and like entities that administer and distribute funds, 
beneficial owner includes: (1) in cases in which future 
beneficiaries are determined, a natural person who is the 
beneficiary of 25 percent or more of the property; (2) in cases 
in which future beneficiaries have yet to be determined, the 
class of person in whose main interest the legal arrangement is 
set up or operates; and (3) natural person who exercises 
control over 25 percent or more of the property.\522\ Under the 
EU Third Money Laundering Directive, EU member states generally 
must require identification of the customer and any beneficial 
owners before the establishment of a business 
relationship.\523\
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    \521\ EU Third Money Laundering Directive Art. 3(6)(a). Inquiries 
into beneficial ownership generally may stop at the level of any owner 
that is a company listed on a regulated market.
    \522\ EU Third Money Laundering Directive Art. 3(6)(b).
    \523\ EU Third Money Laundering Directive Art. 9.
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    The EU Third Money Laundering Directive requires ongoing 
account monitoring including scrutiny of transactions 
throughout the course of relationship to ensure that the 
transactions conducted are consistent with the customer and the 
business risk profile. It requires documents and other 
information to be updated and requires performance of customer 
due diligence procedures at appropriate times (such as a change 
in account signatories or change in the use of an account) for 
existing customers on a risk sensitive basis. Records must be 
maintained for up to five years after the customer relationship 
has ended.

                        Explanation of Provision

    The provision adds a new chapter 4 to the Code that 
provides for withholding taxes to enforce new reporting 
requirements on specified foreign accounts owned by specified 
United States persons or by United States owned foreign 
entities. The provision establishes rules for withholdable 
payments to foreign financial institutions and for withholdable 
payments to other foreign entities.

Withholdable payments to foreign financial institutions

    The provision requires a withholding agent to deduct and 
withhold a tax equal to 30 percent on any withholdable payment 
made to a foreign financial institution if the foreign 
financial institution does not meet certain requirements. 
Specifically, withholding is generally not required if an 
agreement is in effect between the foreign financial 
institution and the Secretary of the Treasury (the 
``Secretary'') under which the institution agrees to:
          1. Obtain information regarding each holder of each 
        account maintained by the institution as is necessary 
        to determine which accounts are United States accounts;
          2. Comply with verification and due diligence 
        procedures as the Secretary requires with respect to 
        the identification of United States accounts;
          3. Report annually certain information with respect 
        to any United States account maintained by such 
        institution;
          4. Deduct and withhold 30 percent from any pass-thru 
        payment that is made to a (1) recalcitrant account 
        holder or another financial institution that does not 
        enter into an agreement with the Secretary, or (2) 
        foreign financial institution that has elected to be 
        withheld upon rather than to withhold with respect to 
        the portion of the payment that is allocable to 
        recalcitrant account holders or to foreign financial 
        institutions that do not have an agreement with the 
        Secretary.
          5. Comply with requests by the Secretary for 
        additional information with respect to any United 
        States account maintained by such institution; and
          6. Attempt to obtain a waiver in any case in which 
        any foreign law would (but for a waiver) prevent the 
        reporting of information required by the provision with 
        respect to any United States account maintained by such 
        institution, and if a waiver is not obtained from each 
        account holder within a reasonable period of time, to 
        close the account.
    If the Secretary determines that the foreign financial 
institution is out of compliance with the agreement, the 
agreement may be terminated by the Secretary. The provision 
applies with respect to United States accounts maintained by 
the foreign financial institution and, except as provided by 
the Secretary, to United States accounts maintained by each 
other financial institution that is a member of the same 
expanded affiliated group (other than any foreign financial 
institution that also enters into an agreement with the 
Secretary).
    It is expected that in complying with the requirements of 
this provision, the foreign financial institution and the other 
members of the same expanded affiliated group comply with know-
your-customer, anti-money laundering, anti-corruption, or other 
similar rules to which they are subject, as well as with such 
procedures and rules as the Secretary may prescribe, both with 
respect to due diligence by the foreign financial institution 
and verification by or on behalf of the IRS to ensure the 
accuracy of the information, documentation, or certification 
obtained to determine if the account is a United States 
account. The Secretary may use existing know-your-customer, 
anti-money laundering, anti-corruption, and other regulatory 
requirements as a basis in crafting due diligence and 
verification procedures in jurisdictions where those 
requirements provide reasonable assurance that the foreign 
financial institution is in compliance with the requirements of 
this provision.
    The provision allowing for withholding on payments made to 
an account holder that fails to provide the information 
required under this provision is not intended to create an 
alternative to information reporting. It is anticipated that 
the Secretary may require, under the terms of the agreement, 
that the foreign financial institution achieve certain levels 
of reporting and make reasonable attempts to acquire the 
information necessary to comply with the requirements of this 
section or to close accounts where necessary to meet the 
purposes of this provision. It is anticipated that the 
Secretary may also require, under the terms of the agreement 
that, in the case of new accounts, the foreign financial 
institution may not withhold as an alternative to collecting 
the required information.
    A foreign financial institution may be deemed, by the 
Secretary, to meet the requirements of this provision if: (1) 
the institution complies with procedures prescribed by the 
Secretary to ensure that the institution does not maintain 
United States accounts, and meets other requirements as the 
Secretary may prescribe with respect to accounts of other 
foreign financial institutions, or (2) the institution is a 
member of a class of institutions for which the Secretary has 
determined that the requirements are not necessary to carry out 
the purposes of this provision. For instance, it is anticipated 
that the Secretary may provide rules that would permit certain 
classes of widely held collective investment vehicles, and to 
the limited extent necessary to implement these rules, the 
entities providing administration, distribution and payment 
services on behalf of those vehicles, to be deemed to meet the 
requirements of this provision. It is anticipated that a 
foreign financial institution that has an agreement with the 
Secretary may meet the requirements under this provision with 
respect to certain members of its expanded affiliated group if 
the affiliated foreign financial institution complies with 
procedures prescribed by the Secretary and does not maintain 
United States accounts. Additionally, the Secretary may 
identify classes of institutions that are deemed to meet the 
requirements of this provision if such institutions are subject 
to similar due diligence and reporting requirements under other 
provisions in the Code. Such institutions may include certain 
controlled foreign corporations owned by U.S. financial 
institutions and certain U.S. branches of foreign financial 
institutions that are treated as U.S. payors under present law.
    Under the provision, a foreign financial institution may 
elect to have a U.S. withholding agent or a foreign financial 
institution that has entered into an agreement with the 
Secretary withhold on payments made to the electing foreign 
financial institution rather than acting as a withholding agent 
for the payments it makes to other foreign financial 
institutions that either do not enter into agreements with the 
Secretary or that themselves have elected not to act as a 
withholding agent, or for payments it makes to account holders 
that fail to provide required information. If the election 
under this provision is made, the withholding tax will apply 
with respect to any payment made to the electing foreign 
financial institution to the extent the payment is allocable to 
accounts held by foreign financial institutions that do not 
enter into an agreement with the Secretary or to payments made 
to recalcitrant account holders.
    A payment may be allocable to accounts held by a 
recalcitrant account holder or a foreign financial institution 
that does not meet the requirements of this section either as a 
result of such person holding an account directly with the 
electing foreign financial institution, or in relation to an 
indirect account held through other foreign financial 
institutions that either do not enter into an agreement with 
the Secretary or are themselves electing foreign financial 
institutions.
    The electing foreign financial institution must notify the 
withholding agent of its election and must provide information 
necessary for the withholding agent to determine the 
appropriate amount of withholding. The information may include 
information regarding the amount of any payment that is 
attributable to a withholdable payment and information 
regarding the amount of any payment that is allocable to 
recalcitrant account holders or to foreign financial 
institutions that have not entered into agreements with the 
Secretary. Additionally, the electing foreign financial 
institution must waive any right under a treaty with respect to 
an amount deducted and withheld pursuant to the election. To 
the extent provided by the Secretary, the election may be made 
with respect to certain classes or types of accounts.
    A foreign financial institution meets the annual 
information reporting requirements under the provision by 
reporting the following information:
          1. The name, address, and TIN of each account holder 
        that is a specified United States person;
          2. The name, address, and TIN of each substantial 
        United States owner of any account holder that is a 
        United States owned foreign entity;
          3. The account number;
          4. The account balance or value (determined at such 
        time and in such manner as the Secretary provides); and
          5. Except to the extent provided by the Secretary, 
        the gross receipts and gross withdrawals or payments 
        from the account (determined for such period and in 
        such manner as the Secretary may provide).
    This information is required with respect to each United 
States account maintained by the foreign financial institution 
and, except as provided by the Secretary, each United States 
account maintained by each other foreign financial institution 
that is a member of the same expanded affiliated group (other 
than any foreign financial institution that also enters into an 
agreement with the Secretary).
    Alternatively, a foreign financial institution may make an 
election and report under sections 6041 (information at 
source), 6042 (returns regarding payments of dividends and 
corporate earnings and profits), 6045 (returns of brokers), and 
6049 (returns regarding payments of interest), as if such 
foreign financial institution were a U.S. person (i.e., elect 
to provide full IRS Form 1099 reporting under these sections). 
Under this election, the foreign financial institution reports 
on each account holder that is a specified United States person 
or United States owned foreign entity as if the holder of the 
account were a natural person and citizen of the United States. 
As a result, both U.S.- and foreign-source amounts (including 
gross proceeds) are subject to reporting under this election 
regardless of whether the amounts are paid inside or outside 
the United States. If a foreign financial institution makes 
this election, the institution is also required to report the 
following information with respect to each United States 
account maintained by the institution: (1) the name, address, 
and TIN of each account holder that is a specified United 
States person; (2) the name, address, and TIN of each 
substantial United States owner of any account holder that is a 
United States owned foreign entity; and (3) the account number. 
This election can be made by a foreign financial institution 
even if other members of its expanded affiliated group do not 
make the election. The Secretary has authority to specify the 
time and manner of the election and to provide other conditions 
for meeting the reporting requirements of the election.
    Foreign financial institutions that have entered into QI or 
similar agreements with the Secretary, under section 1441 and 
the regulations thereunder, are required to meet the 
requirements of this provision in addition to any other 
requirements imposed under the QI or similar agreement.
    Under the provision, a United States account is any 
financial account held by one or more specified United States 
persons or United States owned foreign entities. Depository 
accounts are not treated as United States accounts for these 
purposes if (1) each holder of the account is a natural person 
and (2) the aggregate value of all depository accounts held (in 
whole or in part) by each holder of the account maintained by 
the financial institution does not exceed $50,000. A foreign 
financial institution may, however, elect to include all 
depository accounts held by U.S. individuals as United States 
accounts. To the extent provided by the Secretary, financial 
institutions that are members of the same expanded affiliated 
group may be treated as a single financial institution for 
purposes of determining the aggregate value of depository 
accounts maintained at the financial institution.
    In addition, a financial account is not a United States 
account if the account is held by a foreign financial 
institution that has entered into an agreement with the 
Secretary or is otherwise subject to information reporting 
requirements that the Secretary determines would make the 
reporting duplicative. It is anticipated that the Secretary may 
exclude certain financial accounts held by bona fide residents 
of any possession of the United States maintained by a 
financial institution organized under the laws of the 
possession if the Secretary determines that such reporting is 
not necessary to carry out the purposes of this provision.
    Except as otherwise provided by the Secretary, a financial 
account is any depository or custodial account maintained by a 
foreign financial institution and, any equity or debt interest 
in a foreign financial institution (other than interests that 
are regularly traded on an established securities market). Any 
equity or debt interest that is treated as a financial account 
with respect to any financial institution is treated for 
purposes of this provision as maintained by the financial 
institution. It is anticipated that the Secretary may determine 
that certain short-term obligations, or short-term deposits, 
pose a low risk of U.S. tax evasion and thus, may not treat 
such obligations or deposits as financial accounts for purposes 
of this provision.
    A United States owned foreign entity is any foreign entity 
that has one or more substantial United States owners. A 
foreign entity is any entity that is not a U.S. person.
    A foreign financial institution is any financial 
institution that is a foreign entity, and except as provided by 
the Secretary, does not include a financial institution 
organized under the laws of any possession of the United 
States. The Secretary may exercise its authority to issue 
guidance that it deems necessary to prevent financial 
institutions organized under the laws of U.S. possessions from 
being used as intermediaries in arrangements under which U.S. 
tax avoidance or evasion is facilitated.
    Except as otherwise provided by the Secretary, a financial 
institution for purposes of this provision is any entity that 
(1) accepts deposits in the ordinary course of a banking or 
similar business; (2) as a substantial portion of its business, 
holds financial assets for the account of others; or (3) is 
engaged (or holding itself out as being engaged) primarily in 
the business of investing, reinvesting, or trading in 
securities,\524\ interests in partnerships, commodities,\525\ 
or any interest (including a futures or forward contract or 
option) in such securities, partnership interests, or 
commodities. Accordingly, the term financial institution may 
include among other entities, investment vehicles such as hedge 
funds and private equity funds. Additionally, the Secretary may 
provide exceptions for certain classes of institutions. Such 
exceptions may include entities such as certain holding 
companies, research and development subsidiaries, or financing 
subsidiaries within an affiliated group of non-financial 
operating companies. It is anticipated that the Secretary may 
prescribe special rules addressing the circumstances in which 
certain categories of companies, such as certain insurance 
companies, are financial institutions, or the circumstances in 
which certain contracts or policies, for example annuity 
contracts or cash value life insurance contracts, are financial 
accounts or United States accounts for these purposes.
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    \524\ As defined in section 475(c)(2), without regard to the last 
sentence thereof.
    \525\ As defined in section 475(e)(2).
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    For purposes of this provision, a recalcitrant account 
holder is any account holder that (1) fails to comply with 
reasonable requests for information necessary to determine if 
the account is a United States account; (2) fails to provide 
the name, address, and TIN of each specified United States 
person and each substantial United States owner of a United 
States owned foreign entity; or (3) fails to provide a waiver 
of any foreign law that would prevent the foreign financial 
institution from reporting any information required under this 
provision.
    A passthru payment is any withholdable payment or other 
payment to the extent it is attributable to a withholdable 
payment.
    The reporting requirements apply with respect to United 
States accounts maintained by a foreign financial institution 
and, except as otherwise provided by the Secretary, with 
respect to United States accounts maintained by each other 
foreign financial institution that is a member of the same 
expanded affiliated group as such foreign financial 
institution. An expanded affiliated group for these purposes is 
an affiliated group as defined in section 1504(a) except that 
``more than 50 percent'' is substituted for ``at least 80 
percent'' each place it appears in that section, and is 
determined without regard to paragraphs (2) and (3) of section 
1504(b). A partnership or any other entity that is not a 
corporation is treated as a member of an expanded affiliated 
group if such entity is controlled by members of such 
group.\526\
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    \526\ Control for these purposes has the same meaning as control 
for purposes of section 954(d)(3).
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    This provision does not apply with respect to a payment to 
the extent that the beneficial owner of such payment is (1) a 
foreign government, a political subdivision of a foreign 
government, or a wholly owned agency of any foreign government 
or political subdivision; (2) an international organization or 
any wholly owned agency or instrumentality thereof; (3) a 
foreign central bank of issue; or (4) any other class of 
persons identified by the Secretary as posing a low risk of 
U.S. tax evasion.
    Under the provision, a withholding agent includes any 
person, in whatever capacity, having the control, receipt, 
custody, disposal, or payment of any withholdable payment.
    Except as provided by the Secretary, a withholdable payment 
is any payment of interest (including any original issue 
discount), dividends, rents, salaries, wages, premiums, 
annuities, compensations, remunerations, emoluments, and other 
fixed or determinable annual or periodical gains, profits, and 
income from sources within the United States. The term also 
includes any gross proceeds from the sale or other disposition 
of any property that could produce interest or dividends from 
sources within the United States, including dividend equivalent 
payments treated as dividends from sources in the United States 
pursuant to section 541 of the Act. Any item of income 
effectively connected with the conduct of a trade or business 
within the United States that is taken into account under 
sections 871(b)(1) or 882(a)(2) is not treated as a 
withholdable payment for purposes of the provision. In 
determining the source of a payment, section 861(a)(1)(B) (the 
rule for sourcing interest paid by foreign branches of domestic 
financial institutions) does not apply. The Secretary may 
determine that certain payments made with respect to short-term 
debt or short-term deposits, including gross proceeds paid pose 
little risk of United States tax evasion and may be excluded 
from withholdable payments for purposes of this provision.
    A substantial United States owner is: (1) with respect to 
any corporation, any specified U.S. person that directly or 
indirectly owns more than 10 percent of the stock (by vote or 
value) of such corporation; (2) with respect to any 
partnership, a specified United States person that directly or 
indirectly owns more than 10 percent of the profits or capital 
interests of such partnership; and (3) with respect to any 
trust, any specified United States person treated as an owner 
of any portion of such trust under the grantor trust 
rules,\527\ or to the extent provided by the Secretary, any 
specified United States person that holds, directly or 
indirectly, more than 10 percent of the beneficial interests of 
the trust. To the extent the foreign entity is a corporation or 
partnership engaged (or holding itself out as being engaged) 
primarily in the business of investing, reinvesting, or trading 
in securities, interests in partnerships, commodities, or any 
interest (including a futures or forward contract or option) in 
such securities, interests or commodities, the 10-percent 
threshold is reduced to zero percent. In determining whether an 
entity is a United States owned foreign entity (and whether any 
person is a substantial United States owner of such entity), 
only specified United States persons are considered.
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    \527\ Subpart E of Part I of subchapter J of chapter 1.
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    Except as otherwise provided by the Secretary, a specified 
United States person is any U.S. person other than (1) a 
publicly traded corporation or a member of the same expanded 
affiliated group as a publicly traded corporation, (2) any tax-
exempt organization or individual retirement plan, (3) the 
United States or a wholly owned agency or instrumentality of 
the United States, (4) a State, the District of Columbia, any 
possession of the United States, or a political subdivision or 
wholly owned agency of a State, the District of Columbia, or a 
possession of the United States, (5) a bank,\528\ (6) a real 
estate investment trust,\529\ (7) a regulated investment 
company,\530\ (8) a common trust fund,\531\ and (9) a trust 
that is exempt from tax under section 664(c) \532\ or is 
described in section 4947(a)(1).\533\
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    \528\ As defined in section 581.
    \529\ As defined in section 856.
    \530\ As defined in section 851.
    \531\ As defined in section 584(a).
    \532\ This includes charitable remainder annuity trusts and 
charitable remainder unitrusts.
    \533\ This includes certain charitable trusts not exempt under 
section 501(a).
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Withholdable payments to other foreign entities

    The provision requires a withholding agent to deduct and 
withhold a tax equal to 30 percent of any withholdable payment 
made to a non-financial foreign entity if the beneficial owner 
of such payment is a non-financial foreign entity that does not 
meet specified requirements.
    A non-financial foreign entity is any foreign entity that 
is not a financial institution under the provision. A non-
financial foreign entity meets the requirements of the 
provision (i.e., payments made to such entity will not be 
subject to the imposition of 30-percent withholding tax) if the 
payee or the beneficial owner of the payment provides the 
withholding agent with either a certification that the foreign 
entity does not have a substantial United States owner, or 
provides the withholding agent with the name, address, and TIN 
of each substantial United States owner. Additionally, the 
withholding agent must not know or have reason to know that the 
certification or information provided regarding substantial 
United States owners is incorrect, and the withholding agent 
must report the name, address, and TIN of each substantial 
United States owner to the Secretary.
    The provision does not apply to any payment beneficially 
owned by a publicly traded corporation or a member of an 
expanded affiliated group of a publicly traded corporation 
(defined as above but without the inclusion of partnerships or 
other non-corporate entities). Publicly traded corporations 
(and their affiliates) receiving payments directly from U.S. 
withholding agents may present a lower risk of U.S. tax evasion 
than other non-financial foreign entities. The provision also 
does not apply to any payment beneficially owned by any: (1) 
entity that is organized under the laws of a possession of the 
United States and that is wholly owned by one or more bona fide 
residents of the possession; (2) foreign government, political 
subdivision of a foreign government, or wholly owned agency or 
instrumentality of any foreign government or political 
subdivision of a foreign government; (3) international 
organization or any wholly owned agency or instrumentality of 
an international organization; (4) foreign central bank of 
issue; (5) any other class of persons identified by the 
Secretary for purposes of the provision; or (6) class of 
payments identified by the Secretary as posing a low risk of 
U.S. tax evasion. It is anticipated that the Secretary may 
exclude certain payments made for goods, services, or the use 
of property if the payment is made pursuant to an arm's length 
transaction in the ordinary course of the payor's trade or 
business.
    It is expected that the Secretary will provide coordinating 
rules for application of the withholding provisions applicable 
to foreign financial institutions and to foreign entities that 
are non-financial foreign entities under this provision.

Credits and refunds

    In general, the determination of whether an overpayment of 
tax deducted and withheld under the provision results in an 
overpayment by the beneficial owner of the payment is made in 
the same manner as if the tax had been deducted and withheld 
under subchapter A of chapter 3 (withholding tax on nonresident 
aliens and foreign corporations). An amount of tax required to 
be withheld by a foreign financial institution under its 
agreement with the Secretary is treated the same as if it were 
required to be withheld on a withholdable payment made to a 
foreign financial institution that does not enter into an 
agreement with the Secretary. Under the provision, if a 
beneficial owner of a payment is entitled under an income tax 
treaty to a reduced rate of withholding tax on the payment, 
that beneficial owner may be eligible for a credit or refund of 
the excess of the amount withheld under the provision over the 
amount permitted to be withheld under the treaty. Similarly, if 
a payment is of an amount not otherwise subject to U.S. tax 
(because, for instance, the payment represents gross proceeds 
from the sale of stock or is interest eligible for the 
portfolio interest exemption), the beneficial owner of the 
payment generally is eligible for a credit or refund of the 
full amount of the tax withheld.
    The Secretary has the authority to administer credit and 
refund procedures which may include requirements for taxpayers 
claiming credits or refunds of amounts withheld from payments 
to which the provision applies to supply appropriate 
documentation establishing that they are the beneficial owners 
of the payments from which tax was withheld, and that, in 
circumstances in which treaty benefits are being claimed, they 
are eligible for treaty benefits. No credit or refund is 
allowed with respect to tax properly deducted and withheld 
unless the beneficial owner of the payment provides the 
Secretary with such information as the Secretary may require to 
determine whether the beneficial owner of the payment is a 
United States owned foreign entity and the identity of any 
substantial United States owners of such entity. It is intended 
that any such guidance provided by the Secretary under this 
provision, including documentation and requirements to provide 
information, be consistent with existing income tax treaties.
    If tax is withheld under the provision, this credit and 
refund mechanism ensures that the provisions are consistent 
with U.S. obligations under existing income tax treaties. U.S. 
income tax treaties do not require the United States and its 
treaty partners to follow a specific procedure for providing 
treaty benefits.\534\ For example, in cases in which proof of 
entitlement to treaty benefits is demonstrated in advance of 
payment, the United States may permit reduced withholding or 
exemption at the time of payment. Alternatively, the United 
States may require withholding at the relevant statutory rate 
at the time of payment and allow treaty country residents to 
obtain treaty benefits through a refund process. The credit and 
refund mechanism ensures that residents of treaty partners 
continue to obtain treaty benefits in the event tax is withheld 
under the provision.
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    \534\ See, for example, the Commentaries on the OECD Model Tax 
Convention on Income and on Capital, which make clear that individual 
countries are free to establish procedures for providing any reduced 
tax rates agreed to by treaty partners. These procedures can include 
both relief at source and/or full withholding at domestic rates, 
followed by a refund. See, e.g., Commentary 26.2 to Article 1.
---------------------------------------------------------------------------
      A number of Articles of the Convention limit the right of a 
      State to tax income derived from its territory. As noted in 
      paragraph 19 of the Commentary on Article 10 as concerns 
      the taxation of dividends, the Convention does not settle 
      procedural questions and each State is free to use the 
      procedure provided in its domestic law in order to apply 
      the limits provided by the Convention. A State can 
      therefore automatically limit the tax that it levies in 
      accordance with the relevant provisions of the Convention, 
      subject to possible prior verification of treaty 
      entitlement, or it can impose the tax provided for under 
      its domestic law and subsequently refund the part of that 
      tax that exceeds the amount that it can levy under the 
      provisions of the Convention.
---------------------------------------------------------------------------
    Ibid. While Commentary 26.2 notes that a refund mechanism is not 
the preferred approach, the Act establishes such a mechanism for 
beneficial owners in certain circumstances. This approach serves to 
address, in part, observed difficulties in identifying U.S. persons who 
inappropriately seek treaty benefits to which they are not entitled.
---------------------------------------------------------------------------
    A special rule applies with respect to any tax properly 
deducted and withheld from a specified financial institution 
payment, which is defined as any payment with respect to which 
a foreign financial institution is the beneficial owner. 
Credits and refunds with respect to specified financial 
institution payments generally are not allowed. However, 
refunds and credits are allowed if, with respect to the 
payment, the foreign financial institution is entitled to an 
exemption or a reduced rate of tax by reason of any treaty 
obligation of the United States. In such a case, the foreign 
financial institution is entitled to an exemption or a reduced 
rate of tax only to the extent provided under the treaty. In no 
event will interest be allowed or paid with respect to any 
credit or refund of tax properly withheld on a specified 
financial institution payment.
    Under the provision, the grace period for which the 
government is not required to pay interest on an overpayment is 
increased from 45 days to 180 days for overpayments resulting 
from excess amounts deducted and withheld under chapters 3 or 4 
of the Code. The increased grace period applies to refunds of 
withheld taxes with respect to (1) returns due after the date 
of enactment (March 18, 2010), (2) claims for refund filed 
after date of enactment (March 18, 2010) and (3) IRS-initiated 
adjustments if the refunds are paid after the date of enactment 
(March 18, 2010) . It is anticipated that the Secretary may 
specify the proper form and information required for a claim 
for refund under section 6611(e)(2) and may provide that a 
purported claim that does not include such information is not 
considered filed.

General provisions

    Every person required to deduct and withhold any tax under 
the provision is liable for such tax and is indemnified against 
claims and demands of any person for the amount of payments 
made in accordance with the provision.
    No person may use information under the provision except 
for the purpose of meeting any requirements under the provision 
or for purposes permitted under section 6103. However, the 
identity of foreign financial institutions that have entered 
into an agreement with the Secretary is not treated as return 
information for purposes of section 6103.
    The Secretary is expected to provide for the coordination 
of withholding under this provision with other withholding 
provisions of the Code, including providing for the proper 
crediting of amounts deducted and withheld under this provision 
against amounts required to be deducted and withheld under 
other provisions of the Code. The Secretary may provide further 
coordinating rules to prevent double withholding, including in 
situations involving tiered U.S. withholding agents.
    The provision makes several conforming amendments to other 
provisions in the Code. The provision grants authority to the 
Secretary to prescribe regulations necessary and appropriate to 
carry out the purposes of the provision, and to prevent the 
avoidance of this provision.

                             Effective Date

    The provision generally applies to payments made after 
December 31, 2012. The provision, however, does not require any 
amount to be deducted or withheld from any payment under any 
obligation outstanding on the date that is two years after the 
date of enactment (March 18, 2010), or from the gross proceeds 
from any disposition of such an obligation. It is anticipated 
that the Secretary may provide guidance as to the application 
of the material modification rules under section 1001 in 
determining whether an obligation is considered to be 
outstanding on the date that is two years after the date of 
enactment (March 18, 2010).
    The interest provisions increasing the grace period for 
which the government is not required to pay interest on an 
overpayment from 45 to 180 days apply to: (1) returns with due 
dates after the date of enactment (March 18, 2010); (2) claims 
for credit or refund of overpayment filed after the date of 
enactment (March 18, 2010); and (3) refunds paid on adjustments 
initiated by the Secretary paid after the date of enactment 
(March 18, 2010).

2. Repeal of certain foreign exceptions to registered bond requirements 
        (sec. 502 of the Act and secs. 149, 163, 165, 871, 881, 1287, 
        and 4701 of the Code and 31 U.S.C. sec. 3121)

                              Present Law


Registration-required obligations and treatment of bonds not issued in 
        registered form

    In general, a taxpayer may deduct all interest paid or 
accrued within the taxable year on indebtedness.\535\ For 
registration-required obligations, a deduction for interest is 
allowed only if the obligation is in registered form. 
Generally, an obligation is treated as issued in registered 
form if the issuer or its agent maintains a registration of the 
identity of the owner of the obligation and the obligation can 
be transferred only through this registration system.\536\ A 
registration-required obligation is any obligation other than 
one that: (1) is made by a natural person; (2) matures in one 
year or less; (3) is not of a type offered to the public; or 
(4) is a foreign targeted obligation.\537\
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    \535\ Sec. 163(a).
    \536\ An obligation is treated as in registered form if (1) it is 
registered as to both principal and interest with the issuer (or its 
agent) and transfer of the obligation may be effected only by surrender 
of the old instrument and either the reissuance by the issuer of the 
old instrument to the new holder or the issuance by the issuer of a new 
instrument to the new holder, (2) the right to principal and stated 
interest on the obligation may be transferred only through a book entry 
system maintained by the issuer or its agent, or (3) the obligation is 
registered as to both principal and interest with the issuer or its 
agent and may be transferred through both of the foregoing methods. 
Treas. Reg. sec. 5f.103-1(c).
    \537\ Sec. 163(f)(2)(A). The registration requirement is intended 
to preserve liquidity while reducing opportunities for noncompliant 
taxpayers to conceal income and property from the reach of the income, 
estate and gift taxes. See Joint Committee on Taxation, General 
Explanation of the Revenue Provisions of the Tax Equity and Fiscal 
Responsibility Act of 1982 (JCS-38-82), December 31, 1982, p. 190.
---------------------------------------------------------------------------
    In applying this requirement, the IRS has adopted a 
flexible approach that recognizes that a debt obligation that 
is formally in bearer (i.e., not in registered) form is 
nonetheless ``in registered form'' for these purposes where 
there are arrangements that preclude individual investors from 
obtaining definitive bearer securities or that permit such 
securities to be issued only upon the occurrence of an 
extraordinary event.\538\
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    \538\ Priv. Ltr. Rul. 1993-43-018 (1993); Priv. Ltr. Rul. 1993-43-
019 (1993); Priv. Ltr. Rul. 1996-13-002 (1996). The IRS held that the 
registration requirement may be satisfied by ``dematerialized book-
entry systems'' developed in some foreign countries, even if, under 
such a system, a holder is entitled to receive a physical certificate, 
tradable as a bearer instrument, in the event the clearing organization 
maintaining the system goes out of existence, because ``cessation of 
operation of the book-entry system would be an extraordinary event.'' 
Notice 2006-99, 2006-2 C.B. 907.
---------------------------------------------------------------------------
    A foreign targeted obligation (to which the registration 
requirement does not apply) is any obligation satisfying the 
following requirements: (1) there are arrangements reasonably 
designed to ensure that such obligation will be sold (or resold 
in connection with the original issue) only to a person who is 
not a United States person; (2) interest is payable only 
outside the United States and its possessions; and (3) the face 
of the obligation contains a statement that any United States 
person who holds this obligation will be subject to limitations 
under the U.S. income tax laws.\539\
---------------------------------------------------------------------------
    \539\ Sec. 163(f)(2)(B).
---------------------------------------------------------------------------
    In addition to the denial of an interest deduction, 
interest on a State or local bond that is a registration-
required obligation will not qualify for the applicable tax 
exemption if the bond is not in registered form.\540\ Also, an 
excise tax is imposed on the issuer of any registration-
required obligation that is not in registered form.\541\ The 
excise tax is equal to one percent of the principal amount of 
the obligation multiplied by the number of calendar years (or 
portions thereof) during the period beginning on the date of 
issuance of the obligation and ending on the date of maturity.
---------------------------------------------------------------------------
    \540\ Sec. 103(b)(3). For the purposes of this section, 
registration-required obligation is any obligation other than one that: 
(1) is not of a type offered to the public; (2) matures in one year or 
less; or (3) is a foreign targeted obligation.
    \541\ Sec. 4701.
---------------------------------------------------------------------------
    Moreover, any gain realized by the beneficial owner of a 
registration-required obligation that is not in registered form 
on the sale or other disposition of the obligation is treated 
as ordinary income (rather than capital gain), unless the 
issuer of the obligation was subject to the excise tax 
described above.\542\ Finally, deductions for losses realized 
by beneficial owners of registration-required obligations that 
are not in a registered form are disallowed.\543\ For the 
purposes of ordinary income treatment and denial of deduction 
for losses, a registration-required obligation is any 
obligation other than one that: (1) is made by a natural 
person; (2) matures in one year or less; or (3) is not of a 
type offered to the public.
---------------------------------------------------------------------------
    \542\ Sec. 1287.
    \543\ Sec. 165(j).
---------------------------------------------------------------------------

Treatment as portfolio interest

    Payments of U.S.-source ``fixed or determinable annual or 
periodical'' income, including interest, dividends, and similar 
types of investment income, that are made to foreign persons 
are subject to U.S. withholding tax at a 30-percent rate, 
unless the withholding agent can establish that the beneficial 
owner of the amount is eligible for an exemption from 
withholding or a reduced rate of withholding under an income 
tax treaty.\544\ In 1984, the Congress repealed the 30-percent 
tax on portfolio interest received by a nonresident individual 
or foreign corporation from sources within the United 
States.\545\
---------------------------------------------------------------------------
    \544\ Secs. 871, 881; Treas. Reg. sec. 1.1441-1(b). Generally, the 
determination by a withholding agent of the U.S. or foreign status of a 
payee and of its other relevant characteristics (e.g., as a beneficial 
owner or intermediary, or as an individual, corporation, or flow-
through entity) is made on the basis of a withholding certificate that 
is a Form W-8 or a Form 8233 (indicating foreign status of the payee or 
beneficial owner) or a Form W-9 (indicating U.S. status of the payee).
    \545\ Secs. 871(h) and 881(c). Congress believed that the 
imposition of a withholding tax on portfolio interest paid on debt 
obligations issued by U.S. persons might impair the ability of U.S. 
corporations to raise capital in the Eurobond market (i.e., the global 
market for U.S. dollar-denominated debt obligations). Congress also 
anticipated that repeal of the withholding tax on portfolio interest 
would allow the U.S. Treasury Department direct access to the Eurobond 
market. See Joint Committee on Taxation, General Explanation of the 
Revenue Provisions of the Deficit Reduction Act of 1984 (JCS-41-84), 
December 31, 1984, pp. 391-92.
---------------------------------------------------------------------------
    The term ``portfolio interest'' means any interest 
(including original issue discount) that is (1) paid on an 
obligation that is in registered form and for which the 
beneficial owner has provided to the U.S. withholding agent a 
statement certifying that the beneficial owner is not a U.S. 
person, or (2) paid on an obligation that is not in registered 
form and that meets the foreign targeting requirements of 
section 163(f)(2)(B).\546\ Portfolio interest, however, does 
not include interest received by a 10-percent shareholder,\547\ 
certain contingent interest,\548\ interest received by a 
controlled foreign corporation from a related person,\549\ or 
interest received by a bank on an extension of credit made 
pursuant to a loan agreement entered into in the ordinary 
course of its trade or business.\550\
---------------------------------------------------------------------------
    \546\ In repealing the 30-percent tax on portfolio interest, under 
the Deficit Reduction Act of 1984, Congress expressed concern about 
potential compliance problems in connection with obligations issued in 
bearer form. Given the foreign targeted exception to the registration 
requirement under section 163(f)(2)(A), U.S. persons intent on evading 
U.S. tax on interest income might attempt to buy U.S. bearer 
obligations overseas, claiming to be foreign persons. These persons 
might then claim the statutory exemption from withholding tax for the 
interest paid on the obligations and fail to declare the interest 
income on their U.S. tax returns, without concern that their ownership 
of the obligations would come to the attention of the IRS. Because of 
these concerns, Congress expanded the Treasury's authority to require 
registration of obligations deigned to be sold to foreign persons. See 
Joint Committee on Taxation, General Explanation of the Revenue 
Provisions of the Deficit Reduction Act of 1984 (JCS-41-84), December 
31, 1984, p. 393.
    \547\ Sec. 871(h)(3).
    \548\ Sec. 871(h)(4).
    \549\ Sec. 881(c)(3)(C).
    \550\ Sec. 881(c)(3)(A).
---------------------------------------------------------------------------

Requirement that U.S. Treasury obligations be in registered form

    Under title 31 of the United States Code, every 
``registration-required obligation'' of the U.S. Treasury must 
be in registered form.\551\ For this purpose, a foreign 
targeted obligation is excluded from the definition of a 
registration-required obligation.\552\ Thus, a foreign targeted 
obligation of the Treasury can be in bearer (rather than 
registered) form.
---------------------------------------------------------------------------
    \551\ 31 U.S.C. sec. 3121(g)(3). For purposes of title 31 of the 
United States Code, registration-required obligation is defined as any 
obligation except: (1) an obligation not of a type offered to the 
public; (2) an obligation having a maturity (at issue) of not more than 
one year; or (3) a foreign targeted obligation.
    \552\ 31 U.S.C. sec. 3121(g)(2).
---------------------------------------------------------------------------

                        Explanation of Provision


Repeal of the foreign targeted obligation exception to the registration 
        requirement

    The provision repeals the foreign targeted obligation 
exception to the denial of a deduction for interest on bonds 
not issued in registered form. Thus, under the provision, a 
deduction for interest is disallowed with respect to any 
obligation not issued in registered form, unless that 
obligation (1) is issued by a natural person, (2) matures in 
one year or less, or (3) is not of a type offered to the 
public.
    Also, the provision repeals the foreign targeted obligation 
exception to the denial of the tax exemption on interest on 
State and local bonds not issued in registered form. Therefore, 
under the provision, interest paid on State and local bonds not 
issued in registered form will not qualify for tax exemption 
unless that obligation (1) is not of a type offered to the 
public, or (2) matures in one year or less.
    The Act preserves the ordinary income treatment under 
present law of any gain realized by the beneficial owner from 
the sale or other disposition of a registration-required 
obligation that is not in registered form. Similarly, the Act 
does not change the present law rule disallowing deductions for 
losses realized by a beneficial owner of a registration-
required obligation that is not in a registered form.

Preservation of exception to the registration requirement for excise 
        tax purposes

    Under the provision, the foreign targeted obligation 
exception is available with respect to the excise tax 
applicable to issuers of registration-required obligations that 
are not in registered form. Thus, the excise tax applies with 
respect to any obligation that is not in registered form unless 
the obligation (1) is issued by a natural person, (2) matures 
in one year or less, (3) is not of a type offered to the 
public, or (4) is a foreign targeted obligation.

Repeal of treatment as portfolio interest

    The provision repeals the treatment as portfolio interest 
of interest paid on bonds that are not issued in registered 
form but meet the foreign targeting requirements of section 
163(f)(2)(B). Under the provision, interest qualifies as 
portfolio interest only if it is paid on an obligation that is 
issued in registered form and either (1) the beneficial owner 
has provided the withholding agent with a statement certifying 
that the beneficial owner is not a United States person (on IRS 
Form W-8), or (2) the Secretary has determined that such 
statement is not required in order to carry out the purposes of 
the subsection. It is anticipated that the Secretary may 
exercise its authority under this rule to waive the requirement 
of collecting Forms W-8 in circumstances in which the Secretary 
has determined there is a low risk of tax evasion and there are 
adequate documentation standards within the country of tax 
residency of the beneficial owner of the obligations in 
question or in the country where the book-entry system exists. 
Generally, however, as a result of the provision, interest paid 
to a foreign person on an obligation that is not issued in 
registered form is subject to U.S. withholding tax at a 30-
percent rate, unless the withholding agent can establish that 
the beneficial owner of the amount is eligible for an exemption 
from withholding other than the portfolio interest exemption or 
for a reduced rate of withholding under an income tax treaty.

Dematerialized book-entry systems treated as registered form

    The provision provides that a debt obligation held through 
a dematerialized book entry system, or other book entry system 
specified by the Secretary, is treated, for purposes of section 
163(f), as held through a book entry system for the purpose of 
treating the obligation as in registered form.\553\ A debt 
obligation that is formally in bearer form is treated, for the 
purposes of section 163(f), as held in a book-entry system as 
long as the debt obligation may be transferred only through a 
dematerialized book entry system or other book entry system 
specified by the Secretary.
---------------------------------------------------------------------------
    \553\ By reason of cross references, this rule will also apply to 
sections 165(j), 312(m), 871(h), 881(c), 1287 and 4701.
---------------------------------------------------------------------------

Repeal of exception to requirement that Treasury obligations be in 
        registered form

    The provision includes a conforming change to title 31 of 
the United States Code that repeals the foreign targeted 
exception to the definition of a registration-required 
obligation. Thus, a foreign targeted obligation of the Treasury 
must be in registered form.

                             Effective Date

    The provision applies to debt obligations issued after the 
date which is two years after the date of enactment (March 18, 
2010).

3. Disclosure of information with respect to foreign financial assets 
        (sec. 511 of the Act and new sec. 6038D of the Code)

                              Present Law

    U.S. persons who transfer assets to, and hold interests in, 
foreign bank accounts or foreign entities may be subject to 
self-reporting requirements under both Title 26 (the Internal 
Revenue Code) and Title 31 (the Bank Secrecy Act) of the United 
States Code.
    Since its enactment, the Bank Secrecy Act has been expanded 
beyond its original focus on large currency transactions, while 
retaining its broad purpose of obtaining self-reporting of 
information with ``a high degree of usefulness in criminal, 
tax, or regulatory investigations or proceedings.'' \554\ As 
the reporting regime has expanded,\555\ reporting obligations 
have been imposed on both financial institutions and account 
holders. With respect to account holders, a U.S. citizen, 
resident, or person doing business in the United States is 
required to keep records and file reports, as specified by the 
Secretary, when that person enters into a transaction or 
maintains an account with a foreign financial agency.\556\ 
Regulations promulgated pursuant to broad regulatory authority 
granted to the Secretary in the Bank Secrecy Act \557\ provide 
additional guidance regarding the disclosure obligation with 
respect to foreign accounts. The Bank Secrecy Act specifies 
only that such disclosure contain the following information 
``in the way and to the extent the Secretary prescribes'': (1) 
the identity and address of participants in a transaction or 
relationship; (2) the legal capacity in which a participant is 
acting; (3) the identity of real parties in interest; and (4) a 
description of the transaction.
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    \554\ 31 U.S.C. sec. 5311.
    \555\ See, e.g., Title III of the USA PATRIOT Act, Pub. L. No. 107-
56 (October 26, 2001) (sections 351 through 366 amended the Bank 
Secrecy Act as part of a series of reforms directed at international 
financing of terrorism).
    \556\ 31 U.S.C. sec. 5314. The term ``agency'' in the Bank Secrecy 
Act includes financial institutions.
    \557\ 31 U.S.C. sec. 5314(a) provides: ``Considering the need to 
avoid impeding or controlling the export or import of monetary 
instruments and the need to avoid burdening unreasonably a person 
making a transaction with a foreign financial agency, the Secretary of 
the Treasury shall require a resident or citizen of the United States 
or a person in, and doing business in, the United States, to keep 
records, file reports, or keep records and file reports, when the 
resident, citizen, or person makes a transaction or maintains a 
relation for any person with a foreign financial agency.''
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    Treasury Department Form TD F 90-22.1, ``Report of Foreign 
Bank and Financial Accounts,'' (the ``FBAR'') must be filed by 
June 30 of the year following the year in which the $10,000 
filing threshold is met.\558\ The FBAR is filed with the 
Treasury Department at the IRS Detroit Computing Center. 
Failure to file the FBAR is subject to both criminal \559\ and 
civil penalties.\560\ Since 2004, the civil sanctions have 
included penalties not to exceed (1) $10,000 for failures that 
are not willful and (2) the greater of $100,000 or 50 percent 
of the balance in the account for willful failures. Although 
the FBAR is received and processed by the IRS, it is neither 
part of the income tax return filed with the IRS nor filed in 
the same office as that return. As a result, for purposes of 
Title 26, the FBAR is not considered ``return information,'' 
and its distribution to other law enforcement agencies is not 
limited by the nondisclosure rules of Title 26.\561\
---------------------------------------------------------------------------
    \558\ 31 C.F.R. sec. 103.27(c). The $10,000 threshold is the 
aggregate value of all foreign financial accounts in which a U.S. 
person has a financial interest or over which the U.S. person has 
signature or other authority.
    \559\ 31 U.S.C. sec. 5322 (failure to file is punishable by a fine 
up to $250,000 and imprisonment for five years, which may double if the 
violation occurs in conjunction with certain other violations).
    \560\ 31 U.S.C. sec. 5321(a)(5).
    \561\ Section 6103 bars disclosure of return information, unless 
permitted by an exception.
---------------------------------------------------------------------------
    Although the obligation to file an FBAR arises under Title 
31, individual taxpayers subject to the FBAR reporting 
requirements are alerted to this requirement in the preparation 
of annual Federal income tax returns. Part III (``Foreign 
Accounts and Trusts'') of Schedule B of the 2008 IRS Form 1040 
includes the question, ``At any time during 2008, did you have 
an interest in or signatory or any other authority over a 
financial account in a foreign country, such as a bank account, 
securities account, or other financial account?'' and directs 
taxpayers to ``See page B-2 for exceptions and filing 
requirements for Form TD F 90-22.1.'' The Form 1040 
instructions advise individuals who answer ``yes'' to this 
question to identify the foreign country or countries in which 
such accounts are located.\562\ Responding to this question 
does not discharge one's obligations under Title 31 and 
constitutes ``return information'' protected from routine 
disclosure to those charged with enforcing Title 31. In 
addition, the Form 1040 instructions identify certain types of 
accounts that are not subject to disclosure, including those 
instances in which the combined value of all accounts held by 
the taxpayer did not exceed $10,000 at any point during the 
relevant tax year.
---------------------------------------------------------------------------
    \562\ 31 C.F.R. sec. 103.24.
---------------------------------------------------------------------------
    The FBAR requires disclosure of any account in which the 
filer has a financial interest or as to which the filer has 
signature or other authority (in which case the filer must 
identify the owner of the account). The Treasury Department and 
the IRS revised the FBAR and its accompanying instructions in 
October, 2008, to clarify the filing requirements for U.S. 
persons holding interests in foreign bank accounts.\563\ The 
terminology has been updated to reflect new types of financial 
transactions. For example, ``financial account'' now specifies 
that debit or prepaid credit cards are financial accounts,\564\ 
and the definition of ``signature or other authority'' now 
encompasses the ability to indirectly exercise this authority, 
even in the absence of written instructions.\565\ The revised 
instructions also provide that foreign individuals doing 
business in the United States may be required to file an 
FBAR.\566\ In August, 2009, the IRS requested public comments 
to help determine the scope and nature of future additional 
guidance.\567\
---------------------------------------------------------------------------
    \563\ Treasury Department Form TD F 90-22.1, Report of Foreign Bank 
and Financial Accounts, and its instructions states:
    A financial interest in a bank, securities, or other financial 
account in a foreign country means an interest described in one of the 
following three paragraphs: 1. A United States person has a financial 
interest in each account for which such person is the owner of record 
or has legal title, whether the account is maintained for his or her 
own benefit or for the benefit of others including non-United States 
persons. 2. A United States person has a financial interest in each 
bank, securities, or other financial account in a foreign country for 
which the owner of record or holder of legal title is: (a) a person 
acting as an agent, nominee, attorney, or in some other capacity on 
behalf of the U.S. person; (b) a corporation in which the United States 
person owns directly or indirectly more than 50 percent of the total 
value of shares of stock or more than 50 percent of the voting power 
for all shares of stock; (c) a partnership in which the United States 
person owns an interest in more than 50 percent of the profits 
(distributive share of income, taking into account any special 
allocation agreement) or more than 50 percent of the capital of the 
partnership; or (d) a trust in which the United States person either 
has a present beneficial interest, either directly or indirectly, in 
more than 50 percent of the assets or from which such person receives 
more than 50 percent of the current income. 3. A United States person 
has a financial interest in each bank, securities, or other financial 
account in a foreign country for which the owner of record or holder of 
legal title is a trust, or a person acting on behalf of a trust, that 
was established by such United States person and for which a trust 
protector has been appointed. A trust protector is a person who is 
responsible for monitoring the activities of a trustee, with the 
authority to influence the decisions of the trustee or to replace, or 
recommend the replacement of, the trustee. Correspondent or ``nostro'' 
accounts (international interbank transfer accounts) maintained by 
banks that are used solely for the purpose of bank-to-bank settlement 
need not be reported on this form, but are subject to other Bank 
Secrecy Act filing requirements. This exception is intended to 
encompass those accounts utilized for bank-to-bank settlement purposes 
only.
    \564\ See Chief Couns. Adv. 200603026 (January 20, 2006) for a 
discussion of whether payment card accounts constitute financial 
accounts.
    \565\ According to the instructions to the FBAR, a person has 
``signature authority'' over an account ``if such person can control 
the disposition of money or other property in it by delivery of a 
document containing his or her signature (or his or her signature and 
that of one or more other persons) to the bank or other person with 
whom the account is maintained.'' ``Other authority'' exists in a 
person ``who can exercise comparable power over an account by 
communication to the bank or other person with whom the account is 
maintained, either directly or through an agent, nominee, attorney, or 
in some other capacity on behalf of the U.S. person, either orally or 
by some other means.''
    \566\ Although the revised instructions currently track the 
language of the statute in stating that a person in or doing business 
in the United States is within its purview, and thus merely clarify 
what has long been required, the IRS announced that pending publication 
of guidance on the scope of the statute, people could rely on the 
earlier, unrevised instructions to determine whether they are required 
to file a FBAR. Announcement 2009-51, 2009-25 I.R.B. 1105. 
Subsequently, the IRS announced that persons with only signature 
authority over a foreign financial account as well as for signatories 
or owners of financial interest in a foreign commingled fund have until 
June 30, 2010 to file an FBAR for the 2008 and earlier calendar years 
with respect to those accounts. Notice 2009-62, 2009-35 I.R.B. 260.
    \567\ Notice 2009-62, 2009-35 I.R.B. 260, specifically requested 
comments concerning: (1) when a person having only signature authority 
or having an interest in a commingled fund should be relieved of filing 
an FBAR; (2) the circumstances under which the FBAR filing exceptions 
for officers and employees of banks and some publicly traded domestic 
corporations should be expanded; (3) when an interest in a foreign 
entity should be subject to FBAR reporting; and (4) whether the passive 
asset and passive income thresholds are appropriate and should apply 
conjunctively.
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    The revised instructions explain the basis for reporting 
other information in more detail, and provide that (1) all 
foreign persons with an interest in the account must be 
identified (including foreign identification numbers for each), 
(2) the highest value held in the account at any point in the 
year must be disclosed, (3) corporate employees with signature 
authority but no financial interest are generally required to 
disclose the signature authority, unless the corporate Chief 
Financial Officer (``CFO'') (or in the case of an employee of a 
subsidiary, the parent company's CFO) certifies that the 
account will be reported on the corporate filing and (4) any 
amended or delinquent filing should be identified as such, and 
accompanied by an explanatory statement.
    In addition to the FBAR requirements under Title 31, there 
are additional reports required by the Code to be filed with 
the IRS by U.S. persons engaged in foreign activities, directly 
or indirectly, through a foreign business entity. Upon the 
formation, acquisition or ongoing ownership of certain foreign 
corporations, U.S. persons that are officers, directors, or 
shareholders must file a Form 5471, ``Information Return of 
U.S. Persons with Respect to Certain Foreign Corporations.'' 
\568\ Similarly, an IRS Form 8865, ``Return of U.S. Persons 
with Respect to Certain Foreign Partnerships,'' must be filed 
with respect to certain interests in a controlled foreign 
partnership; an IRS Form 3520, ``Annual Return to Report 
Transactions with Foreign Trusts and Receipt of Certain Foreign 
Gifts,'' must be filed with respect to certain foreign trusts; 
and an IRS Form 8858, ``Information Return of U.S. Persons With 
Respect To Foreign Disregarded Entities'' must be filed with 
respect to a foreign disregarded entity.\569\ To the extent 
that the U.S. person engages in such foreign activities 
indirectly through a foreign business entity, other self-
reporting requirements may apply. In addition, a U.S. person 
that capitalizes a foreign entity generally is required to file 
an IRS Form 926, ``Return by a U.S. Transferor of Property to a 
Foreign Corporation.'' \570\
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    \568\ Secs. 6038, 6046.
    \569\ Form 8858 is used to satisfy reporting requirements of 
sections 6011, 6012, 6031, 6038, and related regulations.
    \570\ Sec. 6038B. The filing of this form may also be required upon 
future contributions to the foreign corporation.
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    With the exception of the questions included on Form 1040, 
Schedule B, there is no requirement to disclose the information 
includible on FBAR on an individual tax return.
            FBAR enforcement responsibility
    Until 2003, the Financial Crimes and Enforcement Network 
(``FinCEN''), an agency of the Department of the Treasury, had 
responsibility for civil penalty enforcement of FBAR.\571\ As a 
result, persons who were more than 180 days delinquent in 
paying any FBAR penalties were referred for collection action 
to the Financial Management Service of the Treasury Department, 
which is responsible for such non-tax collections.\572\ 
Continued nonpayment resulted in a referral to the Department 
of Justice for institution of court proceedings against the 
delinquent person. In 2003, the Secretary delegated civil 
enforcement to the IRS.\573\ This change reflected the fact 
that a major purpose of the FBAR was to identify potential tax 
evasion, and therefore was not closely aligned with FinCEN's 
core mission.\574\ The authority delegated to the IRS in 2003 
included the authority to determine and enforce civil 
penalties,\575\ as well as to revise the form and instructions. 
However, the collection and enforcement powers available to 
enforce the Internal Revenue Code under Title 26 are not 
available to the IRS in the enforcement of FBAR civil 
penalties, which remain collectible only in accord with the 
procedures for non-tax collections described above.
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    \571\ Treas. Directive 15-14 (December 1, 1992), in which the 
Secretary delegated to the IRS authority to investigate violations of 
the Bank Secrecy Act. If the IRS Criminal Investigation Division 
declines to pursue a possible criminal case, it is to refer the matter 
to FinCEN for civil enforcement.
    \572\ 31 U.S.C. sec. 3711(g).
    \573\ 31 C.F.R. sec. 103.56(g). Memorandum of Agreement and 
Delegation of Authority for Enforcement of FBAR Requirements (April 2, 
2003); News Release, IR-2003-48 (April 10, 2003).
    \574\ Secretary of the Treasury, ``A Report to Congress in 
Accordance with sec. 361(b) of the Uniting and Strengthening America by 
Providing Appropriate Tools Required to Intercept and Obstruct 
Terrorism Act of 2001 (USA Patriot Act)'' (April 24, 2003).
    \575\ A penalty may be assessed before the end of the six-year 
period beginning on the date of the transaction with respect to which 
the penalty is assessed. 31 U.S.C. sec. 5321(b)(1). A civil action for 
collection may be commenced within two years of the later of the date 
of assessment and the date a judgment becomes final in any a related 
criminal action. 31 U.S.C. sec. 5321(b)(2).
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    In general, information reported on an FBAR is available to 
the IRS and other law enforcement agencies. In contrast, 
information on income tax returns--including the Schedule B 
information regarding foreign bank accounts--is not readily 
available to those within the IRS who are charged with 
administering FBAR compliance, despite the fact that Federal 
returns and return information may be the best source of 
information for this purpose.
    The nondisclosure constraints on IRS personnel who examine 
income tax liability (i.e., Form 1040 reporting) generally 
preclude the sharing of tax return information with any other 
IRS personnel or Treasury officials, except for tax 
administration purposes.\576\ Tax administration is defined as 
``the administration, management, conduct, direction, and 
supervision of the execution and application of the internal 
revenue laws or related statutes'' and does not necessarily 
include administration of Title 31.\577\ Because Title 31 
includes enforcement of non-tax provisions of the Bank Secrecy 
Act, Title 31 is not, per se, a ``related statute,'' for 
purposes of finding that a disclosure of such information would 
be for tax administration purposes. As a result, IRS personnel 
charged with investigating and enforcing the civil penalties 
under Title 31 are not routinely permitted access to Form 1040 
information that would support or shed light on the existence 
of an FBAR violation. Instead, there must be a determination, 
in writing, that the FBAR violation was in furtherance of a 
Title 26 violation in order to support a finding that the 
statutes are ``related statutes'' for purposes of authorizing 
the disclosure. The effect of this prerequisite is to subsume 
the bank account information reported on Form 1040 under the 
scope of ``return information'' and therefore, the protection 
from disclosure provided under Title 26.\578\
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    \576\ Sec. 6103(h)(1). In essence, section 6103(h)(1) authorizes 
officers and employees of both the Treasury Department and IRS to have 
access to return information on the basis of a ``need to know'' in 
order to perform a tax administration function.
    \577\ Sec. 6103(b)(4).
    \578\ Internal Revenue Manual, paragraphs 4.26.14.2 and 
4.26.14.2.1.
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            Penalties
    Failure to comply with the FBAR filing requirements is 
subject to penalties imposed under Title 31 of the United 
States Code, and may be both civil and criminal. Since the 
initial enactment of the Bank Secrecy Act, a willful failure to 
comply with the FBAR reporting requirement has been subject to 
a civil penalty. In 2004, the available penalties were expanded 
to include a reduced penalty for a non-willful failure to 
file.\579\ Willful failure to file an FBAR may be subject to 
penalties in amounts not to exceed the greater of $100,000 or 
50 percent of the amount in the account at the time of the 
violation.\580\ A non-willful, but negligent, failure to file 
is subject to a penalty of $10,000 for each negligent 
violation.\581\ The penalty may be waived if (1) there is 
reasonable cause for the failure to report and (2) the amount 
of the transaction or balance in the account was properly 
reported. In addition, serious violations are subject to 
criminal prosecution, potentially resulting in both monetary 
penalties and imprisonment. Civil and criminal sanctions are 
not mutually exclusive.
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    \579\ American Jobs Creation Act of 2004, Pub. L. No. 108-357, sec. 
821(b). This provision is codified in 31 U.S.C. sec. 5321(a)(5).
    \580\ 31 U.S.C. sec. 5321(a)(5)(C).
    \581\ 31 U.S.C. sec. 5321(a)(5)(B)(i), (ii).
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    Failure to comply with information returns required by the 
Internal Revenue Code is subject to a variety of sanctions, 
including (1) suspension of the applicable statute of 
limitations,\582\ (2) disallowance of otherwise permitted tax 
attributes, deductions or credits,\583\ and (3) imposition of 
penalties. For most information returns, the failure to file 
penalty is $50 per return, up to a maximum of $250,000 per 
taxpayer.\584\ Failures to disclose control of any foreign 
business entity,\585\ foreign parties with 25-percent ownership 
interest in a domestic company,\586\ domestic officers and 10-
percent owners of a foreign corporation,\587\ or change in 
ownership of a foreign partnership \588\ are subject to 
penalties of $10,000, plus $10,000 for every 30 days the 
failure to file persists longer than 90 days after the taxpayer 
is informed of the failure. A failure to report a transfer to a 
foreign corporation is subject to a penalty equal to 10 percent 
of the value of the transfer, but is capped at $10,000 if the 
failure is not willful.\589\ Failure to report the creation of 
a foreign trust is subject to a 35 percent penalty on the 
reportable amount (or five percent for a Form 3520-A report), 
plus $10,000 for every 30 days the failure to file persists 
after 90 days from the date on which the taxpayer is informed 
of the failure to file. The penalty is capped at the gross 
reportable amount.\590\
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    \582\ Sec. 6501(c)(8).
    \583\ Secs. 1295, 6038.
    \584\ Sec. 6721.
    \585\ Sec. 6038.
    \586\ Sec. 6038A.
    \587\ Sec. 6046.
    \588\ Sec. 6046A.
    \589\ Sec. 6038B.
    \590\ Sec. 6048.
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                        Explanation of Provision

    The provision requires individual taxpayers with an 
interest in a ``specified foreign financial asset'' during the 
taxable year to attach a disclosure statement to their income 
tax return for any year in which the aggregate value of all 
such assets is greater than $50,000. Although the nature of the 
information required is similar to the information disclosed on 
an FBAR, it is not identical. For example, a beneficiary of a 
foreign trust who is not within the scope of the FBAR reporting 
requirements because his interest in the trust is less than 50 
percent may nonetheless be required to disclose the interest in 
the trust with his tax return under this provision if the value 
of his interest in the trust together with the value of other 
specified foreign financial assets exceeds the aggregate value 
threshold. Nothing in this provision is intended as a 
substitute for compliance with the FBAR reporting requirements, 
which are unchanged by this provision.
    ``Specified foreign financial assets'' are depository or 
custodial accounts at foreign financial institutions and, to 
the extent not held in an account at a financial institution, 
(1) stocks or securities issued by foreign persons, (2) any 
other financial instrument or contract held for investment that 
is issued by or has a counterparty that is not a U.S. person, 
and (3) any interest in a foreign entity. The information to be 
included on the statement includes identifying information for 
each asset and its maximum value during the taxable year. For 
an account, the name and address of the institution at which 
the account is maintained and the account number are required. 
For a stock or security, the name and address of the issuer, 
and any other information necessary to identify the stock or 
security and terms of its issuance must be provided. For all 
other instruments or contracts, or interests in foreign 
entities, the information necessary to identify the nature of 
the instrument, contract or interest must be provided, along 
with the names and addresses of all foreign issuers and 
counterparties. An individual is not required under this 
provision to disclose interests that are held in a custodial 
account with a U.S. financial institution nor is an individual 
required to identify separately any stock, security instrument, 
contract, or interest in a foreign financial account disclosed 
under the provision. In addition, the provision permits the 
Secretary to issue regulations that would apply the reporting 
obligations to a domestic entity in the same manner as if such 
entity were an individual if that domestic entity is formed or 
availed of to hold such interests, directly or indirectly.
    Individuals who fail to make the required disclosures are 
subject to a penalty of $10,000 for the taxable year. An 
additional penalty may apply if the Secretary notifies an 
individual by mail of the failure to disclose and the failure 
to disclose continues. If the failure continues beyond 90 days 
following the mailing, the penalty increases by $10,000 for 
each 30 day period (or a fraction thereof), up to a maximum 
penalty of $50,000 for one taxable period. The computation of 
the penalty is similar to that applicable to failures to file 
reports with respect to certain foreign corporations under 
section 6038. Thus, an individual who is notified of his 
failure to disclose with respect to a single taxable year under 
this provision and who takes remedial action on the 95th day 
after such notice is mailed incurs a penalty of $20,000 
comprising the base amount of $10,000, plus $10,000 for the 
fraction (i.e., the five days) of a 30-day period following the 
lapse of 90 days after the notice of noncompliance was mailed. 
An individual who postpones remedial action until the 181st day 
is subject to the maximum penalty of $50,000: the base amount 
of $10,000, plus $30,000 for the three 30-day periods, plus 
$10,000 for the one fraction (i.e., the single day) of a 30-day 
period following the lapse of 90 days after the notice of 
noncompliance was mailed.
    No penalty is imposed under the provision against an 
individual who can establish that the failure was due to 
reasonable cause and not willful neglect. Foreign law 
prohibitions against disclosure of the required information 
cannot be relied upon to establish reasonable cause.
    To the extent the Secretary determines that the individual 
has an interest in one or more foreign financial assets but the 
individual does not provide enough information to enable the 
Secretary to determine the aggregate value thereof, the 
aggregate value of such identified foreign financial assets 
will be presumed to have exceeded $50,000 for purposes of 
assessing the penalty.
    The provision also grants authority to promulgate 
regulations necessary to carry out the intent. Such regulations 
may include exceptions for nonresident aliens and classes of 
assets identified by the Secretary, including those assets 
which the Secretary determines are subject to reporting 
requirements under other provisions of the Code. In particular, 
regulatory exceptions to avoid duplicative reporting 
requirements are anticipated.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (March 18, 2010).

4. Penalties for underpayments attributable to undisclosed foreign 
        financial assets (sec. 512 of the Act and sec. 6662 of the 
        Code)

                              Present Law

    The Code imposes penalties equal to 20 percent of the 
portion of any underpayments that are attributable to any of 
the following five grounds: (1) negligence or disregard of 
rules or regulations; (2) any substantial understatement \591\ 
of income tax; (3) any substantial valuation misstatement; (4) 
any substantial overstatement of pension liabilities; and (5) 
any substantial estate or gift tax valuation understatement. 
With the exception of a penalty based on negligence or 
disregard of rules or regulations, these penalties are commonly 
referred to as accuracy-related penalties, because the 
imposition of the penalty does not require an inquiry into the 
culpability of the taxpayer. If the penalty is asserted, a 
taxpayer may defend against the penalty by demonstrating that 
(1) there was ``reasonable cause'' for the underpayment and (2) 
the taxpayer acted in good faith.\592\ Regulations provide that 
reasonable cause exists in cases in which the taxpayer 
``reasonably relies in good faith on the opinion of a 
professional tax advisor, if the opinion is based on the tax 
advisor's analysis of the pertinent facts and authorities . . . 
and unambiguously states that the tax advisor concludes that 
there is a greater than 50-percent likelihood that the tax 
treatment of the item will be upheld if challenged'' by the 
IRS.\593\
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    \591\ If the correct income tax liability exceeds that reported by 
the taxpayer by the greater of 10 percent of the correct tax or $5,000 
(or, in the case of corporations, by the lesser of (1) 10 percent of 
the correct tax (or, if greater, $10,000) or (2) $10 million), then a 
substantial understatement exists.
    \592\ Sec. 6664(c).
    \593\ Treas. Reg. secs. 1.6662-4(g)(4)(i)(B), 1.6664-4(c).
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    A penalty for a substantial understatement may be reduced 
to the extent of the portion of the understatement attributable 
to an item on the return for which the challenged tax treatment 
(1) is supported by substantial authority or (2) is adequately 
disclosed on the return and there was a reasonable basis for 
such treatment. The tax treatment is considered to have been 
adequately disclosed only if all relevant facts are disclosed 
with the return. Regardless of whether an item would otherwise 
meet either of these tests, this defense is not available with 
respect to penalties imposed on understatements arising from 
tax shelters.\594\ The Secretary may prescribe a list of 
positions which the Secretary believes do not meet the 
requirements for substantial authority under this provision.
---------------------------------------------------------------------------
    \594\ A tax shelter is defined for this purpose as a partnership or 
other entity, an investment plan or arrangement, or any other plan or 
arrangement if a significant purpose of such partnership, other entity, 
plan, or arrangement is the avoidance or evasion of Federal income tax. 
Sec. 6662(d)(2)(C).
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    Under present law, failure to comply with the various 
information reporting requirements generally does not, in 
itself, determine the amount of the penalty imposed on an 
underpayment of tax. However, such failure to comply may be 
relevant to (1) establishing negligence under section 6662 or 
fraudulent intent,\595\ (2) determining whether penalties based 
on culpability are applicable or (3) determining whether 
certain defenses are available.
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    \595\ Section 6663 imposes a penalty of 75 percent on that portion 
of the understatement attributable to fraud. If the government proves 
that such understatement was attributable to fraud, there is a 
rebuttable presumption that any other understatement is attributable to 
fraud.
---------------------------------------------------------------------------
    In the context of transactions that are subject to the 
``reportable transaction'' disclosure regime,\596\ a separate 
accuracy-related penalty may apply.\597\ That penalty applies 
to ``listed transactions'' and other ``reportable 
transactions'' that have a significant tax avoidance purpose (a 
``reportable avoidance transaction''). The penalty rate and 
defenses available to avoid the section 6662A penalty vary, 
based on the adequacy of disclosure. In general, a 20-percent 
accuracy-related penalty is imposed on any understatement 
attributable to an adequately disclosed listed transaction or 
reportable avoidance transaction.\598\ An exception is 
available if the taxpayer satisfies a higher standard under the 
reasonable cause and good faith exception. This higher standard 
requires the taxpayer to demonstrate that there was (1) 
adequate disclosure of the relevant facts affecting the 
treatment on the taxpayer's return, (2) substantial authority 
for the treatment on the taxpayer's return, and (3) a 
reasonable belief that the treatment on the taxpayer's return 
was more likely than not the proper treatment.\599\ If the 
transaction is not adequately disclosed, the reasonable cause 
exception is not available and the taxpayer is subject to a 
penalty equal to 30 percent of the understatement.\600\
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    \596\ Secs. 6011 through 6112 require taxpayers and their advisers 
to disclose certain transactions determined to have the potential for 
tax avoidance. All such transactions are referred to as ``reportable 
transactions,'' and include within that class of transactions, those 
that are ``listed,'' that is, the subject of published guidance in 
which the Secretary announces his intent to challenge such 
transactions.
    \597\ Sec. 6662A.
    \598\ Sec. 6662A(a).
    \599\ Sec. 6664(d).
    \600\ Sec. 6662A(c).
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                        Explanation of Provision

    The provision adds a new accuracy related penalty to 
section 6662. The new provision, which is subject to the same 
defenses as are otherwise available under section 6662, imposes 
a 40-percent penalty on any understatement attributable to an 
undisclosed foreign financial asset. The term ``undisclosed 
foreign financial asset'' includes all assets subject to 
certain information reporting requirements \601\ for which the 
required information was not provided by the taxpayer as 
required under the applicable reporting provisions. An 
understatement is attributable to an undisclosed foreign 
financial asset if it is attributable to any transaction 
involving such asset. Thus, a U.S. person who fails to comply 
with the various self-reporting requirements for a foreign 
financial asset and engages in a transaction with respect to 
that asset incurs a penalty on any resulting underpayment that 
is double the otherwise applicable penalty for substantial 
understatements or negligence. For example, if a taxpayer fails 
to disclose amounts held in a foreign financial account, any 
underpayment of tax related to the transaction that gave rise 
to the income would be subject to the penalty provision, as 
would any underpayment related to interest, dividends or other 
returns accrued on such undisclosed amounts.
---------------------------------------------------------------------------
    \601\ The information reporting requirements identified include 
sections 6038, 6038A, new 6038D, 6046A, and 6048.
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                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (March 18, 2010).

5. Modification of statute of limitations for significant omission of 
        income in connection with foreign assets (sec. 513 of the Act 
        and secs. 6229 and 6501 of the Code)

                              Present Law

    Taxes are generally required to be assessed within three 
years after a taxpayer's return was filed, whether or not it 
was timely filed.\602\ Of the exceptions to this general rule, 
only section 6501(c)(8) is specifically targeted at the 
identification of, and collection of information about, cross-
border transactions. Under this exception, the limitation 
period for assessment of any tax imposed under the Code with 
respect to any event or period to which information about 
certain cross-border transactions required to be reported 
relates does not expire any earlier than three years after the 
required information is actually provided to the Secretary by 
the person required to file the return.\603\ In general, such 
information reporting is due with the taxpayer's return; thus, 
the three-year limitation period commences when a timely and 
complete (including all information reporting) return is filed. 
Without the inclusion of the information reporting with the 
return, the limitation period does not commence until such time 
as the information reports are subsequently provided to the 
Secretary, even though the return has been filed.
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    \602\ Sec. 6501(a). Returns that are filed before the date they are 
due are deemed filed on the due date. See sec. 6501(b)(1) and (2).
    \603\ Required information reporting subject to this three-year 
rule is reporting under sections 6038 (certain foreign corporations and 
partnerships), 6038A (certain foreign-owned corporations), 6038B 
(certain transfers to foreign persons), 6046 (organizations, 
reorganizations, and acquisitions of stock of foreign corporations), 
6046A (interests in foreign partnerships), and 6048 (certain foreign 
trusts).
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    In the case of a false or fraudulent return filed with the 
intent to evade tax, or if the taxpayer fails to file a 
required return, the tax may be assessed, or a proceeding in 
court for collection of such tax may be begun without 
assessment, at any time.\604\ The limitation period also may be 
extended by taxpayer consent.\605\ If a taxpayer engages in a 
listed transaction but fails to include any of the information 
required under section 6011 on any return or statement for a 
taxable year, the limitation period with respect to such 
transaction will not expire before the date which is one year 
after the earlier of (1) the date on which the Secretary is 
provided the information so required, or (2) the date that a 
``material advisor'' (as defined in section 6111) makes its 
section 6112(a) list available for inspection pursuant to a 
request by the Secretary under section 6112(b)(1)(A).\606\
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    \604\ Sec. 6501(c).
    \605\ Sec. 6501(c)(4).
    \606\ Sec. 6501(c)(10).
---------------------------------------------------------------------------
    A special rule is provided where there is a substantial 
omission of income. If a taxpayer omits substantial income on a 
return, any tax with respect to that return may be assessed and 
collected within six years of the date on which the return was 
filed. In the case of income taxes, ``substantial'' means at 
least 25 percent of the amount that was properly includible in 
gross income; for estate and gift taxes, it means 25 percent of 
a gross estate or total gifts. For this purpose, the gross 
income of a trade or business means gross receipts, without 
reduction for the cost of sales or services.\607\ An amount is 
not considered to have been omitted if the item properly 
includible in income is disclosed on the return.\608\
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    \607\ Sec. 6501(e)(1)(A)(i).
    \608\ Sec. 6501(e)(1)(A)(ii) provides that, in determining whether 
an amount was omitted, any amounts that are disclosed in the return or 
in a statement attached to the return in a manner adequate to apprise 
the Secretary of the nature and amount of such item are not taken into 
account.
---------------------------------------------------------------------------
    In addition to the exceptions described, there are also 
circumstances under which the three-year limitation period is 
suspended. For example, service of an administrative summons 
triggers the suspension either (1) beginning six months after 
service (in the case of John Doe summonses) \609\ or (2) when a 
proceeding to quash a summons is initiated by a taxpayer named 
in a summons to a third-party record-keeper. Judicial 
proceedings initiated by the government to enforce a summons 
generally do not suspend the limitation period.
---------------------------------------------------------------------------
    \609\ Sec. 7609(e)(2).
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                     Explanation of Provision \610\

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    \610\ This provision was subsequently amended by section 218 of the 
__ Act of __, Pub. L. No. 111-226, to provide a reasonable cause 
exception under which the suspension of a limitations period under 
section 6501(c)(8) may not apply to the entire return. See Part Twelve 
for a description of the provision.
---------------------------------------------------------------------------
    The provision authorizes a new six-year limitations period 
for assessment of tax on understatements of income attributable 
to foreign financial assets. The present exception that 
provides a six-year period for substantial omission of an 
amount equal to 25 percent of the gross income reported on the 
return is not changed.
    The new exception applies if there is an omission of gross 
income in excess of $5,000 and the omitted gross income is 
attributable to an asset with respect to which information 
reports are required under section 6038D, as applied without 
regard to the dollar threshold, the statutory exception for 
nonresident aliens and any exceptions provided by regulation. 
If a domestic entity is formed or availed of to hold foreign 
financial assets and is subject to the reporting requirements 
of section 6038D in the same manner as an individual, the six-
year limitations period may also apply to that entity. The 
Secretary is permitted to assess the resulting deficiency at 
any time within six years of the filing of the income tax 
return.
    In providing that the applicability of section 6038D 
information reporting requirements is to be determined without 
regard to the statutory or regulatory exceptions, the statute 
ensures that the longer limitation period applies to omissions 
of income with respect to transactions involving foreign assets 
owned by individuals. Thus, a regulatory provision that 
alleviates duplicative reporting obligations by providing that 
a report that complies with another provision of the Code may 
satisfy one's obligations under new section 6038D does not 
change the nature of the asset subject to reporting. The asset 
remains one that is subject to the requirements of section 
6038D for purposes of determining whether the exception to the 
three-year statute of limitations applies.
    The provision also suspends the limitations period for 
assessment if a taxpayer fails to provide timely information 
returns required with respect to passive foreign investment 
corporations \611\ and the new self-reporting of foreign 
financial assets. The limitations period will not begin to run 
until the information required by those provisions has been 
furnished to the Secretary. The provision also clarifies that 
the extension is not limited to adjustments to income related 
to the information required to be reported by one of the 
enumerated sections.
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    \611\ Sec. 1295(b), (f).
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                             Effective Date

    The provision applies to returns filed after the date of 
enactment (March 18, 2010) as well as for any other return for 
which the assessment period specified in section 6501 has not 
yet expired as of the date of enactment (March 18, 2010).

6. Reporting of activities with respect to passive foreign investment 
        companies (sec. 521 of the Act and sec. 1298 of the Code)

                              Present Law

    In general, active foreign business income derived by a 
foreign corporation with U.S. owners is not subject to current 
U.S. taxation until the corporation makes a dividend 
distribution to those owners. Certain rules, however, restrict 
the benefit of deferral of U.S. tax on income derived through 
foreign corporations. One such regime applies to U.S. persons 
who own stock of passive foreign investment companies 
(``PFICs''). A PFIC generally is defined as any foreign 
corporation if 75 percent or more of its gross income for the 
taxable year consists of passive income, or 50 percent or more 
of its assets consist of assets that produce, or are held for 
the production of, passive income.\612\ Various sets of income 
inclusion rules apply to U.S. persons that are shareholders in 
a PFIC, regardless of their percentage ownership in the 
company. One set of rules applies to PFICs under which U.S. 
shareholders pay tax on certain income or gain realized through 
the companies, plus an interest charge intended to eliminate 
the benefit of deferral.\613\ A second set of rules applies to 
PFICs that are ``qualified electing funds'' (``QEF''), under 
which electing U.S. shareholders currently include in gross 
income their respective shares of the company's earnings, with 
a separate election to defer payment of tax, subject to an 
interest charge, on income not currently received.\614\ A third 
set of rules applies to marketable PFIC stock, under which 
electing U.S. shareholders currently take into account as 
income (or loss) the difference between the fair market value 
of the stock as of the close of the taxable year and their 
adjusted basis in such stock (subject to certain limitations), 
often referred to as ``marking to market.'' \615\
---------------------------------------------------------------------------
    \612\ Sec. 1297.
    \613\ Sec. 1291.
    \614\ Secs. 1293-1295.
    \615\ Sec. 1296.
---------------------------------------------------------------------------
    In general, a U.S. person that is a direct or indirect 
shareholder of a PFIC must file IRS Form 8621, ``Return by a 
Shareholder of a Passive Foreign Investment Company or 
Qualifying Electing Fund'' for each tax year in which that U.S. 
person (1) recognizes gain on a direct or indirect disposition 
of PFIC stock, (2) receives certain direct or indirect 
distributions from a PFIC, or (3) is making a reportable 
election.\616\ The Code includes a general reporting 
requirement for certain PFIC shareholders which is contingent 
upon the issuance of regulations.\617\ Although Treasury issued 
proposed regulations in 1992 requiring U.S. persons to file 
annually Form 8621 for each PFIC of which the person is a 
shareholder during the taxable year, such regulations have not 
been finalized and current IRS Form 8621 requires reporting 
only based on one of the triggering events described 
above.\618\
---------------------------------------------------------------------------
    \616\ See Instructions to IRS Form 8621. According to the form, 
reportable elections include the following: (i) an election to treat 
the PFIC as a QEF; (ii) an election to recognize gain on the deemed 
sale of a PFIC interest on the first day of the PFIC's tax year as a 
QEF; (iii) an election to treat an amount equal to the shareholder's 
post-1986 earnings and profits of a CFC as an excess distribution on 
the first day of a PFIC's tax year as a QEF that is also a controlled 
foreign corporation under section 957(a); (iv) an election to extend 
the time for payment of the shareholder's tax on the undistributed 
earnings and profits of a QEF; (v) an election to treat as an excess 
distribution the gain recognized on the deemed sale of the 
shareholder's interest in the PFIC, or to treat such shareholder's 
share of the PFIC's post-1986 earnings and profits as an excess 
distribution, on the last day of its last tax year as a PFIC under 
section 1297(a) if eligible; or (vi) an election to mark-to-market the 
PFIC stock that is marketable within the meaning of section 1296(e).
    \617\ Sec. 1291(e) by reference to sec. 1246(f).
    \618\ Prop. Treas. Reg. sec. 1.1291-1(i).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision requires that, unless otherwise provided by 
the Secretary, each U.S. person who is a shareholder of a PFIC 
must file an annual information return containing such 
information as the Secretary may require. A person that meets 
the reporting requirements of this provision may, however, also 
meet the reporting requirements of section 511 of the Act and 
new section 6038D of the Code requiring disclosure of 
information with respect to foreign financial assets. It is 
anticipated that the Secretary will exercise regulatory 
authority under this provision or new section 6038D to avoid 
duplicative reporting.

                             Effective Date

    The provision is effective on the date of enactment (March 
18, 2010).

7. Secretary permitted to require financial institutions to file 
        certain returns related to withholding on foreign transfers 
        electronically (sec. 522 of the Act and sec. 6011 of the Code).

                              Present Law


Withholding responsibility

    A withholding agent is any person required to withhold U.S. 
income tax under sections 1441, 1442, 1443, or 1461. For 
purposes of these sections, a withholding agent is any person, 
whether a U.S. or a foreign person, that has the control, 
receipt, custody, disposal, or payment of an item of income of 
a foreign person subject to withholding.\619\ A withholding 
agent is personally liable for the tax required to be 
withheld.\620\
---------------------------------------------------------------------------
    \619\ Treas. Reg. sec. 1.1441-7(a)(1).
    \620\ Sec. 1461.
---------------------------------------------------------------------------

Reporting liability of a withholding agent

    Every withholding agent must file an annual return with the 
IRS on Form 1042, ``Annual Withholding Tax Return for U.S. 
Source Income of Foreign Persons,'' reporting all taxes 
withheld during the preceding year and remitting any taxes 
still owing for such preceding year.\621\ IRS Form 1042 must be 
filed on or before March 15 of the year following the year of 
the payment. The form must be filled even though no tax has 
been withheld from income paid during the year.\622\ A 
withholding agent must also file an information return, IRS 
Form 1042-S, which is entitled ``Foreign Person's U.S. Source 
Income Subject to Withholding,'' on or before March 15 of the 
year succeeding the year of payment. IRS Form 1042-S requires 
the withholding agent to provide all items of income specified 
in section 1441(b) paid during the previous year to foreign 
persons.\623\ IRS Form 1042-S must be filed for each foreign 
recipient to whom payments were made during the preceding 
year,\624\ even if no tax was required to have been withheld. A 
copy of IRS Form 1042-S must be sent to the payee.
---------------------------------------------------------------------------
    \621\ Treas. Reg. sec. 1.1461-1(b)(1).
    \622\ Ibid.
    \623\ Treas. Reg. sec. 1.1461-1(c)(1). IRS Form 1042-S filings 
provide information important for the Secretary's purposes in properly 
effecting refund claims and in meeting IRS's obligations under exchange 
of information agreements with various treaty partners. Also, the IRS 
has the ability to validate electronically filed Form 1042-S upon such 
filing, thereby serving to better ensure the reliability of information 
included in such filings.
    \624\ Ibid. If payments are made to a nominee or representative of 
a foreign payee, Form 1042-S must also be sent to the beneficial owner 
of such payments, if known to the withholding agent.
---------------------------------------------------------------------------

IRS's authority to require electronic filing

    The Internal Revenue Service Restructuring and Reform Act 
of 1998 (``RRA 1998'') \625\ states that it is a congressional 
policy to promote the paperless filing of Federal tax returns. 
Section 2001(a) of RRA 1998 set a goal for the IRS to have at 
least 80 percent of all Federal tax and information returns 
filed electronically by 2007. Section 2001(b) of RRA 1998 
requires the IRS to establish a 10-year strategic plan to 
eliminate barriers to electronic filing.
---------------------------------------------------------------------------
    \625\ Pub. L. No. 105-206 (1998).
---------------------------------------------------------------------------
    The Secretary has limited authority to issue regulations 
specifying which returns must be filed electronically. First, 
in general, such regulations can only apply to persons required 
to file at least 250 returns during the year.\626\ Second, the 
Secretary is generally prohibited from requiring that income 
tax returns of individuals, estates, and trusts be submitted in 
any format other than paper (although these returns may be 
filed electronically by choice).\627\ Third, the Secretary, in 
determining which returns must be filed on magnetic media, must 
take into account relevant factors, including the ability of a 
taxpayer to comply with magnetic media filing at reasonable 
cost.\628\ Finally, a failure to comply with the regulations 
mandating electronic filing cannot in itself support a penalty 
for failure to file an information return, with certain 
exceptions for corporations and partnerships.\629\
---------------------------------------------------------------------------
    \626\ Partnerships with more than 100 partners are required to file 
electronically. Sec. 6011(e)(2).
    \627\ For returns filed after 12/31/2010, under the recently 
enacted Worker, Homeownership, and Business Act of 2009, Pub. L. No. 
111-92, any individual tax return, including any return of the tax 
imposed by subtitle A on individuals, estates, or trusts, prepared by a 
tax return preparer, is required to be filed electronically unless the 
tax return preparer reasonably expects to file ten or fewer tax returns 
during such calendar year. Sec. 6011(e)(3).
    \628\ Sec. 6011(e).
    \629\ Sec. 6724(c). If a corporation fails to comply with the 
electronic filing requirements for more than 250 returns that it is 
required to file, it may be subject to the penalty for failure to file 
information returns under section 6721. For partnerships, the penalty 
may only be imposed if the failure extends to more than 100 returns.
---------------------------------------------------------------------------
    Accordingly, the Secretary requires corporations and tax-
exempt organizations that have assets of $10 million or more 
and file at least 250 returns during a calendar year, including 
income tax, information, excise tax, and employment tax 
returns, to file electronically their Form IRS 1120/1120-S 
income tax returns and IRS Form 990 information returns for tax 
years ending on or after December 31, 2006. Private foundations 
and charitable trusts that file at least 250 returns during a 
calendar year are required to file electronically their IRS 
Form 990-PF information returns for tax years ending on or 
after December 31, 2006, regardless of their asset size. 
Taxpayers can request waivers of the electronic filing 
requirement if they cannot meet that requirement due to 
technological constraints, or if compliance with the 
requirement would result in undue financial burden.

                        Explanation of Provision

    The provision provides an exception to the general annual 
250 returns threshold and permits the Secretary to issue 
regulations to require filing on magnetic media for any return 
filed by a ``financial institution'' \630\ with respect to any 
taxes withheld by the ``financial institution'' for which it is 
personally liable.\631\ Under the provision, the Secretary is 
authorized to require a financial institution to electronically 
file returns with respect to any taxes withheld by the 
financial institution even though such financial institution 
would be required to file less than 250 returns during the 
year.
---------------------------------------------------------------------------
    \630\ See section 1471(d)(5) in section 101 of the Act.
    \631\ The ``financial institution'' is personally liable for any 
tax withheld in accordance with section 1461 and section 1474(a) under 
section 101 of the Act.
---------------------------------------------------------------------------
    The provision also makes a conforming amendment to section 
6724, permitting assertion of a failure to file penalty under 
section 6721 against a financial institution that fails to 
comply with the electronic filing requirements.

                             Effective Date

    The provision applies to returns the due date for which 
(determined without regard to extensions) is after the date of 
enactment (March 18, 2010).

8. Clarifications with respect to foreign trusts which are treated as 
        having a United States beneficiary (sec. 531 of the Act and 
        sec. 679 of the Code)

                              Present Law

    Under the grantor trust rules, a U.S. person that directly 
or indirectly transfers property to a foreign trust \632\ is 
generally treated as the owner of the portion of the trust 
comprising the transferred property for any taxable year in 
which there is a U.S. beneficiary of any portion of the 
trust.\633\ This treatment generally does not apply to 
transfers by reason of death, or to transfers of property to 
the trust in exchange for at least the fair market value of the 
transferred property.\634\ A trust is treated as having a U.S. 
beneficiary for the taxable year unless (1) under the terms of 
the trust, no part of the income or corpus of the trust may be 
paid or accumulated during the taxable year to or for the 
benefit of a U.S. person, and (2) if the trust were terminated 
at any time during the taxable year, no part of the income or 
corpus of the trust could be paid to or for the benefit of a 
U.S. person.\635\
---------------------------------------------------------------------------
    \632\ A trust is a foreign trust if it is not a U.S. person. Sec. 
7701(a)(31)(B). A trust is a U.S. person if (1) a U.S. court is able to 
exercise primary supervision over the administration of the trust, and 
(2) one or more U.S. persons have the authority to control all 
substantial decisions of the trust. Sec. 7701(a)(30)(E).
    \633\ Sec. 679(a)(1). This rule does not apply to transfers to 
trusts established to fund certain deferred compensation plan trusts or 
to trusts exempt from tax under section 501(c)(3).
    \634\ Sec. 679(a)(2).
    \635\ Sec. 679(c)(1).
---------------------------------------------------------------------------
    Regulations under section 679 employ a broad approach in 
determining whether a foreign trust is treated as having a U.S. 
beneficiary. The determination of whether the trust has a U.S. 
beneficiary is made for each taxable year of the transferor. 
The default rule under the statute and regulations is that a 
trust has a U.S. beneficiary unless during the U.S. 
transferor's taxable year the trust meets the two requirements 
as stated above. Income or corpus may be paid or accumulated to 
or for the benefit of a U.S. person if, directly or indirectly, 
income may be distributed to or accumulated for the benefit of 
a U.S. person, or corpus of the trust may be distributed to or 
held for the future benefit of a U.S. person.\636\ The 
determination is made without regard to whether income or 
corpus is actually distributed, and without regard to whether a 
U.S. person's interest in the trust income or corpus is 
contingent on a future event. A person who is not a named 
beneficiary and is not a member of a class of beneficiaries 
will not be taken into account if the transferor can show that 
the person's contingent interest in the trust is so remote as 
to be negligible.\637\ In considering whether a foreign trust 
has a U.S. beneficiary under the terms of the trust, the trust 
instrument must be read together with other relevant factors 
including (1) all written and oral agreements and 
understandings related to the trust, (2) memoranda or letters 
of wishes, (3) all records that relate to the actual 
distribution of income and corpus, and (4) all other documents 
that relate to the trust, whether or not of any purported legal 
effect.\638\ Other factors taken into account in determining 
whether a foreign trust is deemed to have a U.S. beneficiary 
include whether (1) the terms of the trust allow the trust to 
be amended to benefit a U.S. person, (2) the trust instrument 
does not allow such an amendment, but the law applicable to the 
foreign trust may require payments or accumulations of income 
or corpus to a U.S. person, or (3) the parties to the trust 
ignore the terms of the trust, or it reasonably expected that 
they will do so to benefit a U.S. person.\639\
---------------------------------------------------------------------------
    \636\ Treas. Reg. sec. 1.679-2(a)(2)(i).
    \637\ Treas. Reg. sec. 1.679-2(a)(2)(ii).
    \638\ Treas. Reg. sec. 1.679-2(a)(4)(i).
    \639\ Treas. Reg. sec. 1.679-2(a)(4)(ii).
---------------------------------------------------------------------------
    If a foreign trust that was not treated as a grantor trust 
acquires a U.S. beneficiary and is treated as a grantor trust 
under section 679 for the taxable year, the transferor is 
taxable on the trust's undistributed net income \640\ computed 
at the end of the preceding taxable year.\641\ Any additional 
amount included in the transferor's gross income as a result of 
this provision is subject to the interest charge rules of 
section 668.\642\
---------------------------------------------------------------------------
    \640\ Undistributed net income is defined in section 665(a).
    \641\ Sec. 679(b).
    \642\ Treas. Reg. sec. 1.679-2(c)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    In determining whether, under section 679, a foreign trust 
has a U.S. beneficiary, the provision clarifies that an amount 
is treated as accumulated for the benefit of a U.S. person even 
if the U.S. person's interest in the trust is contingent on a 
future event. Under the provision, if any person has the 
discretion (by authority given in the trust agreement, by power 
of appointment, or otherwise) to make a distribution from the 
trust to, or for the benefit of, any person, the trust is 
treated as having a U.S. beneficiary unless (1) the terms of 
the trust specifically identify the class of persons to whom 
such distributions may be made, and (2) none of those persons 
is a U.S. person during the taxable year. The provision is 
meant to be consistent with existing regulations under section 
679.
    The provision clarifies that if any U.S. person who 
directly or indirectly transfers property to the trust is 
directly or indirectly involved in any agreement or 
understanding (whether written, oral, or otherwise) that may 
result in the income or corpus of the trust being paid or 
accumulated to or for the benefit of a U.S. person, such 
agreement or understanding is treated as a term of the trust. 
It is assumed for these purposes that a transferor of property 
to the trust is generally directly or indirectly involved with 
agreements regarding the accumulation or disposition of the 
income and corpus of the trust.

                             Effective Date

    The provision is effective on the date of enactment (March 
18, 2010).

9. Presumption that foreign trust has United States beneficiary (sec. 
        532 of the Act and sec. 679 of the Code)

                              Present Law

    Under the grantor trust rules, a U.S. person that directly 
or indirectly transfers property to a foreign trust \643\ is 
generally treated as the owner of the portion of the trust 
comprising that property for any taxable year in which there is 
a U.S. beneficiary of any portion of the trust.\644\ This 
treatment generally does not apply to transfers by reason of 
death, or to transfers of property to the trust in exchange for 
at least the fair market value of the transferred 
property.\645\ A trust is treated as having a U.S. beneficiary 
for the taxable year unless (1) under the terms of the trust, 
no part of the income or corpus of the trust may be paid or 
accumulated during the taxable year to or for the benefit of a 
U.S. person, and (2) if the trust were terminated at any time 
during the taxable year, no part of the income or corpus of the 
trust could be paid to or for the benefit of a U.S. 
person.\646\
---------------------------------------------------------------------------
    \643\ A trust is a foreign trust if it is not a U.S. person. Sec. 
7701(a)(31)(B). A trust is a U.S. person if (1) a U.S. court is able to 
exercise primary supervision over the administration of the trust and 
(2) one or more U.S. persons have the authority to control all 
substantial decisions of the trust. Sec. 7701(a)(30)(E).
    \644\ Sec. 679(a)(1). This rule does not apply to transfers to 
trusts established to fund certain deferred compensation plan trusts or 
to trusts exempt from tax under section 501(c)(3).
    \645\ Sec. 679(a)(2).
    \646\ Sec. 679(c)(1).
---------------------------------------------------------------------------
    Section 6048 imposes various reporting obligations on 
foreign trusts and persons creating, making transfers to, or 
receiving distributions from such trusts. Within 90 days after 
a U.S. person transfers property to a foreign trust, the 
transferor must provide written notice of the transfer to the 
Secretary.\647\
---------------------------------------------------------------------------
    \647\ Sec. 6048(a).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, if a U.S. person directly or 
indirectly transfers property to a foreign trust,\648\ the 
Secretary may treat the trust as having a U.S. beneficiary for 
purposes of section 679 unless such U.S. person submits 
information as required by the Secretary and demonstrates to 
the satisfaction of the Secretary that (1) under the terms of 
the trust, no part of the income or corpus of the trust may be 
paid or accumulated during the taxable year to or for the 
benefit of a U.S. person, and (2) if the trust were terminated 
during the taxable year, no part of the income or corpus of the 
trust could be paid to or for the benefit of a U.S. person.
---------------------------------------------------------------------------
    \648\ A foreign trust for this purpose does not include deferred 
compensation and charitable trusts described in section 
6048(a)(3)(B)(ii).
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to transfers of property after the 
date of enactment (March 18, 2010).

10. Uncompensated use of trust property (sec. 533 of the Act and secs. 
        643 and 679 of the Code)

                              Present Law

    Under section 643(i), a loan of cash or marketable 
securities made by a foreign trust to any U.S. grantor, U.S. 
beneficiary, or any other U.S. person who is related to a U.S. 
grantor or U.S. beneficiary generally is treated as a 
distribution by the foreign trust to such grantor or 
beneficiary. This rule applies for purposes of determining if 
the foreign trust is a simple or complex trust, computing the 
distribution deduction for the trust, determining the amount of 
gross income of the beneficiaries, and computing any 
accumulation distribution. Loans to tax-exempt entities are 
excluded from this rule.\649\ A trust treated under this rule 
as making a distribution is not treated as a simple trust for 
the year of the distribution.\650\ This rule does not apply for 
purposes of determining if a trust has a U.S. beneficiary under 
section 679.
---------------------------------------------------------------------------
    \649\ Sec. 643(i)(2)(C).
    \650\ Sec. 643(i)(2)(D).
---------------------------------------------------------------------------
    A subsequent repayment, satisfaction, or cancellation of a 
loan treated as a distribution under section 643(i) is 
disregarded for tax purposes.\651\ This section applies a broad 
set of related party rules that treat a loan of cash or 
marketable securities to a spouse, sibling, ancestor, 
descendant of the grantor or beneficiary, spouse of such family 
members, other trusts in which the grantor or beneficiary has 
an interest, and corporations or partnerships controlled by the 
beneficiary or grantor or by family members of the beneficiary 
or grantor, as a distribution to the related grantor or 
beneficiary.\652\
---------------------------------------------------------------------------
    \651\ Sec. 643(i)(3).
    \652\ Section 643(i)(2)(B) treats a person as a related person if 
the relationship between such person would result in a disallowance of 
losses under sections 267 or 707(b), broadened to include the spouses 
of members of the family described in such sections.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision expands section 643(i) to provide that any 
use of trust property by the U.S. grantor, U.S. beneficiary or 
any U.S. person related to a U.S. grantor or U.S. beneficiary 
is treated as a distribution of the fair market value of the 
use of the property to the U.S. grantor or U.S. beneficiary. 
The use of property is not treated as a distribution to the 
extent that the trust is paid the fair market value for the use 
of the property within a reasonable period of time. A 
subsequent return of property treated as a distribution under 
section 643(i) is disregarded for tax purposes.
    For purposes of determining whether a foreign trust has a 
U.S. beneficiary under section 679, a loan of cash or 
marketable securities or the use of any other trust property by 
a U.S. person is treated as a payment from the trust to the 
U.S. person in the amount of the loan or the fair market value 
of the use of the property. A loan or use of property is not 
treated as a payment to the extent that the U.S. person repays 
the loan at a market rate of interest or pays the fair market 
value for the use of the trust property within a reasonable 
period of time.

                             Effective Date

    The provision applies to loans made and uses of property 
after the date of enactment (March 18, 2010).

11. Reporting requirement of United States owners of foreign trusts 
        (sec. 534 of the Act and sec. 6048 of the Code)

                              Present Law

    Section 6048 imposes various reporting obligations on 
foreign trusts and persons creating, making transfers to, or 
receiving distributions from such trusts. If a U.S. person is 
treated as the owner of any portion of a foreign trust under 
the rules of subpart E of part I of subchapter J of chapter 1 
(grantor trust provisions), the U.S. person is responsible for 
ensuring that the trust files an information return for the 
year and that the trust provides other information as the 
Secretary may require to each U.S. person who (1) is treated as 
the owner of any portion of the trust, or (2) receives 
(directly or indirectly) any distribution from the trust.\653\
---------------------------------------------------------------------------
    \653\ Sec. 6048(b)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision requires a U.S. person that is treated as an 
owner of any portion of a foreign trust under the rules of 
subpart E of part I of subchapter J of chapter 1 (grantor trust 
provisions) to provide information as the Secretary may require 
with respect to the trust, in addition to ensuring that the 
trust complies with its reporting obligations.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (March 18, 2010).

12. Minimum penalty with respect to failure to report on certain 
        foreign trusts (sec. 535 of the Act and sec. 6677 of the Code)

                              Present Law


Minimum penalty with respect to failure to report on certain foreign 
        trusts

    Section 6048 imposes various reporting obligations on 
foreign trusts and persons creating, making transfers to, or 
receiving distributions from such trusts. Generally, a trust is 
a foreign trust unless a U.S. court is able to exercise primary 
supervision over the trust's administration and a U.S. trustee 
has authority to control all substantial decisions of the 
trust.\654\ If a U.S. person creates or transfers property to a 
foreign trust, the U.S. person generally must report this event 
and certain other information by the due date for the U.S. 
person's tax return, including extensions, for the tax year in 
which the creation of the trust or the transfer occurs.\655\ 
Similar rules apply in the case of the death of a U.S. citizen 
or resident if the decedent was treated as the owner of any 
portion of a foreign trust under the grantor trust rules or if 
any portion of a foreign trust was included in the decedent's 
gross estate. If a U.S. person directly or indirectly receives 
a distribution from a foreign trust, the U.S. person generally 
must report the distribution by the due date for the U.S. 
person's tax return, including extensions, for the tax year 
during which the distribution is received.\656\ If a U.S. 
person is the owner of any portion of a foreign grantor trust 
at any time during the year, the person is responsible for 
causing an information return to be filed for the trust, which 
must, among other things, give the name of a U.S. agent for the 
trust.\657\
---------------------------------------------------------------------------
    \654\ Sec. 7701(a)(30)(E), (31)(B). In addition, for purposes of 
section 6048, the IRS can classify a trust as foreign if it ``has 
substantial activities, or holds substantial property, outside the 
United States.'' Sec. 6048(d)(2).
    \655\ Sec. 6048(a).
    \656\ Sec. 6048(c).
    \657\ Sec. 6048(b).
---------------------------------------------------------------------------
    If a notice or return required under the rules just 
described is not filed when due or is filed without all 
required information, the person required to file is generally 
subject to a penalty based on the ``gross reportable amount.'' 
\658\ The gross reportable amount is (1) the value of the 
property transferred to the foreign trust if the delinquency is 
failure to file notice of the creation of or a transfer to a 
foreign trust; (2) the value (on the last day of the year) of 
the portion of a grantor trust owned by a U.S. person who fails 
to cause an annual return to be filed for the trust; and (3) 
the amount distributed to a distributee who fails to report 
distributions.\659\ The initial penalty is 35 percent of the 
gross reportable amount in cases (1) and (3) and five percent 
in case (2).\660\ If the return is more than 90 days late, 
additional penalties are imposed of $10,000 for every 30 days 
the delinquency continues, except that the aggregate of the 
penalties may not exceed the gross reportable amount.\661\
---------------------------------------------------------------------------
    \658\ Sec. 6677(a).
    \659\ Sec. 6677(c).
    \660\ Sec. 6677(b).
    \661\ Sec. 6677(a).
---------------------------------------------------------------------------

Maximum penalty with respect to failure to report on certain foreign 
        trusts

    In no event may the penalties imposed with respect to any 
failure to report under section 6048 exceed the gross 
reportable amount.\662\
---------------------------------------------------------------------------
    \662\ Ibid.
---------------------------------------------------------------------------

                        Explanation of Provision


Increase of the minimum penalty with respect to failure to report on 
        certain foreign trusts

    Under the provision, the initial penalty for failing to 
report under section 6048 is the greater of $10,000 or 35 
percent of the gross reportable amount in cases (1) and (3) and 
the greater of $10,000 or five percent of the gross reportable 
amount in case (2). Thus, an initial penalty of $10,000 may be 
imposed even where the Secretary has insufficient information 
to determine the gross reportable amount. The additional 
$10,000 penalty for every additional 30 days of delinquency 
continues to apply.

Amendment to the maximum penalty with respect to failure to report on 
        certain foreign trusts

    The provision provides that the penalties with respect to 
failure to report on certain foreign trusts may exceed the 
gross reportable amount. However, to the extent that a taxpayer 
provides sufficient information for the Secretary to determine 
that the aggregate amount of the penalties exceeds the gross 
reportable amount, the Secretary is required to refund such 
excess to the taxpayer.

                             Effective Date

    The provision applies to notices and returns required to be 
filed after December 31, 2009.

13. Substitute dividends and dividend equivalent payments received by 
        foreign persons treated as dividends (sec. 541 of the Act and 
        sec. 871 of the Code)

                              Present Law

    Payments of U.S.-source ``fixed or determinable annual or 
periodical'' income, including interest, dividends, and similar 
types of investment income, made to foreign persons are 
generally subject to U.S. tax, collected by withholding, at a 
30-percent rate, unless the withholding agent can establish 
that the beneficial owner of the amount is eligible for an 
exemption from withholding or a reduced rate of withholding 
under an income tax treaty.\663\ Dividends paid by a domestic 
corporation are generally U.S.-source \664\ and therefore 
potentially subject to withholding tax when paid to foreign 
persons.
---------------------------------------------------------------------------
    \663\ Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b). For 
purposes of the withholding tax rules applicable to payments to 
nonresident alien individuals and foreign corporations, a withholding 
agent is defined broadly to include any U.S. or foreign person that has 
the control, receipt, custody, disposal, or payment of an item of 
income of a foreign person subject to withholding. Treas. Reg. sec. 
1.1441-7(a).
    \664\ Sec. 861(a)(2).
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    The source of notional principal contract income generally 
is determined by reference to the residence of the recipient of 
the income.\665\ Consequently, a foreign person's income 
related to a notional principal contract that references stock 
of a domestic corporation, including any amount attributable 
to, or calculated by reference to, dividends paid on the stock, 
generally is foreign source and is therefore not subject to 
U.S. withholding tax.
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    \665\ Treas. Reg. sec. 1.863-7(b)(1). A notional principal contract 
is a financial instrument that provides for the payment of amounts by 
one party to another at specified intervals calculated by reference to 
a specified index upon a notional principal amount in exchange for 
specified consideration or a promise to pay similar amounts. Treas. 
Reg. sec. 1.446-3(c)(1).
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    In contrast, a substitute dividend payment made to the 
transferor of stock in a securities lending transaction or a 
sale-repurchase transaction is sourced in the same manner as 
actual dividends paid on the transferred stock.\666\ 
Accordingly, because dividends paid with respect to the stock 
of a U.S. company are generally U.S. source, if a foreign 
person lends stock of a U.S. company to another person (or 
sells the stock to the other person and later repurchases the 
stock in a transaction treated as a loan for U.S. Federal 
income tax purposes) and receives substitute dividend payments 
from that other person, the substitute dividend payments are 
U.S. source and are generally subject to U.S. withholding 
tax.\667\ In 1997, the Treasury and IRS issued Notice 97-66 to 
address concerns that the sourcing rule just described (and the 
accompanying character rule) could cause the total U.S. 
withholding tax imposed in a series of securities lending or 
sale-repurchase transactions to be excessive.\668\ In that 
Notice, the Treasury and IRS also stated that they intended to 
propose new regulations to provide detailed guidance on how 
substitute dividend payments made by one foreign person to 
another foreign person were to be treated. To date, no 
regulations have been proposed.\669\
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    \666\ Treas. Reg. sec. 1.861-3(a)(6). This regulation defines a 
substitute dividend payment as a payment, made to the transferor of a 
security in a securities lending transaction or a sale-repurchase 
transaction, of an amount equivalent to a dividend distribution which 
the owner of the transferred security is entitled to receive during the 
term of the transaction.
    \667\ For purposes of the imposition of the 30-percent withholding 
tax, substitute dividend payments (and substitute interest payments) 
received by a foreign person under a securities lending or sale-
repurchase transaction have the same character as dividend (and 
interest) income received in respect of the transferred security. 
Treas. Reg. secs. 1.871-7(b)(2), 1.881-2(b)(2).
    \668\ Notice 97-66, 1997-2 C.B. 328 (December 1, 1997).
    \669\ There is evidence that some taxpayers have taken the position 
that Notice 97-66 sanctions the elimination of withholding tax in 
certain situations. See United States Senate, Permanent Subcommittee on 
Investigations, Committee on Homeland Security and Governmental 
Affairs, Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. 
Stock Dividends, Staff Report, September 11, 2008, pp. 18-20, 22-23, 
40, 47, 52. In the Obama administration's fiscal year 2010 budget, the 
Treasury Department has announced that, to address the avoidance of 
U.S. withholding tax through the use of securities lending 
transactions, it plans to revoke Notice 97-66 and issue guidance that 
eliminates the benefits of those transactions but minimizes over-
withholding. Department of the Treasury, General Explanations of the 
Administration's Fiscal Year 2010 Revenue Proposals, May 2009, p. 37.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision treats a dividend equivalent as a dividend 
from U.S. sources for certain purposes, including the U.S. 
withholding tax rules applicable to foreign persons.
    A dividend equivalent is any substitute dividend made 
pursuant to a securities lending or a sale-repurchase 
transaction that (directly or indirectly) is contingent upon, 
or determined by reference to, the payment of a dividend from 
sources within the United States or any payment made under a 
specified notional principal contract that directly or 
indirectly is contingent upon, or determined by reference to, 
the payment of a dividend from sources within the United 
States. A dividend equivalent also includes any other payment 
that the Secretary determines is substantially similar to a 
payment described in the immediately preceding sentence. Under 
this rule, for example, the Secretary may conclude that 
payments under certain forward contracts or other financial 
contracts that reference stock of U.S. corporations are 
dividend equivalents.
    A specified notional principal contract is any notional 
principal contract that has any one of the following five 
characteristics: (1) in connection with entering into the 
contract, any long party to the contract transfers the 
underlying security to any short party to the contract; (2) in 
connection with the termination of the contract, any short 
party to the contract transfers the underlying security to any 
long party to the contract; (3) the underlying security is not 
readily tradable on an established securities market; (4) in 
connection with entering into the contract, any short party to 
the contract posts the underlying security as collateral with 
any long party to the contract; or (5) the Secretary identifies 
the contract as a specified notional principal contract.\670\ 
For purposes of these characteristics, for any underlying 
security of any notional principal contract (1) a long party is 
any party to the contract that is entitled to receive any 
payment under the contract that is contingent upon or 
determined by reference to the payment of a U.S.-source 
dividend on the underlying security, and (2) a short party is 
any party to the contract that is not a long party in respect 
of the underlying security. An underlying security in a 
notional principal contract is the security with respect to 
which the dividend equivalent is paid. For these purposes, any 
index or fixed basket of securities is treated as a single 
security. In applying this rule, it is intended that such a 
security will be deemed to be regularly traded on an 
established securities market if every component of such index 
or fixed basket is a security that is readily tradable on an 
established securities market.
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    \670\ Any notional principal contract identified by the Secretary 
as a specified notional principal contract will be subject to the 
provision's general effective date described below.
---------------------------------------------------------------------------
    For payments made more than two years after the provision's 
date of enactment (March 18, 2010), a specified notional 
principal contract also includes any notional principal 
contract unless the Secretary determines that the contract is 
of a type that does not have the potential for tax avoidance.
    No inference is intended as to whether the definition of 
specified notional principal contract, or any determination 
under this provision that a transaction does not have the 
potential for the avoidance of taxes on U.S.-source dividends 
(or, in the case of a debt instrument, U.S.-source interest), 
is relevant in determining whether an agency relationship 
exists under general tax principles or whether a foreign party 
to a contract should be treated as having beneficial tax 
ownership of the stock giving rise to U.S.-source dividends.
    The payments that are treated as U.S.-source dividends 
under the provision are the gross amounts that are used in 
computing any net amounts transferred to or from the taxpayer. 
The example of a ``total return swap'' referencing stock of a 
domestic corporation (an example of a notional principal 
contract to which the provision generally applies), illustrates 
the consequences of this rule. Under a typical total return 
swap, a foreign investor enters into an agreement with a 
counterparty under which amounts due to each party are based on 
the returns generated by a notional investment in a specified 
dollar amount of the stock underlying the swap. The investor 
agrees for a specified period to pay to the counterparty (1) an 
amount calculated by reference to a market interest rate (such 
as the London Interbank Offered Rate (``LIBOR'')) on the 
notional amount of the underlying stock and (2) any 
depreciation in the value of the stock. In return, the 
counterparty agrees for the specified period to pay the 
investor (1) any dividends paid on the stock and (2) any 
appreciation in the value of the stock. Amounts owed by each 
party under this swap typically are netted so that only one 
party makes an actual payment. The provision treats any 
dividend-based amount under the swap as a payment even though 
any actual payment under the swap is a net amount determined in 
part by other amounts (for example, the interest amount and the 
amount of any appreciation or depreciation in value of the 
referenced stock). Accordingly, a counterparty to a total 
return swap may be obligated to withhold and remit tax on the 
gross amount of a dividend equivalent even though, as a result 
of a netting of payments due under the swap, the counterparty 
is not required to make an actual payment to the foreign 
investor.
    If there is a chain of dividend equivalents (under, for 
example, transactions similar to those described in Notice 97-
66), and one or more of the dividend equivalents is subject to 
tax under the provision or under section 881, the Secretary may 
reduce that tax, but only to the extent that the taxpayer 
either establishes that the tax has been paid on another 
dividend equivalent in the chain, or that such tax is not 
otherwise due, or as the Secretary determines is appropriate to 
address the role of financial intermediaries in such chain. An 
actual dividend is treated as a dividend equivalent for 
purposes of this rule.
    For purposes of chapter 3 (withholding of tax on 
nonresident aliens and foreign corporations) and chapter 4 
(taxes to enforce reporting on certain foreign accounts), each 
person that is a party to a contract or other arrangement that 
provides for the payment of a dividend equivalent is treated as 
having control of the payment. Accordingly, Treasury may 
provide guidance requiring either party to withhold tax on 
dividend equivalents.
    The rule treating dividend equivalents as U.S.-source 
dividends is not intended to limit the authority of the 
Secretary (1) to determine the appropriate source of income 
from financial arrangements (including notional principal 
contracts) under present law section 863 or 865 or (2) to 
provide additional guidance addressing the source and 
characterization of substitute payments made in securities 
lending and similar transactions.

                             Effective Date

    The provision applies to payments made on or after the date 
that is 180 days after the date of enactment (March 18, 2010).

 B. Delay in Application of Worldwide Allocation of Interest (sec. 551 
                  of the Act and sec. 864 of the Code)


                              Present Law


In general

    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.\671\ 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.
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    \671\ However, exceptions to the fungibility principle 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 that 
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.\672\ 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.
---------------------------------------------------------------------------
    \672\ One such exception is that the affiliated group for interest 
allocation purposes includes section 936 corporations (certain electing 
domestic corporations that have income from the active conduct of a 
trade or business in Puerto Rico or another U.S. possession) that are 
excluded from the consolidated group.
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            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.'' \673\ A financial 
corporation includes 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 that is not a financial institution.\674\ 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.\675\
---------------------------------------------------------------------------
    \673\ Temp. Treas. Reg. sec. 1.861-11T(d)(4).
    \674\ Sec. 864(e)(5)(C).
    \675\ Sec. 864(e)(5)(D).
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    A financial corporation is not treated as a member of the 
regular affiliated group for purposes of applying the one-
taxpayer rule to other nonfinancial 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'') \676\ 
modified 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 that the foreign assets of the 
worldwide affiliated group bears to the total assets of the 
worldwide affiliated group,\677\ 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.\678\
---------------------------------------------------------------------------
    \676\ Pub. L. No. 108-357, sec. 401.
    \677\ 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.
    \678\ 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,\679\ 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.
---------------------------------------------------------------------------
    \679\ 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.
---------------------------------------------------------------------------
            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.\680\ 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.
---------------------------------------------------------------------------
    \680\ See Treas. Reg. sec. 1.904-4(e)(2). a
---------------------------------------------------------------------------
    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
    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, 2017, 
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.\681\ The common 
parent of the pre-election worldwide affiliated group must make 
the election for the first taxable year beginning after 
December 31, 2017, in which a worldwide affiliated group 
includes a financial corporation. Once either election is made, 
it applies to the common parent and all other members of the 
worldwide affiliated group or to all members of the financial 
institution group, as applicable, for the taxable year for 
which the election is made and all subsequent taxable years, 
unless revoked with the consent of the Secretary of the 
Treasury.
---------------------------------------------------------------------------
    \681\ As originally enacted under AJCA, the worldwide interest 
allocation rules were effective for taxable years beginning after 
December 31, 2008. However, section 3093 of the Housing and Economic 
Recovery Act of 2008, Pub. L. No. 110-289, delayed the implementation 
of the worldwide interest allocation rules for two years, until taxable 
years beginning after December 31, 2010. The implementation of the 
worldwide interest allocation rules was further delayed by seven years, 
until taxable years beginning after December 31, 2017, in section 15 of 
the Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. 
No. 111-92.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision delays the effective date of the worldwide 
interest allocation rules for three year, until taxable years 
beginning after December 31, 2020. The required dates for 
making the worldwide affiliated group election and the 
financial institution group election are changed accordingly.

                             Effective Date

    The provision is effective on the date of enactment (March 
18, 2010).

 C. Corporate Estimated Tax (sec. 561 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.\682\ 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. In the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding tax year), payments due in July, August, or 
September, 2014, are increased to 134.75 percent of the payment 
otherwise due and the next required payment is reduced 
accordingly.\683\
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    \682\ Sec. 6655.
    \683\ Act to extend the Generalized System of Preferences and the 
Andean Trade Preference Act, and for other purposes, Pub. L. No. 111-
124, sec. 4; Worker, Homeownership, and Business Assistance Act of 
2009, Pub. L. No. 111-92, sec. 18; Joint resolution approving the 
renewal of import restrictions contained in the Burmese Freedom and 
Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 
202(b)(1).
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                     Explanation of Provision \684\

    The provision increases the applicable percentage in 2014 
by 23.00 percentage points, the applicable percentage in 2015 
by 21.50 percentage points, and the applicable percentage in 
2019 by 6.50 percentage points. For each of the periods 
impacted, the next required payment is reduced accordingly.
---------------------------------------------------------------------------
    \684\ All the public laws enacted in the 111th Congress affecting 
this provision are described in Part Twenty-One of this document.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (March 
18, 2010).

                   PART EIGHT: HEALTH CARE PROVISIONS

 PATIENT PROTECTION AND AFFORDABLE CARE ACT (PUBLIC LAW 111-148),\685\ 
 HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010 (PUBLIC LAW 111-
152),\686\ AN ACT TO CLARIFY THE HEALTH CARE PROVIDED BY THE SECRETARY 
OF VETERANS AFFAIRS THAT CONSTITUTES MINIMUM ESSENTIAL COVERAGE (PUBLIC 
  LAW 111-173),\687\ AND MEDICARE AND MEDICAID EXTENDERS ACT OF 2010 
                       (PUBLIC LAW 111-309) \688\

                  
---------------------------------------------------------------------------
    \685\ H.R. 3590. The bill originated as the Service Members Home 
Ownership Tax Act of 2009 and passed the House on the suspension 
calendar on October 8, 2009. The House Ways and Means Committee 
reported H.R. 3200 on October 14, 2009 (H.R. Rep. No. 111-299 (part 
II)). The Senate Finance Committee reported S. 1796 on October 19, 2009 
(S. Rep. No. 111-89). The House passed H.R. 3962 on November 7, 2009. 
The Senate passed H.R. 3590 with an amendment substituting the text of 
the Patient Protection and Affordable Care Act on December 24, 2009. 
The House agreed to the Senate amendment on March 21, 2010. The 
President signed the bill on March 23, 2010.
    \686\ H.R. 4872. The bill passed the House on March 21, 2010. The 
Senate passed the bill with amendments on March 25, 2010. The House 
agreed to the Senate amendments on March 25, 2010. The President signed 
the bill on March 30, 2010.
    For a technical explanation of the bills prepared by the staff of 
the Joint Committee on Taxation, see Technical Explanation of the 
Revenue Provisions of the ``Reconciliation Act of 2010,'' as Amended, 
in Combination with the ``Patient Protection and Affordable Care Act'' 
(JCX-18-10), March 21, 2010.
    \687\ H.R. 5014. The bill passed the House on the suspension 
calendar on May 12, 2010. The Senate passed the bill by unanimous 
consent on May 18, 2010. The President signed the bill on May 27, 2010.
    Pub. L. No. 111-173, which amends section 5000A(f)(1)(A) of the 
Code, as added by section 1501(b) of the Patient Protection and 
Affordable Care Act, is described infra in a footnote in section H of 
title I of the Patient Protection and Affordable Care Act of Part 
Eight.
    \688\ H.R. 4994. The bill passed the House on the suspension 
calendar on April 14, 2010. The Senate passed the bill with amendments 
by unanimous consent on December 8, 2010. The House agreed to the 
Senate amendments on the suspension calendar on December 9, 2010. The 
President signed the bill on December 15, 2010.
    Pub. L. No. 111-309, which amends section 36B(f)(2)(B) of the Code, 
is described infra in section C of title I of the Patient Protection 
and Affordable Care Act of Part Eight.
---------------------------------------------------------------------------

               PATIENT PROTECTION AND AFFORDABLE CARE ACT

       TITLE I--QUALITY, AFFORDABLE HEALTH CARE FOR ALL AMERICANS

A. Tax Exemption for Certain Member-Run Health Insurance Issuers (sec. 
  1322 \689\ of the Act and new sec. 501(c)(29) and sec. 6033 of the 
                                 Code)

      
---------------------------------------------------------------------------
    \689\ Section 1322 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10104.
---------------------------------------------------------------------------

                              Present Law

In general
    Although present law provides that certain limited 
categories of organizations that offer insurance may qualify 
for exemption from Federal income tax, present law generally 
does not provide tax-exempt status for newly established, 
member-run nonprofit health insurers that are established and 
funded pursuant to the Consumer Oriented, Not-for-Profit Health 
Plan program created under the Act and described below.
Taxation of insurance companies
            Taxation of stock and mutual companies providing health 
                    insurance
    Present law provides special rules for determining the 
taxable income of insurance companies (subchapter L of the 
Code). Both mutual insurance companies and stock insurance 
companies are subject to Federal income tax under these rules. 
Separate sets of rules apply to life insurance companies and to 
property and casualty insurance companies. Insurance companies 
are subject to Federal income tax at regular corporate income 
tax rates.
    An insurance company that provides health insurance is 
subject to Federal income tax as either a life insurance 
company or as a property and casualty insurance company, 
depending on its mix of lines of business and on the resulting 
portion of its reserves that are treated as life insurance 
reserves. For Federal income tax purposes, an insurance company 
is treated as a life insurance company if the sum of its (1) 
life insurance reserves and (2) unearned premiums and unpaid 
losses on noncancellable life, accident or health contracts not 
included in life insurance reserves, comprise more than 50 
percent of its total reserves.\690\
---------------------------------------------------------------------------
    \690\ Sec. 816(a).
---------------------------------------------------------------------------
            Life insurance companies
    A life insurance company, whether stock or mutual, is taxed 
at regular corporate rates on its life insurance company 
taxable income (LICTI). LICTI is life insurance gross income 
reduced by life insurance deductions.\691\ An alternative tax 
applies if a company has a net capital gain for the taxable 
year, if such tax is less than the tax that would otherwise 
apply. Life insurance gross income is the sum of (1) premiums, 
(2) decreases in reserves, and (3) other amounts generally 
includible by a taxpayer in gross income. Methods for 
determining reserves for Federal income tax purposes generally 
are based on reserves prescribed by the National Association of 
Insurance Commissioners for purposes of financial reporting 
under State regulatory rules.
---------------------------------------------------------------------------
    \691\ Sec. 801.
---------------------------------------------------------------------------
    Because deductible reserves might be viewed as being funded 
proportionately out of taxable and tax-exempt income, the net 
increase and net decrease in reserves are computed by reducing 
the ending balance of the reserve items by a portion of tax-
exempt interest (known as a proration rule).\692\ Similarly, a 
life insurance company is allowed a dividends-received 
deduction for intercorporate dividends from nonaffiliates only 
in proportion to the company's share of such dividends.\693\
---------------------------------------------------------------------------
    \692\ Secs. 807(b)(2)(B) and (b)(1)(B).
    \693\ Secs. 805(a)(4), 812. Fully deductible dividends from 
affiliates are excluded from the application of this proration formula 
(so long as such dividends are not themselves distributions from tax-
exempt interest or from dividend income that would not be fully 
deductible if received directly by the taxpayer). In addition, the 
proration rule includes in prorated amounts the increase for the 
taxable year in policy cash values of life insurance policies and 
annuity and endowment contracts owned by the company (the inside 
buildup on which is not taxed).
---------------------------------------------------------------------------
            Property and casualty insurance companies
    The taxable income of a property and casualty insurance 
company is determined as the sum of the amount earned from 
underwriting income and from investment income (as well as 
gains and other income items), reduced by allowable 
deductions.\694\ For this purpose, underwriting income and 
investment income are computed on the basis of the underwriting 
and investment exhibit of the annual statement approved by the 
National Association of Insurance Commissioners.\695\
---------------------------------------------------------------------------
    \694\ Sec. 832.
    \695\ Sec. 832(b)(1)(A).
---------------------------------------------------------------------------
    Underwriting income means premiums earned during the 
taxable year less losses incurred and expenses incurred.\696\ 
Losses incurred include certain unpaid losses (reported losses 
that have not been paid, estimates of losses incurred but not 
reported, resisted claims, and unpaid loss adjustment 
expenses). Present law limits the deduction for unpaid losses 
to the amount of discounted unpaid losses, which are discounted 
using prescribed discount periods and a prescribed interest 
rate, to take account partially of the time value of 
money.\697\ Any net decrease in the amount of unpaid losses 
results in income inclusion, and the amount included is 
computed on a discounted basis.
---------------------------------------------------------------------------
    \696\ Sec. 832(b)(3). In determining premiums earned, the company 
deducts from gross premiums the increase in unearned premiums for the 
year (sec. 832(b)(4)(B)). The company is required to reduce the 
deduction for increases in unearned premiums by 20 percent, reflecting 
the matching of deferred expenses to deferred income.
    \697\ Sec. 846.
---------------------------------------------------------------------------
    In calculating its reserve for losses incurred, a proration 
rule requires that a property and casualty insurance company 
must reduce the amount of losses incurred by 15 percent of (1) 
the insurer's tax-exempt interest, (2) the deductible portion 
of dividends received (with special rules for dividends from 
affiliates), and (3) the increase for the taxable year in the 
cash value of life insurance, endowment, or annuity contracts 
the company owns (sec. 832(b)(5)). This rule reflects the fact 
that reserves are generally funded in part from tax-exempt 
interest, from wholly or partially deductible dividends, or 
from other untaxed amounts.

Tax exemption for certain organizations

            In general
    Section 501(a) generally provides for exemption from 
Federal income tax for certain organizations. These 
organizations include: (1) qualified pension, profit sharing, 
and stock bonus plans described in section 401(a); (2) 
religious and apostolic organizations described in section 
501(d); and (3) organizations described in section 501(c). 
Sections 501(c) describes 28 different categories of exempt 
organizations, including: charitable organizations (section 
501(c)(3)); social welfare organizations (section 501(c)(4)); 
labor, agricultural, and horticultural organizations (section 
501(c)(5)); professional associations (section 501(c)(6)); and 
social clubs (section 501(c)(7)).\698\
---------------------------------------------------------------------------
    \698\ Certain organizations that operate on a cooperative basis are 
taxed under special rules set forth in Subchapter T of the Code. The 
two principal criteria for determining whether an entity is operating 
on a cooperative basis are: (1) ownership of the cooperative by persons 
who patronize the cooperative (e.g., the farmer members of a 
cooperative formed to market the farmers' produce); and (2) return of 
earnings to patrons in proportion to their patronage. In general, 
cooperative members are those who participate in the management of the 
cooperative and who share in patronage capital. For Federal income tax 
purposes, a cooperative that is taxed under the Subchapter T rules 
generally computes its income as if it were a taxable corporation, with 
one exception--the cooperative may deduct from its taxable income 
distributions of patronage dividends. In general, patronage dividends 
are the profits of the cooperative that are rebated to its patrons 
pursuant to a preexisting obligation of the cooperative to do so. 
Certain farmers' cooperatives described in section 521 are authorized 
to deduct not only patronage dividends from patronage sources, but also 
dividends on capital stock and certain distributions to patrons from 
nonpatronage sources.
    Separate from the Subchapter T rules, the Code provides tax 
exemption for certain cooperatives. Section 501(c)(12), for example, 
provides that certain rural electric and telephone cooperative are 
exempt from tax under section 501(a), provided that 85 percent or more 
of the cooperative's income consists of amounts collected from members 
for the sole purpose of meeting losses or expenses, and certain other 
requirements are met.
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            Insurance organizations described in section 501(c)
    Although most organizations that engage principally in 
insurance activities are not exempt from Federal income tax, 
certain organizations that engage in insurance activities are 
described in section 501(c) and exempt from tax under section 
501(a). Section 501(c)(8), for example, describes certain 
fraternal beneficiary societies, orders, or associations 
operating under the lodge system or for the exclusive benefit 
of their members that provide for the payment of life, sick, 
accident, or other benefits to the members or their dependents. 
Section 501(c)(9) describes certain voluntary employees' 
beneficiary associations that provide for the payment of life, 
sick, accident, or other benefits to the members of the 
association or their dependents or designated beneficiaries. 
Section 501(c)(12)(A) describes certain benevolent life 
insurance associations of a purely local character. Section 
501(c)(15) describes certain small non-life insurance companies 
with annual gross receipts of no more than $600,000 ($150,000 
in the case of a mutual insurance company). Section 501(c)(26) 
describes certain membership organizations established to 
provide health insurance to certain high-risk individuals.\699\ 
Section 501(c)(27) describes certain organizations established 
to provide workmen's compensation insurance.
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    \699\ When section 501(c)(26) was enacted in 1996, the House Ways 
and Means Committee, in reporting out the bill, stated as its reasons 
for change: ``The Committee believes that eliminating the uncertainty 
concerning the eligibility of certain State health insurance risk pools 
for tax-exempt status will assist States in providing medical care 
coverage for their uninsured high-risk residents.'' H.R. Rep. No. 104-
496, Part I, ``Health Coverage Availability and Affordability Act of 
1996,'' 104th Cong., 2d Sess., March 25, 1996, 124. See also Joint 
Committee on Taxation, General Explanation of Tax Legislation Enacted 
in the 104th Congress (JCS-12-96), December 18, 1996, p. 351.
---------------------------------------------------------------------------
            Certain section 501(c)(3) organizations
    Certain health maintenance organizations (HMOs) have been 
held to qualify for tax exemption as charitable organizations 
described in section 501(c)(3). In Sound Health Association v. 
Commissioner,\700\ the Tax Court held that a staff model HMO 
qualified as a charitable organization. A staff model HMO 
generally employs its own physicians and staff and serves its 
subscribers at its own facilities. The court concluded that the 
HMO satisfied the section 501(c)(3) community benefit standard, 
as its membership was open to almost all members of the 
community. Although membership was limited to persons who had 
the money to pay the fixed premiums, the court held that this 
was not disqualifying, because the HMO had a subsidized premium 
program for persons of lesser means to be funded through 
donations and Medicare and Medicaid payments. The HMO also 
operated an emergency room open to all persons regardless of 
income. The court rejected the government's contention that the 
HMO conferred primarily a private benefit to its subscribers, 
stating that when the potential membership is such a broad 
segment of the community, benefit to the membership is benefit 
to the community.
---------------------------------------------------------------------------
    \700\ 71 T.C. 158 (1978), acq. 1981-2 C.B. 2.
---------------------------------------------------------------------------
    In Geisinger Health Plan v. Commissioner,\701\ the court 
applied the section 501(c)(3) community benefit standard to an 
individual practice association (IPA) model HMO. In the IPA 
model, health care generally is provided by physicians 
practicing independently in their own offices, with the IPA 
usually contracting on behalf of the physicians with the HMO. 
Reversing a Tax Court decision, the court held that the HMO did 
not qualify as charitable, because the community benefit 
standard requires that an HMO be an actual provider of health 
care rather than merely an arranger or deliverer of health 
care, which is how the court viewed the IPA model in that case.
---------------------------------------------------------------------------
    \701\ 985 F.2d 1210 (3rd Cir. 1993), rev'g T.C. Memo. 1991-649.
---------------------------------------------------------------------------
    More recently, in IHC Health Plans, Inc. v. 
Commissioner,\702\ the court ruled that three affiliated HMOs 
did not operate primarily for the benefit of the community they 
served. The organizations in the case did not provide health 
care directly, but provided group insurance that could be used 
at both affiliated and non-affiliated providers. The court 
found that the organizations primarily performed a risk-bearing 
function and provided virtually no free or below-cost health 
care services. In denying charitable status, the court held 
that a health-care provider must make its services available to 
all in the community plus provide additional community or 
public benefits.\703\ The benefit must either further the 
function of government-funded institutions or provide a service 
that would not likely be provided within the community but for 
the subsidy. Further, the additional public benefit conferred 
must be sufficient to give rise to a strong inference that the 
public benefit is the primary purpose for which the 
organization operates.\704\
---------------------------------------------------------------------------
    \702\ 325 F.3d 1188 (10th Cir. 2003).
    \703\ Ibid. at 1198.
    \704\ Ibid.
---------------------------------------------------------------------------
            Certain organizations providing commercial-type insurance
    Section 501(m) provides that an organization may not be 
exempt from tax under section 501(c)(3) (generally, charitable 
organizations) or section 501(c)(4) (social welfare 
organizations) unless no substantial part of its activities 
consists of providing commercial-type insurance. For this 
purpose, commercial-type insurance excludes, among other 
things: (1) insurance provided at substantially below cost to a 
class of charitable recipients; and (2) incidental health 
insurance provided by an HMO of a kind customarily provided by 
such organizations.
    When section 501(m) was enacted in 1986, the following 
reasons for the provision were stated: ``The committee is 
concerned that exempt charitable and social welfare 
organizations that engaged in insurance activities are engaged 
in an activity whose nature and scope is so inherently 
commercial that tax exempt status is inappropriate. The 
committee believes that the tax-exempt status of organizations 
engaged in insurance activities provides an unfair competitive 
advantage to these organizations. The committee further 
believes that the provision of insurance to the general public 
at a price sufficient to cover the costs of insurance generally 
constitutes an activity that is commercial. In addition, the 
availability of tax-exempt status . . . has allowed some large 
insurance entities to compete directly with commercial 
insurance companies. For example, the Blue Cross/Blue Shield 
organizations historically have been treated as tax-exempt 
organizations described in sections 501(c)(3) or (4). This 
group of organizations is now among the largest health care 
insurers in the United States. Other tax-exempt charitable and 
social welfare organizations engaged in insurance activities 
also have a competitive advantage over commercial insurers who 
do not have tax-exempt status. . . .'' \705\
---------------------------------------------------------------------------
    \705\ H.R. Rep. No. 99-426, ``Tax Reform Act of 1985,'' Report of 
the Committee on Ways and Means, 99th Cong., 1st Sess., December 7, 
1985, 664. See also Joint Committee on Taxation, General Explanation of 
the Tax Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 584.
---------------------------------------------------------------------------
            Unrelated business income tax
    Most organizations that are exempt from tax under section 
501(a) are subject to the unrelated business income tax rules 
of sections 511 through 515. The unrelated business income tax 
generally applies to 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. Certain types of income are specifically 
exempt from the unrelated business income tax, such as 
dividends, interest, royalties, and certain rents, unless 
derived from debt-financed property or from certain 50-percent 
controlled subsidiaries.

                        Explanation of Provision


In general

    The provision authorizes $6 billion in funding for, and 
instructs the Secretary of Health and Human Services (``HHS'') 
to establish, the Consumer Operated and Oriented Plan (the 
``program'') to foster the creation of qualified nonprofit 
health insurance issuers to offer qualified health plans in the 
individual and small group markets in the States in which the 
issuers are licensed to offer such plans. Federal funds are to 
be distributed as loans to assist with start-up costs and 
grants to assist in meeting State solvency requirements.
    Under the provision, the Secretary of HHS must require any 
person receiving a loan or grant under the program to enter 
into an agreement with the Secretary of HHS requiring the 
recipient of funds to meet and continue to meet any requirement 
under the provision for being treated as a qualified nonprofit 
health insurance issuer, and any requirements to receive the 
loan or grant. The provision also requires that the agreement 
prohibit the use of loan or grant funds for carrying on 
propaganda or otherwise attempting to influence legislation or 
for marketing.
    If the Secretary of HHS determines that a grant or loan 
recipient failed to meet the requirements described in the 
preceding paragraph, and failed to correct such failure within 
a reasonable period from when the person first knew (or 
reasonably should have known) of such failure, then such person 
must repay the Secretary of HHS an amount equal to 110 percent 
of the aggregate amount of the loans and grants received under 
the program, plus interest on such amount for the period during 
which the loans or grants were outstanding. The Secretary of 
HHS must notify the Secretary of the Treasury of any 
determination of a failure that results in the termination of 
the grantee's Federal tax-exempt status.

Qualified nonprofit health insurance issuers

    The provision defines a qualified nonprofit health 
insurance issuer as an organization that meets the following 
requirements:
          1. The organization is organized as a nonprofit, 
        member corporation under State law;
          2. Substantially all of its activities consist of the 
        issuance of qualified health plans in the individual 
        and small group markets in each State in which it is 
        licensed to issue such plans;
          3. None of the organization, a related entity, or a 
        predecessor of either was a health insurance issuer as 
        of July 16, 2009;
          4. The organization is not sponsored by a State or 
        local government, any political subdivision thereof, or 
        any instrumentality of such government or political 
        subdivision;
          5. Governance of the organization is subject to a 
        majority vote of its members;
          6. The organization's governing documents incorporate 
        ethics and conflict of interest standards protecting 
        against insurance industry involvement and 
        interference;
          7. The organization must operate with a strong 
        consumer focus, including timeliness, responsiveness, 
        and accountability to its members, in accordance with 
        regulations to be promulgated by the Secretary of HHS;
          8. Any profits made must be used to lower premiums, 
        improve benefits, or for other programs intended to 
        improve the quality of health care delivered to its 
        members;
          9. The organization meets all other requirements that 
        other issuers of qualified health plans are required to 
        meet in any State in which it offers a qualified health 
        plan, including solvency and licensure requirements, 
        rules on payments to providers, rules on network 
        adequacy, rate and form filing rules, and any 
        applicable State premium assessments. Additionally, the 
        organization must coordinate with certain other State 
        insurance reforms under the Act; and
          10. The organization does not offer a health plan in 
        a State until that State has in effect (or the 
        Secretary of HHS has implemented for the State), the 
        market reforms required by part A of title XXVII of the 
        Public Health Service Act (``PHSA''), as amended by the 
        Act.

Tax exemption for qualified nonprofit health insurance issuers

    An organization receiving a grant or loan under the program 
qualifies for exemption from Federal income tax under section 
501(a) of the Code with respect to periods during which the 
organization is in compliance with the above-described 
requirements of the program and with the terms of any program 
grant or loan agreement to which such organization is a party. 
Such organizations also are subject to organizational and 
operational requirements applicable to certain section 501(c) 
organizations, including the prohibitions on private inurement 
and political activities, the limitation on lobbying 
activities, taxation of excess benefit transactions (section 
4958), and taxation of unrelated business taxable income under 
section 511.
    Program participants are required to file an application 
for exempt status with the IRS in such manner as the Secretary 
of the Treasury may require, and are subject to annual 
information reporting requirements. In addition, such an 
organization is required to disclose on its annual information 
return the amount of reserves required by each State in which 
it operates and the amount of reserves on hand.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

  B. Tax Exemption for Entities Established Pursuant to Transitional 
  Reinsurance Program for Individual Market in Each State (sec. 1341 
                           \706\ of the Act)


                              Present Law

    Although present law provides that certain limited 
categories of organizations that offer insurance may qualify 
for exemption from Federal income tax, present law does not 
provide tax-exempt status for transitional nonprofit 
reinsurance entities created under the Senate bill and 
described below.
---------------------------------------------------------------------------
    \706\ Section 1341 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10104.
---------------------------------------------------------------------------

                        Explanation of Provision

    In general, issuers of health benefit plans that are 
offered in the individual market would be required to 
contribute to a temporary reinsurance program for individual 
policies that is administered by a nonprofit reinsurance 
entity. Such contributions would begin January 1, 2014, and 
continue for a 36-month period. The provision requires each 
State, no later than January 1, 2014, to adopt a reinsurance 
program based on a model regulation and to establish (or enter 
into a contract with) one or more applicable reinsurance 
entities to carry out the reinsurance program under the 
provision. For purposes of the provision, an applicable 
reinsurance entity is a not-for-profit organization (1) the 
purpose of which is to help stabilize premiums for coverage in 
the individual market in a State during the first three years 
of operation of an exchange for such markets within the State, 
and (2) the duties of which are to carry out the reinsurance 
program under the provision by coordinating the funding and 
operation of the risk-spreading mechanisms designed to 
implement the reinsurance program. A State may have more than 
one applicable reinsurance entity to carry out the reinsurance 
program in the State, and two or more States may enter into 
agreements to allow a reinsurer to operate the reinsurance 
program in those States.
    An applicable reinsurance entity established under the 
provision is exempt from Federal income tax. Notwithstanding an 
applicable reinsurance entity's tax-exempt status, it is 
subject to tax on unrelated business taxable income under 
section 511 as if such entity were described in section 
511(a)(2).

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

  C. Refundable Tax Credit Providing Premium Assistance for Coverage 
Under a Qualified Health Plan (secs. 1401, 1411, and 1412 \707\ of the 
 Act and sec. 208 of Pub. L. No. 111-309 and new sec. 36B of the Code)


                              Present Law

    Currently there is no tax credit that is generally 
available to low or middle income individuals or families for 
the purchase of health insurance. Some individuals may be 
eligible for health coverage through State Medicaid programs 
which consider income, assets, and family circumstances. 
However, these Medicaid programs are not in the Code.
---------------------------------------------------------------------------
    \707\ Sections 1401, 1411, and 1412 of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148, as amended by sections 10104, 
10105, and 10107, are further amended by section 1001 of the Health 
Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

Health coverage tax credit

    Certain individuals are eligible for the health coverage 
tax credit (``HCTC''). The HCTC is a refundable tax credit 
equal to 80 percent of the cost of qualified health coverage 
paid by an eligible individual. In general, eligible 
individuals are individuals who receive a trade adjustment 
allowance (and individuals who would be eligible to receive 
such an allowance but for the fact that they have not exhausted 
their regular unemployment benefits), individuals eligible for 
the alternative trade adjustment assistance program, and 
individuals over age 55 who receive pension benefits from the 
Pension Benefit Guaranty Corporation. The HCTC is available for 
``qualified health insurance,'' which includes certain 
employer-based insurance, certain State-based insurance, and in 
some cases, insurance purchased in the individual market.
    The credit is available on an advance basis through a 
program established and administered by the Treasury 
Department. The credit generally is delivered as follows: the 
eligible individual sends his or her portion of the premium to 
the Treasury, and the Treasury then pays the full premium (the 
individual's portion and the amount of the refundable tax 
credit) to the insurer. Alternatively, an eligible individual 
is also permitted to pay the entire premium during the year and 
claim the credit on his or her income tax return.
    Individuals entitled to Medicare and certain other 
governmental health programs, covered under certain employer-
subsidized health plans, or with certain other specified health 
coverage are not eligible for the credit.

COBRA continuation coverage premium reduction

    The Consolidated Omnibus Reconciliation Act of 1985 
(``COBRA'') \708\ requires that a group health plan must offer 
continuation coverage to qualified beneficiaries in the case of 
a qualifying event (such as a loss of employment). A plan may 
require payment of a premium for any period of continuation 
coverage. The amount of such premium generally may not exceed 
102 percent of the ``applicable premium'' for such period and 
the premium must be payable, at the election of the payor, in 
monthly installments.
---------------------------------------------------------------------------
    \708\ Pub. L. No. 99-272.
---------------------------------------------------------------------------
    Section 3001 of the American Recovery and Reinvestment Act 
of 2009,\709\ as amended by the Department of Defense 
Appropriations Act, 2010,\710\ and the Temporary Extension Act 
of 2010 \711\ provides that, for a period not exceeding 15 
months, an assistance eligible individual is treated as having 
paid any premium required for COBRA continuation coverage under 
a group health plan if the individual pays 35 percent of the 
premium. Thus, if the assistance eligible individual pays 35 
percent of the premium, the group health plan must treat the 
individual as having paid the full premium required for COBRA 
continuation coverage, and the individual is entitled to a 
subsidy for 65 percent of the premium. An assistance eligible 
individual generally is any qualified beneficiary who elects 
COBRA continuation coverage and the qualifying event with 
respect to the covered employee for that qualified beneficiary 
is a loss of group health plan coverage on account of an 
involuntary termination of the covered employee's employment 
(for other than gross misconduct).\712\ In addition, the 
qualifying event must occur during the period beginning 
September 1, 2008, and ending March 31, 2010.
---------------------------------------------------------------------------
    \709\ Pub. L. No. 111-5.
    \710\ Pub. L. No. 111-118.
    \711\ Pub. L. No. 111-144.
    \712\ TEA expanded eligibility for the COBRA subsidy to include 
individuals who experience a loss of coverage on account of a reduction 
in hours of employment followed by the involuntary termination of 
employment of the covered employee. For an individual entitled to COBRA 
because of a reduction in hours and who is then subsequently 
involuntarily terminated from employment, the termination is considered 
a qualifying event for purposes of the COBRA subsidy, as long as the 
termination occurs during the period beginning on the date following 
TEA's date of enactment and ending on date of enactment (March 31, 
2010).
---------------------------------------------------------------------------
    The COBRA continuation coverage subsidy also applies to 
temporary continuation coverage elected under the Federal 
Employees Health Benefits Program and to continuation health 
coverage under State programs that provide coverage comparable 
to continuation coverage. The subsidy is generally delivered by 
requiring employers to pay the subsidized portion of the 
premium for assistance eligible individuals. The employer then 
treats the payment of the subsidized portion as a payment of 
employment taxes and offsets its employment tax liability by 
the amount of the subsidy. To the extent that the aggregate 
amount of the subsidy for all assistance eligible individuals 
for which the employer is entitled to a credit for a quarter 
exceeds the employer's employment tax liability for the 
quarter, the employer can request a tax refund or can claim the 
credit against future employment tax liability.
    There is an income limit on the entitlement to the COBRA 
continuation coverage subsidy. Taxpayers with modified adjusted 
gross income exceeding $145,000 (or $290,000 for joint filers), 
must repay any subsidy received by them, their spouse, or their 
dependant, during the taxable year. For taxpayers with modified 
adjusted gross incomes between $125,000 and $145,000 (or 
$250,000 and $290,000 for joint filers), the amount of the 
subsidy that must be repaid is reduced proportionately. The 
subsidy is also conditioned on the individual not being 
eligible for certain other health coverage. To the extent that 
an eligible individual receives a subsidy during a taxable year 
to which the individual was not entitled due to income or being 
eligible for other health coverage, the subsidy overpayment is 
repaid on the individual's income tax return as additional tax. 
However, in contrast to the HCTC, the subsidy for COBRA 
continuation coverage may only be claimed through the employer 
and cannot be claimed at the end of the year on an individual 
tax return.

                        Explanation of Provision


Premium assistance credit

    The provision creates a refundable tax credit (the 
``premium assistance credit'') for eligible individuals and 
families who purchase health insurance through an 
exchange.\713\ The premium assistance credit, which is 
refundable and payable in advance directly to the insurer, 
subsidizes the purchase of certain health insurance plans 
through an exchange.
---------------------------------------------------------------------------
    \713\ Individuals enrolled in multi-state plans, pursuant to 
section 1334 of the Patient Protection and Affordable Care Act, Pub. L. 
No. 111-148, are also eligible for the credit.
---------------------------------------------------------------------------
    Under the provision, to receive advance payment of the 
premium assistance credit, an eligible individual enrolls in a 
plan offered through an exchange and reports his or her income 
to the exchange. Based on the information provided to the 
exchange, the individual receives a premium assistance credit 
based on income and the Treasury pays the premium assistance 
credit amount directly to the insurance plan in which the 
individual is enrolled. The individual then pays to the plan in 
which he or she is enrolled the dollar difference between the 
premium tax credit amount and the total premium charged for the 
plan.\714\ Individuals who fail to pay all or part of the 
remaining premium amount are given a mandatory three-month 
grace period prior to an involuntary termination of their 
participation in the plan. Initial eligibility for the premium 
assistance credit is based on the individual's income for the 
tax year ending two years prior to the enrollment period. 
Individuals (or couples) who experience a change in marital 
status or other household circumstance, experience a decrease 
in income of more than 20 percent, or receive unemployment 
insurance, may update eligibility information or request a 
redetermination of their tax credit eligibility.
---------------------------------------------------------------------------
    \714\ Although the credit is generally payable in advance directly 
to the insurer, individuals may choose to purchase health insurance 
out-of-pocket and claim the credit at the end of the taxable year. The 
amount of the reduction in premium is required to be included with each 
bill sent to the individual.
---------------------------------------------------------------------------
    The premium assistance credit is generally available for 
individuals (single or joint filers) with household incomes 
between 100 and 400 percent of the Federal poverty level 
(``FPL'') for the family size involved.\715\ Individuals who 
are not eligible for certain other health insurance, including 
certain health insurance through an employer or a spouse's 
employer, may not be eligible for the credit. Household income 
is defined as the sum of: (1) the taxpayer's modified adjusted 
gross income, plus (2) the aggregate modified adjusted gross 
incomes of all other individuals taken into account in 
determining that taxpayer's family size (but only if such 
individuals are required to file a tax return for the taxable 
year). Modified adjusted gross income is defined as adjusted 
gross income increased by: (1) the amount (if any) normally 
excluded by section 911 (the exclusion from gross income for 
citizens or residents living abroad), plus (2) any tax-exempt 
interest received or accrued during the tax year. To be 
eligible for the premium assistance credit, taxpayers who are 
married (within the meaning of section 7703) must file a joint 
return. Individuals who are listed as dependents on a return 
are ineligible for the premium assistance credit.
---------------------------------------------------------------------------
    \715\ Individuals who are lawfully present in the United States but 
are not eligible for Medicaid because of their immigration status are 
treated as having a household income equal to 100 percent of FPL (and 
thus eligible for the premium assistance credit) as long as their 
household income does not actually exceed 100 percent of FPL.
---------------------------------------------------------------------------
    As described in Table 1 below, premium assistance credits 
are available on a sliding scale basis for individuals and 
families with household incomes between 100 and 400 percent of 
FPL to help offset the cost of private health insurance 
premiums. The premium assistance credit amount is determined 
based on the percentage of income the cost of premiums 
represents, rising from two percent of income for those at 100 
percent of FPL for the family size involved to 9.5 percent of 
income for those at 400 percent of FPL for the family size 
involved. Beginning in 2014, the percentages of income are 
indexed to the excess of premium growth over income growth for 
the preceding calendar year. Beginning in 2018, if the 
aggregate amount of premium assistance credits and cost-sharing 
reductions \716\ exceeds 0.504 percent of the gross domestic 
product for that year, the percentage of income is also 
adjusted to reflect the excess (if any) of premium growth over 
the rate of growth in the consumer price index for the 
preceding calendar year. For purposes of calculating family 
size, individuals who are in the country illegally are not 
included.
---------------------------------------------------------------------------
    \716\ As described in section 1402 of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148.
---------------------------------------------------------------------------
    Premium assistance credits, or any amounts that are 
attributable to them, cannot be used to pay for abortions for 
which federal funding is prohibited. Premium assistance credits 
are not available for months in which an individual has a free 
choice voucher (as defined in section 10108 of the Act).

The low income premium credit phase-out

    The premium assistance credit increases, on a sliding scale 
in a linear manner, as shown in the table below.

------------------------------------------------------------------------
                                                 Initial        Final
 Household Income (expressed as a percent of     Premium       Premium
                poverty line)                 (percentage)  (percentage)
------------------------------------------------------------------------
100% through 133%...........................      2.0           2.0
133% through 150%...........................      3.0           4.0
150% through 200%...........................      4.0           6.3
200% through 250%...........................      6.3          8.05
250% through 300%...........................     8.05           9.5
300% through 400%...........................      9.5           9.5
------------------------------------------------------------------------

    The premium assistance credit amount is tied to the cost of 
the second lowest-cost silver plan (adjusted for age) which: 
(1) is in the rating area where the individual resides, (2) is 
offered through an exchange in the area in which the individual 
resides, and (3) provides self-only coverage in the case of an 
individual who purchases self-only coverage, or family coverage 
in the case of any other individual. If the plan in which the 
individual enrolls offers benefits in addition to essential 
health benefits,\717\ even if the State in which the individual 
resides requires such additional benefits, the portion of the 
premium that is allocable to those additional benefits is 
disregarded in determining the premium assistance credit 
amount.\718\ Premium assistance credits may be used for any 
plan purchased through an exchange, including bronze, silver, 
gold and platinum level plans and, for those eligible,\719\ 
catastrophic plans.
---------------------------------------------------------------------------
    \717\ As defined in section 1302(b) of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148.
    \718\ A similar rule applies to additional benefits that are 
offered in multi-State plans, under section 1334 of the Patient 
Protection and Affordable Care Act, Pub. L. No. 111-148.
    \719\ Those eligible to purchase catastrophic plans either must 
have not reached the age of 30 before the beginning of the plan year, 
or have certification of an affordability or hardship exemption from 
the individual responsibility payment, as described in new sections 
5000A(e)(1) and 5000A(e)(5), respectively.
---------------------------------------------------------------------------

Minimum essential coverage and employer offer of health insurance 
        coverage

    Generally, if an employee is offered minimum essential 
coverage \720\ in the group market, including employer-provided 
health insurance coverage, the individual is ineligible for the 
premium tax credit for health insurance purchased through a 
State exchange.
---------------------------------------------------------------------------
    \720\ As defined in section 5000A(f) of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148.
---------------------------------------------------------------------------
    If an employee is offered unaffordable coverage by his or 
her employer or the plan's share of the total allowed cost of 
benefits is less than 60 percent of such costs, the employee 
can be eligible for the premium tax credit, but only if the 
employee declines to enroll in the coverage and satisfies the 
conditions for receiving a tax credit through an exchange. 
Unaffordable is defined as coverage with a premium required to 
be paid by the employee that is more than 9.5 percent of the 
employee's household income, based on the self-only 
coverage.\721\ The percentage of income that is considered 
unaffordable is indexed in the same manner as the percentage of 
income is indexed for purposes of determining eligibility for 
the credit (as discussed above). The Secretary of the Treasury 
is informed of the name and employer identification number of 
every employer that has one or more employees receiving a 
premium tax credit.
---------------------------------------------------------------------------
    \721\ The 9.5 percent amount is indexed for calendar years 
beginning after 2014.
---------------------------------------------------------------------------
    No later than five years after the date of the enactment of 
the provision the Comptroller General must conduct a study of 
whether the percentage of household income used for purposes of 
determining whether coverage is affordable is the appropriate 
level, and whether such level can be lowered without 
significantly increasing the costs to the Federal Government 
and reducing employer-provided health coverage. The Secretary 
reports the results of such study to the appropriate committees 
of Congress, including any recommendations for legislative 
changes.

Procedures for determining eligibility

    In order to receive an advance payment of the premium 
assistance credit, exchange participants must provide to the 
exchange certain information from their tax return from two 
years prior during the open enrollment period for coverage 
during the next calendar year. For example, if an individual 
applies for a premium assistance credit for 2014, the 
individual must provide a tax return from 2012 during the 2103 
open enrollment period. The Internal Revenue Service (``IRS'') 
is authorized to disclose to HHS limited tax return information 
to verify a taxpayer's income based on the most recent return 
information available to establish eligibility for advance 
payment of the premium tax credit. Existing privacy and 
safeguard requirements apply. Individuals who do not qualify 
for advance payment of the premium tax credit on the basis of 
their prior year income may apply for the premium tax credit 
based on specified changes in circumstances. For individuals 
and families who did not file a tax return in the prior tax 
year, the Secretary of HHS will establish alternative income 
documentation that may be provided to determine income 
eligibility for advance payment of the premium tax credit.
    The Secretary of HHS must establish a program for 
determining whether or not individuals are eligible to: (1) 
enroll in an exchange-offered health plan; (2) receive advance 
payment of a premium assistance credit; and (3) establish that 
their coverage under an employer-sponsored plan is 
unaffordable. The program must provide for the following: (1) 
the details of an individual's application process; (2) the 
details of how public entities are to make determinations of 
individuals' eligibility; (3) procedures for deeming 
individuals to be eligible; and, (4) procedures for allowing 
individuals with limited English proficiency to have proper 
access to exchanges.
    In applying for enrollment in an exchange-offered health 
plan, an individual applicant is required to provide 
individually identifiable information, including name, address, 
date of birth, and citizenship or immigration status. In the 
case of an individual applying to receive advance payment of a 
premium assistance credit, the individual is required to submit 
to the exchange income and family size information and 
information regarding changes in marital or family status or 
income. Personal information provided to the exchange is 
submitted to the Secretary of HHS. In turn, the Secretary of 
HHS submits the applicable information to the Social Security 
Commissioner, Homeland Security Secretary, and Treasury 
Secretary for verification purposes. The Secretary of HHS is 
notified of the results following verification, and notifies 
the exchange of such results. The provision specifies actions 
to be undertaken if inconsistencies are found. The Secretary of 
HHS, in consultation with the Social Security Commissioner, the 
Secretary of Homeland Security, and the Treasury Secretary must 
establish procedures for appealing determinations resulting 
from the verification process, and redetermining eligibility on 
a periodic basis.
    An employer must be notified if one of its employees is 
determined to be eligible for a premium assistance credit 
because the employer does not provide minimal essential 
coverage through an employer-sponsored plan, or the employer 
does offer such coverage but it is not affordable or does not 
provide minimum value. The notice must include information 
about the employer's potential liability for payments under 
section 4980H and that terminating or discriminating against an 
employee because he or she received a credit or subsidy is in 
violation of the Fair Labor Standards Act.\722\ An employer is 
generally not entitled to information about its employees who 
qualify for the premium assistance credit. Employers may, 
however, be notified of the name of the employee and whether 
his or her income is above or below the threshold used to 
measure the affordability of the employer's health insurance 
coverage.
---------------------------------------------------------------------------
    \722\ Pub. L. No. 75-718.
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    Personal information submitted for verification may be used 
only to the extent necessary for verification purposes and may 
not be disclosed to anyone not identified in this provision. 
Any person, who submits false information due to negligence or 
disregard of any rule, and without reasonable cause, is subject 
to a civil penalty of not more than $25,000. Any person who 
intentionally provides false information will be fined not more 
than $250,000. Any person who knowingly and willfully uses or 
discloses confidential applicant information will be fined not 
more than $25,000. Any fines imposed by this provision may not 
be collected through a lien or levy against property, and the 
section does not impose any criminal liability.
    The provision requires the Secretary of HHS, in 
consultation with the Secretaries of the Treasury and Labor, to 
conduct a study to ensure that the procedures necessary to 
administer the determination of individuals' eligibility to 
participate in an exchange, to receive advance payment of 
premium assistance credits, and to obtain an individual 
responsibility exemption, adequately protect employees' rights 
of privacy and employers' rights to due process. The results of 
the study must be reported by January 1, 2013, to the 
appropriate committees of Congress.

Reconciliation

    If the premium assistance received through an advance 
payment exceeds the amount of credit to which the taxpayer is 
entitled, the excess advance payment is treated as an increase 
in tax. For persons with household income below 500% of the 
FPL, the amount of the increase in tax is limited as shown in 
the table below (one half of the applicable dollar amount shown 
below for unmarried individuals who are not surviving spouses 
or filing as heads of households).\723\
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    \723\ Medicare and Medicaid Extenders Act of 2010, Pub. L. No. 111-
309, sec. 208. Prior to the Medicare and Medicaid Extenders Act of 
2010, for persons whose household income was below 400% of the FPL, the 
amount of the increase in tax was limited to $400 ($250 for unmarried 
individuals who are not surviving spouses or filing as heads of 
households).

------------------------------------------------------------------------
 Household income (expressed as a percent of poverty   Applicable dollar
                        line)                                amount
------------------------------------------------------------------------
Less than 200%.......................................               $600
At least 200% but less than 250%.....................              1,000
At least 250% but less than 300%.....................              1,500
At least 300% but less than 350%.....................              2,000
At least 350% but less than 400%.....................              2,500
At least 400% but less than 450%.....................              3,000
At least 450% but less than 500%.....................              3,500
------------------------------------------------------------------------

If the premium assistance received through an advance payment 
is less than the amount of the credit to which the taxpayer is 
entitled, the shortfall is treated as a reduction in tax.
    The eligibility for and amount of advance payment of 
premium assistance is determined in advance of the coverage 
year, on the basis of household income and family size from two 
years prior, and the monthly premiums for qualified health 
plans in the individual market in which the taxpayer, spouse 
and any dependent enroll in an exchange. Any advance premium 
assistance is paid during the year for which coverage is 
provided by the exchange. In the subsequent year, the amount of 
advance premium assistance is required to be reconciled with 
the allowable refundable credit for the year of coverage. 
Generally, this would be accomplished on the tax return filed 
for the year of coverage, based on that year's actual household 
income, family size, and premiums. Any adjustment to tax 
resulting from the difference between the advance premium 
assistance and the allowable refundable tax credit would be 
assessed as additional tax or a reduction in tax on the tax 
return.
    Separately, the provision requires that the exchange, or 
any person with whom it contracts to administer the insurance 
program, must report to the Secretary with respect to any 
taxpayer's participation in the health plan offered by the 
Exchange. The information to be reported is information 
necessary to determine whether a person has received excess 
advance payments, identifying information about the taxpayer 
(such as name, taxpayer identification number, months of 
coverage) and any other person covered by that policy; the 
level of coverage purchased by the taxpayer; the total premium 
charged for the coverage, as well as the aggregate advance 
payments credited to that taxpayer; and information provided to 
the Exchange for the purpose of establishing eligibility for 
the program, including changes of circumstances of the taxpayer 
since first purchasing the coverage. Finally, the party 
submitting the report must provide a copy to the taxpayer whose 
information is the subject of the report.

                             Effective Date

    The provision is effective for taxable years ending after 
December 31, 2013.

 D. Reduced Cost-Sharing for Individuals Enrolling in Qualified Health 
          Plans (secs. 1402, 1411, and 1412 of the Act \724\)


                              Present Law

    Currently there is no tax credit that is generally 
available to low or middle income individuals or families for 
the purchase of health insurance. Some individuals may be 
eligible for health coverage through State Medicaid programs 
which consider income, assets, and family circumstances. 
However, these Medicaid programs are not in the Code.
---------------------------------------------------------------------------
    \724\ Sections 1401, 1411 and 1412 of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148, as amended by section 10104, 
is further amended by section 1001 of the Health Care and Education 
Reconciliation Act of 2010, Pub. L. No. 111-152.
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Health coverage tax credit

    Certain individuals are eligible for the HCTC. The HCTC is 
a refundable tax credit equal to 80 percent of the cost of 
qualified health coverage paid by an eligible individual. In 
general, eligible individuals are individuals who receive a 
trade adjustment allowance (and individuals who would be 
eligible to receive such an allowance but for the fact that 
they have not exhausted their regular unemployment benefits), 
individuals eligible for the alternative trade adjustment 
assistance program, and individuals over age 55 who receive 
pension benefits from the Pension Benefit Guaranty Corporation. 
The HCTC is available for ``qualified health insurance,'' which 
includes certain employer-based insurance, certain State-based 
insurance, and in some cases, insurance purchased in the 
individual market.
    The credit is available on an advance basis through a 
program established and administered by the Treasury 
Department. The credit generally is delivered as follows: the 
eligible individual sends his or her portion of the premium to 
the Treasury, and the Treasury then pays the full premium (the 
individual's portion and the amount of the refundable tax 
credit) to the insurer. Alternatively, an eligible individual 
is also permitted to pay the entire premium during the year and 
claim the credit on his or her income tax return.
    Individuals entitled to Medicare and certain other 
governmental health programs, covered under certain employer-
subsidized health plans, or with certain other specified health 
coverage are not eligible for the credit.

COBRA continuation coverage premium reduction

    COBRA \725\ requires that a group health plan must offer 
continuation coverage to qualified beneficiaries in the case of 
a qualifying event (such as a loss of employment). A plan may 
require payment of a premium for any period of continuation 
coverage. The amount of such premium generally may not exceed 
102 percent of the ``applicable premium'' for such period and 
the premium must be payable, at the election of the payor, in 
monthly installments.
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    \725\ Pub. L. No. 99-272.
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    Section 3001 of the American Recovery and Reinvestment Act 
of 2009,\726\ as amended by the Department of Defense 
Appropriations Act, 2010,\727\ and the Temporary Extension Act 
of 2010 \728\ provides that, for a period not exceeding 15 
months, an assistance eligible individual is treated as having 
paid any premium required for COBRA continuation coverage under 
a group health plan if the individual pays 35 percent of the 
premium. Thus, if the assistance eligible individual pays 35 
percent of the premium, the group health plan must treat the 
individual as having paid the full premium required for COBRA 
continuation coverage, and the individual is entitled to a 
subsidy for 65 percent of the premium. An assistance eligible 
individual generally is any qualified beneficiary who elects 
COBRA continuation coverage and the qualifying event with 
respect to the covered employee for that qualified beneficiary 
is a loss of group health plan coverage on account of an 
involuntary termination of the covered employee's employment 
(for other than gross misconduct).\729\ In addition, the 
qualifying event must occur during the period beginning 
September 1, 2008, and ending March 31, 2010.
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    \726\ Pub. L. No. 111-5.
    \727\ Pub. L. No. 111-118.
    \728\ Pub. L. No. 111-144.
    \729\ TEA expanded eligibility for the COBRA subsidy to include 
individuals who experience a loss of coverage on account of a reduction 
in hours of employment followed by the involuntary termination of 
employment of the covered employee. For an individual entitled to COBRA 
because of a reduction in hours and who is then subsequently 
involuntarily terminated from employment, the termination is considered 
a qualifying event for purposes of the COBRA subsidy, as long as the 
termination occurs during the period beginning on the date following 
TEA's date of enactment and ending on March 31, 2010.
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    The COBRA continuation coverage subsidy also applies to 
temporary continuation coverage elected under the Federal 
Employees Health Benefits Program and to continuation health 
coverage under State programs that provide coverage comparable 
to continuation coverage. The subsidy is generally delivered by 
requiring employers to pay the subsidized portion of the 
premium for assistance eligible individuals. The employer then 
treats the payment of the subsidized portion as a payment of 
employment taxes and offsets its employment tax liability by 
the amount of the subsidy. To the extent that the aggregate 
amount of the subsidy for all assistance eligible individuals 
for which the employer is entitled to a credit for a quarter 
exceeds the employer's employment tax liability for the 
quarter, the employer can request a tax refund or can claim the 
credit against future employment tax liability.
    There is an income limit on the entitlement to the COBRA 
continuation coverage subsidy. Taxpayers with modified adjusted 
gross income exceeding $145,000 (or $290,000 for joint filers), 
must repay any subsidy received by them, their spouse, or their 
dependant, during the taxable year. For taxpayers with modified 
adjusted gross incomes between $125,000 and $145,000 (or 
$250,000 and $290,000 for joint filers), the amount of the 
subsidy that must be repaid is reduced proportionately. The 
subsidy is also conditioned on the individual not being 
eligible for certain other health coverage. To the extent that 
an eligible individual receives a subsidy during a taxable year 
to which the individual was not entitled due to income or being 
eligible for other health coverage, the subsidy overpayment is 
repaid on the individual's income tax return as additional tax. 
However, in contrast to the HCTC, the subsidy for COBRA 
continuation coverage may only be claimed through the employer 
and cannot be claimed at the end of the year on an individual 
tax return.

                        Explanation of Provision


Cost-sharing subsidy

    A cost-sharing subsidy is provided to reduce annual out-of-
pocket cost-sharing for individuals and households between 100 
and 400 of percent FPL (for the family size involved). The 
reductions are made in reference to the dollar cap on annual 
deductibles for high deductable health plans in section 
223(c)(2)(A)(ii) (currently $5,000 for self-only coverage and 
$10,000 for family coverage). For individuals with household 
income of more than 100 but not more than 200 percent of FPL, 
the out-of-pocket limit is reduced by two-thirds. For those 
between 201 and 300 percent of FPL by one-half, and for those 
between 301 and 400 percent of FPL by one-third.
    The cost-sharing subsidy that is provided must buy out any 
difference in cost-sharing between the qualified health 
insurance purchased and the actuarial values specified below. 
For individuals between 100 and 150 percent of FPL (for the 
family size involved), the subsidy must bring the value of the 
plan to not more than 94 percent actuarial value. For those 
between 150 and 200 percent of FPL, the subsidy must bring the 
value of the plan to not more than 87 percent actuarial value. 
For those between 201 and 250 percent of FPL, the subsidy must 
bring the value of the plan to not more than 73 percent 
actuarial value. For those between 251 and 400 percent of FPL, 
the subsidy must bring the value of the plan to not more than 
70 percent actuarial value. The determination of cost-sharing 
subsidies will be made based on data from the same taxable year 
as is used for determining advance credits under section 1412 
of the Act (and not the taxable year used for determining 
premium assistance credits under section 36B). The amount 
received by an insurer as a cost-sharing subsidy on behalf of 
an individual, as well as any out-of-pocket spending by the 
individual, counts towards the out-of-pocket limit. Individuals 
enrolled in multi-state plans, pursuant to section 1334 of the 
Act, are eligible for the subsidy.
    In addition to adjusting actuarial values, plans must 
further reduce cost-sharing for low-income individuals as 
specified below. For individuals between 100 and 150 percent of 
FPL (for the family size involved) the plan's share of the 
total allowed cost of benefits provided under the plan must be 
94 percent. For those between 151 and 200 percent of FPL, the 
plan's share must be 87 percent, and for those between 201 and 
250 percent of FPL the plan's share must be 73 percent.
    The cost-sharing subsidy is available only for those months 
in which an individual receives an affordability credit under 
new section 36B.\730\
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    \730\ Section 1401 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148.
---------------------------------------------------------------------------
    As with the premium assistance credit, if the plan in which 
the individual enrolls offers benefits in addition to essential 
health benefits,\731\ even if the State in which the individual 
resides requires such additional benefits, the reduction in 
cost-sharing does not apply to the additional benefits. In 
addition, individuals enrolled in both a qualified health plan 
and a pediatric dental plan may not receive a cost-sharing 
subsidy for the pediatric dental benefits that are included in 
the essential health benefits required to be provided by the 
qualified health plan. Cost-sharing subsidies, and any amounts 
that are attributable to them, cannot be used to pay for 
abortions for which federal funding is prohibited.
---------------------------------------------------------------------------
    \731\ As defined in section 1302(b) of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148.
---------------------------------------------------------------------------
    The Secretary of HHS must establish a program for 
determining whether individuals are eligible to claim a cost-
sharing credit. The program must provide for the following: (1) 
the details of an individual's application process; (2) the 
details of how public entities are to make determinations of 
individuals' eligibility; (3) procedures for deeming 
individuals to be eligible; and, (4) procedures for allowing 
individuals with limited English proficiency proper access to 
exchanges.
    In applying for enrollment, an individual claiming a cost-
sharing subsidy is required to submit to the exchange income 
and family size information and information regarding changes 
in marital or family status or income. Personal information 
provided to the exchange is submitted to the Secretary of HHS. 
In turn, the Secretary of HHS submits the applicable 
information to the Social Security Commissioner, Homeland 
Security Secretary, and Treasury Secretary for verification 
purposes. The Secretary of HHS is notified of the results 
following verification, and notifies the exchange of such 
results. The provision specifies actions to be undertaken if 
inconsistencies are found. The Secretary of HHS, in 
consultation with the Treasury Secretary, Homeland Security 
Secretary, and Social Security Commissioner, must establish 
procedures for appealing determinations resulting from the 
verification process, and redetermining eligibility on a 
periodic basis.
    The Secretary of HHS notifies the plan that the individual 
is eligible and the plan reduces the cost-sharing by reducing 
the out-of-pocket limit under the provision. The plan notifies 
the Secretary of HHS of cost-sharing reductions and the 
Secretary of HHS makes periodic and timely payments to the plan 
equal to the value of the reductions in cost-sharing. The 
provision authorizes the Secretary of HHS to establish a 
capitated payment system with appropriate risk adjustments.
    An employer must be notified if one of its employees is 
determined to be eligible for a cost-sharing subsidy. The 
notice must include information about the employer's potential 
liability for payments under section 4980H and explicit notice 
that hiring, terminating, or otherwise discriminating against 
an employee because he or she received a credit or subsidy is 
in violation of the Fair Labor Standards Act.\732\ An employer 
is generally not entitled to information about its employees 
who qualify for the premium assistance credit or the cost-
sharing subsidy. Employers may, however, be notified of the 
name of an employee and whether his or her income is above or 
below the threshold used to measure the affordability of the 
employer's health insurance coverage.
---------------------------------------------------------------------------
    \732\ Pub. L. No. 75-718.
---------------------------------------------------------------------------
    The Secretary of the Treasury is informed of the name and 
employer identification number of every employer that has one 
or more employees receiving a cost-sharing subsidy.
    The provision implements special rules for Indians (as 
defined by the Indian Health Care Improvement Act) and 
undocumented aliens. The provision prohibits cost-sharing 
reductions for individuals who are not lawfully present in the 
United States, and such individuals are not taken into account 
in determining the family size involved.
    The provision defines any term used in this section that is 
also used by section 36B as having the same meaning as defined 
by the latter. The provision also denies subsidies to 
dependents, with respect to whom a deduction under section 151 
is allowable to another taxpayer for a taxable year beginning 
in the calendar year in which the individual's taxable year 
begins. Further, the provision does not permit a subsidy for 
any month that is not treated as a coverage month.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

   E. Disclosures to Carry Out Eligibility Requirements for Certain 
    Programs (Sec. 1414 \733\ of the Act and sec. 6103 of the Code)

      
---------------------------------------------------------------------------
    \733\ Section 1414 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is amended by section 1004 of the Health Care 
and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              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 such information except as provided in the Internal 
Revenue Code. Section 6103 contains a number of exceptions to 
the general rule of nondisclosure that authorize disclosure in 
specifically identified circumstances. For example, section 
6103 provides for the disclosure of certain return information 
for purposes of establishing the appropriate amount of any 
Medicare Part B premium subsidy adjustment.
    Section 6103(p)(4) requires, as a condition of receiving 
returns and return information, that Federal and State agencies 
(and certain other recipients) provide safeguards as prescribed 
by the Secretary of the Treasury by regulation to be necessary 
or appropriate to protect the confidentiality of returns or 
return information. Unauthorized disclosure of a return or 
return information is a felony punishable by a fine not 
exceeding $5,000 or imprisonment of not more than five years, 
or both, together with the costs of prosecution.\734\ The 
unauthorized inspection of a return or return information is 
punishable by a fine not exceeding $1,000 or imprisonment of 
not more than one year, or both, together with the costs of 
prosecution.\735\ An action for civil damages also may be 
brought for unauthorized disclosure or inspection.\736\
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    \734\ Sec. 7213.
    \735\ Sec. 7213A.
    \736\ Sec. 7431.
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                        Explanation of Provision

    Individuals will submit income information to an exchange 
as part of an application process in order to claim the cost-
sharing reduction and the tax credit on an advance basis. The 
Department of HHS serves as the centralized verification agency 
for information submitted by individuals to the exchanges with 
respect to the reduction and the tax credit to the extent 
provided on an advance basis. The IRS is permitted to 
substantiate the accuracy of income information that has been 
provided to HHS for eligibility determination.
    Specifically, upon written request of the Secretary of HHS, 
the IRS is permitted to disclose the following return 
information of any taxpayer whose income is relevant in 
determining the amount of the tax credit or cost-sharing 
reduction, or eligibility for participation in the specified 
State health subsidy programs (i.e., a State Medicaid program 
under title XIX of the Social Security Act, a State's 
children's health insurance program under title XXI of such 
Act, or a basic health program under section 2228 of such Act): 
(1) taxpayer identity; (2) the filing status of such taxpayer; 
(3) the modified adjusted gross income (as defined in new sec. 
36B of the Code) of such taxpayer, the taxpayer's spouse and of 
any dependants who are required to file a tax return; (4) such 
other information as is prescribed by Treasury regulation as 
might indicate whether such taxpayer is eligible for the credit 
or subsidy (and the amount thereof); and (5) the taxable year 
with respect to which the preceding information relates, or if 
applicable, the fact that such information is not available. 
HHS is permitted to disclose to an exchange or its contractors, 
or to the State agency administering the health subsidy 
programs referenced above (and their contractors) any 
inconsistency between the information submitted and IRS 
records.
    The disclosed return information may be used only for the 
purposes of, and only to the extent necessary in, establishing 
eligibility for participation in the exchange, verifying the 
appropriate amount of the tax credit, and cost-sharing subsidy, 
or eligibility for the specified State health subsidy programs.
    Recipients of the confidential return information are 
subject to the safeguard protections and civil and criminal 
penalties for unauthorized disclosure and inspection. The IRS 
is required to make an accounting for all disclosures.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

 F. Premium Tax Credit and Cost-Sharing Reduction Payments Disregarded 
   for Federal and Federally Assisted Programs (sec. 1415 of the Act)


                              Present Law

    There is no tax credit that is generally available to low 
or middle income individuals or families for the purchase of 
health insurance.

                        Explanation of Provision

    Any premium assistance tax credits and cost-sharing 
subsidies provided to an individual under the Act are 
disregarded for purposes of determining that individual's 
eligibility for benefits or assistance, or the amount or extent 
of benefits and assistance, under any Federal program or under 
any State or local program financed in whole or in part with 
Federal funds. Specifically, any amount of premium tax credit 
provided to an individual is not counted as income, and cannot 
be taken into account as resources for the month of receipt and 
the following two months. Any cost sharing subsidy provided on 
the individual's behalf is treated as made to the health plan 
in which the individual is enrolled and not to the individual.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

 G. Small Business Tax Credit (sec. 1421 \737\ of the Act and new sec. 
                            45R of the Code)

      
---------------------------------------------------------------------------
    \737\ Section 1421 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is amended by section 10105 of the Patient 
Protection and Affordable Care Act, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              Present Law

    The Code does not provide a tax credit for employers that 
provide health coverage for their employees. The cost to an 
employer of providing health coverage for its employees is 
generally deductible as an ordinary and necessary business 
expense for employee compensation.\738\ In addition, the value 
of employer-provided health insurance is not subject to 
employer-paid Federal Insurance Contributions Act (``FICA'') 
tax.
---------------------------------------------------------------------------
    \738\ Sec. 162. However, see special rules in sections 419 and 419A 
for the deductibility of contributions to welfare benefit plans with 
respect to medical benefits for employees and their dependents.
---------------------------------------------------------------------------
    The Code generally provides that employees are not taxed on 
the value of employer-provided health coverage under an 
accident or health plan.\739\ That is, these benefits are 
excluded from gross income. In addition, medical care provided 
under an accident or health plan for employees, their spouses, 
and their dependents generally is excluded from gross 
income.\740\ Active employees participating in a cafeteria plan 
may be able to pay their share of premiums on a pre-tax basis 
through salary reduction.\741\ Such salary reduction 
contributions are treated as employer contributions and thus 
also are excluded from gross income.
---------------------------------------------------------------------------
    \739\ Sec 106.
    \740\ Sec. 105(b).
    \741\ Sec. 125.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress supports additional incentives and assistance 
to encourage small business employers with low-wage employees 
to provide health insurance coverage to their employees. 
Providing health insurance coverage is particularly challenging 
for these small business employers. In particular, the cost of 
health insurance may be disproportionately large as a portion 
of payroll expenses. The tax credit for qualified employee 
health coverage expenses is designed to make the provision of 
health insurance coverage by small business employers of low-
wage employees more affordable.

                       Explanation of Provisions


Small business employers eligible for the credit

    Under the provision, a tax credit is provided for a 
qualified small employer for nonelective contributions to 
purchase health insurance for its employees. A qualified small 
employer for this purpose generally is an employer with no more 
than 25 full-time equivalent employees (``FTEs'') employed 
during the employer's taxable year, and whose employees have 
annual full-time equivalent wages that average no more than 
$50,000. However, the full amount of the credit is available 
only to an employer with 10 or fewer FTEs and whose employees 
have average annual full-time equivalent wages from the 
employer of not more than $25,000. These wage limits are 
indexed to the Consumer Price Index for Urban Consumers (``CPI-
U'') for years beginning in 2014.
    Under the provision, an employer's FTEs are calculated by 
dividing the total hours worked by all employees during the 
employer's tax year by 2080. For this purpose, the maximum 
number of hours that are counted for any single employee is 
2080 (rounded down to the nearest whole number). Wages are 
defined in the same manner as under section 3121(a) (as 
determined for purposes of FICA taxes but without regard to the 
dollar limit for covered wages) and the average wage is 
determined by dividing the total wages paid by the small 
employer by the number of FTEs (rounded down to the nearest 
$1,000).
    The number of hours of service worked by, and wages paid 
to, a seasonal worker of an employer is not taken into account 
in determining the full-time equivalent employees and average 
annual wages of the employer unless the worker works for the 
employer on more than 120 days during the taxable year. For 
purposes of the credit the term `seasonal worker' means a 
worker who performs labor or services on a seasonal basis as 
defined by the Secretary of Labor, including workers covered by 
29 CFR sec. 500.20(s)(1) and retail workers employed 
exclusively during holiday seasons.
    The contributions must be provided under an arrangement 
that requires the eligible small employer to make a nonelective 
contribution on behalf of each employee who enrolls in certain 
defined qualifying health insurance offered to employees by the 
employer equal to a uniform percentage (not less than 50 
percent) of the premium cost of the qualifying health plan.
    The credit is only available to offset actual tax liability 
and is claimed on the employer's tax return. The credit is not 
payable in advance to the taxpayer or refundable. Thus, the 
employer must pay the employees' premiums during the year and 
claim the credit at the end of the year on its income tax 
return. The credit is a general business credit, and can be 
carried back for one year and carried forward for 20 years. The 
credit is available for tax liability under the alternative 
minimum tax.

Years the credit is available

    Under the provision, the credit is initially available for 
any taxable year beginning in 2010, 2011, 2012, or 2013. 
Qualifying health insurance for claiming the credit for this 
first phase of the credit is health insurance coverage within 
the meaning of section 9832, which is generally health 
insurance coverage purchased from an insurance company licensed 
under State law.
    For taxable years beginning in years after 2013, the credit 
is only available to a qualified small employer that purchases 
health insurance coverage for its employees through a State 
exchange and is only available for a maximum coverage period of 
two consecutive taxable years beginning with the first year in 
which the employer or any predecessor first offers one or more 
qualified plans to its employees through an exchange.\742\
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    \742\ Sec. 1301 of the Patient Protection and Affordable Care Act, 
Pub. L. No. 111-148, provides the requirements for a qualified health 
plan purchased through the exchange.
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    The maximum two-year coverage period does not take into 
account any taxable years beginning in years before 2014. Thus 
a qualified small employer could potentially qualify for this 
credit for six taxable years, four years under the first phase 
and two years under the second phase.

Calculation of credit amount

    Only nonelective contributions by the employer are taken 
into account in calculating the credit. Therefore, any amount 
contributed pursuant to a salary reduction arrangement under a 
cafeteria plan within the meaning of section 125 is not treated 
as an employer contribution for purposes of this credit. The 
credit is equal to the lesser of the following two amounts 
multiplied by an applicable tax credit percentage: (1) the 
amount of contributions the employer made on behalf of the 
employees during the taxable year for the qualifying health 
coverage and (2) the amount of contributions that the employer 
would have made during the taxable year if each employee had 
enrolled in coverage with a small business benchmark premium. 
As discussed above, this tax credit is only available if this 
uniform percentage is at least 50 percent.
    For the first phase of the credit (any taxable years 
beginning in 2010, 2011, 2012, or 2013), the applicable tax 
credit percentage is 35 percent. The benchmark premium is the 
average total premium cost in the small group market for 
employer-sponsored coverage in the employer's State. The 
premium and the benchmark premium vary based on the type of 
coverage provided to the employee (e.g., single or family).
    For taxable years beginning in years after 2013, the 
applicable tax credit percentage is 50 percent. The benchmark 
premium is the average premium cost in the small group market 
in the rating area in which the employee enrolls in coverage. 
The premium and the benchmark premium vary based on the type of 
coverage being provided to the employee (e.g., single or 
family).
    The credit is reduced for an employer with between 10 and 
25 FTEs. The amount of this reduction is equal to the amount of 
the credit (determined before any reduction) multiplied by a 
fraction, the numerator is the number of FTEs of the employer 
in excess of 10 and the denominator of which is 15. The credit 
is also reduced for an employer for whom the average wages per 
employee is between $25,000 and $50,000. The amount of this 
reduction is equal to the amount of the credit (determined 
before any reduction) multiplied by a fraction, the numerator 
of which is the average annual wages of the employer in excess 
of $25,000 and the denominator is $25,000. For an employer with 
both more than 10 FTEs and average annual wages in excess of 
$25,000, the reduction is the sum of the amount of the two 
reductions.

Tax exempt organizations as qualified small employers

    Any organization described in section 501(c) which is 
exempt under section 501(a) that otherwise qualifies for the 
small business tax credit is eligible to receive the credit. 
However, for tax-exempt organizations, the applicable 
percentage for the credit during the first phase of the credit 
(any taxable year beginning in 2010, 2011, 2012, or 2013) is 
limited to 25 percent and the applicable percentage for the 
credit during the second phase (taxable years beginning in 
years after 2013) is limited to 35 percent. The small business 
tax credit is otherwise calculated in the same manner for tax-
exempt organizations that are qualified small employers as the 
tax credit is calculated for all other qualified small 
employers. However, for tax-exempt organizations, instead of 
being a general business credit, the small business tax credit 
is a refundable tax credit limited to the amount of the payroll 
taxes of the employer during the calendar year in which the 
taxable year begins. For this purpose, payroll taxes of an 
employer means: (1) the amount of income tax required to be 
withheld from its employees' wages; (2) the amount of hospital 
insurance tax under section 3101(b) required to be withheld 
from its employees' wages; and (3) the amount of the hospital 
insurance tax under section 3111(b) imposed on the employer.

Special rules

    The employer is entitled to a deduction under section 162 
equal to the amount of the employer contribution minus the 
dollar amount of the credit. For example, if a qualified small 
employer pays 100 percent of the cost of its employees' health 
insurance coverage and the tax credit under this provision is 
50 percent of that cost, the employer is able to claim a 
section 162 deduction for the other 50 percent of the premium 
cost.
    The employer is determined by applying the employer 
aggregations rules in section 414(b), (c), and (m). In 
addition, the definition of employee includes a leased employee 
within the meaning of section 414(n).\743\
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    \743\ Section 414(b) provides that, for specified employee benefit 
purposes, all employees of all corporations which are members of a 
controlled group of corporations are treated as employed by a single 
employer. There is a similar rule in section 414(c) under which all 
employees of trades or businesses (whether or not incorporated) which 
are under common are treated under regulations as employed by a single 
employer, and, in section 414(m), under which employees of an 
affiliated service group (as defined in that section) are treated as 
employed by a single employer. Section 414(n) provides that leased 
employees, as defined in that section, are treated as employees of the 
service recipient for specified purposes. Section 414(o) authorizes the 
Treasury to issue regulations to prevent avoidance of the certain 
requirement under sections 414(m) and (n).
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    Self-employed individuals, including partners and sole 
proprietors, two percent share-holders of an S Corporation, and 
five percent owners of the employer (within the meaning of 
section 416(i)(1)(B)(i)) are not treated as employees for 
purposes of this credit. There is also a special rule to 
prevent sole proprietorships from receiving the credit for the 
owner and their family members. Thus, no credit is available 
for any contribution to the purchase of health insurance for 
these individuals and these individuals are not taken into 
account in determining the number of FTEs or average full-time 
equivalent wages.
    The Secretary of is directed to prescribe such regulations 
as may be necessary to carry out the provisions of new section 
45R, including regulations to prevent the avoidance of the two-
year limit on the credit period for the second phase of the 
credit through the use of successor entities and the use of the 
limit on the number of employees and the amount of average 
wages through the use of multiple entities. The Secretary of 
the Treasury, in consultation with the Secretary of Labor, is 
directed to prescribe such regulations, rules, and guidance as 
may be necessary to determine the hours of service of an 
employee for purposes of determining FTEs, including rules for 
the employees who are not compensated on an hourly basis.

                             Effective Date

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

H. Excise Tax on Individuals Without Essential Health Benefits Coverage 
 (sec. 1501 \744\ of the Act and sec. 1 of Pub. L. No. 111-173 and new 
                        sec. 5000A of the Code)

      
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    \744\ Section 1501 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10106, is further 
amended by section 1002 of the Health Care and Education Reconciliation 
Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              Present Law

    Federal law does not require individuals to have health 
insurance. Only the Commonwealth of Massachusetts, through its 
statewide program, requires that individuals have health 
insurance (although this policy has been considered in other 
states, such as California, Maryland, Maine, and Washington). 
All adult residents of Massachusetts are required to have 
health insurance that meets ``minimum creditable coverage'' 
standards if it is deemed ``affordable'' at their income level 
under a schedule set by the board of the Commonwealth Health 
Insurance Connector Authority (``Connector''). Individuals 
report their insurance status on State income tax forms. 
Individuals can file hardship exemptions from the mandate; 
persons for whom there are no affordable insurance options 
available are not subject to the requirement for insurance 
coverage.
    For taxable year 2007, an individual without insurance and 
who was not exempt from the requirement did not qualify under 
Massachusetts law for a State income tax personal exemption. 
For taxable years beginning on or after January 1, 2008, a 
penalty is levied for each month an individual is without 
insurance. The penalty consists of an amount up to 50 percent 
of the lowest premium available to the individual through the 
Connector. The penalty is reported and paid by the individual 
with the individual's Massachusetts State income tax return at 
the same time and in the same manner as State income taxes. 
Failure to pay the penalty results in the same interest and 
penalties as apply to unpaid income tax.

                        Explanation of Provision


Personal responsibility requirement

    Beginning January, 2014, non-exempt U.S. citizens and legal 
residents are required to maintain minimum essential coverage. 
Minimum essential coverage includes government sponsored 
programs, eligible employer-sponsored plans, plans in the 
individual market, grandfathered group health plans and 
grandfathered health insurance coverage, and other coverage as 
recognized by the Secretary of HHS in coordination with the 
Secretary of the Treasury. Government sponsored programs 
include Medicare, Medicaid, Children's Health Insurance 
Program, coverage for members of the U.S. military,\745\ 
veterans health care,\746\ and health care for Peace Corps 
volunteers.\747\ Eligible employer-sponsored plans include: 
governmental plans,\748\ church plans,\749\ grandfathered plans 
and other group health plans offered in the small or large 
group market within a State. Minimum essential coverage does 
not include coverage that consists of certain HIPAA excepted 
benefits.\750\ Other HIPAA excepted benefits that do not 
constitute minimum essential coverage if offered under a 
separate policy, certificate or contract of insurance include 
long term care, limited scope dental and vision benefits, 
coverage for a disease or specified illness, hospital indemnity 
or other fixed indemnity insurance or Medicare supplemental 
health insurance.\751\
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    \745\ 10 U.S.C. sec. 55 and 38 U.S.C. sec. 1781.
    \746\ Section 5000A is amended by Pub. L. No. 111-173 to clarify 
that minimum essential coverage includes any health care program under 
section 17 or 18 of Title 38 of the United States Code, as determined 
by the Secretary of Veterans Affairs, in coordination with the 
Secretary of HHS and the Secretary of Treasury.
    \747\ 22 U.S.C. sec. 2504(e).
    \748\ ERISA sec. 3(32).
    \749\ ERISA sec. 3(33).
    \750\ 42 U.S.C. sec. 300gg-91(c)(1). HIPAA excepted benefits 
include: (1) coverage only for accident, or disability income 
insurance; (2) coverage issued as a supplement to liability insurance; 
(3) liability insurance, including general liability insurance and 
automobile liability insurance; (4) workers' compensation or similar 
insurance; (5) automobile medical payment insurance; (6) credit-only 
insurance; (7) coverage for on-site medical clinics; and (8) other 
similar insurance coverage, specified in regulations, under which 
benefits for medical care are secondary or incidental to other 
insurance benefits.
    \751\ 42 U.S.C. sec. 300gg-91(c)(2-4).
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    Individuals are exempt from the requirement for months they 
are incarcerated, not legally present in the United States or 
maintain religious exemptions. Those who are exempt from the 
requirement due to religious reasons must be members of a 
recognized religious sect exempting them from self-employment 
taxes \752\ and adhere to tenets of the sect. Individuals 
residing \753\ outside of the United States are deemed to 
maintain minimum essential coverage. If an individual is a 
dependent \754\ of another taxpayer, the other taxpayer is 
liable for any penalty payment with respect to the individual.
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    \752\ Sec. 1402(g)(1).
    \753\ Sec. 911(d)(1).
    \754\ Sec. 152.
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Penalty

    Individuals who fail to maintain minimum essential coverage 
in 2016 are subject to a penalty equal to the greater of: (1) 
2.5 percent of the excess of the taxpayer's household income 
for the taxable year over the threshold amount of income 
required for income tax return filing for that taxpayer under 
section 6012(a)(1); \755\ or (2) $695 per uninsured adult in 
the household. The fee for an uninsured individual under age 18 
is one-half of the adult fee for an adult. The total household 
penalty may not exceed 300 percent of the per adult penalty 
($2,085). The total annual household payment may not exceed the 
national average annual premium for bronze level health plan 
offered through the Exchange that year for the household size.
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    \755\ Generally, in 2010, the filing threshold is $9,350 for a 
single person or a married person filing separately and is $18,700 for 
married filing jointly. IR-2009-93, Oct. 15, 2009.
---------------------------------------------------------------------------
    This per adult annual penalty is phased in as follows: $95 
for 2014; $325 for 2015; and $695 in 2016. For years after 
2016, the $695 amount is indexed to CPI-U, rounded to the next 
lowest $50. The percentage of income is phased in as follows: 
one percent for 2014; two percent in 2015; and 2.5 percent 
beginning after 2015. If a taxpayer files a joint return, the 
individual and spouse are jointly liable for any penalty 
payment.
    The penalty applies to any period the individual does not 
maintain minimum essential coverage and is determined monthly. 
The penalty is an excise tax that is assessed in the same 
manner as an assessable penalty under the enforcement 
provisions of subtitle F of the Code.\756\ As a result, it is 
assessable without regard to the restrictions of section 
6213(b). Although assessable and collectible under the Code, 
the IRS authority to use certain collection methods is limited. 
Specifically, the filing of notices of liens and levies 
otherwise authorized for collection of taxes does not apply to 
the collection of this penalty. In addition, the statute waives 
criminal penalties for non-compliance with the requirement to 
maintain minimum essential coverage. However, the authority to 
offset refunds or credits is not limited by the provision.
---------------------------------------------------------------------------
    \756\ IRS authority to assess and collect taxes is generally 
provided in subtitle F, ``Procedure and Administration'' in the Code. 
That subtitle establishes the rules governing both how taxpayers are 
required to report information to the IRS and pay their taxes as well 
as their rights. It also establishes the duties and authority of the 
IRS to enforce the Code, including civil and criminal penalties.
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    Individuals who cannot afford coverage because their 
required contribution for employer-sponsored coverage or, with 
respect to whom, the lowest cost bronze plan in the local 
Exchange exceeds eight percent of household income for the year 
are exempt from the penalty.\757\ In years after 2014, the 
eight percent exemption is increased by the amount by which 
premium growth exceeds income growth. For employees, and 
individuals who are eligible for minimum essential coverage 
through an employer by reason of a relationship to an employee, 
the determination of whether coverage is affordable to the 
employee and any such individual is made by reference to the 
required contribution of the employees for self-only coverage. 
Individuals are liable for penalties imposed with respect to 
their dependents (as defined in section 152). An individual 
filing a joint return with a spouse is jointly liable for any 
penalty imposed with respect to the spouse. Taxpayers with 
income below the income tax filing threshold \758\ are also 
exempt from the penalty for failure to maintain minimum 
essential coverage. All members of Indian tribes \759\ are 
exempt from the penalty.
---------------------------------------------------------------------------
    \757\ In the case of an individual participating in a salary 
reduction arrangement, the taxpayer's household income is increased by 
any exclusion from gross income for any portion of the required 
contribution to the premium. The required contribution to the premium 
is the individual contribution to coverage through an employer or in 
the purchase of a bronze plan through the Exchange.
    \758\ Generally, in 2010, the filing threshold is $9,350 for a 
single person or a married person filing separately and is $18,700 for 
married filing jointly. IR-2009-93, Oct. 15, 2009.
    \759\ Tribal membership is defined in section 45A(c)(6).
---------------------------------------------------------------------------
    No penalty is assessed for individuals who do not maintain 
health insurance for a period of three months or less during 
the taxable year. If an individual exceeds the three month 
maximum during the taxable year, the penalty for the full 
duration of the gap during the year is applied. If there are 
multiple gaps in coverage during a calendar year, the exemption 
from penalty applies only to the first such gap in coverage. 
The Secretary of the Treasury shall provide rules when a 
coverage gap includes months in multiple calendar years. 
Individuals may also apply to the Secretary of HHS for a 
hardship exemption due to hardship in obtaining coverage.\760\ 
Residents of the possessions \761\ of the United States are 
treated as being covered by acceptable coverage.
---------------------------------------------------------------------------
    \760\ Sec. 1311(d)(4)(H).
    \761\ Sec. 937(a).
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    Family size is the number of individuals for whom the 
taxpayer is allowed a personal exemption. Household income is 
the sum of the modified adjusted gross incomes of the taxpayer 
and all individuals accounted for in the family size required 
to file a tax return for that year. Modified adjusted gross 
income means adjusted gross income increased by all tax-exempt 
interest and foreign earned income.\762\
---------------------------------------------------------------------------
    \762\ Sec. 911.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2013.

I. Reporting of Health Insurance Coverage (sec. 1502 of the Act and new 
                sec. 6055 and sec. 6724(d) of the Code)


                              Present Law


Insurer reporting of health insurance coverage

    No provision.

Penalties for failure to comply with information reporting requirements

    Present law imposes a variety of information reporting 
requirements on participants in certain transactions.\763\ 
These requirements are intended to assist taxpayers in 
preparing their income tax returns and help the IRS determine 
whether such returns are correct and complete. Failure to 
comply with the information reporting requirements may result 
in penalties, including: a penalty for failure to file the 
information return,\764\ a penalty for failure to furnish payee 
statements,\765\ and a penalty for failure to comply with 
various other reporting requirements.\766\
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    \763\ Secs. 6031 through 6060.
    \764\ Sec. 6721.
    \765\ Sec. 6722.
    \766\ Sec. 6723. The penalty for failure to comply timely with a 
specified information reporting requirement is $50 per failure, not to 
exceed $100,000 for a calendar year.
---------------------------------------------------------------------------
    The penalty for failure to file an information return 
generally is $50 for each return for which such failure occurs. 
The total penalty imposed on a person for all failures during a 
calendar year cannot exceed $250,000. Additionally, special 
rules apply to reduce the per-failure and maximum penalty where 
the failure is corrected within a specified period.
    The penalty for failure to provide a correct payee 
statement is $50 for each statement with respect to which such 
failure occurs, with the total penalty for a calendar year not 
to exceed $100,000. Special rules apply that increase the per-
statement and total penalties where there is intentional 
disregard of the requirement to furnish a payee statement.

                        Explanation of Provision

    Under the provision, insurers (including employers who 
self-insure) that provide minimum essential coverage \767\ to 
any individual during a calendar year must report certain 
health insurance coverage information to both the covered 
individual and to the IRS. In the case of coverage provided by 
a governmental unit, or any agency or instrumentality thereof, 
the reporting requirement applies to the person or employee who 
enters into the agreement to provide the health insurance 
coverage (or their designee).
---------------------------------------------------------------------------
    \767\ As defined in section 5000A of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148, as amended by section 10106, 
as further amended by section 1002 of the Health Care and Education 
Reconciliation Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------
    The information required to be reported includes: (1) the 
name, address, and taxpayer identification number of the 
primary insured, and the name and taxpayer identification 
number of each other individual obtaining coverage under the 
policy; (2) the dates during which the individual was covered 
under the policy during the calendar year; (3) whether the 
coverage is a qualified health plan offered through an 
exchange; (4) the amount of any premium tax credit or cost-
sharing reduction received by the individual with respect to 
such coverage; and (5) such other information as the Secretary 
may require.
    To the extent health insurance coverage is provided through 
an employer-sponsored group health plan, the insurer is also 
required to report the name, address and employer 
identification number of the employer, the portion of the 
premium, if any, required to be paid by the employer, and any 
other information the Secretary may require to administer the 
new tax credit for eligible small employers.
    The insurer is required to report the above information, 
along with the name, address and contact information of the 
reporting insurer, to the covered individual on or before 
January 31 of the year following the calendar year for which 
the information is required to be reported to the IRS.
    The provision amends the information reporting provisions 
of the Code to provide that an insurer who fails to comply with 
these new reporting requirements is subject to the penalties 
for failure to file an information return and failure to 
furnish payee statements, respectively.
    The IRS is required, not later than June 30 of each year, 
in consultation with the Secretary of HHS, to provide annual 
notice to each individual who files an income tax return and 
who fails to enroll in minimum essential coverage. The notice 
is required to include information on the services available 
through the exchange operating in the individual's State of 
residence.

                             Effective Date

    The provision is effective for calendar years beginning 
after 2013.

J. Shared Responsibility for Employers (sec. 1513 \768\ of the Act and 
                      new sec. 4980H of the Code)

---------------------------------------------------------------------------
    \768\ Section 1513 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10106, is further 
amended by section 1003 of the Health Care and Education Reconciliation 
Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              Present Law

    Currently, there is no Federal requirement that employers 
offer health insurance coverage to employees or their families. 
However, as with other compensation, the cost of employer-
provided health coverage is a deductible business expense under 
section 162 of the Code.\769\ In addition, employer-provided 
health insurance coverage is generally not included in an 
employee's gross income.\770\
---------------------------------------------------------------------------
    \769\ Sec. 162. However see special rules in sections 419 and 419A 
for the deductibility of contributions to welfare benefit plans with 
respect to medical benefits for employees and their dependents.
    \770\ Sec. 106.
---------------------------------------------------------------------------
    Employees participating in a cafeteria plan may be able to 
pay the portion of premiums for health insurance coverage not 
otherwise paid for by their employers on a pre-tax basis 
through salary reduction.\771\ Such salary reduction 
contributions are treated as employer contributions for 
purposes of the Code, and are thus excluded from gross income.
---------------------------------------------------------------------------
    \771\ Sec. 125.
---------------------------------------------------------------------------
    One way that employers can offer employer-provided health 
insurance coverage for purposes of the tax exclusion is to 
offer to reimburse employees for the premiums for health 
insurance purchased by employees in the individual health 
insurance market. The payment or reimbursement of employees' 
substantiated individual health insurance premiums is 
excludible from employees' gross income.\772\ This 
reimbursement for individual health insurance premiums can also 
be paid through salary reduction under a cafeteria plan.\773\ 
However, this offer to reimburse individual health insurance 
premiums constitutes a group health plan.
---------------------------------------------------------------------------
    \772\ Rev. Rul. 61-146 (1961-2 CB 25).
    \773\ Prop. Treas. Reg. sec. 1.125-1(m).
---------------------------------------------------------------------------
    The Employee Retirement Income Security Act of 1974 
(``ERISA'') \774\ preempts State law relating to certain 
employee benefit plans, including employer-sponsored health 
plans. While ERISA specifically provides that its preemption 
rule does not exempt or relieve any person from any State law 
which regulates insurance, ERISA also provides that an employee 
benefit plan is not deemed to be engaged in the business of 
insurance for purposes of any State law regulating insurance 
companies or insurance contracts. As a result of this ERISA 
preemption, self-insured employer-sponsored health plans need 
not provide benefits that are mandated under State insurance 
law.
---------------------------------------------------------------------------
    \774\ Pub. L. No. 93-406.
---------------------------------------------------------------------------
    While ERISA does not require an employer to offer health 
benefits, it does require compliance if an employer chooses to 
offer health benefits, such as compliance with plan fiduciary 
standards, reporting and disclosure requirements, and 
procedures for appealing denied benefit claims. There are other 
Federal requirements for health plans which include, for 
example, rules for health care continuation coverage.\775\ The 
Code imposes an excise tax on group health plans that fail to 
meet these other requirements.\776\ The excise tax generally is 
equal to $100 per day per failure during the period of 
noncompliance and is imposed on the employer sponsoring the 
plan.
---------------------------------------------------------------------------
    \775\ These rules were added to ERISA and the Code by the 
Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-
272.
    \776\ Sec. 4980B.
---------------------------------------------------------------------------
    Under Medicaid, States may establish ``premium assistance'' 
programs, which pay a Medicaid beneficiary's share of premiums 
for employer-sponsored health coverage. Besides being available 
to the beneficiary through his or her employer, the coverage 
must be comprehensive and cost-effective for the State. An 
individual's enrollment in an employer plan is considered cost-
effective if paying the premiums, deductibles, coinsurance and 
other cost-sharing obligations of the employer plan is less 
expensive than the State's expected cost of directly providing 
Medicaid-covered services. States are also required to provide 
coverage for those Medicaid-covered services that are not 
included in the private plans. A 2007 analysis showed that 12 
States had Medicaid premium assistance programs as authorized 
under current law.

                        Explanation of Provision

    An applicable large employer that does not offer coverage 
for all its full-time employees, offers minimum essential 
coverage that is unaffordable, or offers minimum essential 
coverage that consists of a plan under which the plan's share 
of the total allowed cost of benefits is less than 60 percent, 
is required to pay a penalty if any full-time employee is 
certified to the employer as having purchased health insurance 
through a state exchange with respect to which a tax credit or 
cost-sharing reduction is allowed or paid to the employee.

Applicable large employer

    An employer is an applicable large employer with respect to 
any calendar year if it employed an average of at least 50 
full-time employees during the preceding calendar year. For 
purposes of the provision, ``employer'' includes any 
predecessor employer. An employer is not treated as employing 
more than 50 full-time employees if the employer's workforce 
exceeds 50 full-time employees for 120 days or fewer during the 
calendar year and the employees that cause the employer's 
workforce to exceed 50 full-time employees are seasonal 
workers. A seasonal worker is a worker who performs labor or 
services on a seasonal basis (as defined by the Secretary of 
Labor), including retail workers employed exclusively during 
the holiday season and workers whose employment is, ordinarily, 
the kind exclusively performed at certain seasons or periods of 
the year and which, from its nature, may not be continuous or 
carried on throughout the year.\777\
---------------------------------------------------------------------------
    \777\ 29 C.F.R. section 500.20(s)(1). Under section 5000.20(s)(1), 
a worker who moves from one seasonal activity to another, while 
employed in agriculture or performing agricultural labor, is employed 
on a seasonal basis even though he may continue to be employed during a 
major portion of the year.
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    In counting the number of employees for purposes of 
determining whether an employer is an applicable large 
employer, a full-time employee (meaning, for any month, an 
employee working an average of at least 30 hours or more each 
week) is counted as one employee and all other employees are 
counted on a pro-rated basis in accordance with regulations 
prescribed by the Secretary. The number of full-time equivalent 
employees that must be taken into account for purposes of 
determining whether the employer exceeds the threshold is equal 
to the aggregate number of hours worked by non-full-time 
employees for the month, divided by 120 (or such other number 
based on an average of 30 hours of service each week as the 
Secretary may prescribe in regulations).
    The Secretary, in consultation with the Secretary of Labor, 
is directed to issue, as necessary, rules, regulations and 
guidance to determine an employee's hours of service, including 
rules that apply to employees who are not compensated on an 
hourly basis.
    The aggregation rules of section 414(b), (c), (m), and (o) 
apply in determining whether an employer is an applicable large 
employer. The determination of whether an employer that was not 
in existence during the preceding calendar year is an 
applicable large employer is made based on the average number 
of employees that it is reasonably expected to employ on 
business days in the current calendar year.

Penalty for employers not offering coverage

    An applicable large employer who fails to offer its full-
time employees and their dependents the opportunity to enroll 
in minimum essential coverage under an employer-sponsored plan 
for any month is subject to a penalty if at least one of its 
full-time employees is certified to the employer as having 
enrolled in health insurance coverage purchased through a State 
exchange with respect to which a premium tax credit or cost-
sharing reduction is allowed or paid to such employee or 
employees. The penalty for any month is an excise tax equal to 
the number of full-time employees over a 30-employee threshold 
during the applicable month (regardless of how many employees 
are receiving a premium tax credit or cost-sharing reduction) 
multiplied by one-twelfth of $2,000. In the case of persons 
treated as a single employer under the provision, the 30-
employee reduction in full-time employees is made from the 
total number of full-time employees employed by such persons 
(i.e., only one 30-person reduction is permitted per controlled 
group of employers) and is allocated among such persons in 
relation to the number of full-time employees employed by each 
such person.
    For example, in 2014, Employer A fails to offer minimum 
essential coverage and has 100 full-time employees, ten of whom 
receive a tax credit for the year for enrolling in a State 
exchange-offered plan. For each employee over the 30-employee 
threshold, the employer owes $2,000, for a total penalty of 
$140,000 ($2,000 multiplied by 70 ((100-30)). This penalty is 
assessed on an annual, monthly, or periodic basis as the 
Secretary may prescribe.
    For calendar years after 2014, the $2,000 amount is 
increased by the percentage (if any) by which the average per 
capita premium for health insurance coverage in the United 
States for the preceding calendar year (as estimated by the 
Secretary of HHS no later than October 1 of the preceding 
calendar year) exceeds the average per capita premium for 2013 
(as determined by the Secretary of HHS), rounded down to the 
nearest $10.

Penalty for employees receiving premium credits

    An applicable large employer who offers, for any month, its 
full-time employees and their dependents the opportunity to 
enroll in minimum essential coverage under an employer-
sponsored plan is subject to a penalty if any full-time 
employee is certified to the employer as having enrolled in 
health insurance coverage purchased through a State exchange 
with respect to which a premium tax credit or cost-sharing 
reduction is allowed or paid to such employee or employees.
    The penalty is an excise tax that is imposed for each 
employee who receives a premium tax credit or cost-sharing 
reduction for health insurance purchased through a State 
exchange. For each full-time employee receiving a premium tax 
credit or cost-sharing subsidy through a State exchange for any 
month, the employer is required to pay an amount equal to one-
twelfth of $3,000. The penalty for each employer for any month 
is capped at an amount equal to the number of full-time 
employees during the month (regardless of how many employees 
are receiving a premium tax credit or cost-sharing reduction) 
in excess of 30, multiplied by one-twelfth of $2,000. In the 
case of persons treated as a single employer under the 
provision, the 30-employee reduction in full-time employees for 
purposes of calculating the maximum penalty is made from the 
total number of full-time employees employed by such persons 
(i.e., only one 30-person reduction is permitted per controlled 
group of employers) and is allocated among such persons in 
relation to the number of full-time employees employed by each 
such person.
    For example, in 2014, Employer A offers health coverage and 
has 100 full-time employees, 20 of whom receive a tax credit 
for the year for enrolling in a State exchange offered plan. 
For each employee receiving a tax credit, the employer owes 
$3,000, for a total penalty of $60,000. The maximum penalty for 
this employer is capped at the amount of the penalty that it 
would have been assessed for a failure to provide coverage, or 
$140,000 ($2,000 multiplied by 70 ((100-30)). Since the 
calculated penalty of $60,000 is less than the maximum amount, 
Employer A pays the $60,000 calculated penalty. This penalty is 
assessed on an annual, monthly, or periodic basis as the 
Secretary may prescribe.
    For calendar years after 2014, the $3,000 and $2,000 
amounts are increased by the percentage (if any) by which the 
average per capita premium for health insurance coverage in the 
United States for the preceding calendar year (as estimated by 
the Secretary of HHS no later than October 1 of the preceding 
calendar year) exceeds the average per capita premium for 2013 
(as determined by the Secretary of HHS), rounded down to the 
nearest $10.

Time for payment, deductibility of excise taxes, restrictions on 
        assessment

    The excise taxes imposed under this provision are payable 
on an annual, monthly or other periodic basis as the Secretary 
of the Treasury may prescribe. The excise taxes imposed under 
this provision for employees receiving premium tax credits are 
not deductible under section 162 as a business expense. The 
restrictions on assessment under section 6213 are not 
applicable to the excise taxes imposed under the provision.

Employer offer of health insurance coverage

    Under the provision, as under current law, an employer is 
not required to offer health insurance coverage. If an employee 
is offered health insurance coverage by his or her employer and 
chooses to enroll in the coverage, the employer-provided 
portion of the coverage is excluded from gross income. The tax 
treatment is the same whether the employer offers coverage 
outside of a State exchange or the employer offers a coverage 
option through a State exchange.
            Definition of coverage
    As a general matter, if an employee is offered affordable 
minimum essential coverage under an employer-sponsored plan, 
the individual is ineligible for a premium tax credit and cost 
sharing reductions for health insurance purchased through a 
State exchange.
            Unaffordable coverage
    If an employee is offered minimum essential coverage by 
their employer that is either unaffordable or that consists of 
a plan under which the plan's share of the total allowed cost 
of benefits is less than 60 percent, however, the employee is 
eligible for a premium tax credit and cost sharing reductions, 
but only if the employee declines to enroll in the coverage and 
purchases coverage through the exchange instead. Unaffordable 
is defined as coverage with a premium required to be paid by 
the employee that is more than 9.5 percent of the employee's 
household income (as defined for purposes of the premium tax 
credits), based on the self-only coverage. This percentage of 
the employee's income is indexed to the per capita growth in 
premiums for the insured market as determined by the Secretary 
of HHS. The employee must seek an affordability waiver from the 
State exchange and provide information as to family income and 
the lowest cost employer option offered to them. The State 
exchange then provides the waiver to the employee. The employer 
penalty applies for any employee(s) receiving an affordability 
waiver.
    For purposes of determining if coverage is unaffordable, 
required salary reduction contributions are treated as payments 
required to be made by the employee. However, if an employee is 
reimbursed by the employer for any portion of the premium for 
health insurance coverage purchased through the exchange, 
including any reimbursement through salary reduction 
contributions under a cafeteria plan, the coverage is employer-
provided and the employee is not eligible for premium tax 
credits or cost-sharing reductions. Thus, an individual is not 
permitted to purchase coverage through the exchange, apply for 
the premium tax credit, and pay for the individual's portion of 
the premium using salary reduction contributions under the 
cafeteria plan of the individual's employer.
    An employer must be notified if one of its employees is 
determined to be eligible for a premium assistance credit or a 
cost-sharing reduction because the employer does not provide 
minimal essential coverage through an employer-sponsored plan, 
or the employer does offer such coverage but it is not 
affordable or the plan's share of the total allowed cost of 
benefits is less than 60 percent. The notice must include 
information about the employer's potential liability for 
payments under section 4980H. The employer must also receive 
notification of the appeals process established for employers 
notified of potential liability for payments under section 
4980H. An employer is generally not entitled to information 
about its employees who qualify for the premium assistance 
credit or cost-sharing reductions; however, the appeals process 
must provide an employer the opportunity to access the data 
used to make the determination of an employee's eligibility for 
a premium assistance credit or cost-sharing reduction, to the 
extent allowable by law.
    The Secretary is required to prescribe rules, regulations 
or guidance for the repayment of any assessable payment 
(including interest) if the payment is based on the allowance 
or payment of a premium tax credit or cost-sharing reduction 
with respect to an employee that is subsequently disallowed and 
with respect to which the assessable payment would not have 
been required to have been made in the absence of the allowance 
or payment.
            Effect of medicaid enrollment
    A Medicaid-eligible individual can always choose to leave 
the employer's coverage and enroll in Medicaid, and an employer 
is not required to pay a penalty for any employees enrolled in 
Medicaid.

Study and reporting on employer responsibility requirements

    The Secretary of Labor is required to study whether 
employee wages are reduced by reason of the application of the 
employer responsibility requirements, using the National 
Compensation Survey published by the Bureau of Labor 
Statistics. The Secretary of Labor is to report the results of 
this study to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate.

                             Effective Date

    The provision is effective for months beginning after 
December 31, 2013.

 K. Reporting of Employer Health Insurance Coverage (sec. 1514 of the 
          Act and new sec. 6056 and sec. 6724(d) of the Code)


                              Present Law


Employer reporting of health insurance coverage

    No provision.

Penalties for failure to comply with information reporting requirements

    Present law imposes a variety of information reporting 
requirements on participants in certain transactions.\778\ 
These requirements are intended to assist taxpayers in 
preparing their income tax returns and help the IRS determine 
whether such returns are correct and complete. Failure to 
comply with the information reporting requirements may result 
in penalties, including: a penalty for failure to file the 
information return,\779\ a penalty for failure to furnish payee 
statements,\780\ and a penalty for failure to comply with 
various other reporting requirements.\781\
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    \778\ Secs. 6031 through 6060.
    \779\ Sec. 6721.
    \780\ Sec. 6722.
    \781\ Sec. 6723. The penalty for failure to comply timely with a 
specified information reporting requirement is $50 per failure, not to 
exceed $100,000 for a calendar year.
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    The penalty for failure to file an information return 
generally is $50 for each return for which such failure occurs. 
The total penalty imposed on a person for all failures during a 
calendar year cannot exceed $250,000. Additionally, special 
rules apply to reduce the per-failure and maximum penalty where 
the failure is corrected within a specified period.
    The penalty for failure to provide a correct payee 
statement is $50 for each statement with respect to which such 
failure occurs, with the total penalty for a calendar year not 
to exceed $100,000. Special rules apply that increase the per-
statement and total penalties where there is intentional 
disregard of the requirement to furnish a payee statement.

                        Explanation of Provision

    Under the provision, each applicable large employer subject 
to the employer responsibility provisions of new section 4980H 
and each ``offering employer'' must report certain health 
insurance coverage information to both its full-time employees 
and to the IRS. An offering employer is any employer who offers 
minimum essential coverage \782\ to its employees under an 
eligible employer-sponsored plan and who pays any portion of 
the costs of such plan, but only if the required employer 
contribution of any employee exceeds eight percent of the wages 
paid by the employer to the employee. In the case of years 
after 2014, the eight percent is indexed to reflect the rate of 
premium growth over income growth between 2013 and the 
preceding calendar year. In the case of coverage provided by a 
governmental unit, or any agency or instrumentality thereof, 
the reporting requirement applies to the person or employee 
appropriately designated for purposes of making the returns and 
statements required by the provision.
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    \782\ As defined in section 5000A of the Patient Protection and 
Affordable Care Act, Pub. L. No. 111-148, as amended by section 10106, 
as further amended by section 1002 of the Health Care and Education 
Reconciliation Act of 2010, Pub. L. No. 111-152.
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    The information required to be reported includes: (1) the 
name, address and employer identification number of the 
employer; (2) a certification as to whether the employer offers 
its full-time employees and their dependents the opportunity to 
enroll in minimum essential coverage under an eligible 
employer-sponsored plan; (3) the number of full-time employees 
of the employer for each month during the calendar year; (4) 
the name, address and taxpayer identification number of each 
full-time employee employed by the employer during the calendar 
year and the number of months, if any, during which the 
employee (and any dependents) was covered under a plan 
sponsored by the employer during the calendar year; and (5) 
such other information as the Secretary may require.
    Employers who offer the opportunity to enroll in minimum 
essential coverage must also report: (1) in the case of an 
applicable large employer, the length of any waiting period 
with respect to such coverage; (2) the months during the 
calendar year during which the coverage was available; (3) the 
monthly premium for the lowest cost option in each of the 
enrollment categories under the plan; (4) the employer's share 
of the total allowed costs of benefits under the plan; and (5), 
in the case of an offering employer, the option for which the 
employer pays the largest position of the cost of the plan and 
the portion of the cost paid by the employer in each of the 
enrollment categories under each option.
    The employer is required to report to each full-time 
employee the above information required to be reported with 
respect to that employee, along with the name, address and 
contact information of the reporting employer, on or before 
January 31 of the year following the calendar year for which 
the information is required to be reported to the IRS.
    The provision amends the information reporting provisions 
of the Code to provide that an employer who fails to comply 
with these new reporting requirements is subject to the 
penalties for failure to file an information return and failure 
to furnish payee statements, respectively.
    To the maximum extent feasible, the Secretary may provide 
that any information return or payee statement required to be 
provided under the provision may be provided as part of any 
return or statement required under new sections 6051 \783\ or 
6055 \784\ and, in the case of an applicable large employer or 
offering employer offering health insurance coverage of a 
health insurance issuer, the employer may enter into an 
agreement with the issuer to include the information required 
by the provision with the information return and payee 
statement required under new section 6055.
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    \783\ For additional information on new section 6051, see the 
explanation of section 9002 of the Patient Protection and Affordable 
Care Act, Pub. L. No. 111-148, ``Inclusion of Employer-Sponsored Health 
Coverage on W-2.''
    \784\ For additional information on new section 6055, see the 
explanation of section 1502 of the Patient Protection and Affordable 
Care Act, Pub. L. No. 111-148, ``Reporting of Health Insurance 
Coverage.''
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    The Secretary has the authority, in coordination with the 
Secretary of Labor, to review the accuracy of the information 
reported by the employer, including the employer's share of the 
total allowed costs of benefits under the plan.

                             Effective Date

    The provision is effective for periods beginning after 
December 31, 2013.

  L. Offering of Qualified Health Plans Through Cafeteria Plans (sec. 
               1515 of the Act and sec. 125 of the Code)


                              Present Law

    Currently, there is no Federal requirement that employers 
offer health insurance coverage to employees or their families. 
However, as with other compensation, the cost of employer-
provided health coverage is a deductible business expense under 
section 162 of the Code.\785\ In addition, employer-provided 
health insurance coverage is generally not included in an 
employee's gross income.\786\
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    \785\ Sec. 162. However see special rules in sections 419 and 419A 
for the deductibility of contributions to welfare benefit plans with 
respect to medical benefits for employees and their dependents.
    \786\ Sec. 106.
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Definition of a cafeteria plan

    If an employee receives a qualified benefit (as defined 
below) based on the employee's election between the qualified 
benefit and a taxable benefit under a cafeteria plan, the 
qualified benefit generally is not includable in gross 
income.\787\ However, if a plan offering an employee an 
election between taxable benefits (including cash) and 
nontaxable qualified benefits does not meet the requirements 
for being a cafeteria plan, the election between taxable and 
nontaxable benefits results in gross income to the employee, 
regardless of what benefit is elected and when the election is 
made.\788\ A cafeteria plan is a separate written plan under 
which all participants are employees, and participants are 
permitted to choose among at least one permitted taxable 
benefit (for example, current cash compensation) and at least 
one qualified benefit. Finally, a cafeteria plan must not 
provide for deferral of compensation, except as specifically 
permitted in sections 125(d)(2)(B), (C), or (D).
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    \787\ Sec. 125(a).
    \788\ Prop. Treas. Reg. sec. 1.125-1(b).
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Qualified benefits

    Qualified benefits under a cafeteria plan are generally 
employer-provided benefits that are not includable in gross 
income under an express provision of the Code. Examples of 
qualified benefits include employer-provided health insurance 
coverage, group term life insurance coverage not in excess of 
$50,000, and benefits under a dependent care assistance 
program. In order to be excludable, any qualified benefit 
elected under a cafeteria plan must independently satisfy any 
requirements under the Code section that provides the 
exclusion. However, some employer-provided benefits that are 
not includable in gross income under an express provision of 
the Code are explicitly not allowed in a cafeteria plan. These 
benefits are generally referred to as nonqualified benefits. 
Examples of nonqualified benefits include scholarships; \789\ 
employer-provided meals and lodging; \790\ educational 
assistance; \791\ and fringe benefits.\792\ A plan offering any 
nonqualified benefit is not a cafeteria plan.\793\
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    \789\ Sec. 117.
    \790\ Sec. 119.
    \791\ Sec. 127.
    \792\ Sec. 132.
    \793\ Prop. Treas. Reg. sec. 1.125-1(q). Long-term care services, 
contributions to Archer Medical Savings Accounts, group term life 
insurance for an employee's spouse, child or dependent, and elective 
deferrals to section 403(b) plans are also nonqualified benefits.
---------------------------------------------------------------------------

Payment of health insurance premiums through a cafeteria plan

    Employees participating in a cafeteria plan may be able to 
pay the portion of premiums for health insurance coverage not 
otherwise paid for by their employers on a pre-tax basis 
through salary reduction.\794\ Such salary reduction 
contributions are treated as employer contributions for 
purposes of the Code, and are thus excluded from gross income.
---------------------------------------------------------------------------
    \794\ Sec. 125.
---------------------------------------------------------------------------
    One way that employers can offer employer-provided health 
insurance coverage for purposes of the tax exclusion is to 
offer to reimburse employees for the premiums for health 
insurance purchased by employees in the individual health 
insurance market. The payment or reimbursement of employees' 
substantiated individual health insurance premiums is 
excludible from employees' gross income.\795\ This 
reimbursement for individual health insurance premiums can also 
be paid for through salary reduction under a cafeteria 
plan.\796\ This offer to reimburse individual health insurance 
premiums constitutes a group health plan.
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    \795\ Rev. Rul. 61-146, 1961-2 CB 25.
    \796\ Prop. Treas. Reg. sec. 1.125-1(m).
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                        Explanation of Provision

    Under the provision, reimbursement (or direct payment) for 
the premiums for coverage under any qualified health plan (as 
defined in section 1301(a) of the Act) offered through an 
Exchange established under section 1311 of the Act is a 
qualified benefit under a cafeteria plan if the employer is a 
qualified employer. Under section 1312(f)(2) of the Act, a 
qualified employer is generally a small employer that elects to 
make all its full-time employees eligible for one or more 
qualified plans offered in the small group market through an 
Exchange.\797\ Otherwise, reimbursement (or direct payment) for 
the premiums for coverage under any qualified health plan 
offered through an Exchange is not a qualified benefit under a 
cafeteria plan. Thus, an employer that is not a qualified 
employer cannot offer to reimburse an employee for the premium 
for a qualified plan that the employee purchases through the 
individual market in an Exchange as a health insurance coverage 
option under its cafeteria plan.
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    \797\ Beginning in 2017, each State may allow issuers of health 
insurance coverage in the large group market in a state to offer 
qualified plans in the large group market. In that event, a qualified 
employer includes a small employer that elects to make all its full-
time employees eligible for one or more qualified plans offered in the 
large group market through an Exchange.
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                             Effective Date

    This provision applies to taxable years beginning after 
December 31, 2013.

M. Conforming Amendments (sec. 1563 of the Act and new sec. 9815 of the 
                                 Code)


                              Present Law

    The Health Insurance Portability and Accountability Act of 
1996 (``HIPAA'') \798\ imposes a number of requirements with 
respect to group health coverage that are designed to provide 
protections to health plan participants. These protections 
include limitations on exclusions from coverage based on pre-
existing conditions; the prohibition of discrimination on the 
basis of health status; guaranteed renewability in 
multiemployer plans and certain employer welfare arrangements; 
standards relating to benefits for mother and newborns; parity 
in the application of certain limits to mental health benefits; 
and coverage of dependent students on medically necessary leave 
of absence. The requirements are enforced through the Code, 
ERISA,\799\ and the PHSA.\800\ The HIPAA requirements in the 
Code are in chapter 100 of Subtitle K, Group Health Plan 
Requirements.
---------------------------------------------------------------------------
    \798\ Pub. L. No. 104-191.
    \799\ Pub. L. No. 93-406.
    \800\ 42 U.S.C. 6A.
---------------------------------------------------------------------------
    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.\801\
---------------------------------------------------------------------------
    \801\ The requirements do not apply to any governmental plan or any 
group health plan that has fewer than two participants who are current 
employees.
---------------------------------------------------------------------------
    The Code imposes an excise tax on group health plans which 
fail to meet the HIPAA requirements.\802\ 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 determines that the employer did not know, and in 
exercising reasonable diligence would not have known, that the 
failure existed.
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    \802\ Sec. 4980D.
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                        Explanation of Provision

    The provision adds new Code section 9815 which provides 
that the provisions of part A of title XXVII of the PHSA (as 
amended by the Act) apply to group health plans, and health 
insurance issuers providing health insurance coverage in 
connection with group health plans, as if included in 
Subchapter B of Chapter 100 of the Code. To the extent that any 
HIPAA provision of the Code conflicts with a provision of part 
A of title XXVII of the PHSA with respect to group health 
plans, or health insurance issuers providing health insurance 
coverage in connection with group health plans, the provisions 
of such part A generally apply.
    The provisions of part A of title XXVII of the PHSA added 
by section 1001 of the Act that are incorporated by reference 
in new section 9815 include the following: section 2711 (No 
lifetime or annual limits); section 2712 (Prohibition on 
rescissions); section 2713 (Coverage of preventive health 
services); section 2714 (Extension of dependent coverage); 
section 2715 (Development and utilization of uniform 
explanation of coverage documents and standardized 
definitions); section 2716 (Prohibition of discrimination in 
favor of highly compensated individuals); section 2717 
(Ensuring the quality of care); section 2718 (Bringing down the 
cost of health care coverage); and section 2719 (Appeals 
process). These new sections of the PHSA, which relate to 
individual and group market reforms, are effective six months 
after the date of enactment (March 23, 2010).
    The provisions of part A of title XXVII of the PHSA added 
by section 1201 of the Act that are incorporated by reference 
in new section 9815 include the following: section 2704 
(Prohibition of preexisting condition exclusions or other 
discrimination based on health status); section 2701 (Fair 
health insurance premiums); section 2702 (Guaranteed 
availability of coverage) section 2703 (Guaranteed renewability 
of coverage); section 2705 (Prohibiting discrimination against 
individual participants and beneficiaries based on health 
status); section 2706 (Non-discrimination in health care); 
section 2707 (Comprehensive health insurance coverage); and 
section 2708 (Prohibition on excessive waiting periods). These 
new sections of the PHSA, which relate to general health 
insurance reforms, are effective for plan years beginning on or 
after January 1, 2014.
    New section 9815 specifies that section 2716 (Prohibition 
of discrimination based on salary) and 2718 (Bringing down the 
cost of health coverage) of title XXVII of the PHSA (as amended 
by the Act) do not apply under the Code provisions of HIPAA 
with respect to self-insured group health plans.
    As a result of incorporating these PHSA provisions by 
reference, the excise tax that applies in the event of a 
violation of present law HIPAA requirements also applies in the 
event of a violation of these new requirements.

                             Effective Date

    This provision is effective on the date of enactment (March 
23, 2010).

     TITLE III--IMPROVING THE QUALITY AND EFFICIENCY OF HEALTHCARE


A. Disclosures to Carry Out the Reduction of Medicare Part D Subsidies 
for High Income Beneficiaries (sec. 3308(b)(2) of the Act and sec. 6103 
                              of the Code)


                              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 such information except as provided in the Code. 
Section 6103 contains a number of exceptions to the general 
rule of nondisclosure that authorize disclosure in specifically 
identified circumstances. For example, section 6103 provides 
for the disclosure of certain return information for purposes 
of establishing the appropriate amount of any Medicare Part B 
premium subsidy adjustment.
    Specifically, upon written request from the Commissioner of 
Social Security, the IRS may disclose the following limited 
return information of a taxpayer whose premium, according to 
the records of the Secretary, may be subject to adjustment 
under section 1839(i) of the Social Security Act (relating to 
Medicare Part B):
           Taxpayer identity information with respect 
        to such taxpayer;
           The filing status of the taxpayer;
           The adjusted gross income of such taxpayer;
           The amounts excluded from such taxpayer's 
        gross income under sections 135 and 911 to the extent 
        such information is available;
           The interest received or accrued during the 
        taxable year which is exempt from the tax imposed by 
        chapter 1 to the extent such information is available;
           The amounts excluded from such taxpayer's 
        gross income by sections 931 and 933 to the extent such 
        information is available;
           Such other information relating to the 
        liability of the taxpayer as is prescribed by the 
        Secretary by regulation as might indicate that the 
        amount of the premium of the taxpayer may be subject to 
        an adjustment and the amount of such adjustment; and
           The taxable year with respect to which the 
        preceding information relates.
    This return information may be used by officers, employees, 
and contractors of the Social Security Administration only for 
the purposes of, and to the extent necessary in, establishing 
the appropriate amount of any Medicare Part B premium subsidy 
adjustment.
    Section 6103(p)(4) requires, as a condition of receiving 
returns and return information, that Federal and State agencies 
(and certain other recipients) provide safeguards as prescribed 
by the Secretary by regulation to be necessary or appropriate 
to protect the confidentiality of returns or return 
information. Unauthorized disclosure of a return or return 
information is a felony punishable by a fine not exceeding 
$5,000 or imprisonment of not more than five years, or both, 
together with the costs of prosecution.\803\ The unauthorized 
inspection of a return or return information is punishable by a 
fine not exceeding $1,000 or imprisonment of not more than one 
year, or both, together with the costs of prosecution.\804\ An 
action for civil damages also may be brought for unauthorized 
disclosure or inspection.\805\
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    \803\ Sec. 7213.
    \804\ Sec. 7213A.
    \805\ Sec. 7431.
---------------------------------------------------------------------------

                        Explanation of Provision

    Upon written request from the Commissioner of Social 
Security, the IRS may disclose the following limited return 
information of a taxpayer whose Medicare Part D premium 
subsidy, according to the records of the Secretary, may be 
subject to adjustment:
           Taxpayer identity information with respect 
        to such taxpayer;
           The filing status of the taxpayer;
           The adjusted gross income of such taxpayer;
           The amounts excluded from such taxpayer's 
        gross income under sections 135 and 911 to the extent 
        such information is available;
           The interest received or accrued during the 
        taxable year which is exempt from the tax imposed by 
        chapter 1 to the extent such information is available;
           The amounts excluded from such taxpayer's 
        gross income by sections 931 and 933 to the extent such 
        information is available;
           Such other information relating to the 
        liability of the taxpayer as is prescribed by the 
        Secretary by regulation as might indicate that the 
        amount of the Part D premium of the taxpayer may be 
        subject to an adjustment and the amount of such 
        adjustment; and
           The taxable year with respect to which the 
        preceding information relates.
    This return information may be used by officers, employees, 
and contractors of the Social Security Administration only for 
the purposes of, and to the extent necessary in, establishing 
the appropriate amount of any Medicare Part D premium subsidy 
adjustment.
    For purposes of both the Medicare Part B premium subsidy 
adjustment and the Medicare Part D premium subsidy adjustment, 
the provision provides that the Social Security Administration 
may redisclose only taxpayer identity and the amount of premium 
subsidy adjustment to officers and employees and contractors of 
the Centers for Medicare and Medicaid Services, and officers 
and employees of the Office of Personnel Management and the 
Railroad Retirement Board. This redisclosure is permitted only 
to the extent necessary for the collection of the premium 
subsidy amount from the taxpayers under the jurisdiction of the 
respective agencies.
    Further, the Social Security Administration may redisclose 
the return information received under this provision to 
officers and employees of the Department of HHS to the extent 
necessary to resolve administrative appeals of the Part B and 
Part D subsidy adjustments and to officers and employees of the 
Department of Justice to the extent necessary for use in 
judicial proceedings related to establishing and collecting the 
appropriate amount of any Medicare Part B or Medicare Part D 
premium subsidy adjustments.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

              TITLE VI--TRANSPARENCY AND PROGRAM INTEGRITY


 A. Patient-Centered Outcomes Research Trust Fund; Financing for Trust 
Fund (sec. 6301 of the Act and new secs. 4375, 4376, 4377, and 9511 of 
                               the Code)


                              Present Law

    No provision.

                           Reasons for Change

    The Congress believes that comparative effectiveness 
research is a public good and that a sustained investment in 
such research is needed to improve the quality of information 
about the relative strengths and weaknesses of various health 
care items, services and systems to allow physicians and 
patients to make more informed health care decisions. To insure 
that there are sufficient amounts of public and private funds 
dedicated to this purpose, and to insulate such funding from 
inappropriate outside influence, the Congress believes that it 
is appropriate to establish a trust fund, impose fees on health 
insurance plans and receive transfer payments from Medicare, 
and have such amounts in the fund dedicated to finance 
comparative effectiveness research.

                        Explanation of Provision


Patient-Centered Outcomes Research Trust Fund

    Under new section 9511, there is established in the 
Treasury of the United States a trust fund, the Patient 
Centered Outcomes Research Trust Fund (``PCORTF''), to carry 
out the provisions in the Act relating to comparative 
effectiveness research. The PCORTF is funded in part from fees 
imposed on health plans under new sections 4375 through 4377.

Fee on insured and self-insured health plans

            Insured plans
    Under new section 4375, a fee is imposed on each specified 
health insurance policy. The fee is equal to two dollars (one 
dollar in the case of policy years ending during fiscal year 
2013) multiplied by the average number of lives covered under 
the policy. For any policy year beginning after September 30, 
2014, the dollar amount is equal to the sum of: (1) the dollar 
amount for policy years ending in the preceding fiscal year, 
plus (2) an amount equal to the product of (A) the dollar 
amount for policy years ending in the preceding fiscal year, 
multiplied by (B) the percentage increase in the projected per 
capita amount of National Health Expenditures, as most recently 
published by the Secretary before the beginning of the fiscal 
year. The issuer of the policy is liable for payment of the 
fee. A specified health insurance policy includes any accident 
or health insurance policy \806\ issued with respect to 
individuals residing in the United States.\807\ An arrangement 
under which fixed payments of premiums are received as 
consideration for a person's agreement to provide, or arrange 
for the provision of, accident or health coverage to residents 
of the United States, regardless of how such coverage is 
provided or arranged to be provided, is treated as a specified 
health insurance policy. The person agreeing to provide or 
arrange for the provision of coverage is treated as the issuer.
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    \806\ A specified health insurance policy does not include 
insurance if substantially all of the coverage provided under such 
policy consists of excepted benefits described in section 9832(c). 
Examples of excepted benefits described in section 9832(c) are coverage 
for only accident, or disability insurance, or any combination thereof; 
liability insurance, including general liability insurance and 
automobile liability insurance; workers' compensation or similar 
insurance; automobile medical payment insurance; coverage for on-site 
medical clinics; limited scope dental or vision benefits; benefits for 
long term care, nursing home care, community based care, or any 
combination thereof; coverage only for a specified disease or illness; 
hospital indemnity or other fixed indemnity insurance; and Medicare 
supplemental coverage.
    \807\ Under the provision, the United States includes any 
possession of the United States.
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            Self-insured plans
    In the case of an applicable self-insured health plan, new 
Code section 4376 imposes a fee equal to two dollars (one 
dollar in the case of policy years ending during fiscal year 
2013) multiplied by the average number of lives covered under 
the plan. For any policy year beginning after September 30, 
2014, the dollar amount is equal to the sum of: (1) the dollar 
amount for policy years ending in the preceding fiscal year, 
plus (2) an amount equal to the product of (A) the dollar 
amount for policy years ending in the preceding fiscal year, 
multiplied by (B) the percentage increase in the projected per 
capita amount of National Health Expenditures, as most recently 
published by the Secretary before the beginning of the fiscal 
year. The plan sponsor is liable for payment of the fee. For 
purposes of the provision, the plan sponsor is: the employer in 
the case of a plan established or maintained by a single 
employer or the employee organization in the case of a plan 
established or maintained by an employee organization. In the 
case of: (1) a plan established or maintained by two or more 
employers or jointly by one of more employers and one or more 
employee organizations, (2) a multiple employer welfare 
arrangement, or (3) a voluntary employees' beneficiary 
association described in Code section 501(c)(9) (``VEBA''), the 
plan sponsor is the association, committee, joint board of 
trustees, or other similar group of representatives of the 
parties who establish or maintain the plan. In the case of a 
rural electric cooperative or a rural telephone cooperative, 
the plan sponsor is the cooperative or association.
    Under the provision, an applicable self-insured health plan 
is any plan providing accident or health coverage if any 
portion of such coverage is provided other than through an 
insurance policy and such plan is established or maintained: 
(1) by one or more employers for the benefit of their employees 
or former employees, (2) by one or more employee organizations 
for the benefit of their members or former members, (3) jointly 
by one or more employers and one or more employee organizations 
for the benefit of employees or former employees, (4) by a 
VEBA, (5) by any organization described in section 501(c)(6) of 
the Code, or (6) in the case of a plan not previously 
described, by a multiple employer welfare arrangement (as 
defined in section 3(40) of ERISA, a rural electric cooperative 
(as defined in section 3(40)(B)(iv) of ERISA), or a rural 
telephone cooperative association (as defined in section 
3(40)(B)(v) of ERISA).
            Other special rules
    Governmental entities are generally not exempt from the 
fees imposed under the provision. There is an exception for 
exempt governmental programs including, Medicare, Medicaid, 
SCHIP, and any program established by Federal law for proving 
medical care (other than through insurance policies) to members 
of the Armed Forces, veterans, or members of Indian tribes.
    No amount collected from the fee on health insurance and 
self-insured plans is covered over to any possession of the 
United States. For purposes of the Code's procedure and 
administration rules, the fee imposed under the provision is 
treated as a tax. The fees imposed under new sections 4375 and 
4376 do not apply to plan years ending after September 31, 
2019.

                             Effective Date

    The fee on health insurance and self-insured plans is 
effective with respect to policies and plans for portions of 
policy or plan years ending after September 30, 2012.

                      TITLE IX--REVENUE PROVISIONS


  A. Excise Tax on High Cost Employer-Sponsored Health Coverage (sec. 
         9001 \808\ of the Act and new sec. 4980I of the Code)

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    \808\ Section 9001 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10901, is further 
amended by section 1401 of the Health Care and Education Reconciliation 
Act of 2010, Pub. L. No. 111-152.
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                              Present Law


Taxation of insurance companies

    Current law provides special rules for determining the 
taxable income of insurance companies (subchapter L of the 
Code). Separate sets of rules apply to life insurance companies 
and to property and casualty insurance companies. Insurance 
companies generally are subject to Federal income tax at 
regular corporate income tax rates.
    An insurance company that provides health insurance is 
subject to Federal income tax as either a life insurance 
company or as a property insurance company, depending on its 
mix of lines of business and on the resulting portion of its 
reserves that are treated as life insurance reserves. For 
Federal income tax purposes, an insurance company is treated as 
a life insurance company if the sum of its (1) life insurance 
reserves and (2) unearned premiums and unpaid losses on 
noncancellable life, accident or health contracts not included 
in life insurance reserves, comprise more than 50 percent of 
its total reserves.\809\
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    \809\ Sec. 816(a).
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    Some insurance providers may be exempt from Federal income 
tax under section 501(a) if specific requirements are 
satisfied. Section 501(c)(8), for example, describes certain 
fraternal beneficiary societies, orders, or associations 
operating under the lodge system or for the exclusive benefit 
of their members that provide for the payment of life, sick, 
accident, or other benefits to the members or their dependents. 
Section 501(c)(9) describes certain voluntary employees' 
beneficiary associations that provide for the payment of life, 
sick, accident, or other benefits to the members of the 
association or their dependents or designated beneficiaries. 
Section 501(c)(12)(A) describes certain benevolent life 
insurance associations of a purely local character. Section 
501(c)(15) describes certain small non-life insurance companies 
with annual gross receipts of no more than $600,000 ($150,000 
in the case of a mutual insurance company). Section 501(c)(26) 
describes certain membership organizations established to 
provide health insurance to certain high-risk individuals. 
Section 501(c)(27) describes certain organizations established 
to provide workmen's compensation insurance. A health 
maintenance organization that is tax-exempt under section 
501(c)(3) or (4) is not treated as providing prohibited \810\ 
commercial-type insurance, in the case of incidental health 
insurance provided by the health maintenance organization that 
is of a kind customarily provided by such organizations.
---------------------------------------------------------------------------
    \810\ Sec. 501(m).
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Treatment of employer-sponsored health coverage

    As with other compensation, the cost of employer-provided 
health coverage is a deductible business expense under section 
162.\811\ Employer-provided health insurance coverage is 
generally not included in an employee's gross income.
---------------------------------------------------------------------------
    \811\ Sec. 162. However see special rules in section 419 and 419A 
for the deductibility of contributions to welfare benefit plans with 
respect to medical benefits for employees and their dependents.
---------------------------------------------------------------------------
    In addition, employees participating in a cafeteria plan 
may be able to pay the portion of premiums for health insurance 
coverage not otherwise paid for by their employers on a pre-tax 
basis through salary reduction.\812\ Such salary reduction 
contributions are treated as employer contributions for Federal 
income purposes, and are thus excluded from gross income.
---------------------------------------------------------------------------
    \812\ Sec. 125.
---------------------------------------------------------------------------
    Employers may agree to reimburse medical expenses of their 
employees (and their spouses and dependents), not covered by a 
health insurance plan, through flexible spending arrangements 
which allow reimbursement not in excess of a specified dollar 
amount (either elected by an employee under a cafeteria plan or 
otherwise specified by the employer). Reimbursements under 
these arrangements are also excludible from gross income as 
employer-provided health coverage.
    A flexible spending arrangement for medical expenses under 
a cafeteria plan (``Health FSA'') is an unfunded arrangement 
under which employees are given the option to reduce their 
current cash compensation and instead have the amount made 
available for use in reimbursing the employee for his or her 
medical expenses.\813\ Health FSAs that are funded on a salary 
reduction basis are subject to the requirements for cafeteria 
plans, including a requirement that amounts remaining under a 
Health FSA at the end of a plan year must be forfeited by the 
employee (referred to as the ``use-it-or-lose-it rule'').\814\
---------------------------------------------------------------------------
    \813\ Sec. 125. Prop. Treas. Reg. sec. 1.125-5 provides rules for 
Health FSAs. There is a similar type of flexible spending arrangement 
for dependent care expenses.
    \814\ Sec. 125(d)(2). A cafeteria plan is permitted to allow a 
grace period not to exceed two and one-half months immediately 
following the end of the plan year during which unused amounts may be 
used. Notice 2005-42, 2005-1 C.B. 1204.
---------------------------------------------------------------------------
    Alternatively, the employer may specify a dollar amount 
that is available for medical expense reimbursement. These 
arrangements are commonly called Health Reimbursement 
Arrangements (``HRAs''). Some of the rules applicable to HRAs 
and Health FSAs are similar (e.g., the amounts in the 
arrangements can only be used to reimburse medical expenses and 
not for other purposes), but the rules are not identical. In 
particular, HRAs cannot be funded on a salary reduction basis 
and the use-it-or-lose-it rule does not apply. Thus, amounts 
remaining at the end of the year may be carried forward to be 
used to reimburse medical expenses in following years.\815\
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    \815\ Guidance with respect to HRAs, including the interaction of 
FSAs and HRAs in the case of an individual covered under both, is 
provided in Notice 2002-45, 2002-2 C.B. 93.
---------------------------------------------------------------------------
    Current law provides that individuals with a high 
deductible health plan (and generally no other health plan) may 
establish and make tax-deductible contributions to a health 
savings account (``HSA''). An HSA is subject to a condition 
that the individual is covered under a high deductible health 
plan (purchased either through the individual market or through 
an employer). Subject to certain limitations,\816\ 
contributions made to an HSA by an employer, including 
contributions made through a cafeteria plan through salary 
reduction, are excluded from income (and from wages for payroll 
tax purposes). Contributions made by individuals are deductible 
for income tax purposes, regardless of whether the individuals 
itemize. Like an HSA, an Archer MSA is a tax-exempt trust or 
custodial account to which tax-deductible contributions may be 
made by individuals with a high deductible health plan; 
however, only self-employed individuals and employees of small 
employers are eligible to have an Archer MSA. Archer MSAs 
provide tax benefits similar to, but generally not as favorable 
as, those provided by HSAs for individuals covered by high 
deductible health plans.\817\
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    \816\ For 2010, the maximum aggregate annual contribution that can 
be made to an HSA is $3,050 in the case of self-only coverage and 
$6,150 in the case of family coverage. The annual contribution limits 
are increased for individuals who have attained age 55 by the end of 
the taxable year (referred to as ``catch-up contributions''). In the 
case of policyholders and covered spouses who are age 55 or older, the 
HSA annual contribution limit is greater than the otherwise applicable 
limit by $1,000 in 2009 and thereafter. Contributions, including catch-
up contributions, cannot be made once an individual is enrolled in 
Medicare.
    \817\ In addition to being limited to self-employed individuals and 
employees of small employers, the definition of a high deductible 
health plan for an Archer MSA differs from that for an HSA. After 2007, 
no new contributions can be made to Archer MSAs except by or on behalf 
of individuals who previously had made Archer MSA contributions and 
employees who are employed by a participating employer.
---------------------------------------------------------------------------
    ERISA \818\ preempts State law relating to certain employee 
benefit plans, including employer-sponsored health plans. While 
ERISA specifically provides that its preemption rule does not 
exempt or relieve any person from any State law which regulates 
insurance, ERISA also provides that an employee benefit plan is 
not deemed to be engaged in the business of insurance for 
purposes of any State law regulating insurance companies or 
insurance contracts. As a result of this ERISA preemption, 
self-insured employer-sponsored health plans need not provide 
benefits that are mandated under State insurance law.
---------------------------------------------------------------------------
    \818\ Pub. L. No. 93-406.
---------------------------------------------------------------------------
    While ERISA does not require an employer to offer health 
benefits, it does require compliance if an employer chooses to 
offer health benefits, such as compliance with plan fiduciary 
standards, reporting and disclosure requirements, and 
procedures for appealing denied benefit claims. ERISA was 
amended (as well as the PHSA and the Code) by COBRA \819\ and 
HIPAA,\820\ which added other Federal requirements for health 
plans, including rules for health care continuation coverage, 
limitations on exclusions from coverage based on preexisting 
conditions, and a few benefit requirements such as minimum 
hospital stay requirements for mothers following the birth of a 
child.
---------------------------------------------------------------------------
    \819\ Pub. L. No. 99-272.
    \820\ Pub. L. No. 104-191.
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    COBRA requires that a group health plan offer continuation 
coverage to qualified beneficiaries in the case of a qualifying 
event (such as a loss of employment).\821\ A plan may require 
payment of a premium for any period of continuation coverage. 
The amount of such premium generally may not exceed 102 percent 
of the ``applicable premium'' for such period and the premium 
must be payable, at the election of the payor, in monthly 
installments. The applicable premium for any period of 
continuation coverage means the cost to the plan for such 
period of coverage for similarly situated non-COBRA 
beneficiaries with respect to whom a qualifying event has not 
occurred, and is determined without regard to whether the cost 
is paid by the employer or employee. There are special rules 
for determining the applicable premium in the case of self-
insured plans. Under the special rules for self-insured plans, 
the applicable premium generally is equal to a reasonable 
estimate of the cost of providing coverage for similarly 
situated beneficiaries which is determined on an actuarial 
basis and takes into account such other factors as the 
Secretary of the Treasury may prescribe in regulations.
---------------------------------------------------------------------------
    \821\ 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 COBRA requirements are 
enforced through the Code, ERISA, and the PHSA.
---------------------------------------------------------------------------
    Current law imposes an excise tax on group health plans 
that fail to meet HIPAA and COBRA requirements.\822\ The excise 
tax generally is equal to $100 per day per failure during the 
period of noncompliance and is imposed on the employer 
sponsoring the plan.
---------------------------------------------------------------------------
    \822\ Secs. 4980B and 4980D.
---------------------------------------------------------------------------

Deduction for health insurance costs of self-employed individuals

    Under current law, self-employed individuals may deduct the 
cost of health insurance for themselves and their spouses and 
dependents.\823\ The deduction is not available for any month 
in which the self-employed individual is eligible to 
participate in an employer-subsidized health plan. Moreover, 
the deduction may not exceed the individual's earned income 
from self-employment. The deduction applies only to the cost of 
insurance (i.e., it does not apply to out-of-pocket expenses 
that are not reimbursed by insurance). The deduction does not 
apply for self-employment tax purposes. For purposes of the 
deduction, a more-than-two-percent-shareholder-employee of an S 
corporation is treated the same as a self-employed individual. 
Thus, the exclusion for employer provided health care coverage 
does not apply to such individuals, but they are entitled to 
the deduction for health insurance costs as if they were self-
employed.
---------------------------------------------------------------------------
    \823\ Sec. 162(l).
---------------------------------------------------------------------------

Deductibility of excise taxes

    In general, excise taxes may be deductible under section 
162 of the Code if such taxes are paid or incurred in carrying 
on a trade or business, and are not within the scope of the 
disallowance of deductions for certain taxes enumerated in 
section 275 of the Code.

                        Explanation of Provision

    The provision imposes an excise tax on insurers if the 
aggregate value of employer-sponsored health insurance coverage 
for an employee (including, for purposes of the provision, any 
former employee, surviving spouse and any other primary insured 
individual) exceeds a threshold amount. The tax is equal to 40 
percent of the aggregate value that exceeds the threshold 
amount. For 2018, the threshold amount is $10,200 for 
individual coverage and $27,500 for family coverage, multiplied 
by the health cost adjustment percentage (as defined below) and 
increased by the age and gender adjusted excess premium amount 
(as defined below).
    The health cost adjustment percentage is designed to 
increase the thresholds in the event that the actual growth in 
the cost of U.S. health care between 2010 and 2018 exceeds the 
projected growth for that period. The health cost adjustment 
percentage is equal to 100 percent plus the excess, if any, of 
(1) the percentage by which the per employee cost of coverage 
under the Blue Cross/Blue Shield standard benefit option under 
the Federal Employees Health Benefits Plan (``standard FEHBP 
coverage'') \824\ for plan year 2018 (as determined using the 
benefit package for standard FEHBP coverage for plan year 2010) 
exceeds the per employee cost of standard FEHBP coverage for 
plan year 2010; over (2) 55 percent. In 2019, the threshold 
amounts, after application of the health cost adjustment 
percentage in 2018, if any, are indexed to the CPI-U, as 
determined by the Department of Labor, plus one percentage 
point, rounded to the nearest $50. In 2020 and thereafter, the 
threshold amounts are indexed to the CPI-U as determined by the 
Department of Labor, rounded to the nearest $50.
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    \824\ For purposes of determining the health cost adjustment 
percentage in 2018 and the age and gender adjusted excess premium 
amount in any year, in the event the standard Blue Cross/Blue Shield 
option is not available under the Federal Employees Health Benefit Plan 
for such year, the Secretary will determine the health cost adjustment 
percentage by reference to a substantially similar option available 
under the Federal Employees Health Benefit Plan for that year.
---------------------------------------------------------------------------
    For each employee (other than for certain retirees and 
employees in high risk professions, whose thresholds are 
adjusted under rules described below), the age and gender 
adjusted excess premium amount is equal to the excess, if any, 
of (1) the premium cost of standard FEHBP coverage for the type 
of coverage provided to the individual if priced for the age 
and gender characteristics of all employees of the individual's 
employer over (2) the premium cost, determined under procedures 
proscribed by the Secretary, for that coverage if priced for 
the age and gender characteristics of the national workforce.
    For example, if the growth in the cost of health care 
during the period between 2010 and 2018, calculated by 
reference to the growth in the per employee cost of standard 
FEHBP coverage during that period (holding benefits under the 
standard FEBHP plan constant during the period) is 57 percent, 
the threshold amounts for 2018 will be $10,200 for individual 
coverage and $27,500 for family coverage, multiplied by 102 
percent (100 percent plus the excess of 57 percent over 55 
percent), or $10,404 for individual coverage and $28,050 for 
family coverage. In 2019, the new threshold amounts of $10,404 
for individual coverage and $28,050 for family coverage are 
indexed for CPI-U, plus one percentage point, rounded to the 
nearest $50. Beginning in 2020, the threshold amounts are 
indexed to the CPI-U, rounded to the nearest $50.
    The new threshold amounts (as indexed) are then increased 
for any employee by the age and gender adjusted excess premium 
amount, if any. For an employee with individual coverage in 
2019, if standard FEHBP coverage priced for the age and gender 
characteristics of the workforce of the employee's employer is 
$11,400 and the Secretary estimates that the premium cost for 
individual standard FEHBP coverage priced for the age and 
gender characteristics of the national workforce is $10,500, 
the threshold for that employee is increased by $900 ($11,400 
less $10,500) to $11,304 ($10,404 plus $900).
    The excise tax is imposed pro rata on the issuers of the 
insurance. In the case of a self-insured group health plan, a 
Health FSA or an HRA, the excise tax is paid by the entity that 
administers benefits under the plan or arrangement (``plan 
administrator''). Where the employer acts as plan administrator 
to a self-insured group health plan, a Health FSA or an HRA, 
the excise tax is paid by the employer. Where an employer 
contributes to an HSA or an Archer MSA, the employer is 
responsible for payment of the excise tax, as the insurer.
    Employer-sponsored health insurance coverage is health 
coverage under any group health plan offered by an employer to 
an employee without regard to whether the employer provides the 
coverage (and thus the coverage is excludable from the 
employee's gross income) or the employee pays for the coverage 
with after-tax dollars. Employer-sponsored health insurance 
coverage includes coverage under any group health plan 
established and maintained primarily for the civilian employees 
of the Federal government or any of its agencies or 
instrumentalities and, except as provided below, of any State 
government or political subdivision thereof or by any of 
agencies or instrumentalities of such government or 
subdivision.
    Employer-sponsored health insurance coverage includes both 
fully-insured and self-insured health coverage excludable from 
the employee's gross income, including, in the self-insured 
context, on-site medical clinics that offer more than a de 
minimis amount of medical care to employees and executive 
physical programs. In the case of a self-employed individual, 
employer-sponsored health insurance coverage is coverage for 
any portion of which a deduction is allowable to the self-
employed individual under section 162(l).
    In determining the amount by which the value of employer-
sponsored health insurance coverage exceeds the threshold 
amount, the aggregate value of all employer-sponsored health 
insurance coverage is taken into account, including coverage in 
the form of reimbursements under a Health FSA or an HRA, 
contributions to an HSA or Archer MSA, and, except as provided 
below, other supplementary health insurance coverage. The value 
of employer-sponsored coverage for long term care and the 
following benefits described in section 9832(c)(1) that are 
excepted from the portability, access and renewability 
requirements of HIPAA are not taken into account in the 
determination of whether the value of health coverage exceeds 
the threshold amount: (1) coverage only for accident or 
disability income insurance, or any combination of these 
coverages; (2) coverage issued as a supplement to liability 
insurance; (3) liability insurance, including general liability 
insurance and automobile liability insurance; (4) workers' 
compensation or similar insurance; (5) automobile medical 
payment insurance; (5) credit-only insurance; and (6) other 
similar insurance coverage, specified in regulations, under 
which benefits for medical care are secondary or incidental to 
other insurance benefits.
    The value of employer-sponsored health insurance coverage 
does not include the value of independent, noncoordinated 
coverage described in section 9832(c)(3) as excepted from the 
portability, access and renewability requirements of HIPAA if 
that coverage is purchased exclusively by the employee with 
after-tax dollars (or, in the case of a self-employed 
individual, for which a deduction under section 162(l) is not 
allowable). The value of employer-sponsored health insurance 
coverage does include the value of such coverage if any portion 
of the coverage is employer-provided (or, in the case of a 
self-employed individual, if a deduction is allowable for any 
portion of the payment for the coverage). Coverage described in 
section 9832(c)(3) is coverage only for a specified disease or 
illness or for hospital or other fixed indemnity health 
coverage. Fixed indemnity health coverage pays fixed dollar 
amounts based on the occurrence of qualifying events, including 
but not limited to the diagnosis of a specific disease, an 
accidental injury or a hospitalization, provided that the 
coverage is not coordinated with other health coverage.
    Finally, the value of employer-sponsored health insurance 
coverage does not include any coverage under a separate policy, 
certificate, or contract of insurance which provides benefits 
substantially all of which are for treatment of the mouth 
(including any organ or structure within the mouth) or for 
treatment of the eye.

Calculation and proration of excise tax and reporting requirements

            Applicable threshold
    In general, the individual threshold applies to any 
employee covered by employer-sponsored health insurance 
coverage. The family threshold applies to an employee only if 
such individual and at least one other beneficiary are enrolled 
in coverage other than self-only coverage under an employer-
sponsored health insurance plan that provides minimum essential 
coverage (as determined for purposes of the individual 
responsibility requirements) and under which the benefits 
provided do not vary based on whether the covered individual is 
the employee or other beneficiary.
    For all employees covered by a multiemployer plan, the 
family threshold applies regardless of whether the individual 
maintains individual or family coverage under the plan. For 
purposes of the provision, a multiemployer plan is an employee 
health benefit plan to which more than one employer is required 
to contribute, which is maintained pursuant to one or more 
collective bargaining agreements between one or more employee 
organizations and more than one employer.
            Amount of applicable premium
    Under the provision, the aggregate value of all employer-
sponsored health insurance coverage, including any 
supplementary health insurance coverage not excluded from the 
value of employer-sponsored health insurance, is generally 
calculated in the same manner as the applicable premiums for 
the taxable year for the employee determined under the rules 
for COBRA continuation coverage, but without regard to the 
excise tax. If the plan provides for the same COBRA 
continuation coverage premium for both individual coverage and 
family coverage, the plan is required to calculate separate 
individual and family premiums for this purpose. In determining 
the coverage value for retirees, employers may elect to treat 
pre-65 retirees together with post-65 retirees.
            Value of coverage in the form of Health FSA reimbursements
    In the case of a Health FSA from which reimbursements are 
limited to the amount of the salary reduction, the value of 
employer-sponsored health insurance coverage is equal to the 
dollar amount of the aggregate salary reduction contributions 
for the year. To the extent that the Health FSA provides for 
employer contributions in excess of the amount of the 
employee's salary reduction, the value of the coverage 
generally is determined in the same manner as the applicable 
premium for COBRA continuation coverage. If the plan provides 
for the same COBRA continuation coverage premium for both 
individual coverage and family coverage, the plan is required 
to calculate separate individual and family premiums for this 
purpose.
            Amount subject to the excise tax and reporting requirement
    The amount subject to the excise tax on high cost employer-
sponsored health insurance coverage for each employee is the 
sum of the aggregate premiums for health insurance coverage, 
the amount of any salary reduction contributions to a Health 
FSA for the taxable year, and the dollar amount of employer 
contributions to an HSA or an Archer MSA, minus the dollar 
amount of the threshold. The aggregate premiums for health 
insurance coverage include all employer-sponsored health 
insurance coverage including coverage for any supplementary 
health insurance coverage. The applicable premium for health 
coverage provided through an HRA is also included in this 
aggregate amount.
    Under a separate rule,\825\ an employer is required to 
disclose the aggregate premiums for health insurance coverage 
for each employee on his or her annual Form W-2.
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    \825\ See the explanation of section 9002 of the Patient Protection 
and Affordable Care Act, Pub. L. No. 111-148, ``Inclusion of Cost of 
Employer Sponsored Health Coverage on W-2.''
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    Under the provision, the excise tax is allocated pro rata 
among the insurers, with each insurer responsible for payment 
of the excise tax on an amount equal to the amount subject to 
the total excise tax multiplied by a fraction, the numerator of 
which is the amount of employer-sponsored health insurance 
coverage provided by that insurer to the employee and the 
denominator of which is the aggregate value of all employer-
sponsored health insurance coverage provided to the employee. 
In the case of a self-insured group health plan, a Health FSA 
or an HRA, the excise tax is allocated to the plan 
administrator. If an employer contributes to an HSA or an 
Archer MSA, the employer is responsible for payment of the 
excise tax, as the insurer. The employer is responsible for 
calculating the amount subject to the excise tax allocable to 
each insurer and plan administrator and for reporting these 
amounts to each insurer, plan administrator and the Secretary, 
in such form and at such time as the Secretary may prescribe. 
Each insurer and plan administrator is then responsible for 
calculating, reporting and paying the excise tax to the IRS on 
such forms and at such time as the Secretary may prescribe.
    For example, if in 2018 an employee elects family coverage 
under a fully-insured health care policy covering major medical 
and dental with a value of $31,000, the health cost adjustment 
percentage for that year is 100 percent, and the age and gender 
adjusted excess premium amount for the employee is $600, the 
amount subject to the excise tax is $2,900 ($31,000 less the 
threshold of $28,100 ($27,500 multiplied by 100 percent and 
increased by $600)). The employer reports $2,900 as taxable to 
the insurer, which calculates and remits the excise tax to the 
IRS.
    Alternatively, if in 2018 an employee elects family 
coverage under a fully-insured major medical policy with a 
value of $28,500 and contributes $2,500 to a Health FSA, the 
employee has an aggregate health insurance coverage value of 
$31,000. If the health cost adjustment percentage for that year 
is 100 percent and the age and gender adjusted excess premium 
amount for the employee is $600, the amount subject to the 
excise tax is $2,900 ($31,000 less the threshold of $28,100 
($27,500 multiplied by 100 percent and increased by $600)). The 
employer reports $2,666 ($2,900  $28,500/$31,000) as 
taxable to the major medical insurer which then calculates and 
remits the excise tax to the IRS. If the employer uses a third-
party administrator for the Health FSA, the employer reports 
$234 ($2,900  $2,500/$31,000) to the administrator and 
the administrator calculates and remits the excise tax to the 
IRS. If the employer is acting as the plan administrator of the 
Health FSA, the employer is responsible for calculating and 
remitting the excise tax on the $234 to the IRS.

Penalty for underreporting liability for tax to insurers

    If the employer reports to insurers, plan administrators 
and the IRS a lower amount of insurance cost subject to the 
excise tax than required, the employer is subject to a penalty 
equal to the sum of any additional excise tax that each such 
insurer and administrator would have owed if the employer had 
reported correctly and interest attributable to that additional 
excise tax as determined under Code section 6621 from the date 
that the tax was otherwise due to the date paid by the 
employer. This may occur, for example, if the employer 
undervalues the aggregate premium and thereby lowers the amount 
subject to the excise tax for all insurers and plan 
administrators (including the employer, when acting as plan 
administrator of a self-insured plan).
    The penalty will not apply if it is established to the 
satisfaction of the Secretary that the employer neither knew, 
nor exercising reasonable diligence would have known, that the 
failure existed. In addition, no penalty will be imposed on any 
failure corrected within the 30-day period beginning on the 
first date that the employer knew, or exercising reasonable 
diligence, would have known, that the failure existed, so long 
as the failure is due to reasonable cause and not to willful 
neglect. All or part of the penalty may be waived by the 
Secretary in the case of any failure due to reasonable cause 
and not to willful neglect, to the extent that the payment of 
the penalty would be excessive or otherwise inequitable 
relative to the failure involved.
    The penalty is in addition to the amount of excise tax 
owed, which may not be waived.

Increased thresholds for certain retirees and individuals in high-risk 
        professions

    The threshold amounts are increased for an individual who 
has attained age of 55 who is non-Medicare eligible and 
receiving employer-sponsored retiree health coverage or who is 
covered by a plan sponsored by an employer the majority of 
whose employees covered by the plan are engaged in a high risk 
profession or employed to repair or install electrical and 
telecommunications lines. For these individuals, the threshold 
amount in 2018 is increased by (1) $1,650 for individual 
coverage or $3,450 for family coverage and (2) the age and 
gender adjusted excess premium amount (as defined above). In 
2019, the additional $1,650 and $3,450 amounts are indexed to 
the CPI-U, plus one percentage point, rounded to the nearest 
$50. In 2020 and thereafter, the additional threshold amounts 
are indexed to the CPI-U, rounded to the nearest $50.
    For purposes of this rule, employees considered to be 
engaged in a high risk profession are law enforcement officers, 
employees who engage in fire protection activities, individuals 
who provide out-of-hospital emergency medical care (including 
emergency medical technicians, paramedics, and first-
responders), individuals whose primary work is longshore work, 
and individuals engaged in the construction, mining, 
agriculture (not including food processing), forestry, and 
fishing industries. A retiree with at least 20 years of 
employment in a high risk profession is also eligible for the 
increased threshold.
    Under this provision, an individual's threshold cannot be 
increased by more than $1,650 for individual coverage or $3,450 
for family coverage (indexed as described above) and the age 
and gender adjusted excess premium amount, even if the 
individual would qualify for an increased threshold both on 
account of his or her status as a retiree over age 55 and as a 
participant in a plan that covers employees in a high risk 
profession.

Deductibility of excise tax

    Under the provision, the amount of the excise tax imposed 
is not deductible for Federal income tax purposes.

Regulatory authority

    The Secretary is directed to prescribe such regulations as 
may be necessary to carry out the provision.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2017.

B. Inclusion of Cost of Employer-Sponsored Health Coverage on W-2 (sec. 
               9002 of the Act and sec. 6051 of the Code)


                              Present Law

    In many cases, an employer pays for all or a portion of its 
employees' health insurance coverage as an employee benefit. 
This benefit often includes premiums for major medical, dental, 
and other supplementary health insurance coverage. Under 
present law, the value of employer-provided health coverage is 
not required to be reported to the IRS or any other Federal 
agency. The value of the employer contribution to health 
coverage is excludible from an employee's income.\826\
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    \826\ Sec. 106.
---------------------------------------------------------------------------
    Under current law, every employer is required to furnish 
each employee and the Federal government with a statement of 
compensation information, including wages, paid by the employer 
to the employee, and the taxes withheld from such wages during 
the calendar year. The statement, made on the Form W-2, must be 
provided to each employee by January 31 of the succeeding year. 
There is no requirement that the employer report the total 
value of employer-sponsored health insurance coverage on the 
Form W-2,\827\ although some employers voluntarily report the 
amount of salary reduction under a cafeteria plan resulting in 
tax-free employee benefits in box 14.
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    \827\ Any portion of employer sponsored coverage that is paid for 
by the employee with after-tax contributions is included as wages on 
the W-2 Form.
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                        Explanation of Provision

    Under the provision, an employer is required to disclose on 
each employee's annual Form W-2 the value of the employee's 
health insurance coverage sponsored by the employer. If an 
employee enrolls in employer-sponsored health insurance 
coverage under multiple plans, the employer must disclose the 
aggregate value of all such health coverage (excluding the 
value of any salary reduction contribution to a health flexible 
spending arrangement). For example, if an employee enrolls in 
employer-sponsored health insurance coverage under a major 
medical plan and a health reimbursement arrangement, the 
employer is required to report the total value of the 
combination of both of these health plans. For this purpose, 
employers generally use the same value for all similarly 
situated employees receiving the same category of coverage 
(such as single or family health insurance coverage).
    To determine the value of employer-sponsored health 
insurance coverage, the employer calculates the applicable 
premiums for the taxable year for the employee under the rules 
for COBRA continuation coverage under section 4980B(f)(4) (and 
accompanying Treasury regulations), including the special rule 
for self-insured plans. The value that the employer is required 
to report is the portion of the aggregate premium. If the plan 
provides for the same COBRA continuation coverage premium for 
both individual coverage and family coverage, the plan would be 
required to calculate separate individual and family premiums 
for this purpose.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

C. Distributions for Medicine Qualified Only if for Prescribed Drug or 
 Insulin (sec. 9003 of the Act and secs. 105, 106, 220, and 223 of the 
                                 Code)


                              Present Law


Individual deduction for medical expenses

    Expenses for medical care, not compensated for by insurance 
or otherwise, are deductible by an individual under the rules 
relating to itemized deductions to the extent the expenses 
exceed 7.5 percent of adjusted gross income (``AGI'').\828\ 
Medical care generally is defined broadly as amounts paid for 
diagnoses, cure, mitigation, treatment or prevention of 
disease, or for the purpose of affecting any structure of the 
body.\829\ However, any amount paid during a taxable year for 
medicine or drugs is explicitly deductible as a medical expense 
only if the medicine or drug is a prescribed drug or is 
insulin.\830\ Thus, any amount paid for medicine available 
without a prescription (``over-the-counter medicine'') is not 
deductible as a medical expense, including any medicine 
recommended by a physician.\831\
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    \828\ Sec. 213(a).
    \829\ Sec. 213(d). There are certain limitations on the general 
definition including a rule that cosmetic surgery or similar procedures 
are generally not medical care.
    \830\ Sec. 213(b).
    \831\ Rev. Rul. 2003-58, 2003-1 CB 959.
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Exclusion for employer-provided health care

    The Code generally provides that employees are not taxed on 
(that is, may exclude from gross income) the value of employer-
provided health coverage under an accident or health plan.\832\ 
In addition, any reimbursements under an accident or health 
plan for medical care expenses for employees, their spouses, 
and their dependents generally are excluded from gross 
income.\833\ An employer may agree to reimburse expenses for 
medical care of its employees (and their spouses and 
dependents), not covered by a health insurance plan, through a 
flexible spending arrangement (``FSA'') which allows 
reimbursement not in excess of a specified dollar amount. Such 
dollar amount is either elected by an employee under a 
cafeteria plan (``Health FSA'') or otherwise specified by the 
employer under an HRA. Reimbursements under these arrangements 
are also excludible from gross income as employer-provided 
health coverage. The general definition of medical care without 
the explicit limitation on medicine applies for purposes of the 
exclusion for employer-provided health coverage and medical 
care.\834\ Thus, under an HRA or under a Health FSA, amounts 
paid for prescription and over-the-counter medicine are treated 
as medical expenses, and reimbursements for such amounts are 
excludible from gross income.
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    \832\ Sec 106.
    \833\ Sec. 105(b).
    \834\ Sec. 105(b) provides that reimbursements for medical care 
within the meaning of section 213(d) pursuant to employer-provided 
health coverage are excludible from gross income. The definition of 
medical care in section 213(d) does not include the prescription drug 
limitation in section 213(b).
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Medical savings arrangements

    Present law provides that individuals with a high 
deductible health plan (and generally no other health plan) 
purchased either through the individual market or through an 
employer may establish and make tax-deductible contributions to 
a health savings account (``HSA'').\835\ Subject to certain 
limitations,\836\ contributions made to an HSA by an employer, 
including contributions made through a cafeteria plan through 
salary reduction, are excluded from income (and from wages for 
payroll tax purposes). Contributions made by individuals are 
deductible for income tax purposes, regardless of whether the 
individuals itemize. Distributions from an HSA that are used 
for qualified medical expenses are excludible from gross 
income.\837\ The general definition of medical care without the 
explicit limitation on medicine also applies for purposes of 
this exclusion.\838\ Similar rules apply for another type of 
medical savings arrangement called an Archer MSA.\839\ Thus, a 
distribution from a HSA or an Archer MSA used to purchase over-
the-counter medicine also is excludible as an amount used for 
qualified medical expenses.
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    \835\ Sec. 223.
    \836\ For 2009, the maximum aggregate annual contribution that can 
be made to an HSA is $3,000 in the case of self-only coverage and 
$5,950 in the case of family coverage ($3,050 and $6,150 for 2010). The 
annual contribution limits are increased for individuals who have 
attained age 55 by the end of the taxable year (referred to as ``catch-
up contributions''). In the case of policyholders and covered spouses 
who are age 55 or older, the HSA annual contribution limit is greater 
than the otherwise applicable limit by $1,000 in 2009 and thereafter. 
Contributions, including catch-up contributions, cannot be made once an 
individual is enrolled in Medicare.
    \837\ Sec. 223(f).
    \838\ Sec. 223(d)(2).
    \839\ Sec. 220.
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                        Explanation of Provision

    Under the provision, with respect to medicines, the 
definition of medical expense for purposes of employer-provided 
health coverage (including HRAs and Health FSAs), HSAs, and 
Archer MSAs, is conformed to the definition for purposes of the 
itemized deduction for medical expenses, except that prescribed 
drug is determined without regard to whether the drug is 
available without a prescription. Thus, under the provision, 
the cost of over-the-counter medicines may not be reimbursed 
with excludible income through a Health FSA, HRA, HSA, or 
Archer MSA, unless the medicine is prescribed by a physician.

                             Effective Date

    The provision is effective for expenses incurred after 
December 31, 2010.

 D. Increase in Additional Tax on Distributions from HSAs Not Used for 
  Medical Expenses (sec. 9004 of the Act and secs. 220 and 223 of the 
                                 Code)


                              Present Law


Health savings account

    Present law provides that individuals with a high 
deductible health plan (and generally no other health plan) may 
establish and make tax-deductible contributions to a health 
savings account (``HSA'').\840\ An HSA is a tax-exempt account 
held by a trustee or custodian for the benefit of the 
individual. An HSA is subject to a condition that the 
individual is covered under a high deductible health plan 
(purchased either through the individual market or through an 
employer). The decision to create and fund an HSA is made on an 
individual-by-individual basis and does not require any action 
on the part of the employer.
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    \840\ An individual with other coverage in addition to a high 
deductible health plan is still eligible for an HSA if such other 
coverage is ``permitted insurance'' or ``permitted coverage.'' 
Permitted insurance is: (1) insurance if substantially all of the 
coverage provided under such insurance relates to (a) liabilities 
incurred under worker's compensation law, (b) tort liabilities, (c) 
liabilities relating to ownership or use of property (e.g., auto 
insurance), or (d) such other similar liabilities as the Secretary may 
prescribe by regulations; (2) insurance for a specified disease or 
illness; and (3) insurance that provides a fixed payment for 
hospitalization. Permitted coverage is coverage (whether provided 
through insurance or otherwise) for accidents, disability, dental care, 
vision care, or long-term care. With respect to coverage for years 
beginning after December 31, 2006, certain coverage under a Health FSA 
is disregarded in determining eligibility for an HSA.
---------------------------------------------------------------------------
    Subject to certain limitations, contributions made to an 
HSA by an employer, including contributions made through a 
cafeteria plan through salary reduction, are excluded from 
income (and from wages for payroll tax purposes). Contributions 
made by individuals are deductible for income tax purposes, 
regardless of whether the individuals itemize their deductions 
on their tax return (rather than claiming the standard 
deduction). Income from investments made in HSAs is not taxable 
and the overall income is not taxable upon disbursement for 
medical expenses.
    For 2010, the maximum aggregate annual contribution that 
can be made to an HSA is $3,050 in the case of self-only 
coverage and $6,150 in the case of family coverage. The annual 
contribution limits are increased for individuals who have 
attained age 55 by the end of the taxable year (referred to as 
``catch-up contributions''). In the case of policyholders and 
covered spouses who are age 55 or older, the HSA annual 
contribution limit is greater than the otherwise applicable 
limit by $1,000 in 2010 and thereafter. Contributions, 
including catch-up contributions, cannot be made once an 
individual is enrolled in Medicare.
    A high deductible health plan is a health plan that has an 
annual deductible that is at least $1,200 for self-only 
coverage or $2,400 for family coverage for 2010 and that limits 
the sum of the annual deductible and other payments that the 
individual must make with respect to covered benefits to no 
more than $5,950 in the case of self-only coverage and $11,900 
in the case of family coverage for 2010.
    Distributions from an HSA that are used for qualified 
medical expenses are excludible from gross income. 
Distributions from an HSA that are not used for qualified 
medical expenses are includible in gross income. An additional 
10 percent tax is added for all HSA disbursements not made for 
qualified medical expenses. The additional 10-percent tax does 
not apply, however, if the distribution is made after death, 
disability, or attainment of age of Medicare eligibility 
(currently, age 65). Unlike reimbursements from a flexible 
spending arrangement or health reimbursement arrangement, 
distributions from an HSA are not required to be substantiated 
by the employer or a third party for the distributions to be 
excludible from income.
    As in the case of individual retirement arrangements,\841\ 
the individual is the beneficial owner of his or her HSA, and 
thus the individual is required to maintain books and records 
with respect to the expense and claim the exclusion for a 
distribution from the HSA on their tax return. The 
determination of whether the distribution is for a qualified 
medical expense is subject to individual self-reporting and IRS 
enforcement.
---------------------------------------------------------------------------
    \841\ Sec. 408.
---------------------------------------------------------------------------

Archer medical savings account

    An Archer MSA is also a tax-exempt trust or custodial 
account to which tax-deductible contributions may be made by 
individuals with a high deductible health plan.\842\ Archer 
MSAs provide tax benefits similar to, but generally not as 
favorable as, those provided by HSAs for individuals covered by 
high deductible health plans. The main differences include: (1) 
only self-employed individuals and employees of small employers 
are eligible to have an Archer MSA; (2) for Archer MSA 
purposes, a high deductible health plan is a health plan with 
(a) an annual deductible for 2010 of at least $2,000 and no 
more than $3,000 in the case of self-only coverage and at least 
$4,050 and no more than $6,050 in the case of family coverage 
and (b) maximum out-of pocket expenses for 2010 of no more than 
$4,050 in the case of self-only coverage and no more than 
$7,400 in the case of family coverage; and (3) the additional 
tax on distributions not used for medical expenses is 15 
percent rather than 10 percent. After 2007, no new 
contributions can be made to Archer MSAs except by or on behalf 
of individuals who previously had made Archer MSA contributions 
and employees who are employed by a participating employer.
---------------------------------------------------------------------------
    \842\ Sec. 220.
---------------------------------------------------------------------------

                        Explanation of Provision

    The additional tax on distributions from an HSA or an 
Archer MSA that are not used for qualified medical expenses is 
increased to 20 percent of the disbursed amount.

                             Effective Date

    The change is effective for disbursements made during tax 
years starting after December 31, 2010.

E. Limitation on Health Flexible Spending Arrangements under Cafeteria 
      Plans (sec. 9005 \843\ of the Act and sec. 125 of the Code)


                              Present law


Exclusion from income for employer-provided health coverage

    The Code generally provides that the value of employer-
provided health coverage under an accident or health plan is 
excludible from gross income.\844\ In addition, any 
reimbursements under an accident or health plan for medical 
care expenses for employees, their spouses, and their 
dependents generally are excluded from gross income.\845\ The 
exclusion applies both to health coverage in the case in which 
an employer absorbs the cost of employees' medical expenses not 
covered by insurance (i.e., a self-insured plan) as well as in 
the case in which the employer purchases health insurance 
coverage for its employees. There is no limit on the amount of 
employer-provided health coverage that is excludible. A similar 
rule excludes employer-provided health insurance coverage from 
the employees' wages for payroll tax purposes.\846\
---------------------------------------------------------------------------
    \843\ Section 9005 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10902, is further 
amended by section 1403 of the Health Care and Education Reconciliation 
Act of 2010, Pub. L. No. 111-152.
    \844\ Sec. 106. Health coverage provided to active members of the 
uniformed services, military retirees, and their dependents are 
excludable under section 134. That section provides an exclusion for 
``qualified military benefits,'' defined as benefits received by reason 
of status or service as a member of the uniformed services and which 
were excludable from gross income on September 9, 1986, under any 
provision of law, regulation, or administrative practice then in 
effect.
    \845\ Sec. 105(b).
    \846\ Secs. 3121(a)(2), and 3306(a)(2). See also section 3231(e)(1) 
for a similar rule with respect to compensation for purposes of 
Railroad Retirement Tax.
---------------------------------------------------------------------------
    Employers may also provide health coverage in the form of 
an agreement to reimburse medical expenses of their employees 
(and their spouses and dependents), not reimbursed by a health 
insurance plan, through flexible spending arrangements which 
allow reimbursement for medical care not in excess of a 
specified dollar amount (either elected by an employee under a 
cafeteria plan or otherwise specified by the employer). Health 
coverage provided in the form of one of these arrangements is 
also excludible from gross income as employer-provided health 
coverage under an accident or health plan.\847\
---------------------------------------------------------------------------
    \847\ Sec. 106.
---------------------------------------------------------------------------

Qualified benefits

    Qualified benefits under a cafeteria plan are generally 
employer-provided benefits that are not includable in gross 
income under an express provision of the Code. Examples of 
qualified benefits include employer-provided health coverage, 
group term life insurance coverage not in excess of $50,000, 
and benefits under a dependent care assistance program. In 
order to be excludable, any qualified benefit elected under a 
cafeteria plan must independently satisfy any requirements 
under the Code section that provides the exclusion. However, 
some employer-provided benefits that are not includable in 
gross income under an express provision of the Code are 
explicitly not allowed in a cafeteria plan. These benefits are 
generally referred to as nonqualified benefits. Examples of 
nonqualified benefits include scholarships; \848\ employer-
provided meals and lodging; \849\ educational assistance; \850\ 
and fringe benefits.\851\ A plan offering any nonqualified 
benefit is not a cafeteria plan.\852\
---------------------------------------------------------------------------
    \848\ Sec. 117.
    \849\ Sec. 119.
    \850\ Sec. 127.
    \851\ Sec. 132.
    \852\ Prop. Treas. Reg. sec. 1.125-1(q). Long-term care services, 
contributions to Archer Medical Savings Accounts, group term life 
insurance for an employee's spouse, child or dependent, and elective 
deferrals to section 403(b) plans are also nonqualified benefits.
---------------------------------------------------------------------------

Flexible spending arrangement under a cafeteria plan

    A flexible spending arrangement for medical expenses under 
a cafeteria plan (``Health FSA'') is health coverage in the 
form of an unfunded arrangement under which employees are given 
the option to reduce their current cash compensation and 
instead have the amount of the salary reduction contributions 
made available for use in reimbursing the employee for his or 
her medical expenses.\853\ Health FSAs are subject to the 
general requirements for cafeteria plans, including a 
requirement that amounts remaining under a Health FSA at the 
end of a plan year must be forfeited by the employee (referred 
to as the ``use-it-or-lose-it rule'').\854\ A Health FSA is 
permitted to allow a grace period not to exceed two and one-
half months immediately following the end of the plan year 
during which unused amounts may be used.\855\ A Health FSA can 
also include employer flex-credits which are non-elective 
employer contributions that the employer makes for every 
employee eligible to participate in the employer's cafeteria 
plan, to be used only for one or more tax excludible qualified 
benefits (but not as cash or a taxable benefit).\856\
---------------------------------------------------------------------------
    \853\ Sec. 125 and Prop. Treas. Reg. sec. 1.125-5.
    \854\ Sec. 125(d)(2) and Prop. Treas. Reg. sec. 1.125-5(c).
    \855\ Notice 2005-42, 2005-1 C.B. 1204 and Prop. Treas. Reg. sec. 
1.125-1(e).
    \856\ Prop. Treas. Reg. sec. 1-125-5(b).
---------------------------------------------------------------------------
    A flexible spending arrangement including a Health FSA 
(under a cafeteria plan) is generally distinguishable from 
other employer-provided health coverage by the relationship 
between the value of the coverage for a year and the maximum 
amount of reimbursement reasonably available during the same 
period. A flexible spending arrangement for health coverage 
generally is defined as a benefit program which provides 
employees with coverage under which specific incurred medical 
care expenses may be reimbursed (subject to reimbursement 
maximums and other conditions) and the maximum amount of 
reimbursement reasonably available is less than 500 percent of 
the value of such coverage.\857\
---------------------------------------------------------------------------
    \857\ Sec. 106(c)(2) and Prop. Treas. Reg. sec. 1.125-5(a).
---------------------------------------------------------------------------

Health reimbursement arrangement

    Rather than offering a Health FSA through a cafeteria plan, 
an employer may specify a dollar amount that is available for 
medical expense reimbursement. These arrangements are commonly 
called HRAs. Some of the rules applicable to HRAs and Health 
FSAs are similar (e.g., the amounts in the arrangements can 
only be used to reimburse medical expenses and not for other 
purposes), but the rules are not identical. In particular, HRAs 
cannot be funded on a salary reduction basis and the use-it-or-
lose-it rule does not apply. Thus, amounts remaining at the end 
of the year may be carried forward to be used to reimburse 
medical expenses in following years.\858\
---------------------------------------------------------------------------
    \858\ Guidance with respect to HRAs, including the interaction of 
FSAs and HRAs in the case of an individual covered under both, is 
provided in Notice 2002-45, 2002-2 C.B. 93.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, in order for a Health FSA to be a 
qualified benefit under a cafeteria plan, the maximum amount 
available for reimbursement of incurred medical expenses of an 
employee, the employee's dependents, and any other eligible 
beneficiaries with respect to the employee, under the Health 
FSA for a plan year (or other 12-month coverage period) must 
not exceed $2,500.\859\ The $2,500 limitation is indexed to 
CPI-U, with any increase that is not a multiple of $50 rounded 
to the next lowest multiple of $50 for years beginning after 
December 31, 2013.
---------------------------------------------------------------------------
    \859\ The provision does not change the present law treatment as 
described in Prop. Treas. Reg. section 1.125-5 for dependent care 
flexible spending arrangements or adoption assistance flexible spending 
arrangements.
---------------------------------------------------------------------------
    A cafeteria plan that does not include this limitation on 
the maximum amount available for reimbursement under any FSA is 
not a cafeteria plan within the meaning of section 125. Thus, 
when an employee is given the option under a cafeteria plan 
maintained by an employer to reduce his or her current cash 
compensation and instead have the amount of the salary 
reduction be made available for use in reimbursing the employee 
for his or her medical expenses under a Health FSA, the amount 
of the reduction in cash compensation pursuant to a salary 
reduction election must be limited to $2,500 for a plan year.
    It is intended that regulations would require all cafeteria 
plans of an employer to be aggregated for purposes of applying 
this limit. The employer for this purpose is determined after 
applying the employer aggregation rules in section 414(b), (c), 
(m), and (o).\860\ In the event of a plan year or coverage 
period that is less than 12 months, it is intended that the 
limit be required to be prorated.
---------------------------------------------------------------------------
    \860\ Section 414(b) provides that, for specified employee benefit 
purposes, all employees of all corporations which are members of a 
controlled group of corporations are treated as employed by a single 
employer. There is a similar rule in section 414(c) under which all 
employees of trades or businesses (whether or not incorporated) which 
are under common control are treated under regulations as employed by a 
single employer, and, in section 414(m), under which employees of an 
affiliated service group (as defined in that section) are treated as 
employed by a single employer. Section 414(o) authorizes the Treasury 
to issue regulations to prevent avoidance of the requirements under 
section 414(m). Section 125(g)(4) applies this rule to cafeteria plans.
---------------------------------------------------------------------------
    The provision does not limit the amount permitted to be 
available for reimbursement under employer-provided health 
coverage offered through an HRA, including a flexible spending 
arrangement within the meaning of section 106(c)(2), that is 
not part of a cafeteria plan.

                             Effective Date

    The provision is effective for taxable year beginning after 
December 31, 2012.

 F. Expansion of Information Reporting Requirements (sec. 9006 of the 
                  Act and sec. 6041 of the Code) \861\


                              Present Law

    Present law imposes a variety of information reporting 
requirements on participants in certain transactions.\862\ 
These requirements are intended to assist taxpayers in 
preparing their income tax returns and to help the IRS 
determine whether such returns are correct and complete.
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    \861\ This description is based upon the discussion at page 334 in 
S. Rep. No. 111-89, Final Committee Report of the Senate Finance 
Committee on ``America's Healthy Future Act of 2009,'' published 
October 21, 2009.
    \862\ Secs. 6031 through 6060.
---------------------------------------------------------------------------
    The primary provision governing information reporting by 
payors requires an information return by every person engaged 
in a trade or business who makes payments aggregating $600 or 
more in any taxable year to a single payee in the course of 
that payor's trade or business.\863\ Payments subject to 
reporting include fixed or determinable income or compensation, 
but do not include payments for goods or certain enumerated 
types of payments that are subject to other specific reporting 
requirements.\864\ The payor is required to provide the 
recipient of the payment with an annual statement showing the 
aggregate payments made and contact information for the 
payor.\865\ The regulations generally except from reporting, 
payments to corporations, exempt organizations, governmental 
entities, international organizations, or retirement 
plans.\866\ However, the following types of payments to 
corporations must be reported: Medical and healthcare payments; 
\867\ fish purchases for cash; \868\ attorney's fees; \869\ 
gross proceeds paid to an attorney; \870\ substitute payments 
in lieu of dividends or tax-exempt interest; \871\ and payments 
by a Federal executive agency for services.\872\
---------------------------------------------------------------------------
    \863\ Sec. 6041(a). The information return is generally submitted 
electronically as a Form-1099 or Form-1096, although certain payments 
to beneficiaries or employees may require use of Forms W-3 or W-2, 
respectively. Treas. Reg. sec. 1.6041-1(a)(2).
    \864\ Sec. 6041(a) requires reporting as to ``other fixed or 
determinable gains, profits, and income (other than payments to which 
section 6042(a)(1), 6044(a)(1), 6047(c), 6049(a) or 6050N(a) applies 
and other than payments with respect to which a statement is required 
under authority of section 6042(a), 6044(a)(2) or 6045)[.]'' These 
excepted payments include most interest, royalties, and dividends.
    \865\ Sec. 6041(d).
    \866\ Treas. Reg. sec. 1.6041-3(p). Certain for-profit health 
provider corporations are not covered by this general exception, 
including those organizations providing billing services for such 
companies.
    \867\ Sec. 6050T.
    \868\ Sec. 6050R.
    \869\ Sec. 6045(f)(1) and (2); Treas. Reg. secs. 1.6041-1(d)(2) and 
1.6045-5(d)(5).
    \870\ Ibid.
    \871\ Sec. 6045(d).
    \872\ Sec. 6041(d)(3).
---------------------------------------------------------------------------
    Failure to comply with the information reporting 
requirements results in penalties, which may include a penalty 
for failure to file the information return,\873\ and a penalty 
for failure to furnish payee statements \874\ or failure to 
comply with other various reporting requirements.\875\
---------------------------------------------------------------------------
    \873\ Sec. 6721. The penalty for the failure to file an information 
return generally is $50 for each return for which such failure occurs. 
The total penalty imposed on a person for all failures during a 
calendar year cannot exceed $250,000. Additionally, special rules apply 
to reduce the per-failure and maximum penalty where the failure is 
corrected within a specified period.
    \874\ Sec. 6722. The penalty for failure to provide a correct payee 
statement is $50 for each statement with respect to which such failure 
occurs, with the total penalty for a calendar year not to exceed 
$100,000. Special rules apply that increase the per-statement and total 
penalties where there is intentional disregard of the requirement to 
furnish a payee statement.
    \875\ Sec. 6723. The penalty for failure to timely comply with a 
specified information reporting requirement is $50 per failure, not to 
exceed $100,000 for a calendar year.
---------------------------------------------------------------------------
    Detailed rules are provided for the reporting of various 
types of investment income, including interest, dividends, and 
gross proceeds from brokered transactions (such as a sale of 
stock).\876\ In general, the requirement to file Form 1099 
applies with respect to amounts paid to U.S. persons and is 
linked to the backup withholding rules of section 3406. Thus, a 
payor of interest, dividends or gross proceeds generally must 
request that a U.S. payee (other than certain exempt 
recipients) furnish a Form W-9 providing that person's name and 
taxpayer identification number.\877\ That information is then 
used to complete the Form 1099.
---------------------------------------------------------------------------
    \876\ Secs. 6042 (dividends), 6045 (broker reporting) and 6049 
(interest) and the Treasury regulations thereunder.
    \877\ See Treas. Reg. sec. 31.3406(h)-3.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a business is required to file an 
information return for all payments aggregating $600 or more in 
a calendar year to a single payee (other than a payee that is a 
tax-exempt corporation), notwithstanding any regulation 
promulgated under section 6041 prior to the date of enactment 
(March 23, 2010). The payments to be reported include gross 
proceeds paid in consideration for property or services. 
However, the provision does not override specific provisions 
elsewhere in the Code that except certain payments from 
reporting, such as securities or broker transactions as defined 
under section 6045(a) and the regulations thereunder.

                             Effective Date

    The provision is effective for payments made after December 
31, 2011.

G. Additional Requirements for Charitable Hospitals (sec. 9007 \878\ of 
   the Act and sec. 501(c), new sec. 4959, and sec. 6033 of the Code)

      
---------------------------------------------------------------------------
    \878\ Section 9007 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is amended by section 10903 of the Patient 
Protection and Affordable Care Act, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              Present Law


Tax exemption

    Charitable organizations, i.e., organizations described in 
section 501(c)(3), generally are exempt from Federal income 
tax, are eligible to receive tax deductible contributions,\879\ 
have access to tax-exempt financing through State and local 
governments (described in more detail below),\880\ and 
generally are exempt from State and local taxes. A charitable 
organization must operate primarily in pursuit of one or more 
tax-exempt purposes constituting the basis of its tax 
exemption.\881\ The Code specifies such purposes as religious, 
charitable, scientific, educational, literary, testing for 
public safety, to foster international amateur sports 
competition, or for the prevention of cruelty to children or 
animals. In general, an organization is organized and operated 
for charitable purposes if it provides relief for the poor and 
distressed or the underprivileged.\882\
---------------------------------------------------------------------------
    \879\ Sec. 170.
    \880\ Sec. 145.
    \881\ Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
    \882\ Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
---------------------------------------------------------------------------
    The Code does not provide a per se exemption for hospitals. 
Rather, a hospital qualifies for exemption if it is organized 
and operated for a charitable purpose and otherwise meets the 
requirements of section 501(c)(3).\883\ The promotion of health 
has been recognized by the IRS as a charitable purpose that is 
beneficial to the community as a whole.\884\ It includes not 
only the establishment or maintenance of charitable hospitals, 
but clinics, homes for the aged, and other providers of health 
care.
---------------------------------------------------------------------------
    \883\ Although nonprofit hospitals generally are recognized as tax-
exempt by virtue of being ``charitable'' organizations, some might 
qualify for exemption as educational or scientific organizations 
because they are organized and operated primarily for medical education 
and research purposes.
    \884\ Rev. Rul. 69-545, 1969-2 C.B. 117; see also Restatement 
(Second) of Trusts secs. 368, 372 (1959); see Bruce R. Hopkins, The Law 
of Tax-Exempt Organizations, sec. 6.3 (8th ed. 2003) (discussing 
various forms of health-care providers that may qualify for exemption 
under section 501(c)(3)).
---------------------------------------------------------------------------
    Since 1969, the IRS has applied a ``community benefit'' 
standard for determining whether a hospital is charitable.\885\ 
According to Revenue Ruling 69-545, community benefit can 
include, for example: maintaining an emergency room open to all 
persons regardless of ability to pay; having an independent 
board of trustees composed of representatives of the community; 
operating with an open medical staff policy, with privileges 
available to all qualifying physicians; providing charity care; 
and utilizing surplus funds to improve the quality of patient 
care, expand facilities, and advance medical training, 
education and research. Beginning in 2009, hospitals generally 
are required to submit information on community benefit on 
their annual information returns filed with the IRS.\886\ 
Present law does not include sanctions short of revocation of 
tax-exempt status for hospitals that fail to satisfy the 
community benefit standard.
---------------------------------------------------------------------------
    \885\ Rev. Rul. 69-545, 1969-2 C.B. 117. From 1956 until 1969, the 
IRS applied a ``financial ability'' standard, requiring that a 
charitable hospital be ``operated to the extent of its financial 
ability for those not able to pay for the services rendered and not 
exclusively for those who are able and expected to pay.'' Rev. Rul. 56-
185, 1956-1 C.B. 202.
    \886\ IRS Form 990, Schedule H.
---------------------------------------------------------------------------
    Although section 501(c)(3) hospitals generally are exempt 
from Federal tax on their net income, such organizations 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.\887\ In 
general, interest, rents, royalties, and annuities are excluded 
from the unrelated business income of tax-exempt 
organizations.\888\
---------------------------------------------------------------------------
    \887\ Secs. 511-514.
    \888\ Sec. 512(b).
---------------------------------------------------------------------------

Charitable contributions

    In general, a deduction is permitted for charitable 
contributions, including charitable contributions to tax-exempt 
hospitals, 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.\889\
---------------------------------------------------------------------------
    \889\ Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------

Tax-exempt financing

    In addition to issuing tax-exempt bonds for government 
operations and services, State and local governments may issue 
tax-exempt bonds to finance the activities of charitable 
organizations described in section 501(c)(3). Because interest 
income on tax-exempt bonds is excluded from gross income, 
investors generally are willing to accept a lower pre-tax rate 
of return on such bonds than they might otherwise accept on a 
taxable investment. This, in turn, lowers the cost of capital 
for the users of such financing. Both capital expenditures and 
limited working capital expenditures of charitable 
organizations described in section 501(c)(3) generally may be 
financed with tax-exempt bonds. Private, nonprofit hospitals 
frequently are the beneficiaries of this type of financing.
    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 (e.g., 
private businesses or individuals). For these purposes, the 
term ``nongovernmental person'' generally includes the Federal 
government and all other individuals and entities other than 
States or local governments, including section 501(c)(3) 
organizations. 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.

Reporting and disclosure requirements

    Exempt organizations 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.\890\ Section 501(c)(3) 
organizations that are classified as public charities must file 
Form 990 (Return of Organization Exempt From Income Tax),\891\ 
including Schedule A, which requests information specific to 
section 501(c)(3) organizations. Additionally, an organization 
that operates at least one facility that is, or is required to 
be, licensed, registered, or similarly recognized by a state as 
a hospital must complete Schedule H (Form 990), which requests 
information regarding charity care, community benefits, bad 
debt expense, and certain management company and joint venture 
arrangements of a hospital.
---------------------------------------------------------------------------
    \890\ 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.
    \891\ Social welfare organizations, labor organizations, 
agricultural organizations, horticultural organizations, and business 
leagues are subject to the generally applicable Form 990, Form 990-EZ, 
and Form 990-T annual filing requirements.
---------------------------------------------------------------------------
    An organization described in section 501(c) or (d) 
generally is also required to make available for public 
inspection for a period of three years a copy of its annual 
information return (Form 990) and exemption application 
materials.\892\ This requirement is satisfied if the 
organization has made the annual return and exemption 
application widely available (e.g., by posting such information 
on its website).\893\
---------------------------------------------------------------------------
    \892\ Sec. 6104(d).
    \893\ Sec. 6104(d)(4); Treas. Reg. sec. 301.6104(d)-2(b).
---------------------------------------------------------------------------

                        Explanation of Provision


Additional requirements for section 501(c)(3) hospitals \894\
---------------------------------------------------------------------------

    \894\ No inference is intended regarding whether an organization 
satisfies the present law community benefit standard.
---------------------------------------------------------------------------
            In general
    The provision establishes new requirements applicable to 
section 501(c)(3) hospitals. The new requirements are in 
addition to, and not in lieu of, the requirements otherwise 
applicable to an organization described in section 501(c)(3). 
The requirements generally apply to any section 501(c)(3) 
organization that operates at least one hospital facility. For 
purposes of the provision, a hospital facility generally 
includes: (1) any facility that is, or is required to be, 
licensed, registered, or similarly recognized by a State as a 
hospital; and (2) any other facility or organization the 
Secretary of the Treasury (the ``Secretary''), in consultation 
with the Secretary of HHS and after public comment, determines 
has the provision of hospital care as its principal purpose. To 
qualify for tax exemption under section 501(c)(3), an 
organization subject to the provision is required to comply 
with the following requirements with respect to each hospital 
facility operated by such organization.
            Community health needs assessment
    Each hospital facility is required to conduct a community 
health needs assessment at least once every three taxable years 
and adopt an implementation strategy to meet the community 
needs identified through such assessment. The assessment may be 
based on current information collected by a public health 
agency or non-profit organizations and may be conducted 
together with one or more other organizations, including 
related organizations. The assessment process must take into 
account input from persons who represent the broad interests of 
the community served by the hospital facility, including those 
with special knowledge or expertise of public health issues. 
The hospital must disclose in its annual information report to 
the IRS (i.e., Form 990 and related schedules) how it is 
addressing the needs identified in the assessment and, if all 
identified needs are not addressed, the reasons why (e.g., lack 
of financial or human resources). Each hospital facility is 
required to make the assessment widely available. Failure to 
complete a community health needs assessment in any applicable 
three-year period results in a penalty on the organization 
equal to $50,000. For example, if a facility does not complete 
a community health needs assessment in taxable years one, two 
or three, it is subject to the penalty in year three. If it 
then fails to complete a community health needs assessment in 
year four, it is subject to another penalty in year four (for 
failing to satisfy the requirement during the three-year period 
beginning with taxable year two and ending with taxable year 
four). An organization that fails to disclose how it is meeting 
needs identified in the assessment is subject to existing 
incomplete return penalties.\895\
---------------------------------------------------------------------------
    \895\ Sec. 6652.
---------------------------------------------------------------------------
            Financial assistance policy
    Each hospital facility is required to adopt, implement, and 
widely publicize a written financial assistance policy. The 
financial assistance policy must indicate the eligibility 
criteria for financial assistance and whether such assistance 
includes free or discounted care. For those eligible for 
discounted care, the policy must indicate the basis for 
calculating the amounts that will be billed to such patients. 
The policy must also indicate how to apply for such assistance. 
If a hospital does not have a separate billing and collections 
policy, the financial assistance policy must also indicate what 
actions the hospital may take in the event of non-response or 
non-payment, including collections action and reporting to 
credit rating agencies. Each hospital facility also is required 
to adopt and implement a policy to provide emergency medical 
treatment to individuals. The policy must prevent 
discrimination in the provision of emergency medical treatment, 
including denial of service, against those eligible for 
financial assistance under the facility's financial assistance 
policy or those eligible for government assistance.
            Limitation on charges
    Each hospital facility is permitted to bill for emergency 
or other medically necessary care provided to individuals who 
qualify for financial assistance under the facility's financial 
assistance policy no more than the amounts generally billed to 
individuals who have insurance covering such care. A hospital 
facility may not use gross charges (i.e., ``chargemaster'' 
rates) when billing individuals who qualify for financial 
assistance. It is intended that amounts billed to those who 
qualify for financial assistance may be based on either the 
best, or an average of the three best, negotiated commercial 
rates, or Medicare rates.
            Collection processes
    Under the provision, a hospital facility (or its 
affiliates) may not undertake extraordinary collection actions 
(even if otherwise permitted by law) against an individual 
without first making reasonable efforts to determine whether 
the individual is eligible for assistance under the hospital's 
financial assistance policy. Such extraordinary collection 
actions include lawsuits, liens on residences, arrests, body 
attachments, or other similar collection processes. The 
Secretary is directed to issue guidance concerning what 
constitutes reasonable efforts to determine eligibility. It is 
intended that for this purpose, ``reasonable efforts'' includes 
notification by the hospital of its financial assistance policy 
upon admission and in written and oral communications with the 
patient regarding the patient's bill, including invoices and 
telephone calls, before collection action or reporting to 
credit rating agencies is initiated.

Reporting and disclosure requirements

    The provision includes new reporting and disclosure 
requirements. Under the provision, the Secretary or the 
Secretary's delegate is required to review information about a 
hospital's community benefit activities (currently reported on 
Form 990, Schedule H) at least once every three years. The 
provision also requires each organization to which the 
provision applies to file with its annual information return 
(i.e., Form 990) a copy of its audited financial statements 
(or, in the case of an organization the financial statements of 
which are included in a consolidated financial statement with 
other organizations, such consolidated financial statements).
    The provision requires the Secretary, in consultation with 
the Secretary of HHS, to submit annually a report to Congress 
with information regarding the levels of charity care, bad debt 
expenses, unreimbursed costs of means-tested government 
programs, and unreimbursed costs of non-means tested government 
programs incurred by private tax-exempt, taxable, and 
governmental hospitals, as well as the costs incurred by 
private tax-exempt hospitals for community benefit activities. 
In addition, the Secretary, in consultation with the Secretary 
of HHS, must conduct a study of the trends in these amounts, 
and submit a report on such study to Congress not later than 
five years from date of enactment (March 23, 2010).

                             Effective Date

    Except as provided below, the provision is effective for 
taxable years beginning after the date of enactment (March 23, 
2010). The community health needs assessment requirement is 
effective for taxable years beginning after the date which is 
two years after the date of enactment (March 23, 2010).\896\ 
The excise tax on failures to satisfy the community health 
needs assessment requirement is effective for failures 
occurring after the date of enactment (March 23, 2010).
---------------------------------------------------------------------------
    \896\ For example, assume the date of enactment is April 1, 2010. A 
calendar year taxpayer would test whether it meets the community health 
needs assessment requirement in the taxable year ending December 31, 
2013. To avoid the penalty, the taxpayer must have satisfied the 
community health needs assessment requirements in 2011, 2012, or 2013.
---------------------------------------------------------------------------

  H. Imposition of Annual Fee on Branded Prescription Pharmaceutical 
        Manufacturers and Importers (sec. 9008 \897\ of the Act)


                              Present Law

    There are two Medicare trust funds under present law, the 
Hospital Insurance (``HI'') fund and the Supplementary Medical 
Insurance (``SMI'') fund.\898\ The HI trust fund is primarily 
funded through payroll tax on covered earnings. Employers and 
employees each pay 1.45 percent of wages, while self-employed 
workers pay 2.9 percent of a portion of their net earnings from 
self-employment. Other HI trust fund revenue sources include a 
portion of the Federal income taxes paid on Social Security 
benefits, and interest paid on the U.S. Treasury securities 
held in the HI trust fund. For the SMI trust fund, transfers 
from the general fund of the Treasury represent the largest 
source of revenue, but additional revenues include monthly 
premiums paid by beneficiaries, and interest paid on the U.S. 
Treasury securities held in the SMI trust fund.
---------------------------------------------------------------------------
    \897\ Section 9008 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is amended by section 1404 of the Health Care 
and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
    \898\ See 2009 Annual Report of the Boards of Trustees of the 
Federal Hospital Insurance and Federal Supplementary Medical Insurance 
Trust Funds, available at http://www.cms.hhs.gov/ReportsTrustFunds/
downloads/tr2009.pdf.
---------------------------------------------------------------------------
    Present law does not impose a fee creditable to the 
Medicare trust funds on companies that manufacture or import 
prescription drugs for sale in the United States.

                        Explanation of Provision

    The provision imposes a fee on each covered entity engaged 
in the business of manufacturing or importing branded 
prescription drugs for sale to any specified government program 
or pursuant to coverage under any such program for each 
calendar year beginning after 2010. Fees collected under the 
provision are credited to the Medicare Part B trust fund.
    The aggregate annual fee for all covered entities is the 
applicable amount. The applicable amount is $2.5 billion for 
calendar year 2011, $2.8 billion for calendar years 2012 and 
2013, $3 billion for calendar years 2014 through 2016, $4 
billion for calendar year 2017, $4.1 billion for calendar year 
2018, and $2.8 billion for calendar year 2019 and thereafter. 
The aggregate fee is apportioned among the covered entities 
each year based on such entity's relative share of branded 
prescription drug sales taken into account during the previous 
calendar year. The Secretary of the Treasury will establish an 
annual payment date that will be no later than September 30 of 
each calendar year.
    The Secretary of the Treasury will calculate the amount of 
each covered entity's fee for each calendar year by determining 
the relative market share for each covered entity. A covered 
entity's relative market share for a calendar year is the 
covered entity's branded prescription drug sales taken into 
account during the preceding calendar year as a percentage of 
the aggregate branded prescription drug sales of all covered 
entities taken into account during the preceding calendar year. 
The percentage of branded prescription drug sales that are 
taken into account during any calendar year with respect to any 
covered entity is: (1) zero percent of sales not more than $5 
million, (2) 10 percent of sales over $5 million but not more 
than $125 million, (3) 40 percent of sales over $125 million 
but not more than $225 million, (4) 75 percent of sales over 
$225 million but not more than $400 million, and (5) 100 
percent of sales over $400 million.
    For purposes of the provision, a covered entity is any 
manufacturer or importer with gross receipts from branded 
prescription drug sales. All persons treated as a single 
employer under section 52(a) or (b) or under section 414(m) or 
414(o) will be treated as a single covered entity for purposes 
of the provision. In applying the single employer rules under 
52(a) and (b), foreign corporations will not be excluded. If 
more than one person is liable for payment of the fee imposed 
by this provision, all such persons are jointly and severally 
liable for payment of such fee. It is anticipated that the 
Secretary may require each covered entity to identify each 
member of the group that is treated as a single covered entity 
under the provision.
    Under the provision, branded prescription drug sales are 
sales of branded prescription drugs made to any specified 
government program or pursuant to coverage under any such 
program. The term branded prescription drugs includes any drug 
which is subject to section 503(b) of the Federal Food, Drug, 
and Cosmetic Act and for which an application was submitted 
under section 505(b) of such Act, and any biological product 
the license for which was submitted under section 351(a) of the 
Public Health Service Act. Branded prescription drug sales, as 
defined under the provision, does not include sales of any drug 
or biological product with respect to which an orphan drug tax 
credit was allowed for any taxable year under section 45C. The 
exception for orphan drug sales does not apply to any drug or 
biological product after such drug or biological product is 
approved by the Food and Drug Administration for marketing for 
any indication other than the rare disease or condition with 
respect to which the section 45C credit was allowed.
    Specified government programs under the provision are: (1) 
the Medicare Part D program under part D of title XVIII of the 
Social Security Act; (2) the Medicare Part B program under part 
B of title XVIII of the Social Security Act; (3) the Medicaid 
program under title XIX of the Social Security Act; (4) any 
program under which branded prescription drugs are procured by 
the Department of Veterans Affairs; (5) any program under which 
branded prescription drugs are procured by the Department of 
Defense; and (6) the TRICARE retail pharmacy program under 
section 1074g of title 10, United States Code.
    The Secretary of HHS, the Secretary of Veterans Affairs, 
and the Secretary of Defense will report to the Secretary of 
the Treasury, at a time and in such a manner as the Secretary 
of the Treasury prescribes, the total branded prescription drug 
sales for each covered entity with respect to each specified 
government program under such Secretary's jurisdiction. The 
provision includes specific information to be included in the 
reports by the respective Secretaries for each specified 
government program.
    The fees imposed under the provision are treated as excise 
taxes with respect to which only civil actions for refunds 
under the provisions of subtitle F will apply. Thus, the fees 
may be assessed and collected using the procedures in subtitle 
F without regard to the restrictions on assessment in section 
6213.
    The Secretary of the Treasury has authority to publish 
guidance as necessary to carry out the purposes of this 
provision.\899\ It is anticipated that the Secretary of the 
Treasury will publish guidance related to the determination of 
the fee under this section. For example, the Secretary may 
publish initial determinations, allow a notice and comment 
period, and then provide notice and demand for payment of the 
fee. It is also anticipated that the Secretary of the Treasury 
will provide guidance as to the determination of the fee in 
situations involving mergers, acquisitions, business divisions, 
bankruptcy, or any other situations where guidance is necessary 
to account for sales taken into account for determining the fee 
for any calendar year.
---------------------------------------------------------------------------
    \899\ Notice 2010-71 provided initial guidance on the annual fee 
imposed under this provision, including procedures for filing Form 
8947, Report of Branded Prescription Drug Information. Notice 2011-9 
supersedes Notice 2010-71 and provides guidance on the methodology that 
will be used for calculating the allocation of the branded prescription 
drug fee and requests public comments.
---------------------------------------------------------------------------
    The fees imposed under the provision are not deductible for 
U.S. income tax purposes.

                             Effective Date

    The provision is effective for calendar years beginning 
after December 31, 2010.

    I. Imposition of Annual Fee on Medical Device Manufacturers and 
                 Importers (sec. 9009 \900\ of the Act)

---------------------------------------------------------------------------
    \900\ Section 9009 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is repealed by section 1405(d) of the Health 
Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                                 Repeal

    The provision of the Patient Protection and Affordable Care 
Act imposing an annual fee on manufacturers and importers of 
medical devices is repealed by the Health Care and Education 
Reconciliation Act of 2010.

                             Effective Date

    The repeal is effective as of the date of enactment (March 
23, 2010) of the Patient Protection and Affordable Care Act.

 J. Imposition of Annual Fee on Health Insurance Providers (sec. 9010 
                           \901\ of the Act)

---------------------------------------------------------------------------
    \901\ Section 9010 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10905, is further 
amended by section 1406 of the Health Care and Education Reconciliation 
Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              Present Law

    Present law provides special rules for determining the 
taxable income of insurance companies (subchapter L of the 
Code). Separate sets of rules apply to life insurance companies 
and to property and casualty insurance companies. Insurance 
companies are subject to Federal income tax at regular 
corporate income tax rates.
    An insurance company that provides health insurance is 
subject to Federal income tax as either a life insurance 
company or as a property insurance company, depending on its 
mix of lines of business and on the resulting portion of its 
reserves that are treated as life insurance reserves. For 
Federal income tax purposes, an insurance company is treated as 
a life insurance company if the sum of its (1) life insurance 
reserves and (2) unearned premiums and unpaid losses on 
noncancellable life, accident or health contracts not included 
in life insurance reserves, comprise more than 50 percent of 
its total reserves.\902\
---------------------------------------------------------------------------
    \902\ Sec. 816(a).
---------------------------------------------------------------------------
    Some insurance providers may be exempt from Federal income 
tax under section 501(a) if specific requirements are 
satisfied. Section 501(c)(8), for example, describes certain 
fraternal beneficiary societies, orders, or associations 
operating under the lodge system or for the exclusive benefit 
of their members that provide for the payment of life, sick, 
accident, or other benefits to the members or their dependents. 
Section 501(c)(9) describes certain voluntary employees' 
beneficiary associations that provide for the payment of life, 
sick, accident, or other benefits to the members of the 
association or their dependents or designated beneficiaries. 
Section 501(c)(12)(A) describes certain benevolent life 
insurance associations of a purely local character. Section 
501(c)(15) describes certain small non-life insurance companies 
with annual gross receipts of no more than $600,000 ($150,000 
in the case of a mutual insurance company). Section 501(c)(26) 
describes certain membership organizations established to 
provide health insurance to certain high-risk individuals. 
Section 501(c)(27) describes certain organizations established 
to provide workmen's compensation insurance.
    An excise tax applies to premiums paid to foreign insurers 
and reinsurers covering U.S. risks.\903\ The excise tax is 
imposed on a gross basis at the rate of one percent on 
reinsurance and life insurance premiums, and at the rate of 
four percent on property and casualty insurance premiums. The 
excise tax does not apply to premiums that are effectively 
connected with the conduct of a U.S. trade or business or that 
are exempted from the excise tax under an applicable income tax 
treaty. The excise tax paid by one party cannot be credited if, 
for example, the risk is reinsured with a second party in a 
transaction that is also subject to the excise tax.
---------------------------------------------------------------------------
    \903\ Secs. 4371-4374.
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    IRS authority to assess and collect taxes is generally 
provided in subtitle F of the Code (secs. 6001-7874), relating 
to procedure and administration. That subtitle establishes the 
rules governing both how taxpayers are required to report 
information to the IRS and to pay their taxes, as well as their 
rights. It also establishes the duties and authority of the IRS 
to enforce the Federal tax law, and sets forth rules relating 
to judicial proceedings involving Federal tax.

                        Explanation of Provision

    Under the provision, an annual fee applies to any covered 
entity engaged in the business of providing health insurance 
with respect to United States health risks. The fee applies for 
calendar years beginning after 2013. The aggregate annual fee 
for all covered entities is the applicable amount. The 
applicable amount is $8 billion for calendar year 2014, $11.3 
billion for calendar years 2015 and 2016, $13.9 billion for 
calendar year 2017, and $14.3 billion for calendar year 2018. 
For calendar years after 2018, the applicable amount is indexed 
to the rate of premium growth.
    The annual payment date for a calendar year is determined 
by the Secretary of the Treasury, but in no event may be later 
than September 30 of that year.
    Under the provision, the aggregate annual fee is 
apportioned among the providers based on a ratio designed to 
reflect relative market share of U.S. health insurance 
business. For each covered entity, the fee for a calendar year 
is an amount that bears the same ratio to the applicable amount 
as (1) the covered entity's net premiums written during the 
preceding calendar year with respect to health insurance for 
any United States health risk, bears to (2) the aggregate net 
written premiums of all covered entities during such preceding 
calendar year with respect to such health insurance.
    The provision requires the Secretary of the Treasury to 
calculate the amount of each covered entity's fee for the 
calendar year, determining the covered entity's net written 
premiums for the preceding calendar year with respect to health 
insurance for any United States health risk on the basis of 
reports submitted by the covered entity and through the use of 
any other source of information available to the Treasury 
Department. It is intended that the Treasury Department be able 
to rely on published aggregate annual statement data to the 
extent necessary, and may use annual statement data and filed 
annual statements that are publicly available to verify or 
supplement the reports submitted by covered entities.
    Net written premiums is intended to mean premiums written, 
including reinsurance premiums written, reduced by reinsurance 
ceded, and reduced by ceding commissions. Net written premiums 
do not include amounts arising under arrangements that are not 
treated as insurance (i.e., in the absence of sufficient risk 
shifting and risk distribution for the arrangement to 
constitute insurance).\904\
---------------------------------------------------------------------------
    \904\ See Helvering v. Le Gierse, 312 U.S. 531 (1941).
---------------------------------------------------------------------------
    The amount of net premiums written that are taken into 
account for purposes of determining a covered entity's market 
share is subject to dollar thresholds. A covered entity's net 
premiums written during the calendar year that are not more 
than $25 million are not taken into account for this purpose. 
With respect to a covered entity's net premiums written during 
the calendar year that are more than $25 million but not more 
than $50 million, 50 percent are taken into account, and 100 
percent of net premiums written in excess of $50 million are 
taken into account.
    After application of the above dollar thresholds, a special 
rule provides an exclusion, for purposes of determining an 
otherwise covered entity's market share, of 50 percent of net 
premiums written that are attributable to the exempt activities 
\905\ of a health insurance organization that is exempt from 
Federal income tax \906\ by reason of being described in 
section 501(c)(3) (generally, a public charity), section 
501(c)(4) (generally, a social welfare organization), section 
501(c)(26) (generally, a high-risk health insurance pool), or 
section 501(c)(29) (a consumer operated and oriented plan 
(``CO-OP'') health insurance issuer).
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    \905\ The exempt activities for this purpose are activities other 
than activities of an unrelated trade or business defined in section 
513.
    \906\ Section 501(m) of the Code provides that an organization 
described in section 501(c)(3) or (4) is exempt from Federal income tax 
only if no substantial part of its activities consists of providing 
commercial-type insurance. Thus, an organization otherwise described in 
section 501(c)(3) or (4) that is taxable (under the Federal income tax 
rules) by reason of section 501(m) is not eligible for the 50-percent 
exclusion under the insurance fee.
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    A covered entity generally is an entity that provides 
health insurance with respect to United States health risks 
during the calendar year in which the fee under this section is 
due. Thus for example, an insurance company subject to tax 
under part I or II of subchapter L, an organization exempt from 
tax under section 501(a), a foreign insurer that provides 
health insurance with respect to United States health risks, or 
an insurer that provides health insurance with respect to 
United States health risks under Medicare Advantage, Medicare 
Part D, or Medicaid, is a covered entity under the provision 
except as provided in specific exceptions.
    Specific exceptions are provided to the definition of a 
covered entity. A covered entity does not include an employer 
to the extent that the employer self-insures the health risks 
of its employees. For example, a manufacturer that enters into 
a self-insurance arrangement with respect to the health risks 
of its employees is not treated as a covered entity. As a 
further example, an insurer that sells health insurance and 
that also enters into a self-insurance arrangement with respect 
to the health risks of its own employees is treated as a 
covered entity with respect to its health insurance business, 
but is not treated as a covered entity to the extent of the 
self-insurance of its own employees' health risks.
    A covered entity does not include any governmental entity. 
For this purpose, it is intended that a governmental entity 
includes a county organized health system entity that is an 
independent public agency organized as a nonprofit under State 
law and that contracts with a State to administer State 
Medicaid benefits through local care providers or HMOs.
    A covered entity does not include an entity that (1) 
qualifies as nonprofit under applicable State law, (2) meets 
the private inurement and limitation on lobbying provisions 
described in section 501(c)(3), and (3) receives more than 80 
percent of its gross revenue from government programs that 
target low-income, elderly, or disabled populations (including 
Medicare, Medicaid, the State Children's Health Insurance Plan 
(``SCHIP''), and dual-eligible plans).
    A covered entity does not include an organization that 
qualifies as a VEBA under section 501(c)(9) that is established 
by an entity other than the employer (i.e., a union) for the 
purpose of providing health care benefits. This exclusion does 
not apply to multi-employer welfare arrangements (``MEWAs'').
    For purposes of the provision, all persons treated as a 
single employer under section 52(a) or (b) or section 414(m) or 
(o) are treated as a single covered entity (or as a single 
employer, for purposes of the rule relating to employers that 
self-insure the health risks of employees), and otherwise 
applicable exclusion of foreign corporations under those rules 
is disregarded. However, the exceptions to the definition of a 
covered entity are applied on a separate entity basis, not 
taking into account this rule. If more than one person is 
liable for payment of the fee by reason of being treated as a 
single covered entity, all such persons are jointly and 
severally liable for payment of the fee.
    A United States heath risk means the health risk of an 
individual who is a U.S. citizen, is a U.S. resident within the 
meaning of section 7701(b)(1)(A) (whether or not located in the 
United States), or is located in the United States, with 
respect to the period that the individual is located there. In 
general, it is intended that risks in the following lines of 
business reported on the annual statement as prescribed by the 
National Association of Insurance Commissioners and as filed 
with the insurance commissioners of the States in which 
insurers are licensed to do business constitute health risks 
for this purpose: comprehensive (hospital and medical), vision, 
dental, Federal Employees Health Benefit plan, title XVIII 
Medicare, title XIX Medicaid, and other health.
    For purposes of the provision, health insurance does not 
include coverage only for accident, or disability income 
insurance, or a combination thereof. Health insurance does not 
include coverage only for a specified disease or illness, nor 
does health insurance include hospital indemnity or other fixed 
indemnity insurance. Health insurance does not include any 
insurance for long-term care or any Medicare supplemental 
health insurance (as defined in section 1882(g)(1) of the 
Social Security Act).
    For purposes of procedure and administration under the 
rules of Subtitle F of the Code, the fee under this provision 
is treated as an excise tax with respect to which only civil 
actions for refund under Subtitle F apply. The Secretary of the 
Treasury may redetermine the amount of a covered entity's fee 
under the provision for any calendar year for which the statute 
of limitations remains open.
    For purposes of section 275, relating to the 
nondeductibility of specified taxes, the fee is considered to 
be a nondeductible tax described in section 275(a)(6).
    A reporting rule applies under the provision. A covered 
entity is required to report to the Secretary of the Treasury 
the amount of its net premiums written during any calendar year 
with respect to health insurance for any United States health 
risk.
    A penalty applies for failure to report, unless it is shown 
that the failure is due to reasonable cause. The amount of the 
penalty is $10,000 plus the lesser of (1) $1,000 per day while 
the failure continues, or (2) the amount of the fee imposed for 
which the report was required. The penalty is treated as a 
penalty for purposes of subtitle F of the Code, must be paid on 
notice and demand by the Treasury Department and in the same 
manner as tax, and with respect to which only civil actions for 
refund under procedures of subtitle F apply. The reported 
information is not treated as taxpayer information under 
section 6103.
    An accuracy-related penalty applies in the case of any 
understatement of a covered entity's net premiums written. For 
this purpose, an understatement is the difference between the 
amount of net premiums written as reported on the return filed 
by the covered entity and the amount of net premiums written 
that should have been reported on the return. The penalty is 
equal to the amount of the fee that should have been paid in 
the absence of an understatement over the amount of the fee 
determined based on the understatement. The accuracy-related 
penalty is subject to the provisions of subtitle F of the Code 
that apply to assessable penalties imposed under Chapter 68.
    The provision provides authority for the Secretary of the 
Treasury to publish guidance necessary to carry out the 
purposes of the provision and to prescribe regulations 
necessary or appropriate to prevent avoidance of the purposes 
of the provision, including inappropriate actions taken to 
qualify as an exempt entity under the provision.

                             Effective Date

    The annual fee is required to be paid in each calendar year 
beginning after December 31, 2013. The fee under the provision 
is determined with respect to net premiums written after 
December 31, 2012, with respect to health insurance for any 
United States health risk.

K. Study and Report of Effect on Veterans Health Care (sec. 9011 of the 
                                  Act)


                              Present Law

    No provision.

                        Explanation of Provision

    The provision requires the Secretary of Veterans Affairs to 
conduct a study on the effect (if any) of the fees assessed on 
manufacturers and importers of branded prescription drugs, 
manufacturers and importers of medical devices, and health 
insurance providers on (1) the cost of medical care provided to 
veterans and (2) veterans' access to branded prescription drugs 
and medical devices.
    The Secretary of Veterans Affairs will report the results 
of the study to the Committee on Ways and Means of the House of 
Representatives and to the Committee on Finance of the Senate 
no later than December 31, 2012.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

L. Repeal Business Deduction for Federal Subsidies for Certain Retiree 
 Prescription Drug Plans (sec. 9012 \907\ of the Act and sec. 139A of 
                               the Code)

---------------------------------------------------------------------------
    \907\ Section 9012 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is amended by section 1407 of the Health Care 
and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
---------------------------------------------------------------------------

                              Present Law


In general

    Sponsors \908\ of qualified retiree prescription drug plans 
are eligible for subsidy payments from the Secretary of HHS 
with respect to a portion of each qualified covered retiree's 
gross covered prescription drug costs (``qualified retiree 
prescription drug plan subsidy'').\909\ A qualified retiree 
prescription drug plan is employment-based retiree health 
coverage \910\ that has an actuarial value at least as great as 
the Medicare Part D standard plan for the risk pool and that 
meets certain other disclosure and recordkeeping 
requirements.\911\ These qualified retiree prescription drug 
plan subsidies are excludable from the plan sponsor's gross 
income for the purposes of regular income tax and alternative 
minimum tax (including the adjustment for adjusted current 
earnings).\912\
---------------------------------------------------------------------------
    \908\ The identity of the plan sponsor is determined in accordance 
with section 16(B) of ERISA, except that for cases where a plan is 
maintained jointly by one employer and an employee organization, and 
the employer is the primary source of financing, the employer is the 
plan sponsor.
    \909\ Sec. 1860D-22 of the Social Security Act (SSA), 42 U.S.C. 
sec. 1395w-132.
    \910\ Employment-based retiree health coverage is health insurance 
coverage or other coverage of health care costs (whether provided by 
voluntary insurance coverage or pursuant to statutory or contractual 
obligation) for Medicare Part D eligible individuals (their spouses and 
dependents) under group health plans based on their status as retired 
participants in such plans. For purposes of the subsidy, group health 
plans generally include employee welfare benefit plans (as defined in 
section 607(1) of ERISA) that provide medical care (as defined in 
section 213(d)), Federal and State governmental plans, collectively 
bargained plans, and church plans.
    \911\ In addition to meeting the actuarial value standard, the plan 
sponsor must also maintain and provide the Secretary of HHS access to 
records that meet the Secretary of HHS's requirements for purposes of 
audits and other oversight activities necessary to ensure the adequacy 
of prescription drug coverage and the accuracy of payments made to 
eligible individuals under the plan. In addition, the plan sponsor must 
disclose to the Secretary of HHS whether the plan meets the actuarial 
equivalence requirement and if it does not, must disclose to retirees 
the limitations of their ability to enroll in Medicare Part D and that 
non-creditable coverage enrollment is subject to penalties such as fees 
for late enrollment. 42 U.S.C. sec. 1395w-132(a)(2).
    \912\ Sec. 139A.
---------------------------------------------------------------------------

Subsidy amounts

    For each qualifying covered retiree enrolled for a coverage 
year in a qualified retiree prescription drug plan, the 
qualified retiree prescription drug plan subsidy is equal to 28 
percent of the portion of the allowable retiree costs paid by 
the plan sponsor on behalf of the retiree that exceed the cost 
threshold but do not exceed the cost limit. A ``qualifying 
covered retiree'' is an individual who is eligible for Medicare 
but not enrolled in either a Medicare Part D prescription drug 
plan or a Medicare Advantage-Prescription Drug plan, but who is 
covered under a qualified retiree prescription drug plan. In 
general, allowable retiree costs are, with respect to 
prescription drug costs under a qualified retiree prescription 
drug plan, the part of the actual costs paid by the plan 
sponsor on behalf of a qualifying covered retiree under the 
plan.\913\ Both the threshold and limit are indexed to the 
percentage increase in Medicare per capita prescription drug 
costs; the cost threshold was $250 in 2006 ($310 in 2010) and 
the cost limit was $5,000 in 2006 ($6,300 in 2010).\914\
---------------------------------------------------------------------------
    \913\ For purposes of calculating allowable retiree costs, actual 
costs paid are net of discounts, chargebacks, and average percentage 
rebates, and exclude administrative costs.
    \914\ http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/Downloads/
Announcement2010.pdf. Retrieved on March 19, 2010.
---------------------------------------------------------------------------

Expenses relating to tax-exempt income

    In general, no deduction is allowed under any provision of 
the Code for any expense or amount which would otherwise be 
allowable as a deduction if such expense or amount is allocable 
to a class or classes of exempt income.\915\ Thus, expenses or 
amount paid or incurred with respect to the subsidies excluded 
from income under section 139A would generally not be 
deductible. However, a provision under section 139A specifies 
that the exclusion of the qualified retiree prescription drug 
plan subsidy from income is not taken into account in 
determining whether any deduction is allowable with respect to 
covered retiree prescription drug expenses that are taken into 
account in determining the subsidy payment. Therefore, under 
present law, a taxpayer may claim a business deduction for 
covered retiree prescription drug expenses incurred 
notwithstanding that the taxpayer excludes from income 
qualified retiree prescription drug plan subsidies allocable to 
such expenses.
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    \915\ Sec. 265(a) and Treas. Reg. sec. 1.265-1(a).
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                        Explanation of Provision

    The provision eliminates the rule that the exclusion for 
subsidy payments is not taken into account for purposes of 
determining whether a deduction is allowable with respect to 
retiree prescription drug expenses. Thus, under the provision, 
the amount otherwise allowable as a deduction for retiree 
prescription drug expenses is reduced by the amount of the 
excludable subsidy payments received.
    For example, assume a company receives a subsidy of $28 
with respect to eligible drug expenses of $100. The $28 is 
excludable from income under section 139A, and the amount 
otherwise allowable as a deduction is reduced by the $28. Thus, 
if the company otherwise meets the requirements of section 162 
with respect to its eligible drug expenses, it would be 
entitled to an ordinary business expense deduction of $72.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2012.

M. Modify the Itemized Deduction for Medical Expenses (sec. 9013 of the 
                     Act and sec. 213 of the Code)


                              Present Law


Regular income tax

    For regular income tax purposes, individuals are allowed an 
itemized deduction for unreimbursed medical expenses, but only 
to the extent that such expenses exceed 7.5 percent of 
AGI.\916\
---------------------------------------------------------------------------
    \916\ Sec. 213.
---------------------------------------------------------------------------
    This deduction is available both to insured and uninsured 
individuals; thus, for example, an individual with employer-
provided health insurance (or certain other forms of tax-
subsidized health benefits) may also claim the itemized 
deduction for the individual's medical expenses not covered by 
that insurance if the 7.5 percent AGI threshold is met. The 
medical deduction encompasses health insurance premiums to the 
extent they have not been excluded from taxable income through 
the employer exclusion or self-insured deduction.

Alternative minimum tax

    For purposes of the alternative minimum tax (``AMT''), 
medical expenses are deductible only to the extent that they 
exceed 10 percent of AGI.

                        Explanation of Provision

    This provision increases the threshold for the itemized 
deduction for unreimbursed medical expenses from 7.5 percent of 
AGI to 10 percent of AGI for regular income tax purposes. 
However, for the years 2013, 2014, 2015 and 2016, if either the 
taxpayer or the taxpayer's spouse turns 65 before the end of 
the taxable year, the increased threshold does not apply and 
the threshold remains at 7.5 percent of AGI. The provision does 
not change the AMT treatment of the itemized deduction for 
medical expenses.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2012.

 N. Limitation on Deduction for Remuneration Paid by Health Insurance 
       Providers (sec. 9014 of the Act and sec. 162 of the Code)


                              Present Law

    An employer generally may deduct reasonable compensation 
for personal services as an ordinary and necessary business 
expense. Section 162(m) provides 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 \917\ is limited to no more than $1 million per 
year.\918\ 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).
---------------------------------------------------------------------------
    \917\ 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.
    \918\ 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 
IRS issued updated guidance on identifying which employees are 
covered by section 162(m).\919\
---------------------------------------------------------------------------
    \919\ Notice 2007-49, 2007-25 I.R.B. 1429.
---------------------------------------------------------------------------
            Remuneration subject to the limit
    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 \920\); and (5) any remuneration payable under a 
written binding contract which was in effect on February 17, 
1993.
---------------------------------------------------------------------------
    \920\ Sec. 132.
---------------------------------------------------------------------------
    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.

Executive compensation of employers participating in the Troubled 
        Assets Relief Program

            In general
    Under section 162(m)(5), the deduction 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 Emergency 
Stabilization Act of 2008 \921\ (``EESA'') 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 EESA) 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 
EESA). 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.
---------------------------------------------------------------------------
    \921\ Pub. L. No. 110-343.
---------------------------------------------------------------------------
    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 
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 EESA 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).\922\
---------------------------------------------------------------------------
    \922\ 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. 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).
---------------------------------------------------------------------------
            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 $500,000 limit. In addition, the $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 $500,000 limit.

Taxation of insurance companies

    Present law provides special rules for determining the 
taxable income of insurance companies (subchapter L of the 
Code). Separate sets of rules apply to life insurance companies 
and to property and casualty insurance companies. Insurance 
companies are subject to Federal income tax at regular 
corporate income tax rates. An insurance company generally may 
deduct compensation paid in the course of its trade or 
business.

                        Explanation of Provision

    Under the provision, no deduction is allowed for 
remuneration which is attributable to services performed by an 
applicable individual for a covered health insurance provider 
during an applicable taxable year to the extent that such 
remuneration exceeds $500,000. As under section 162(m)(5) for 
remuneration from TARP participants, the exceptions for 
performance based remuneration, commissions, or remuneration 
under existing binding contracts do not apply. This $500,000 
deduction limitation applies without regard to whether such 
remuneration is paid during the taxable year or a subsequent 
taxable year. In applying this rule, rules similar to those in 
section 162(m)(5)(A)(ii) apply. Thus in the case of 
remuneration that relates to services that an applicable 
individual performs during a taxable year but that is not 
deductible until a later year, such as nonqualified deferred 
compensation, the unused portion (if any) of the $500,000 limit 
for the 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.
    In determining whether the remuneration of an applicable 
individual for a year exceeds $500,000, all remuneration from 
all members of any controlled group of corporations (within the 
meaning of section 414(b)), other businesses under common 
control (within the meaning of section 414(c)), or affiliated 
service group (within the meaning of sections 414(m) and (o)) 
are aggregated.

Covered health insurance provider and applicable taxable year

    An insurance provider is a covered health insurance 
provider if at least 25 percent of the insurance provider's 
gross premium income from health business is derived from 
health insurance plans that meet the minimum creditable 
coverage requirements in the bill (``covered health insurance 
provider''). A taxable year is an applicable taxable year for 
an insurance provider if an insurance provider is a covered 
insurance provider for any portion of the taxable year. 
Employers with self-insured plans are excluded from the 
definition of covered health insurance provider.

Applicable individual

    Applicable individuals include all officers, employees, 
directors, and other workers or service providers (such as 
consultants) performing services for or on behalf of a covered 
health insurance provider. Thus, in contrast to the general 
rules under section 162(m) and the special rules executive 
compensation of employers participating in the TARP program, 
the limitation on the deductibility of remuneration from a 
covered health insurance provided is not limited to a small 
group of officers and covered executives but generally applies 
to remuneration of all employees and service providers. If an 
individual is an applicable individual with respect to a 
covered health insurance provider for any taxable year, the 
individual is treated as an applicable individual for all 
subsequent taxable years (and is treated as an applicable 
individual for purposes of any subsequent taxable year for 
purposes of the special rule for deferred remuneration).

                             Effective Date

    The provision is effective for remuneration paid in taxable 
years beginning after 2012 with respect to services performed 
after 2009.

  O. Additional Hospital Insurance Tax on High Income Taxpayers (sec. 
     9015 \923\ of the Act and new secs. 1401 and 3101 of the Code)

---------------------------------------------------------------------------
    \923\ Section 9015 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, is amended by section 10906.
---------------------------------------------------------------------------

                              Present Law


Federal Insurance Contributions Act tax

    The Federal Insurance Contributions Act imposes tax on 
employers based on the amount of wages paid to an employee 
during the year. The tax imposed is composed of two parts: (1) 
the old age, survivors, and disability insurance (``OASDI'') 
tax equal to 6.2 percent of covered wages up to the taxable 
wage base ($106,800 in 2010); and (2) the HI tax amount equal 
to 1.45 percent of covered wages. Generally, covered wages 
means all remuneration for employment, including the cash value 
of all remuneration (including benefits) paid in any medium 
other than cash. Certain exceptions from covered wages are also 
provided. In addition to the tax on employers, each employee is 
subject to FICA taxes equal to the amount of tax imposed on the 
employer.
    The employee portion of the FICA tax generally must be 
withheld and remitted to the Federal government by the 
employer.\924\ The employer generally is liable for the amount 
of this tax whether or not the employer withholds the amount 
from the employee's wages.\925\ In the event that the employer 
fails to withhold from an employee, the employee generally is 
not liable to the IRS for the amount of the tax. However, if 
the employer pays its liability for the amount of the tax not 
withheld, the employer generally has a right to collect that 
amount from the employee. Further, if the employer deducts and 
pays the tax the employer is indemnified against the claims and 
demands of any person for the amount of any payment of the tax 
made by the employer.\926\
---------------------------------------------------------------------------
    \924\ Sec. 3102(a).
    \925\ Sec. 3102(b).
    \926\ Ibid.
---------------------------------------------------------------------------

Self-Employment Contributions Act tax

    As a parallel to FICA taxes, the Self-Employment 
Contributions Act (``SECA'') imposes taxes on the net income 
from self employment of self employed individuals. The rate of 
the OASDI portion of SECA taxes is equal to the combined 
employee and employer OASDI FICA tax rates and applies to self 
employment income up to the FICA taxable wage base. Similarly, 
the rate of the HI portion is the same as the combined employer 
and employee HI rates and there is no cap on the amount of self 
employment income to which the rate applies.\927\
---------------------------------------------------------------------------
    \927\ For purposes of computing net earnings from self employment, 
taxpayers are permitted a deduction equal to the product of the 
taxpayer's earnings (determined without regard to this deduction) and 
one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 
percent), i.e., 7.65 percent of net earnings. This deduction reflects 
the fact that the FICA rates apply to an employee's wages, which do not 
include FICA taxes paid by the employer, whereas the self-employed 
individual's net earnings are economically equivalent to an employee's 
wages plus the employer share of FICA taxes.
---------------------------------------------------------------------------
    For purposes of computing net earnings from self 
employment, taxpayers are permitted a deduction equal to the 
product of the taxpayer's earnings (determined without regard 
to this deduction) and one-half of the sum of the rates for 
OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent 
of net earnings. This deduction reflects the fact that the FICA 
rates apply to an employee's wages, which do not include FICA 
taxes paid by the employer, whereas the self-employed 
individual's net earnings are economically equivalent to an 
employee's wages plus the employer share of FICA taxes.

                        Explanation of Provision


Additional HI tax on employee portion of HI tax

            Calculation of additional tax
    The employee portion of the HI tax is increased by an 
additional tax of 0.9 percent on wages \928\ received in excess 
of the threshold amount. However, unlike the general 1.45 
percent HI tax on wages, this additional tax is on the combined 
wages of the employee and the employee's spouse, in the case of 
a joint return. The threshold amount is $250,000 in the case of 
a joint return or surviving spouse, $125,000 in the case of a 
married individual filing a separate return, and $200,000 in 
any other case.
---------------------------------------------------------------------------
    \928\ Sec. 3121(a).
---------------------------------------------------------------------------
            Liability for the additional HI tax on wages
    As under present law, the employer is required to withhold 
the additional HI tax on wages but is liable for the tax if the 
employer fails to withhold the amount of the tax from wages, or 
collect the tax from the employee if the employer fails to 
withhold. However, in determining the employer's requirement to 
withhold and liability for the tax, only wages that the 
employee receives from the employer in excess of $200,000 for a 
year are taken into account and the employer must disregard the 
amount of wages received by the employee's spouse. Thus, the 
employer is only required to withhold on wages in excess of 
$200,000 for the year, even though the tax may apply to a 
portion of the employee's wages at or below $200,000, if the 
employee's spouse also has wages for the year, they are filing 
a joint return, and their total combined wages for the year 
exceed $250,000.
    For example, if a taxpayer's spouse has wages in excess of 
$250,000 and the taxpayer has wages of $100,000, the employer 
of the taxpayer is not required to withhold any portion of the 
additional tax, even though the combined wages of the taxpayer 
and the taxpayer's spouse are over the $250,000 threshold. In 
this instance, the employer of the taxpayer's spouse is 
obligated to withhold the additional 0.9-percent HI tax with 
respect to the $50,000 above the threshold with respect to the 
wages of $250,000 for the taxpayer's spouse.
    In contrast to the employee portion of the general HI tax 
of 1.45 percent of wages for which the employee generally has 
no direct liability to the IRS to pay the tax, the employee is 
also liable for this additional 0.9-percent HI tax to the 
extent the tax is not withheld by the employer. The amount of 
this tax not withheld by an employer must also be taken into 
account in determining a taxpayer's liability for estimated 
tax.

Additional HI for self-employed individuals

    This same additional HI tax applies to the HI portion of 
SECA tax on self-employment income in excess of the threshold 
amount. Thus, an additional tax of 0.9 percent is imposed on 
every self-employed individual on self-employment income \929\ 
in excess of the threshold amount.
---------------------------------------------------------------------------
    \929\ Sec. 1402(b).
---------------------------------------------------------------------------
    As in the case of the additional HI tax on wages, the 
threshold amount for the additional SECA HI tax is $250,000 in 
the case of a joint return or surviving spouse, $125,000 in the 
case of a married individual filing a separate return, and 
$200,000 in any other case. The threshold amount is reduced 
(but not below zero) by the amount of wages taken into account 
in determining the FICA tax with respect to the taxpayer. No 
deduction is allowed under section 164(f) for the additional 
SECA tax, and the deduction under 1402(a)(12) is determined 
without regard to the additional SECA tax rate.

                             Effective Date

    The provision applies to remuneration received and taxable 
years beginning after December 31, 2012.

      P. Modification of Section 833 Treatment of Certain Health 
     Organizations (sec. 9016 of the Act and sec. 833 of the Code)


                              Present Law

    A property and casualty insurance company is subject to tax 
on its taxable income, generally defined as its gross income 
less allowable deductions (sec. 832). For this purpose, gross 
income includes underwriting income and investment income, as 
well as other items. Underwriting income is the premiums earned 
on insurance contracts during the year, less losses incurred 
and expenses incurred. The amount of losses incurred is 
determined by taking into account the discounted unpaid losses. 
Premiums earned during the year is determined taking into 
account a 20-percent reduction in the otherwise allowable 
deduction, intended to represent the allocable portion of 
expenses incurred in generating the unearned premiums (sec. 
832(b)(4)(B)).
    Present law provides that an organization described in 
sections 501(c)(3) or (4) of the Code is exempt from tax only 
if no substantial part of its activities consists of providing 
commercial-type insurance (sec. 501(m)). When this rule was 
enacted in 1986,\930\ special rules were provided under section 
833 for Blue Cross and Blue Shield organizations providing 
health insurance that (1) were in existence on August 16, 1986; 
(2) were determined at any time to be tax-exempt under a 
determination that had not been revoked; and (3) were tax-
exempt for the last taxable year beginning before January 1, 
1987 (when the present-law rule became effective), provided 
that no material change occurred in the structure or operations 
of the organizations after August 16, 1986, and before the 
close of 1986 or any subsequent taxable year. Any other 
organization is eligible for section 833 treatment if it meets 
six requirements set forth in section 833(c): (1) substantially 
all of its activities involve providing health insurance; (2) 
at least 10 percent of its health insurance is provided to 
individuals and small groups (not taking into account Medicare 
supplemental coverage); (3) it provides continuous full-year 
open enrollment for individuals and small groups; (4) for 
individuals, it provides full coverage of pre-existing 
conditions of high-risk individuals and coverage without regard 
to age, income, or employment of individuals under age 65; (5) 
at least 35 percent of its premiums are community rated; and 
(6) no part of its net earnings inures to the benefit of any 
private shareholder or individual.
---------------------------------------------------------------------------
    \930\ See H. Rep. 99-426, Tax Reform Act of 1985, (December 7, 
1985), p. 664. The Committee stated, ``[T]he availability of tax-exempt 
status under [then-]present law has allowed some large insurance 
entities to compete directly with commercial insurance companies. For 
example, the Blue Cross/Blue Shield organizations historically have 
been treated as tax-exempt organizations described in sections 
501(c)(3) or (4). This group of organizations is now among the largest 
health care insurers in the United States.'' See also Joint Committee 
on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-10-
87 (May 4, 1987), pp. 583-592.
---------------------------------------------------------------------------
    Section 833 provides a deduction with respect to health 
business of such organizations. The deduction is equal to 25 
percent of the sum of (1) claims incurred, and liabilities 
incurred under cost-plus contracts, for the taxable year, and 
(2) expenses incurred in connection with administration, 
adjustment, or settlement of claims or in connection with 
administration of cost-plus contracts during the taxable year, 
to the extent this sum exceeds the adjusted surplus at the 
beginning of the taxable year. Only health-related items are 
taken into account.
    Section 833 provides an exception for such an organization 
from the application of the 20-percent reduction in the 
deduction for increases in unearned premiums that applies 
generally to property and casualty companies.
    Section 833 provides that such an organization is taxable 
as a stock property and casualty insurer under the Federal 
income tax rules applicable to property and casualty insurers.

                        Explanation of Provision

    The provision limits eligibility for the rules of section 
833 to those organizations meeting a medical loss ratio 
standard of 85 percent for the taxable year. Thus, under the 
provision, an organization that does not meet the 85-percent 
standard is not allowed the 25-percent deduction and the 
exception from the 20-percent reduction in the unearned premium 
reserve deduction under section 833.
    For this purpose, an organization's medical loss ratio is 
determined as the percentage of total premium revenue expended 
on reimbursement for clinical services that are provided to 
enrollees under the organization's policies during the taxable 
year, as reported under section 2718 of the PHSA.\931\
---------------------------------------------------------------------------
    \931\ See Wednesday, March 24, 2010, Senate Floor statement of 
Senator Baucus relating to this provision, 156 Cong. Rec. S1989, 
stating in part, ``First, it was our intention that, in calculating the 
medical loss ratios, these entities could include both the cost of 
reimbursement for clinical services provided to the individuals they 
insure and the cost of activities that improve health care quality. 
Determining the medical loss ratio under this provision using those two 
types of costs is consistent with the calculation of medical loss 
ratios elsewhere in the legislation. This determination would be made 
on an annual basis and would only affect the application of the special 
deductions for that year. Second, it was our intention that the only 
consequence for not meeting the medical loss ratio threshold would be 
that the 25 percent deduction for claims and expenses and the exception 
from the 20 percent reduction in the deduction for unearned premium 
reserves would not be allowed. The entity would still be treated as a 
stock property and casualty insurance company.'' A technical correction 
may be necessary so that the statute reflects this intent.
---------------------------------------------------------------------------
    It is intended that the medical loss ratio under this 
provision be determined on an organization-by-organization 
basis, not on an affiliated or other group basis, and that 
Treasury Department guidance be promulgated promptly to carry 
out the purposes of the provision.

                             Effective Date

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

 Q. Excise Tax on Indoor Tanning Services (sec. 9017 \932\ of the Act 
                    and new sec. 5000B of the Code)

---------------------------------------------------------------------------
    \932\ Section 9017 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, as amended by section 10907.
---------------------------------------------------------------------------

                              Present Law

    There is no tax on indoor tanning services under present 
law.

                        Explanation of Provision


In general

    The provision imposes a tax on each individual on whom 
indoor tanning services are performed. The tax is equal to 10 
percent of the amount paid for indoor tanning services.
    For purposes of the provision, indoor tanning services are 
services employing any electronic product designed to induce 
skin tanning and which incorporate one or more ultraviolet 
lamps and intended for the irradiation of an individual by 
ultraviolet radiation, with wavelengths in air between 200 and 
400 nanometers. Indoor tanning services do not include any 
phototherapy service performed by a licensed medical 
professional.

Payment of tax

    The tax is paid by the individual on whom the indoor 
tanning services are performed. The tax is collected by each 
person receiving a payment for tanning services on which a tax 
is imposed. If the tax is not paid by the person receiving the 
indoor tanning services at the time the payment for the service 
is received, the person performing the procedure pays the tax.
    Payment of the tax is remitted quarterly to the Secretary 
by the person collecting the tax. The Secretary is given 
discretion over the manner of the payment.

                             Effective Date

    The provision applies to tanning services performed on or 
after July 1, 2010.

 R. Exclusion of Health Benefits Provided by Indian Tribal Governments 
          (sec. 9021 of the Act and new sec. 139D of the Code)


                              Present Law

    Present law generally provides that gross income includes 
all income from whatever source derived.\933\ Exclusions from 
income are provided, however, for certain health care benefits.
---------------------------------------------------------------------------
    \933\ Sec. 61.
---------------------------------------------------------------------------

Exclusion from income for employer-provided health coverage

    Employees generally are not taxed on (that is, may 
``exclude'' from gross income) the value of employer-provided 
health coverage under an accident or health plan.\934\ In 
addition, any reimbursements under an accident or health plan 
for medical care expenses for employees, their spouses, and 
their dependents generally are excluded from gross income.\935\ 
As with cash or other compensation, the amount paid by 
employers for employer-provided health coverage is a deductible 
business expense. Unlike other forms of compensation, however, 
if an employer contributes to a plan providing health coverage 
for employees (and the employees' spouses and dependents), the 
value of the coverage and all benefits (including 
reimbursements) in the form of medical care under the plan are 
excludable from the employees' income for income tax 
purposes.\936\ The exclusion applies both to health coverage in 
the case in which an employer absorbs the cost of employees' 
medical expenses not covered by insurance (i.e., a self-insured 
plan) as well as in the case in which the employer purchases 
health insurance coverage for its employees. There is no limit 
on the amount of employer-provided health coverage that is 
excludable.
---------------------------------------------------------------------------
    \934\ Sec 106.
    \935\ Sec. 105(b).
    \936\ Secs. 104, 105, 106, 125. A similar rule excludes employer 
provided health insurance coverage and reimbursements for medical 
expenses from the employees' wages for payroll tax purposes under 
sections 3121(a)(2), and 3306(a)(2). Health coverage provided to active 
members of the uniformed services, military retirees, and their 
dependents are excludable under section 134. That section provides an 
exclusion for ``qualified military benefits,'' defined as benefits 
received by reason of status or service as a member of the uniformed 
services and which were excludable from gross income on September 9, 
1986, under any provision of law, regulation, or administrative 
practice then in effect.
---------------------------------------------------------------------------
    In addition, employees participating in a cafeteria plan 
may be able to pay the portion of premiums for health insurance 
coverage not otherwise paid for by their employers on a pre-tax 
basis through salary reduction.\937\ Such salary reduction 
contributions are treated as employer contributions and thus 
also are excluded from gross income.
---------------------------------------------------------------------------
    \937\ Sec. 125.
---------------------------------------------------------------------------
    Employers may agree to reimburse medical expenses of their 
employees (and their spouses and dependents), not covered by a 
health insurance plan, through flexible spending arrangements 
which allow reimbursement not in excess of a specified dollar 
amount (either elected by an employee under a cafeteria plan or 
otherwise specified by the employer). Reimbursements under 
these arrangements are also excludible from gross income as 
employer-provided health coverage.

The general welfare exclusion

    Under the general welfare exclusion doctrine, certain 
payments made to individuals are excluded from gross income. 
The exclusion has been interpreted to cover payments by 
governmental units under legislatively provided social benefit 
programs for the promotion of the general welfare.\938\
---------------------------------------------------------------------------
    \938\ See, e.g., Rev. Rul. 78-170, 1978-1 C.B. 24 (government 
payments to assist low-income persons with utility costs are not 
income); Rev. Rul. 76-395, 1976-2 C.B. 16, 17 (government grants to 
assist low-income city inhabitants to refurbish homes are not income); 
Rev. Rul. 76-144, 1976-1 C.B. 17 (government grants to persons eligible 
for relief under the Disaster Relief Act of 1974 are not income); Rev. 
Rul. 74-153, 1974-1 C.B. 20 (government payments to assist adoptive 
parents with support and maintenance of adoptive children are not 
income); Rev. Rul. 74-205, 1974-1 C.B. 20 (replacement housing payments 
received by individuals under the Housing and Urban Development Act of 
1968 are not includible in gross income); Gen. Couns. Mem. 34506 (May 
26, 1971) (federal mortgage assistance payments excluded from income 
under general welfare exception); Rev. Rul. 57-102, 1957-1 C.B. 26 
(government benefits paid to blind persons are not income). The courts 
have also acknowledged the existence of this doctrine. See, e.g., 
Bailey v. Commissioner, 88 T.C. 1293, 1299-1301 (1987) (new building 
facade paid for by urban renewal agency on taxpayer's property under 
facade grant program not considered payments under general welfare 
doctrine because awarded without regard to any need of the recipients); 
Graff v. Commissioner, 74 TC 743, 753-754 (1980) (court acknowledged 
that rental subsidies under Housing Act were excludable under general 
welfare doctrine but found that payments at issue made by HUD on 
taxpayer landlord's behalf were taxable income to him), affd. per 
curiam 673 F.2d 784 (5th Cir. 1982).
---------------------------------------------------------------------------
    The general welfare exclusion generally applies if the 
payments: (1) are made from a governmental fund, (2) are for 
the promotion of general welfare (on the basis of the need of 
the recipient), and (3) do not represent compensation for 
services.\939\ A representative of the IRS recently expressed 
the view that the general welfare exclusion does not apply to 
persons with significant income or assets, and that any such 
extension would represent a departure from well-established 
administrative practice.\940\ The representative further 
expressed the view that application of the general welfare 
exclusion to an Indian tribal government providing coverage or 
benefits to tribal members is dependent upon the structure and 
administration of the particular program.\941\
---------------------------------------------------------------------------
    \939\ See Rev. Rul. 98-19, 1998-1 C.B. 840 (excluding relocation 
payments made by local governments to those whose homes were damaged by 
floods). Recent guidance as to whether the need of the recipient (taken 
into account under the second requirement of the general welfare 
exclusion) must be based solely on financial means or whether the need 
can be based on a variety of other considerations including health, 
educational background, or employment status, has been mixed. Chief 
Couns. Adv. 200021036 (May 25, 2000) (excluding state adoption 
assistant payments made to individuals adopting special needs children 
without regard to financial means of parents; the children were 
considered to be the recipients); Priv. Ltr. Rul. 200632005 (April 13, 
2006) (excluding payments made by Tribe to members based on multiple 
factors of need pursuant to housing assistance program); Chief Couns. 
Adv. 200648027 (Jul 25, 2006) (excluding subsidy payments based on 
financial need of recipient made by state to certain participants in 
state health insurance program to reduce cost of health insurance 
premiums).
    \940\ Testimony of Sarah H. Ingram, Commissioner, Tax Exempt and 
Government Entities, Internal Revenue Service, before the Senate 
Committee on Indian Affairs, Oversight Hearing to Examine the Federal 
Tax Treatment of Health Care Benefits Provided by Tribal Governments to 
Their Citizens, September 17, 2009.
    \941\ Ibid.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows an exclusion from gross income for the 
value of specified Indian tribe health care benefits. The 
exclusion applies to the value of: (1) health services or 
benefits provided or purchased by the Indian Health Service 
(``IHS''), either directly or indirectly, through a grant to or 
a contract or compact with an Indian tribe or tribal 
organization or through programs of third parties funded by the 
IHS; \942\ (2) medical care (in the form of provided or 
purchased medical care services, accident or health insurance 
or an arrangement having the same effect, or amounts paid 
directly or indirectly, to reimburse the member for expenses 
incurred for medical care) provided by an Indian tribe or 
tribal organization to a member of an Indian tribe, including 
the member's spouse or dependents; \943\ (3) accident or health 
plan coverage (or an arrangement having the same effect) 
provided by an Indian tribe or tribal organization for medical 
care to a member of an Indian tribe, including the member's 
spouse or dependents; and (4) any other medical care provided 
by an Indian tribe or tribal organization that supplements, 
replaces, or substitutes for the programs and services provided 
by the Federal government to Indian tribes or Indians.
---------------------------------------------------------------------------
    \942\ The term ``Indian tribe'' means any Indian tribe, band, 
nation, pueblo, or other organized group or community, including any 
Alaska Native village, or regional or village corporation, as defined 
by, or established pursuant to, the Alaska Native Claims Settlement Act 
(43 U.S.C. 1601 et seq.), which is recognized as eligible for the 
special programs and services provided by the United States to Indians 
because of their status as Indians. The term ``tribal organization'' 
has the same meaning as such term in section 4(l) of the Indian Self-
Determination and Education Assistance Act (25 U.S.C. 450b(1)).
    \943\ The terms ``accident or health insurance'' and ``accident or 
health plan'' have the same meaning as when used in section 105. The 
term ``medical care'' is the same as the definition under section 213. 
For purposes of the provision, dependents are determined under section 
152, but without regard to subsections (b)(1), (b)(2), and (d)(1)(B). 
Section 152(b)(1) generally provides that if an individual is a 
dependent of another taxpayer during a taxable year such individual is 
treated as having no dependents for such taxable year. Section 
152(b)(2) provides that a married individual filing a joint return with 
his or her spouse is not treated as a dependent of a taxpayer. Section 
152(d)(1)(B) provides that a ``qualifying relative'' (i.e., a relative 
that qualifies as a dependent) does not include a person whose gross 
income for the calendar year in which the taxable year begins equals or 
exceeds the exempt amount (as defined under section 151).
---------------------------------------------------------------------------
    This provision does not apply to any amount which is 
deducted or excluded from gross income under another provision 
of the Code.
    No change made by the provision is intended to create an 
inference with respect to the exclusion from gross income of 
benefits provided prior to the date of enactment (March 23, 
2010). Additionally, no inference is intended with respect to 
the tax treatment of other benefits provided by an Indian tribe 
or tribal organization not covered by this provision.

                             Effective Date

    The provision applies to benefits and coverage provided 
after the date of enactment (March 23, 2010).

 S. Establishment of SIMPLE Cafeteria Plans for Small Businesses (sec. 
               9022 of the Act and sec. 125 of the Code)


                              Present Law


Definition of a cafeteria plan

    If an employee receives a qualified benefit (as defined 
below) based on the employee's election between the qualified 
benefit and a taxable benefit under a cafeteria plan, the 
qualified benefit generally is not includable in gross 
income.\944\ However, if a plan offering an employee an 
election between taxable benefits (including cash) and 
nontaxable qualified benefits does not meet the requirements 
for being a cafeteria plan, the election between taxable and 
nontaxable benefits results in gross income to the employee, 
regardless of what benefit is elected and when the election is 
made.\945\ A cafeteria plan is a separate written plan under 
which all participants are employees, and participants are 
permitted to choose among at least one permitted taxable 
benefit (for example, current cash compensation) and at least 
one qualified benefit. Finally, a cafeteria plan must not 
provide for deferral of compensation, except as specifically 
permitted in sections 125(d)(2)(B), (C), or (D).
---------------------------------------------------------------------------
    \944\ Sec. 125(a).
    \945\ Prop. Treas. Reg. sec. 1.125-1(b).
---------------------------------------------------------------------------

Qualified benefits

    Qualified benefits under a cafeteria plan are generally 
employer-provided benefits that are not includable in gross 
income under an express provision of the Code. Examples of 
qualified benefits include employer-provided health insurance 
coverage, group term life insurance coverage not in excess of 
$50,000, and benefits under a dependent care assistance 
program. In order to be excludable, any qualified benefit 
elected under a cafeteria plan must independently satisfy any 
requirements under the Code section that provides the 
exclusion. However, some employer-provided benefits that are 
not includable in gross income under an express provision of 
the Code are explicitly not allowed in a cafeteria plan. These 
benefits are generally referred to as nonqualified benefits. 
Examples of nonqualified benefits include scholarships; \946\ 
employer-provided meals and lodging; \947\ educational 
assistance; \948\ and fringe benefits.\949\ A plan offering any 
nonqualified benefit is not a cafeteria plan.\950\
---------------------------------------------------------------------------
    \946\ Sec. 117.
    \947\ Sec. 119.
    \948\ Sec. 127.
    \949\ Sec. 132.
    \950\ Prop. Treas. Reg. sec. 1.125-1(q). Long-term care services, 
contributions to Archer Medical Savings Accounts, group term life 
insurance for an employee's spouse, child or dependent, and elective 
deferrals to section 403(b) plans are also nonqualified benefits.
---------------------------------------------------------------------------

Employer contributions through salary reduction

    Employees electing a qualified benefit through salary 
reduction are electing to forego salary and instead to receive 
a benefit that is excludible from gross income because it is 
provided by employer contributions. Section 125 provides that 
the employee is treated as receiving the qualified benefit from 
the employer in lieu of the taxable benefit. For example, 
active employees participating in a cafeteria plan may be able 
to pay their share of premiums for employer-provided health 
insurance on a pre-tax basis through salary reduction.\951\
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    \951\ Sec. 125.
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Nondiscrimination requirements

    Cafeteria plans and certain qualified benefits (including 
group term life insurance, self-insured medical reimbursement 
plans, and dependent care assistance programs) are subject to 
nondiscrimination requirements to prevent discrimination in 
favor of highly compensated individuals generally as to 
eligibility for benefits and as to actual contributions and 
benefits provided. There are also rules to prevent the 
provision of disproportionate benefits to key employees (within 
the meaning of section 416(i)) through a cafeteria plan.\952\ 
Although the basic purpose of each of the nondiscrimination 
rules is the same, the specific rules for satisfying the 
relevant nondiscrimination requirements, including the 
definition of highly compensated individual,\953\ vary for 
cafeteria plans generally and for each qualified benefit. An 
employer maintaining a cafeteria plan in which any highly 
compensated individual participates must make sure that both 
the cafeteria plan and each qualified benefit satisfies the 
relevant nondiscrimination requirements, as a failure to 
satisfy the nondiscrimination rules generally results in a loss 
of the tax exclusion by the highly compensated individuals.
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    \952\ A key employee generally is an employee who, at any time 
during the year is (1) a five-percent owner of the employer, or (2) a 
one-percent owner with compensation of more than $150,000 (not indexed 
for inflation), or (3) an officer with compensation more than $160,000 
(for 2010). A special rule limits the number of officers treated as key 
employees. If the employer is a corporation, a five-percent owner is a 
person who owns more than five percent of the outstanding stock or 
stock possessing more than five percent of the total combined voting 
power of all stock. If the employer is not a corporation, a five-
percent owner is a person who owns more than five percent of the 
capital or profits interest. A one-percent owner is determined by 
substituting one percent for five percent in the preceding definitions. 
For purposes of determining employee ownership in the employer, certain 
attribution rules apply.
    \953\ For cafeteria plan purposes, a ``highly compensated 
individual'' is (1) an officer, (2) a five-percent shareholder, (3) an 
individual who is highly compensated, or (4) the spouse or dependent of 
any of the preceding categories. A ``highly compensated participant'' 
is a participant who falls in any of those categories. ``Highly 
compensated'' is not defined for this purpose. Under section 105(h), a 
self-insured medical expense reimbursement plan must not discriminate 
in favor of a ``highly compensated individual,'' defined as (1) one of 
the five highest paid officers, (2) a 10-percent shareholder, or (3) an 
individual among the highest paid 25 percent of all employees. Under 
section 129 for a dependent care assistance program, eligibility for 
benefits, and the benefits and contributions provided, generally must 
not discriminate in favor of highly compensated employees within the 
meaning of section 414(q).
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                        Explanation of Provision

    Under the provision, an eligible small employer is provided 
with a safe harbor from the nondiscrimination requirements for 
cafeteria plans as well as from the nondiscrimination 
requirements for specified qualified benefits offered under a 
cafeteria plan, including group term life insurance, benefits 
under a self insured medical expense reimbursement plan, and 
benefits under a dependent care assistance program. Under the 
safe harbor, a cafeteria plan and the specified qualified 
benefits are treated as meeting the specified nondiscrimination 
rules if the cafeteria plan satisfies minimum eligibility and 
participation requirements and minimum contribution 
requirements.

Eligibility requirement

    The eligibility requirement is met only if all employees 
(other than excludable employees) are eligible to participate, 
and each employee eligible to participate is able to elect any 
benefit available under the plan (subject to the terms and 
conditions applicable to all participants). However, a 
cafeteria plan will not fail to satisfy this eligibility 
requirement merely because the plan excludes employees who (1) 
have not attained the age of 21 (or a younger age provided in 
the plan) before the close of a plan year, (2) have fewer than 
1,000 hours of service for the preceding plan year, (3) have 
not completed one year of service with the employer as of any 
day during the plan year, (4) are covered under an agreement 
that the Secretary of Labor finds to be a collective bargaining 
agreement if there is evidence that the benefits covered under 
the cafeteria plan were the subject of good faith bargaining 
between employee representatives and the employer, or (5) are 
described in section 410(b)(3)(C) (relating to nonresident 
aliens working outside the United States). An employer may have 
a shorter age and service requirement but only if such shorter 
service or younger age applies to all employees.

Minimum contribution requirement

    The minimum contribution requirement is met if the employer 
provides a minimum contribution for each nonhighly compensated 
employee (employee who is not a highly compensated employee 
\954\ or a key employee (within the meaning of section 416(i))) 
in addition to any salary reduction contributions made by the 
employee. The minimum must be available for application toward 
the cost of any qualified benefit (other than a taxable 
benefit) offered under the plan. The minimum contribution is 
permitted to be calculated under either the nonelective 
contribution method or the matching contribution method, but 
the same method must be used for calculating the minimum 
contribution for all nonhighly compensated employees. The 
minimum contribution under the nonelective contribution method 
is an amount equal to a uniform percentage (not less than two 
percent) of each eligible employee's compensation for the plan 
year, determined without regard to whether the employees makes 
any salary reduction contribution under the cafeteria plan. The 
minimum matching contribution is the lesser of 100 percent of 
the amount of the salary reduction contribution elected to be 
made by the employee for the plan year or six percent of the 
employee's compensation for the plan year. Compensation for 
purposes of this minimum contribution requirement is 
compensation with the meaning of section 414(s).
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    \954\ Section 414(q) generally defines a highly compensated 
employee as an employee (1) who was a five-percent owner during the 
year or the preceding year, or (2) who had compensation of $110,000 
(for 2010) or more for the preceding year. An employer may elect to 
limit the employees treated as highly compensated employees based upon 
their compensation in the preceding year to the highest paid 20 percent 
of employees in the preceding year. Five-percent owner is defined by 
cross-reference to the definition of key employee in section 416(i).
---------------------------------------------------------------------------
    A simple cafeteria plan is permitted to provide for the 
matching contributions in addition to the minimum required but 
only if matching contributions with respect to salary reduction 
contributions for any highly compensated employee or key 
employee are not made at a greater rate than the matching 
contributions for any nonhighly compensated employee. Nothing 
in this provision prohibits an employer from making 
contributions to provide qualified benefits under the plan in 
addition to the required contributions.

Eligible employer

    An eligible small employer under the provision is, with 
respect to any year, an employer who employed an average of 100 
or fewer employees on business days during either of the two 
preceding years. For purposes of the provision, a year may only 
be taken into account if the employer was in existence 
throughout the year. If an employer was not in existence 
throughout the preceding year, the determination is based on 
the average number of employees that it is reasonably expected 
such employer will employ on business days in the current year. 
If an employer was an eligible employer for any year and 
maintained a simple cafeteria plan for its employees for such 
year, then, for each subsequent year during which the employer 
continues, without interruption, to maintain the cafeteria 
plan, the employer is deemed to be an eligible small employer 
until the employer employs an average of 200 or more employees 
on business days during any year preceding any such subsequent 
year.
    The determination of whether an employer is an eligible 
small employer is determined by applying the controlled group 
rules of sections 52(a) and (b) under which all members of the 
controlled group are treated as a single employer. In addition, 
the definition of employee includes leased employees within the 
meaning of sections 414(n) and (o).\955\
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    \955\ Section 52(b) provides that, for specified purposes, all 
employees of all corporations which are members of a controlled group 
of corporations are treated as employed by a single employer. However, 
section 52(b) provides certain modifications to the control group rules 
including substituting 50 percent ownership for 80 percent ownership as 
the measure of control. There is a similar rule in section 52(c) under 
which all employees of trades or businesses (whether or not 
incorporated) which are under common control are treated under 
regulations as employed by a single employer. Section 414(n) provides 
rules for specified purposes when leased employees are treated as 
employed by the service recipient and section 414(o) authorizes the 
Treasury to issue regulations to prevent avoidance of the requirements 
of section 414(n).
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                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

  T. Investment Credit for Qualifying Therapeutic Discovery Projects 
          (sec. 9023 of the Act and new sec. 48D of the Code)


                              Present Law

    Present law provides for a research credit equal to 20 
percent (14 percent in the case of the alternative simplified 
credit) of the amount by which the taxpayer's qualified 
research expenses for a taxable year exceed its base amount for 
that year.\956\ Thus, the research credit is generally 
available with respect to incremental increases in qualified 
research.
---------------------------------------------------------------------------
    \956\ 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.'' \957\
---------------------------------------------------------------------------
    \957\ 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, expired for 
amounts paid or incurred after December 31, 2009.\958\
---------------------------------------------------------------------------
    \958\ Sec. 41(h). The research credit, including the university 
basic research credit and the energy research credit, was extended for 
two years through 2011, in section 731 of the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 
111-312, described in Part Sixteen of this document.
---------------------------------------------------------------------------
    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).\959\ 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.
---------------------------------------------------------------------------
    \959\ 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 of 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).
---------------------------------------------------------------------------
    Present law also provides a 50-percent credit \960\ for 
expenses related to human clinical testing of drugs for the 
treatment of certain rare diseases and conditions, generally 
those that afflict less than 200,000 persons in the United 
States. Qualifying expenses are those paid or incurred by the 
taxpayer after the date on which the drug is designated as a 
potential treatment for a rare disease or disorder by the Food 
and Drug Administration (``FDA'') in accordance with section 
526 of the Federal Food, Drug, and Cosmetic Act.
---------------------------------------------------------------------------
    \960\ Sec. 45C.
---------------------------------------------------------------------------
    Present law does not provide a credit specifically designed 
to encourage investment in new therapies relating to diseases.

                        Explanation of Provision


In general

    The provision establishes a 50-percent nonrefundable 
investment tax credit for qualified investments in qualifying 
therapeutic discovery projects. The provision allocates $1 
billion during the two-year period 2009 through 2010 for the 
program. The Secretary, in consultation with the Secretary of 
HHS, will award certifications for qualified investments. The 
credit is available only to companies having 250 or fewer 
employees.\961\
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    \961\ The number of employees is determined taking into account all 
businesses of the taxpayer at the time it submits an application, and 
is determined taking into account the rules for determining a single 
employer under section 52(a) or (b) or section 414(m) or (o).
---------------------------------------------------------------------------
    A ``qualifying therapeutic discovery project'' is a project 
which is designed to develop a product, process, or therapy to 
diagnose, treat, or prevent diseases and afflictions by: (1) 
conducting pre-clinical activities, clinical trials, clinical 
studies, and research protocols, or (2) by developing 
technology or products designed to diagnose diseases and 
conditions, including molecular and companion drugs and 
diagnostics, or to further the delivery or administration of 
therapeutics.
    The qualified investment for any taxable year is the 
aggregate amount of the costs paid or incurred in such year for 
expenses necessary for and directly related to the conduct of a 
qualifying therapeutic discovery project. The qualified 
investment for any taxable year with respect to any qualifying 
therapeutic discovery project does not include any cost for: 
(1) remuneration for an employee described in section 
162(m)(3), (2) interest expense, (3) facility maintenance 
expenses, (4) a service cost identified under Treas. Reg. Sec. 
1.263A-1(e)(4), or (5) any other expenditure as determined by 
the Secretary as appropriate to carry out the purposes of the 
provision.
    Companies must apply to the Secretary to obtain 
certification for qualifying investments.\962\ The Secretary, 
in determining qualifying projects, will consider only those 
projects that show reasonable potential to: (1) result in new 
therapies to treat areas of unmet medical need or to prevent, 
detect, or treat chronic or acute disease and conditions, (2) 
reduce long-term health care costs in the United States, or (3) 
significantly advance the goal of curing cancer within a 30-
year period. Additionally, the Secretary will take into 
consideration which projects have the greatest potential to: 
(1) create and sustain (directly or indirectly) high quality, 
high paying jobs in the United States, and (2) advance the 
United States' competitiveness in the fields of life, 
biological, and medical sciences.
---------------------------------------------------------------------------
    \962\ The Secretary must take action to approve or deny an 
application within 30 days of the submission of such application.
---------------------------------------------------------------------------
    Qualified therapeutic discovery project expenditures do not 
qualify for the research credit, orphan drug credit, or bonus 
depreciation.\963\ If a credit is allowed for an expenditure 
related to property subject to depreciation, the basis of the 
property is reduced by the amount of the credit. Additionally, 
expenditures taken into account in determining the credit are 
nondeductible to the extent of the credit claimed that is 
attributable to such expenditures.
---------------------------------------------------------------------------
    \963\ Any expenses for the taxable year that are qualified research 
expenses under section 41(b) are taken into account in determining base 
period research expenses for purposes of computing the research credit 
under section 41 for subsequent taxable years.
---------------------------------------------------------------------------

            Election to receive grant in lieu of tax credit

    Taxpayers may elect to receive credits that have been 
allocated to them in the form of Treasury grants equal to 50 
percent of the qualifying investment. Any such grant is not 
includible in the taxpayer's gross income.
    In making grants under this section, the Secretary of the 
Treasury is to apply rules similar to the rules of section 50. 
In applying such rules, if an investment ceases to be a 
qualified investment, the Secretary of the Treasury shall 
provide for the recapture of the appropriate percentage of the 
grant amount in such manner as the Secretary of the Treasury 
determines appropriate. The Secretary of the Treasury shall not 
make any grant under this section to: (1) any Federal, State, 
or local government (or any political subdivision, agency, or 
instrumentality thereof), (2) any organization described in 
section 501(c) and exempt from tax under section 501(a), (3) 
any entity referred to in paragraph (4) of section 54(j), or 
(4) any partnership or other pass-thru entity any partner (or 
other holder of an equity or profits interest) of which is 
described in paragraph (1), (2), or (3).

                             Effective Date

    The provision applies to expenditures paid or incurred 
after December 31, 2008, in taxable years beginning after 
December 31, 2008.

    TITLE X--STRENGTHENING QUALITY, AFFORDABLE HEALTH CARE FOR ALL 
                               AMERICANS


 A. Study of Geographic Variation in Application of FPL (sec. 10105 of 
                                the Act)


                              Present Law

    No provision.

                        Explanation of Provision

    The Secretary of HHS is instructed to conduct a study on 
the feasibility and implication of adjusting the application of 
the FPL under the provisions enacted in the Act for different 
geographical areas so as to reflect disparities in the cost of 
living among different areas in the United States, including 
the territories. If the Secretary deems such an adjustment 
feasible, then the study should include a methodology for 
implementing the adjustment. The Secretary is required to 
report the results of the study to Congress no later than 
January 1, 2013. The provision requires that special attention 
be paid to the impact of disparities between the poverty levels 
and the cost of living in the territories and the impact of 
this disparity on the expansion of health coverage in the 
territories. The territories are the Commonwealth of Puerto 
Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the 
Northern Mariana Islands, American Samoa, and any other 
territory or possession of the United States.

                             Effective Date

    The provision is effective on the date of enactment (March 
23, 2010).

  B. Free Choice Vouchers (sec. 10108 of the Act and sec. 139D of the 
                                 Code)


                              Present Law

    No provision.

                        Explanation of Provision


Provision of vouchers

    Employers offering minimum essential coverage through an 
eligible employer-sponsored plan and paying a portion of that 
coverage must provide qualified employees with a voucher whose 
value can be applied to purchase of a health plan through the 
Exchange. Qualified employees are employees whose required 
contribution for employer sponsored minimum essential coverage 
exceeds eight percent, but does not exceed 9.8 percent of the 
employee's household income for the taxable year and the 
employee's total household income does not exceed 400 percent 
of the poverty line for the family. In addition, the employee 
must not participate in the employer's health plan.
    The value of the voucher is equal to the dollar value of 
the employer contribution to the employer offered health plan. 
If multiple plans are offered by the employer, the value of the 
voucher is the dollar amount that would be paid if the employee 
chose the plan for which the employer would pay the largest 
percentage of the premium cost.\964\ The value of the voucher 
is for self-only coverage unless the individual purchases 
family coverage in the Exchange. Under the provision, for 
purposes of calculating the dollar value of the employer 
contribution, the premium for any health plan is determined 
under rules similar to the rules of section 2204 of PHSA, 
except that the amount is adjusted for age and category of 
enrollment in accordance with regulations established by the 
Secretary.
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    \964\ For example, if an employer offering the same plans for $200 
and $300 offers a flat $180 contribution for all plans, a contribution 
of 90 percent for the $200 plan and a contribution of 60 percent for 
the $300 plan, and the value of the voucher would equal the value of 
the contribution to the $200 since it received a 90 percent 
contribution, a value of $180. However, if the firm offers a $150 
contribution to the $200 plan (75 percent) and a $200 contribution to 
the $300 plan (67 percent), the value of the voucher is based on the 
plan receiving the greater percentage paid by the employer and would be 
$150. If a firm offers health plans with monthly premiums of $200 and 
$300 and provides a payment of 60 percent of any plan purchased, the 
value of the voucher will be 60 percent the higher premium plan, in 
this case, 60 percent of $300 or $180.
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    In the case of years after 2014, the eight percent and the 
9.8 percent are indexed to the excess of premium growth over 
income growth for the preceding calendar year.

Use of vouchers

    Vouchers can be used in the Exchange towards the monthly 
premium of any qualified health plan in the Exchange. The value 
of the voucher to the extent it is used for the purchase of a 
health plan is not includable in gross income. If the value of 
the voucher exceeds the premium of the health plan chosen by 
the employee, the employee is paid the excess value of the 
voucher. The excess amount received by the employee is 
includible in the employee's gross income.
    If an individual receives a voucher, the individual is 
disqualified from receiving any tax credit or cost sharing 
credit for the purchase of a plan in the Exchange. Similarly, 
if any employee receives a free choice voucher, the employer is 
not be assessed a shared responsibility payment on behalf of 
that employee.\965\
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    \965\ Section 1513 of the Patient Protection and Affordable Care 
Act, Pub. L. No. 111-148, and new Code section 4980H.
---------------------------------------------------------------------------

Definition of terms

    The terms used for this provision have the same meaning as 
any term used in the provision for the requirement to maintain 
minimum essential coverage (section 1501 of the Act and new 
section 5000A). Thus for example, the terms ``household 
income,'' ``poverty line,'' ``required contribution,'' and 
``eligible employer-sponsored plan'' have the same meaning for 
both provisions. Thus, the required contribution includes the 
amount of any salary reduction contribution.

                             Effective Date

    The provision is effective after December 31, 2013.

 C. Exclusion for Assistance Provided to Participants in State Student 
Loan Repayment Programs for Certain Health Professionals (sec. 10908 of 
                the Act and sec. 108(f)(4) of the Code)


                              Present Law

    Gross income generally includes the discharge of 
indebtedness of the taxpayer. Under an exception to this 
general rule, gross income does not include any amount from the 
forgiveness (in whole or in part) of certain student loans, 
provided that the forgiveness is contingent on the student's 
working for a certain period of time in certain professions for 
any of a broad class of employers.
    Student loans eligible for this special rule must be made 
to an individual to assist the individual in attending an 
educational institution that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses. The loan must be made by (1) the United 
States (or an instrumentality or agency thereof), (2) a State 
(or any political subdivision thereof), (3) certain tax-exempt 
public benefit corporations that control a State, county, or 
municipal hospital and whose employees have been deemed to be 
public employees under State law, or (4) an educational 
organization that originally received the funds from which the 
loan was made from the United States, a State, or a tax-exempt 
public benefit corporation.
    In addition, an individual's gross income does not include 
amounts from the forgiveness of loans made by educational 
organizations (and certain tax-exempt organizations in the case 
of refinancing loans) out of private, nongovernmental funds if 
the proceeds of such loans are used to pay costs of attendance 
at an educational institution or to refinance any outstanding 
student loans (not just loans made by educational 
organizations) and the student is not employed by the lender 
organization. In the case of such loans made or refinanced by 
educational organizations (or refinancing loans made by certain 
tax-exempt organizations), cancellation of the student loan 
must be contingent upon the student working in an occupation or 
area with unmet needs, and such work must be performed for, or 
under the direction of, a tax-exempt charitable organization or 
a governmental entity.
    Finally, an individual's gross income does not include any 
loan repayment amount received under the National Health 
Service Corps loan repayment program or certain State loan 
repayment programs.

                        Explanation of Provision

    The provision modifies the gross income exclusion for 
amounts received under the National Health Service Corps loan 
repayment program or certain State loan repayment programs to 
include any amount received by an individual under any State 
loan repayment or loan forgiveness program that is intended to 
provide for the increased availability of health care services 
in underserved or health professional shortage areas (as 
determined by the State).

                             Effective Date

    The provision is effective for amounts received by an 
individual in taxable years beginning after December 31, 2008.

D. Expansion of Adoption Credit and the Exclusion from Gross Income for 
Employer-Provided Adoption Assistance (sec. 10909 of the Act and secs. 
                        23 and 137 of the Code)


                              Present Law


Tax credit

            Non-special needs adoptions
    Generally a nonrefundable tax credit is allowed for 
qualified adoption expenses paid or incurred by a taxpayer 
subject to the maximum credit. The maximum credit is $12,170 
per eligible child for taxable years beginning in 2010. An 
eligible child is an individual who: (1) has not attained age 
18; or (2) is physically or mentally incapable of caring for 
himself or herself. The maximum credit is applied per child 
rather than per year. Therefore, while qualified adoption 
expenses may be incurred in one or more taxable years, the tax 
credit per adoption of an eligible child may not exceed the 
maximum credit.
            Special needs adoptions
    In the case of a special needs adoption finalized during a 
taxable year, the taxpayer may claim as an adoption credit the 
amount of the maximum credit minus the aggregate qualified 
adoption expenses with respect to that adoption for all prior 
taxable years. A special needs child is an eligible child who 
is a citizen or resident of the United States whom a State has 
determined: (1) cannot or should not be returned to the home of 
the birth parents; and (2) has a specific factor or condition 
(such as the child's ethnic background, age, or membership in a 
minority or sibling group, or the presence of factors such as 
medical conditions, or physical, mental, or emotional 
handicaps) because of which the child cannot be placed with 
adoptive parents without adoption assistance.
            Qualified adoption expenses
    Qualified adoption expenses are reasonable and necessary 
adoption fees, court costs, attorneys fees, and other expenses 
that are: (1) directly related to, and the principal purpose of 
which is for, the legal adoption of an eligible child by the 
taxpayer; (2) not incurred in violation of State or Federal 
law, or in carrying out any surrogate parenting arrangement; 
(3) not for the adoption of the child of the taxpayer's spouse; 
and (4) not reimbursed (e.g., by an employer).
            Phase-out for higher-income individuals
    The adoption credit is phased out ratably for taxpayers 
with modified adjusted gross income between $182,520 and 
$222,520 for taxable years beginning in 2010. Under present 
law, modified adjusted gross income is the sum of the 
taxpayer's adjusted gross income plus amounts excluded from 
income under sections 911, 931, and 933 (relating to the 
exclusion of income of U.S. citizens or residents living 
abroad; residents of Guam, American Samoa, and the Northern 
Mariana Islands; and residents of Puerto Rico, respectively).
            EGTRRA sunset \966\
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    \966\ ``EGTRRA'' refers to the Economic Growth and Tax Relief 
Reconciliation Act of 2001, Pub. L. No. 107-16.
---------------------------------------------------------------------------
    For taxable years after 2010, the adoption credit will be 
reduced to a maximum credit of $6,000 for special needs 
adoptions and no tax credit for non-special needs adoptions. 
Also, the credit phase-out range will revert to the pre-EGTRRA 
levels (i.e., a ratable phase-out between modified adjusted 
gross income between $75,000 and $115,000). Finally, the 
adoption credit will be allowed only to the extent the 
individual's regular income tax liability exceeds the 
individual's tentative minimum tax, determined without regard 
to the minimum foreign tax credit.

Exclusion for employer-provided adoption assistance

    An exclusion from the gross income of an employee is 
allowed for qualified adoption expenses paid or reimbursed by 
an employer under an adoption assistance program. For 2010, the 
maximum exclusion is $12,170. Also for 2010, the exclusion is 
phased out ratably for taxpayers with modified adjusted gross 
income between $182,520 and $222,520. Modified adjusted gross 
income is the sum of the taxpayer's adjusted gross income plus 
amounts excluded from income under Code sections 911, 931, and 
933 (relating to the exclusion of income of U.S. citizens or 
residents living abroad; residents of Guam, American Samoa, and 
the Northern Mariana Islands; and residents of Puerto Rico, 
respectively). For purposes of this exclusion, modified 
adjusted gross income also includes all employer payments and 
reimbursements for adoption expenses whether or not they are 
taxable to the employee.
    Adoption expenses paid or reimbursed by the employer under 
an adoption assistance program are not eligible for the 
adoption credit. A taxpayer may be eligible for the adoption 
credit (with respect to qualified adoption expenses he or she 
incurs) and also for the exclusion (with respect to different 
qualified adoption expenses paid or reimbursed by his or her 
employer).
    Because of the EGTRRA sunset, the exclusion for employer-
provided adoption assistance does not apply to amounts paid or 
incurred after December 31, 2010.

                        Explanation of Provision


Tax credit

    For 2010, the maximum credit is increased to $13,170 per 
eligible child (a $1,000 increase). This increase applies to 
both non-special needs adoptions and special needs adoptions. 
Also, the adoption credit is made refundable.
    The new dollar limit and phase-out of the adoption credit 
are adjusted for inflation in taxable years beginning after 
December 31, 2010.
    The EGTRRA sunset is delayed for one year (i.e., the sunset 
becomes effective for taxable years beginning after December 
31, 2011).

Adoption assistance program

    The maximum exclusion is increased to $13,170 per eligible 
child (a $1,000 increase).
    The new dollar limit and income limitations of the 
employer-provided adoption assistance exclusion are adjusted 
for inflation in taxable years beginning after December 31, 
2010.
    The EGTRRA sunset is delayed for one year (i.e., the sunset 
becomes effective for taxable years beginning after December 
31, 2011).\967\
---------------------------------------------------------------------------
    \967\ Section 101(b) of the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010 terminated the amendments 
made by this provision for taxable years beginning after December 31, 
2011, without regard to the EGTRRA sunset.
---------------------------------------------------------------------------

                             Effective Date

    The provisions generally are effective for taxable years 
beginning after December 31, 2009.

          HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010


A. Adult Dependents (sec. 1004 of the Act and secs. 105, 162, 401, and 
                            501 of the Code)


                              Present Law


Definition of dependent for exclusion for employer-provided health 
        coverage

    The Code generally provides that employees are not taxed on 
(that is, may ``exclude'' from gross income) the value of 
employer-provided health coverage under an accident or health 
plan.\968\ This exclusion applies to coverage for personal 
injuries or sickness for employees (including retirees), their 
spouses and their dependents.\969\ In addition, any 
reimbursements under an accident or health plan for medical 
care expenses for employees (including retirees), their 
spouses, and their dependents (as defined in section 152) 
generally are excluded from gross income.\970\ Section 152 
defines a dependent as a qualifying child or qualifying 
relative.
---------------------------------------------------------------------------
    \968\ Sec 106.
    \969\ Treas. Reg. sec. 1.106-1.
    \970\ Sec. 105(b).
---------------------------------------------------------------------------
    Under section 152(c), a child generally is a qualifying 
child of a taxpayer if the child satisfies each of five tests 
for the taxable year: (1) the child has the same principal 
place of abode as the taxpayer for more than one-half of the 
taxable year; (2) the child has a specified relationship to the 
taxpayer; (3) the child has not yet attained a specified age; 
(4) the child has not provided over one-half of their own 
support for the calendar year in which the taxable year of the 
taxpayer begins; and (5) the qualifying child has not filed a 
joint return (other than for a claim of refund) with their 
spouse for the taxable year beginning in the calendar year in 
which the taxable year of the taxpayer begins. A tie-breaking 
rule applies if more than one taxpayer claims a child as a 
qualifying child. The specified relationship is that the child 
is the taxpayer's son, daughter, stepson, stepdaughter, 
brother, sister, stepbrother, stepsister, or a descendant of 
any such individual. With respect to the specified age, a child 
must be under age 19 (or under age 24 in the case of a full-
time student). However, 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. Other rules may apply.
    Under section 152(d), a qualifying relative means an 
individual that satisfies four tests for the taxable year: (1) 
the individual bears a specified relationship to the taxpayer; 
(2) the individual's gross income for the calendar year in 
which such taxable year begins is less than the exemption 
amount under section 151(d); (3) the taxpayer provides more 
than one-half the individual's support for the calendar year in 
which the taxable year begins; and (4) the individual is not a 
qualifying child of the taxpayer or any other taxpayer for any 
taxable year beginning in the calendar year in which such 
taxable year begins. The specified relationship test for 
qualifying relative is satisfied if that individual is the 
taxpayer's: (1) child or descendant of a child; (2) brother, 
sister, stepbrother or stepsister; (3) father, mother or 
ancestor of either; (4) stepfather or stepmother; (5) niece or 
nephew; (6) aunt or uncle; (7) in-law; or (8) certain other 
individuals, who for the taxable year of the taxpayer, have the 
same principal place of abode as the taxpayer and are members 
of the taxpayer's household.\971\
---------------------------------------------------------------------------
    \971\ Generally, same-sex partners do not qualify as dependents 
under section 152. In addition, same-sex partners are not recognized as 
spouses for purposes of the Code. The Defense of Marriage Act, Pub. L. 
No. 104-199.
---------------------------------------------------------------------------
    Employers may agree to reimburse medical expenses of their 
employees (and their spouses and dependents), not covered by a 
health insurance plan, through flexible spending arrangements 
which allow reimbursement not in excess of a specified dollar 
amount (either elected by an employee under a cafeteria plan or 
otherwise specified by the employer). Reimbursements under 
these arrangements are also excludible from gross income as 
employer-provided health coverage. The same definition of 
dependents applies for purposes of flexible spending 
arrangements.

Deduction for health insurance premiums of self-employed individuals

    Under present law, self-employed individuals may deduct the 
cost of health insurance for themselves and their spouses and 
dependents. The deduction is not available for any month in 
which the self-employed individual is eligible to participate 
in an employer-subsidized health plan. Moreover, the deduction 
may not exceed the individual's self-employment income. The 
deduction applies only to the cost of insurance (i.e., it does 
not apply to out-of-pocket expenses that are not reimbursed by 
insurance). The deduction does not apply for self-employment 
tax purposes. For purposes of the deduction, a more than two 
percent shareholder-employee of an S corporation is treated the 
same as a self-employed individual. Thus, the exclusion for 
employer-provided health care coverage does not apply to such 
individuals, but they are entitled to the deduction for health 
insurance costs as if they were self-employed.

Voluntary Employees' Beneficiary Associations

    A VEBA is a tax-exempt entity that is a part of a plan for 
providing life, sick or accident benefits to its members or 
their dependents or designated beneficiaries.\972\ No part of 
the net earnings of the association inures (other than through 
the payment of life, sick, accident or other benefits) to the 
benefit of any private shareholder or individual. A VEBA may be 
funded with employer contributions or employee contributions or 
a combination of employer contributions and employee 
contributions. The same definition of dependent applies for 
purposes of receipt of medical benefits through a VEBA.
---------------------------------------------------------------------------
    \972\ Secs. 419(e) and 501(c)(9).
---------------------------------------------------------------------------

Qualified plans providing retiree health benefits

    A qualified pension or annuity plan can establish and 
maintain a separate account to provide for the payment of 
sickness, accident, hospitalization, and medical expenses for 
retired employees, their spouses and their dependents (``401(h) 
account''). An employer's contributions to a 401(h) account 
must be reasonable and ascertainable, and retiree health 
benefits must be subordinate to the retirement benefits 
provided by the plan. In addition, it must be impossible, at 
any time prior to the satisfaction of all retiree health 
liabilities under the plan, for any part of the corpus or 
income of the 401(h) account to be (within the taxable year or 
thereafter) used for, or diverted to, any purpose other than 
providing retiree health benefits and, upon satisfaction of all 
retiree health liabilities, the plan must provide that any 
amount remaining in the 401(h) account be returned to the 
employer.

                        Explanation of Provision

    The provision amends section 105(b) to extend the general 
exclusion for reimbursements for medical care expenses under an 
employer-provided accident or health plan to any child of an 
employee who has not attained age 27 as of the end of the 
taxable year. This change is also intended to apply to the 
exclusion for employer- proved coverage under an accident or 
health plan for injuries or sickness for such a child. A 
parallel change is made for VEBAs and 401(h) accounts.
    The provision similarly amends section 162(l) to permit 
self-employed individuals to take a deduction for the cost of 
health insurance for any child of the taxpayer who has not 
attained age 27 as of the end of the taxable year.
    For purposes of the provision, ``child'' means an 
individual who is a son, daughter, stepson, stepdaughter or 
eligible foster child of the taxpayer.\973\ An eligible foster 
child means an individual who is placed with the taxpayer by an 
authorized placement agency or by judgment, decree, or other 
order of any court of competent jurisdiction.
---------------------------------------------------------------------------
    \973\ Sec. 152(f)(1). Under section 152(f)(1), a legally adopted 
child of the taxpayer or an individual who is lawfully placed with the 
taxpayer for legal adoption by the taxpayer is treated as a child of 
the taxpayer by blood.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective as of the date of enactment 
(March 30, 2010).

B. Unearned Income Medicare Contribution (sec. 1402 of the Act and new 
                         sec. 1411 of the Code)


                              Present Law

    Social Security benefits and certain Medicare benefits are 
financed primarily by payroll taxes on covered wages. FICA 
imposes tax on employers based on the amount of wages paid to 
an employee during the year. The tax imposed is composed of two 
parts: (1) the OASDI tax equal to 6.2 percent of covered wages 
up to the taxable wage base ($106,800 in 2010); and (2) the 
Medicare hospital insurance (``HI'') tax amount equal to 1.45 
percent of covered wages. In addition to the tax on employers, 
each employee is subject to FICA taxes equal to the amount of 
tax imposed on the employer. The employee level tax generally 
must be withheld and remitted to the Federal government by the 
employer.
    As a parallel to FICA taxes, SECA imposes taxes on the net 
income from self-employment of self-employed individuals. The 
rate of the OASDI portion of SECA taxes is equal to the 
combined employee and employer OASDI FICA tax rates and applies 
to self- employment income up to the FICA taxable wage base. 
Similarly, the rate of the HI portion is the same as the 
combined employer and employee HI rates and there is no cap on 
the amount of self-employment income to which the rate 
applies.\974\
---------------------------------------------------------------------------
    \974\ For purposes of computing net earnings from self employment, 
taxpayers are permitted a deduction equal to the product of the 
taxpayer's earnings (determined without regard to this deduction) and 
one-half of the sum of the rates for OASDI tax (12.4 percent) and HI 
tax (2.9 percent), i.e., 7.65 percent of net earnings. This deduction 
reflects the fact that the FICA rates apply to an employee's wages, 
which do not include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent to an 
employee's wages plus the employer share of FICA taxes.
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    In the case of an individual, estate, or trust an unearned 
income Medicare contribution tax is imposed. No provision is 
made for the transfer of the tax imposed by this provision from 
the General Fund of the United States Treasury to any Trust 
Fund.
    In the case of an individual, the tax is 3.8 percent of the 
lesser of net investment income or the excess of modified 
adjusted gross income over the threshold amount.
    The threshold amount is $250,000 in the case of a joint 
return or surviving spouse, $125,000 in the case of a married 
individual filing a separate return, and $200,000 in any other 
case.
    Modified adjusted gross income is adjusted gross income 
increased by the amount excluded from income as foreign earned 
income under section 911(a)(1) (net of the deductions and 
exclusions disallowed with respect to the foreign earned 
income).
    In the case of an estate or trust, the tax is 3.8 percent 
of the lesser of undistributed net investment income or the 
excess of adjusted gross income (as defined in section 67(e)) 
over the dollar amount at which the highest income tax bracket 
applicable to an estate or trust begins.
    The tax does not apply to a non-resident alien or to a 
trust all the unexpired interests in which are devoted to 
charitable purposes. The tax also does not apply to a trust 
that is exempt from tax under section 501 or a charitable 
remainder trust exempt from tax under section 664.
    The tax is subject to the individual estimated tax 
provisions. The tax is not deductible in computing any tax 
imposed by subtitle A of the Internal Revenue Code (relating to 
income taxes).

Net investment income

    Net investment income is investment income reduced by the 
deductions properly allocable to such income.
    Investment income is the sum of (i) gross income from 
interest, dividends, annuities, royalties, and rents (other 
than income derived in the ordinary course of any trade or 
business to which the tax does not apply), (ii) other gross 
income derived from any trade or business to which the tax 
applies, and (iii) net gain (to the extent taken into account 
in computing taxable income) attributable to the disposition of 
property other than property held in a trade or business to 
which the tax does not apply.\975\
---------------------------------------------------------------------------
    \975\ Gross income does not include items, such as interest on tax-
exempt bonds, veterans' benefits, and excluded gain from the sale of a 
principal residence, which are excluded from gross income under the 
income tax.
---------------------------------------------------------------------------
    In the case of a trade or business, the tax applies if the 
trade or business is a passive activity with respect to the 
taxpayer or the trade or business consists of trading financial 
instruments or commodities (as defined in section 475(e)(2)). 
The tax does not apply to other trades or businesses.
    In the case of the disposition of a partnership interest or 
stock in an S corporation, gain or loss is taken into account 
only to the extent gain or loss would be taken into account by 
the partner or shareholder if the entity had sold all its 
properties for fair market value immediately before the 
disposition. Thus, only net gain or loss attributable to 
property held by the entity which is not property attributable 
to an active trade or business is taken into account.\976\
---------------------------------------------------------------------------
    \976\ For this purpose, a business of trading financial instruments 
or commodities is not treated as an active trade or business.
---------------------------------------------------------------------------
    Income, gain, or loss on working capital is not treated as 
derived from a trade or business. Investment income does not 
include distributions from a qualified retirement plan or 
amounts subject to SECA tax.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2012.

 C. Excise Tax on Medical Device Manufacturers \977\ (sec. 1405 of the 
                   Act and new sec. 4191 of the Code)

---------------------------------------------------------------------------
    \977\ The excise tax on medical devices as imposed by this 
provision replaces the annual fee on medical device manufacturers and 
importers under section 9009 of the Patient Protection and Affordable 
Care Act.
---------------------------------------------------------------------------

                              Present Law

    Chapter 32 imposes excise taxes on sales by manufacturers 
of certain products. Terms and procedures related to the 
imposition, payment, and reporting of these excise taxes are 
included in various provisions within the Code.
    Certain sales are exempt from the excise tax imposed on 
manufacturers. Exempt sales include sales (1) for use by the 
purchaser for further manufacture, or for resale to a second 
purchaser in further manufacture, (2) for export or for resale 
to a second purchaser for export, (3) for use by the purchaser 
as supplies for vessels or aircraft, (4) to a State or local 
government for the exclusive use of a State or local 
government, (5) to a nonprofit educational organization for its 
exclusive use, or (6) to a qualified blood collector 
organization for such organization's exclusive use in the 
collection, storage, or transportation of blood.\978\ If an 
article is sold free of tax for resale to a second purchaser 
for further manufacture or for export, the exemption will not 
apply unless, within the six-month period beginning on the date 
of sale by the manufacturer, the manufacturer receives proof 
that the article has been exported or resold for the use in 
further manufacturing.\979\ In general, the exemptions will not 
apply unless the manufacturer, the first purchaser, and the 
second purchaser are registered with the Secretary of the 
Treasury.
---------------------------------------------------------------------------
    \978\ Sec. 4221(a).
    \979\ Sec. 4221(b).
---------------------------------------------------------------------------
    The lease of an article is generally considered to be a 
sale of such article.\980\ Special rules apply for the 
imposition of tax to each lease payment. Rules are also imposed 
that treat the use of articles subject to tax by manufacturers, 
producers, or importers of such articles, as sales for the 
purpose of imposition of certain excise taxes.\981\
---------------------------------------------------------------------------
    \980\ Sec. 4217(a).
    \981\ Sec. 4218.
---------------------------------------------------------------------------
    There are also rules for determining the price of an 
article on which excise tax is imposed.\982\ These rules 
provide for: (1) the inclusion of containers, packaging, and 
certain transportation charges in the price, (2) determining a 
constructive sales price if an article is sold for less than 
the fair market price, and (3) determining the tax due in the 
case of partial payments or installment sales.
---------------------------------------------------------------------------
    \982\ Sec. 4216.
---------------------------------------------------------------------------
    A credit or refund is generally allowed for overpayments of 
manufacturers excise taxes.\983\ Overpayments may occur when 
tax-paid articles are sold for export and for certain specified 
uses and resales, when there are price adjustments, and where 
tax paid articles are subject to further manufacture. 
Generally, no credit or refund of any overpayment of tax is 
allowed or made unless the person who paid the tax establishes 
one of four prerequisites: (1) the tax was not included in the 
price of the article or otherwise collected from the person who 
purchased the article; (2) the tax was repaid to the ultimate 
purchaser of the article; (3) for overpayments due to specified 
uses and resales, the tax has been repaid to the ultimate 
vendor or the person has obtained the written consent of such 
ultimate vendor; or (4) the person has filed with the Secretary 
of the Treasury the written consent of the ultimate purchaser 
of the article to the allowance of the credit or making of the 
refund.\984\
---------------------------------------------------------------------------
    \983\ Sec. 6416.
    \984\ Sec. 6416(a).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a tax equal to 2.3 percent of the sale 
price is imposed on the sale of any taxable medical device by 
the manufacturer, producer, or importer of such device. A 
taxable medical device is any device, defined in section 201(h) 
of the Federal Food, Drug, and Cosmetic Act,\985\ intended for 
humans. The excise tax does not apply to eyeglasses, contact 
lenses, hearing aids, and any other medical device determined 
by the Secretary to be of a type that is generally purchased by 
the general public at retail for individual use. The Secretary 
may determine that a specific medical device is exempt under 
the provision if the device is generally sold at retail 
establishments (including over the internet) to individuals for 
their personal use. The exemption for such items is not limited 
by device class as defined in section 513 of the Federal Food, 
Drug, and Cosmetic Act. For example, items purchased by the 
general public at retail for individual use could include Class 
I items such as certain bandages and tipped applicators, Class 
II items such as certain pregnancy test kits and diabetes 
testing supplies, and Class III items such as certain denture 
adhesives and snake bite kits. Such items would only be exempt 
if they are generally designed and sold for individual use. It 
is anticipated that the Secretary will publish a list of 
medical device classifications \986\ that are of a type 
generally purchased by the general public at retail for 
individual use.
---------------------------------------------------------------------------
    \985\ 21 U.S.C. 321. Section 201(h) defines device as an 
instrument, apparatus, implement, machine, contrivance, implant, in 
vitro reagent, or other similar or related article, including any 
component, part, or accessory, which is (1) recognized in the official 
National Formulary, or the United States Pharmacopeia, or any 
supplement to them, (2) intended for use in the diagnosis of disease or 
other conditions, or in the cure, mitigation, treatment, or prevention 
of disease, in man or other animals, or (3) intended to affect the 
structure or any function of the body of man or other animals, and 
which does not achieve its primary intended purposes through chemical 
action within or on the body of man or other animals and which is not 
dependent upon being metabolized for the achievement of its primary 
intended purposes.
    \986\ Medical device classifications are found in Title 21 of the 
Code of Federal Regulations, Parts 862-892.
---------------------------------------------------------------------------
    The present law manufacturers excise tax exemptions for 
further manufacture and for export apply to tax imposed under 
this provision; however exemptions for use as supplies for 
vessels or aircraft, and for sales to State or local 
governments, nonprofit educational organizations, and qualified 
blood collector organizations are not applicable.
    The provision repeals section 9009 of the Patient 
Protection and Affordable Care Act (relating to an annual fee 
on medical device manufacturers and importers).

                             Effective Date

    The provision applies to sales after December 31, 2012.
    The repeal of section 9009 of Patient Protection and 
Affordable Care Act is effective on the date of enactment of 
the Patient Protection and Affordable Care Act (March 30, 
2010).

D. Elimination of Unintended Application of Cellulosic Biofuel Producer 
         Credit (sec. 1408 of the Act and sec. 40 of the Code)


                              Present Law

    The ``cellulosic biofuel producer 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 is generally $1.01 per 
gallon.\987\
---------------------------------------------------------------------------
    \987\ In the case of cellulosic biofuel that is alcohol, the $1.01 
credit amount is reduced by the credit amount of the alcohol mixture 
credit, and for ethanol, the credit amount for small ethanol producers, 
as in effect at the time the cellulosic biofuel fuel is produced.
---------------------------------------------------------------------------
    ``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 cellulosic 
biofuel 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 
cellulosic biofuel at retail to another person and places such 
cellulosic biofuel in the fuel tank of such other person; or 
(2) used by the producer for any purpose described in (1)(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, (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 (``EPA'') under section 211 of the Clean Air 
Act. The cellulosic biofuel producer credit cannot be claimed 
unless the taxpayer is registered by the IRS as a producer of 
cellulosic biofuel.
    Cellulosic biofuel eligible for the section 40 credit is 
precluded from qualifying as biodiesel, renewable diesel, or 
alternative fuel for purposes of the applicable income tax 
credit, excise tax credit, or payment provisions relating to 
those fuels.\988\
---------------------------------------------------------------------------
    \988\ See secs. 40A(d)(1), 40A(f)(3), and 6426(h).
---------------------------------------------------------------------------
    Because it is a credit under section 40(a), the cellulosic 
biofuel producer credit is part of the general business credits 
in section 38. However, the credit can only be carried forward 
three taxable years after the termination of the credit. The 
credit is also allowable against the alternative minimum tax. 
Under section 87, the credit is included in gross income. The 
cellulosic biofuel producer credit terminates on December 31, 
2012.
    The kraft process for making paper produces a byproduct 
called black liquor, which has been used for decades by paper 
manufacturers as a fuel in the papermaking process. Black 
liquor is composed of water, lignin and the spent chemicals 
used to break down the wood. The amount of the biomass in black 
liquor varies. The portion of the black liquor that is not 
consumed as a fuel source for the paper mills is recycled back 
into the papermaking process. Black liquor has ash content 
(mineral and other inorganic matter) significantly above that 
of other fuels.
    In an informal Chief Counsel Advice (``CCA''), the IRS has 
concluded that black liquor is a liquid fuel from biomass and 
may qualify for the cellulosic biofuel producer credit, as well 
as the refundable alternative fuel mixture credit.\989\ A 
taxpayer cannot claim both the alternative fuel mixture credit 
and the cellulosic biofuel producer credit. The alternative 
fuel credits and payment provisions expired December 31, 2009.
---------------------------------------------------------------------------
    \989\ Chief Couns. Adv. 200941011 (June 30, 2009). The Code 
provides for a tax credit of 50 cents for each gallon of alternative 
fuel used to produce an alternative fuel mixture that is used or sold 
for use as a fuel. (sec. 6426(e)). Under Notice 2006-92, an alternative 
fuel mixture is a mixture of alternative fuel and a taxable fuel (such 
as diesel) that contains at least 0.1 percent taxable fuel. Liquid fuel 
derived from biomass is an alternative fuel (sec. 6426(d)(2)(G)). 
Diesel fuel has been added to black liquor to qualify for the 
alternative mixture credit and the mixture is burned in a recovery 
boiler as fuel. Persons that have an alternative fuel mixture credit 
amount in excess of their taxable fuel excise tax liability may make a 
claim for payment from the Treasury in the amount of the excess.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the cellulosic biofuel producer 
credit to exclude fuels with significant water, sediment, or 
ash content, such as black liquor. Consequently, credits will 
cease to be available for these fuels. Specifically, the 
provision excludes from the definition of cellulosic biofuel 
any fuels that (1) are more than four percent (determined by 
weight) water and sediment in any combination, or (2) have an 
ash content of more than one percent (determined by weight). 
Water content (including both free water and water in solution 
with dissolved solids) is determined by distillation, using for 
example ASTM method D95 or a similar method suitable to the 
specific fuel being tested. Sediment consists of solid 
particles that are dispersed in the liquid fuel and is 
determined by centrifuge or extraction using, for example, ASTM 
method D1796 or D473 or similar method that reports sediment 
content in weight percent. Ash is the residue remaining after 
combustion of the sample using a specified method, such as ASTM 
D3174 or a similar method suitable for the fuel being tested.

                             Effective Date

    The provision is effective for fuels sold or used on or 
after January 1, 2010.

   E. Codification of Economic Substance Doctrine and Imposition of 
Penalties (sec. 1409 of the Act and secs. 6662, 6662A, 6664, 6676, and 
                           7701 of the Code)


                              Present Law


In general

    The Code provides detailed rules specifying the computation 
of taxable income, including the amount, timing, source, and 
character of items of income, gain, loss, and deduction. These 
rules permit both taxpayers and the government to compute 
taxable income with reasonable accuracy and predictability. 
Taxpayers generally may plan their transactions in reliance on 
these rules to determine the Federal income tax consequences 
arising from the transactions.
    In addition to the statutory provisions, courts have 
developed several doctrines that can be applied to deny the tax 
benefits of a tax-motivated transaction, notwithstanding that 
the transaction may satisfy the literal requirements of a 
specific tax provision. These common-law doctrines are not 
entirely distinguishable, and their application to a given set 
of facts is often blurred by the courts, the IRS, and 
litigants. Although these doctrines serve an important role in 
the administration of the tax system, they can be seen as at 
odds with an objective, ``rule-based'' system of taxation.
    One common-law doctrine applied over the years is the 
``economic substance'' doctrine. In general, this doctrine 
denies tax benefits arising from transactions that do not 
result in a meaningful change to the taxpayer's economic 
position other than a purported reduction in Federal income 
tax.\990\
---------------------------------------------------------------------------
    \990\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d 
Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 
1017 (1999); Klamath Strategic Investment Fund, LLC v. United States, 
472 F. Supp. 2d 885 (E.D. Texas 2007), aff'd 568 F.3d 537 (5th Cir. 
2009); Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. 
Cir. 2006), vacating and remanding 62 Fed. Cl. 716 (2004) (slip opinion 
pp. 123-124, 128); cert. denied, 127 S. Ct. 1261 (Mem.) (2007).
    Closely related doctrines also applied by the courts (sometimes 
interchangeable with the economic substance doctrine) include the 
``sham transaction doctrine'' and the ``business purpose doctrine.'' 
See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) (denying 
interest deductions on a ``sham transaction'' that lacked ``commercial 
economic substance''). Certain ``substance over form'' cases involving 
tax-indifferent parties, in which courts have found that the substance 
of the transaction did not comport with the form asserted by the 
taxpayer, have also involved examination of whether the change in 
economic position that occurred, if any, was consistent with the form 
asserted, and whether the claimed business purpose supported the 
particular tax benefits that were claimed. See, e.g., TIFD III-E, Inc. 
v. United States, 459 F.3d 220 (2d Cir. 2006); BB&T Corporation v. 
United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007), aff'd 523 F.3d 461 
(4th Cir. 2008). Although the Second Circuit found for the government 
in TIFD III-E, Inc., on remand to consider issues under section 704(e), 
the District Court found for the taxpayer. See, TIFD III-E Inc. v. 
United States, No. 3:01-cv-01839, 2009 WL 3208650 (D. Conn. Oct. 23, 
2009).
---------------------------------------------------------------------------
            Economic substance doctrine
    Courts generally deny claimed tax benefits if the 
transaction that gives rise to those benefits lacks economic 
substance independent of U.S. Federal income tax 
considerations--notwithstanding that the purported activity 
actually occurred. The Tax Court has described the doctrine as 
follows:
          The tax law . . . requires that the intended 
        transactions have economic substance separate and 
        distinct from economic benefit achieved solely by tax 
        reduction. The doctrine of economic substance becomes 
        applicable, and a judicial remedy is warranted, where a 
        taxpayer seeks to claim tax benefits, unintended by 
        Congress, by means of transactions that serve no 
        economic purpose other than tax savings.\991\
---------------------------------------------------------------------------
    \991\ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
---------------------------------------------------------------------------
            Business purpose doctrine
    A common law doctrine that often is considered together 
with the economic substance doctrine is the business purpose 
doctrine. The business purpose doctrine involves an inquiry 
into the subjective motives of the taxpayer--that is, whether 
the taxpayer intended the transaction to serve some useful non-
tax purpose. In making this determination, some courts have 
bifurcated a transaction in which activities with non-tax 
objectives have been combined with unrelated activities having 
only tax-avoidance objectives, in order to disallow the tax 
benefits of the overall transaction.\992\
---------------------------------------------------------------------------
    \992\ See, ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
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Application by the courts

            Elements of the doctrine
    There is a lack of uniformity regarding the proper 
application of the economic substance doctrine.\993\ Some 
courts apply a conjunctive test that requires a taxpayer to 
establish the presence of both economic substance (i.e., the 
objective component) and business purpose (i.e., the subjective 
component) in order for the transaction to survive judicial 
scrutiny.\994\ A narrower approach used by some courts is to 
conclude that either a business purpose or economic substance 
is sufficient to respect the transaction.\995\ A third approach 
regards economic substance and business purpose as ``simply 
more precise factors to consider'' in determining whether a 
transaction has any practical economic effects other than the 
creation of tax benefits.\996\
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    \993\ ``The casebooks are glutted with [economic substance] tests. 
Many such tests proliferate because they give the comforting illusion 
of consistency and precision. They often obscure rather than clarify.'' 
Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).
    \994\ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th 
Cir. 1993) (``The threshold question is whether the transaction has 
economic substance. If the answer is yes, the question becomes whether 
the taxpayer was motivated by profit to participate in the 
transaction.''). See also, Klamath Strategic Investment Fund v. United 
States, 568 F. 3d 537, (5th Cir. 2009) (even if taxpayers may have had 
a profit motive, a transaction was disregarded where it did not in fact 
have any realistic possibility of profit and funding was never at 
risk).
    \995\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 
91-92 (4th Cir. 1985) (``To treat a transaction as a sham, the court 
must find that the taxpayer was motivated by no business purposes other 
than obtaining tax benefits in entering the transaction, and, second, 
that the transaction has no economic substance because no reasonable 
possibility of a profit exists.''); IES Industries v. United States, 
253 F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
transaction is a sham for tax purposes [under the Eighth Circuit test], 
a transaction will be characterized as a sham if it is not motivated by 
any economic purpose outside of tax considerations (the business 
purpose test), and if it is without economic substance because no real 
potential for profit exists (the economic substance test).''). As noted 
earlier, the economic substance doctrine and the sham transaction 
doctrine are similar and sometimes are applied interchangeably. For a 
more detailed discussion of the sham transaction doctrine, see, e.g., 
Joint Committee on Taxation, Study of Present-Law Penalty and Interest 
Provisions as Required by Section 3801 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (including Provisions Relating to 
Corporate Tax Shelters (JCS-3-99), p. 182.
    \996\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; 
James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v. 
Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) (``Instead, the 
consideration of business purpose and economic substance are simply 
more precise factors to consider . . . We have repeatedly and carefully 
noted that this formulation cannot be used as a `rigid two-step 
analysis'.'')
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    One decision by the Court of Federal Claims questioned the 
continuing viability of the doctrine. That court also stated 
that ``the use of the `economic substance' doctrine to trump 
`mere compliance with the Code' would violate the separation of 
powers'' though that court also found that the particular 
transaction at issue in the case did not lack economic 
substance. The Court of Appeals for the Federal Circuit 
(``Federal Circuit Court'') overruled the Court of Federal 
Claims decision, reiterating the viability of the economic 
substance doctrine and concluding that the transaction in 
question violated that doctrine.\997\ The Federal Circuit Court 
stated that ``[w]hile the doctrine may well also apply if the 
taxpayer's sole subjective motivation is tax avoidance even if 
the transaction has economic substance, [footnote omitted], a 
lack of economic substance is sufficient to disqualify the 
transaction without proof that the taxpayer's sole motive is 
tax avoidance.'' \998\
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    \997\ Coltec Industries, Inc. v. United States, 62 Fed. Cl. 716 
(2004) (slip opinion at 123-124, 128); vacated and remanded, 454 F.3d 
1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 1261 (Mem.) (2007).
    \998\ The Federal Circuit Court stated that ``when the taxpayer 
claims a deduction, it is the taxpayer who bears the burden of proving 
that the transaction has economic substance.'' The Federal Circuit 
Court quoted a decision of its predecessor court, stating that 
``Gregory v. Helvering requires that a taxpayer carry an unusually 
heavy burden when he attempts to demonstrate that Congress intended to 
give favorable tax treatment to the kind of transaction that would 
never occur absent the motive of tax avoidance.'' The Court also stated 
that ``while the taxpayer's subjective motivation may be pertinent to 
the existence of a tax avoidance purpose, all courts have looked to the 
objective reality of a transaction in assessing its economic 
substance.'' Coltec Industries, Inc. v. United States, 454 F.3d at 
1355, 1356.
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            Nontax economic benefits
    There also is a lack of uniformity regarding the type of 
non-tax economic benefit a taxpayer must establish in order to 
demonstrate that a transaction has economic substance. Some 
courts have denied tax benefits on the grounds that a stated 
business benefit of a particular structure was not in fact 
obtained by that structure.\999\ Several courts have denied tax 
benefits on the grounds that the subject transactions lacked 
profit potential.\1000\ In addition, some courts have applied 
the economic substance doctrine to disallow tax benefits in 
transactions in which a taxpayer was exposed to risk and the 
transaction had a profit potential, but the court concluded 
that the economic risks and profit potential were insignificant 
when compared to the tax benefits.\1001\ Under this analysis, 
the taxpayer's profit potential must be more than nominal. 
Conversely, other courts view the application of the economic 
substance doctrine as requiring an objective determination of 
whether a ``reasonable possibility of profit'' from the 
transaction existed apart from the tax benefits.\1002\ In these 
cases, in assessing whether a reasonable possibility of profit 
exists, it may be sufficient if there is a nominal amount of 
pre-tax profit as measured against expected tax benefits.
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    \999\ See, e.g., Coltec Industries v. United States, 454 F.3d 1340 
(Fed. Cir. 2006). The court analyzed the transfer to a subsidiary of a 
note purporting to provide high stock basis in exchange for a purported 
assumption of liabilities, and held these transactions unnecessary to 
accomplish any business purpose of using a subsidiary to manage 
asbestos liabilities. The court also held that the purported business 
purpose of adding a barrier to veil-piercing claims by third parties 
was not accomplished by the transaction. 454 F.3d at 1358-1360 (Fed. 
Cir. 2006).
    \1000\ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
unprofitable, leveraged acquisition of Treasury bills, and accompanying 
prepaid interest deduction, lacked economic substance).
    \1001\ See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 
(disallowing deduction even though taxpayer had a possibility of small 
gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 
T.C. 738, 768 (1990) (stating that ``potential for gain . . . is 
infinitesimally nominal and vastly insignificant when considered in 
comparison with the claimed deductions'').
    \1002\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 
94 (4th Cir. 1985) (the economic substance inquiry requires an 
objective determination of whether a reasonable possibility of profit 
from the transaction existed apart from tax benefits); Compaq Computer 
Corp. v. Commissioner, 277 F.3d 778, 781 (5th Cir. 2001) (applied the 
same test, citing Rice's Toyota World); IES Industries v. United 
States, 253 F.3d 350, 354 (8th Cir. 2001); Wells Fargo & Company v. 
United States, No. 06-628T, 2010 WL 94544, at *57-58 (Fed. Cl. Jan. 8, 
2010).
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            Financial accounting benefits
    In determining whether a taxpayer had a valid business 
purpose for entering into a transaction, at least two courts 
have concluded that financial accounting benefits arising from 
tax savings do not qualify as a non-tax business purpose.\1003\ 
However, based on court decisions that recognize the importance 
of financial accounting treatment, taxpayers have asserted that 
financial accounting benefits arising from tax savings can 
satisfy the business purpose test.\1004\
---------------------------------------------------------------------------
    \1003\ See American Electric Power, Inc. v. United States, 136 F. 
Supp. 2d 762, 791-92 (S.D. Ohio 2001), aff'd, 326 F.3d.737 (6th Cir. 
2003) and Wells Fargo & Company v. United States, No. 06-628T, 2010 WL 
94544, at *59 (Fed. Cl. Jan. 8, 2010).
    \1004\ See, e.g., Joint Committee on Taxation, Report of 
Investigation of Enron Corporation and Related Entities Regarding 
Federal Tax and Compensation Issues, and Policy Recommendations (JSC-3-
03), February, 2003 (``Enron Report''), Volume III at C-93, 289. Enron 
Corporation relied on Frank Lyon Co. v. United States, 435 U.S. 561, 
577-78 (1978), and Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir. 
1990), to argue that financial accounting benefits arising from tax 
savings constitute a good business purpose.
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            Tax-indifferent parties
    A number of cases have involved transactions structured to 
allocate income for Federal tax purposes to a tax-indifferent 
party, with a corresponding deduction, or favorable basis 
result, to a taxable person. The income allocated to the tax-
indifferent party for tax purposes was structured to exceed any 
actual economic income to be received by the tax indifferent 
party from the transaction. Courts have sometimes concluded 
that this particular type of transaction did not satisfy the 
economic substance doctrine.\1005\ In other cases, courts have 
indicated that the substance of a transaction did not support 
the form of income allocations asserted by the taxpayer and 
have questioned whether asserted business purpose or other 
standards were met.\1006\
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    \1005\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d 
Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 
1017 (1999).
    \1006\ See, e.g., TIFD III-E, Inc. v. United States, 459 F.3d 220 
(2d Cir. 2006). Although the Second Circuit found for the government in 
TIFD III-E, Inc., on remand to consider issues under section 704(e), 
the District Court found for the taxpayer. See, TIFD III-E Inc. v. 
United States, No. 3:01-cv-01839, 2009 WL 3208650 (Oct. 23, 2009).
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Penalty regime

                General accuracy-related penalty
    An accuracy-related penalty under section 6662 applies to 
the portion of any underpayment that is attributable to (1) 
negligence, (2) any substantial understatement of income tax, 
(3) any substantial valuation misstatement, (4) any substantial 
overstatement of pension liabilities, or (5) any substantial 
estate or gift tax valuation understatement. If the correct 
income tax liability exceeds that reported by the taxpayer by 
the greater of 10 percent of the correct tax or $5,000 (or, in 
the case of corporations, by the lesser of (a) 10 percent of 
the correct tax (or $10,000 if greater) or (b) $10 million), 
then a substantial understatement exists and a penalty may be 
imposed equal to 20 percent of the underpayment of tax 
attributable to the understatement.\1007\ The section 6662 
penalty is increased to 40 percent in the case of gross 
valuation misstatements as defined in section 6662(h). Except 
in the case of tax shelters,\1008\ the amount of any 
understatement is reduced by any portion attributable to an 
item if (1) the treatment of the item is supported by 
substantial authority, or (2) facts relevant to the tax 
treatment of the item were adequately disclosed and there was a 
reasonable basis for its tax treatment. The Treasury Secretary 
may prescribe a list of positions which the Secretary believes 
do not meet the requirements for substantial authority under 
this provision.
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    \1007\ Sec. 6662.
    \1008\ A tax shelter is defined for this purpose as a partnership 
or other entity, an investment plan or arrangement, or any other plan 
or arrangement if a significant purpose of such partnership, other 
entity, plan, or arrangement is the avoidance or evasion of Federal 
income tax. Sec. 6662(d)(2)(C).
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    The section 6662 penalty generally is abated (even with 
respect to tax shelters) in cases in which the taxpayer can 
demonstrate that there was ``reasonable cause'' for the 
underpayment and that the taxpayer acted in good faith.\1009\ 
The relevant regulations for a tax shelter provide that 
reasonable cause exists where the taxpayer ``reasonably relies 
in good faith on an opinion based on a professional tax 
advisor's analysis of the pertinent facts and authorities 
[that] . . . unambiguously concludes that there is a greater 
than 50-percent likelihood that the tax treatment of the item 
will be upheld if challenged'' by the IRS.\1010\ For 
transactions other than tax shelters, the relevant regulations 
provide a facts and circumstances test, the most important 
factor generally being the extent of the taxpayer's effort to 
assess the proper tax liability. If a taxpayer relies on an 
opinion, reliance is not reasonable if the taxpayer knows or 
should have known that the advisor lacked knowledge in the 
relevant aspects of Federal tax law, or if the taxpayer fails 
to disclose a fact that it knows or should have known is 
relevant. Certain additional requirements apply with respect to 
the advice.\1011\
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    \1009\ Sec. 6664(c).
    \1010\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
1.6664-4(c).
    \1011\ See Treas. Reg. Sec. 1.6664-4(c). In addition to the 
requirements applicable to taxpayers under the regulations, advisors 
may be subject to potential penalties under section 6694 (applicable to 
return preparers), and to monetary penalties and other sanctions under 
Circular 230 (which provides rules governing persons practicing before 
the IRS). Under Circular 230, if a transaction is a ``covered 
transaction'' (a term that includes listed transactions and certain 
non-listed reportable transactions) a ``more likely than not'' 
confidence level is required for written tax advice that may be relied 
upon by a taxpayer for the purpose of avoiding penalties, and certain 
other standards must also be met. Treasury Dept. Circular 230 (Rev. 4-
2008) Sec. 10.35. For other tax advice, Circular 230 generally requires 
a lower ``realistic possibility'' confidence level or a ``non-
frivolous'' confidence level coupled with advising the client of any 
opportunity to avoid the accuracy related penalty under section 6662 by 
adequate disclosure. Treasury Dept. Circular 230 (Rev. 4-2008) Sec. 
10.34.
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                Listed transactions and reportable avoidance 
                    transactions
            In general
    A separate accuracy-related penalty under section 6662A 
applies to any ``listed transaction'' and to any other 
``reportable transaction'' that is not a listed transaction, if 
a significant purpose of such transaction is the avoidance or 
evasion of Federal income tax \1012\ (hereinafter referred to 
as a ``reportable avoidance transaction''). The penalty rate 
and defenses available to avoid the penalty vary depending on 
whether the transaction was adequately disclosed.
---------------------------------------------------------------------------
    \1012\ Sec. 6662A(b)(2).
---------------------------------------------------------------------------
    Both listed transactions and other reportable transactions 
are allowed to be described by the Treasury Department under 
section 6011 as transactions that must be reported, and section 
6707A(c) imposes a penalty for failure to adequately report 
such transactions under section 6011. A reportable transaction 
is defined as one that the Treasury Secretary determines is 
required to be disclosed because it is determined to have a 
potential for tax avoidance or evasion.\1013\ A listed 
transaction is defined as a reportable transaction which is the 
same as, or substantially similar to, a transaction 
specifically identified by the Secretary as a tax avoidance 
transaction for purposes of the reporting disclosure 
requirements.\1014\
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    \1013\ Sec. 6707A(c)(1).
    \1014\ Sec. 6707A(c)(2).
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            Disclosed transactions
    In general, a 20-percent accuracy-related penalty is 
imposed on any understatement attributable to an adequately 
disclosed listed transaction or reportable avoidance 
transaction.\1015\ The only exception to the penalty is if the 
taxpayer satisfies a more stringent reasonable cause and good 
faith exception (hereinafter referred to as the ``strengthened 
reasonable cause exception''), which is described below. The 
strengthened reasonable cause exception is available only if 
the relevant facts affecting the tax treatment were adequately 
disclosed, there is or was substantial authority for the 
claimed tax treatment, and the taxpayer reasonably believed 
that the claimed tax treatment was more likely than not the 
proper treatment. A ``reasonable belief'' must be based on the 
facts and law as they exist at the time that the return in 
question is filed, and not take into account the possibility 
that a return would not be audited. Moreover, reliance on 
professional advice may support a ``reasonable belief'' only in 
certain circumstances.\1016\
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    \1015\ Sec. 6662A(a).
    \1016\ Section 6664(d)(3)(B) does not allow a reasonable belief to 
be based on a ``disqualified opinion'' or on an opinion from a 
``disqualified tax advisor.''
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            Undisclosed transactions
    If the taxpayer does not adequately disclose the 
transaction, the strengthened reasonable cause exception is not 
available (i.e., a strict liability penalty generally applies), 
and the taxpayer is subject to an increased penalty equal to 30 
percent of the understatement.\1017\ However, a taxpayer will 
be treated as having adequately disclosed a transaction for 
this purpose if the IRS Commissioner has separately rescinded 
the separate penalty under section 6707A for failure to 
disclose a reportable transaction.\1018\ The IRS Commissioner 
is authorized to do this only if the failure does not relate to 
a listed transaction and only if rescinding the penalty would 
promote compliance and effective tax administration.\1019\
---------------------------------------------------------------------------
    \1017\ Sec. 6662A(c).
    \1018\ Sec. 6664(d).
    \1019\ Sec. 6707A(d).
---------------------------------------------------------------------------
    A public entity that is required to pay a penalty for an 
undisclosed listed or reportable transaction must disclose the 
imposition of the penalty in reports to the SEC for such 
periods as the Secretary specifies. The disclosure to the SEC 
applies without regard to whether the taxpayer determines the 
amount of the penalty to be material to the reports in which 
the penalty must appear, and any failure to disclose such 
penalty in the reports is treated as a failure to disclose a 
listed transaction. A taxpayer must disclose a penalty in 
reports to the SEC once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid).\1020\
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    \1020\ Sec. 6707A(e).
---------------------------------------------------------------------------
            Determination of the understatement amount
    The penalty is applied to the amount of any understatement 
attributable to the listed or reportable avoidance transaction 
without regard to other items on the tax return. For purposes 
of this provision, the amount of the understatement is 
determined as the sum of: (1) the product of the highest 
corporate or individual tax rate (as appropriate) and the 
increase in taxable income resulting from the difference 
between the taxpayer's treatment of the item and the proper 
treatment of the item (without regard to other items on the tax 
return);\1021\ and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item.
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    \1021\ For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses which would (without regard 
to section 1211) be allowed for such year, will be treated as an 
increase in taxable income. Sec. 6662A(b).
---------------------------------------------------------------------------
    Except as provided in regulations, a taxpayer's treatment 
of an item will not take into account any amendment or 
supplement to a return if the amendment or supplement is filed 
after the earlier of when the taxpayer is first contacted 
regarding an examination of the return or such other date as 
specified by the Secretary.\1022\
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    \1022\ Sec. 6662A(e)(3).
---------------------------------------------------------------------------
            Strengthened reasonable cause exception
    A penalty is not imposed under section 6662A with respect 
to any portion of an understatement if it is shown that there 
was reasonable cause for such portion and the taxpayer acted in 
good faith. Such a showing requires: (1) adequate disclosure of 
the facts affecting the transaction in accordance with the 
regulations under section 6011;\1023\ (2) that there is or was 
substantial authority for such treatment; and (3) that the 
taxpayer reasonably believed that such treatment was more 
likely than not the proper treatment. For this purpose, a 
taxpayer will be treated as having a reasonable belief with 
respect to the tax treatment of an item only if such belief: 
(1) is based on the facts and law that exist at the time the 
tax return (that includes the item) is filed; and (2) relates 
solely to the taxpayer's chances of success on the merits and 
does not take into account the possibility that (a) a return 
will not be audited, (b) the treatment will not be raised on 
audit, or (c) the treatment will be resolved through settlement 
if raised.\1024\
---------------------------------------------------------------------------
    \1023\ See the previous discussion regarding the penalty for 
failing to disclose a reportable transaction.
    \1024\ Sec. 6664(d).
---------------------------------------------------------------------------
    A taxpayer may (but is not required to) rely on an opinion 
of a tax advisor in establishing its reasonable belief with 
respect to the tax treatment of the item. However, a taxpayer 
may not rely on an opinion of a tax advisor for this purpose if 
the opinion (1) is provided by a ``disqualified tax advisor'' 
or (2) is a ``disqualified opinion.''
            Disqualified tax advisor
    A disqualified tax advisor is any advisor who: (1) is a 
material advisor \1025\ and who participates in the 
organization, management, promotion, or sale of the transaction 
or is related (within the meaning of section 267(b) or 
707(b)(1)) to any person who so participates; (2) is 
compensated directly or indirectly \1026\ by a material advisor 
with respect to the transaction; (3) has a fee arrangement with 
respect to the transaction that is contingent on all or part of 
the intended tax benefits from the transaction being sustained; 
or (4) as determined under regulations prescribed by the 
Secretary, has a disqualifying financial interest with respect 
to the transaction.
---------------------------------------------------------------------------
    \1025\ The term ``material advisor'' means any person who provides 
any material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, or carrying out any 
reportable transaction, and who derives gross income in excess of 
$50,000 in the case of a reportable transaction substantially all of 
the tax benefits from which are provided to natural persons ($250,000 
in any other case). Sec. 6111(b)(1).
    \1026\ This situation could arise, for example, when an advisor has 
an arrangement or understanding (oral or written) with an organizer, 
manager, or promoter of a reportable transaction that such party will 
recommend or refer potential participants to the advisor for an opinion 
regarding the tax treatment of the transaction.
---------------------------------------------------------------------------
    A material advisor is considered as participating in the 
``organization'' of a transaction if the advisor performs acts 
relating to the development of the transaction. This may 
include, for example, preparing documents: (1) establishing a 
structure used in connection with the transaction (such as a 
partnership agreement); (2) describing the transaction (such as 
an offering memorandum or other statement describing the 
transaction); or (3) relating to the registration of the 
transaction with any Federal, state, or local government 
body.\1027\ Participation in the ``management'' of a 
transaction means involvement in the decision-making process 
regarding any business activity with respect to the 
transaction. Participation in the ``promotion or sale'' of a 
transaction means involvement in the marketing or solicitation 
of the transaction to others. Thus, an advisor who provides 
information about the transaction to a potential participant is 
involved in the promotion or sale of a transaction, as is any 
advisor who recommends the transaction to a potential 
participant.
---------------------------------------------------------------------------
    \1027\ An advisor should not be treated as participating in the 
organization of a transaction if the advisor's only involvement with 
respect to the organization of the transaction is the rendering of an 
opinion regarding the tax consequences of such transaction. However, 
such an advisor may be a ``disqualified tax advisor'' with respect to 
the transaction if the advisor participates in the management, 
promotion, or sale of the transaction (or if the advisor is compensated 
by a material advisor, has a fee arrangement that is contingent on the 
tax benefits of the transaction, or as determined by the Secretary, has 
a continuing financial interest with respect to the transaction). See 
Notice 2005-12, 2005-1 C.B. 494, regarding disqualified compensation 
arrangements.
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            Disqualified opinion
    An opinion may not be relied upon if the opinion: (1) is 
based on unreasonable factual or legal assumptions (including 
assumptions as to future events); (2) unreasonably relies upon 
representations, statements, findings or agreements of the 
taxpayer or any other person; (3) does not identify and 
consider all relevant facts; or (4) fails to meet any other 
requirement prescribed by the Secretary.
            Coordination with other penalties
    Any understatement upon which a penalty is imposed under 
section 6662A is not subject to the accuracy related penalty 
for underpayments under section 6662.\1028\ However, that 
understatement is included for purposes of determining whether 
any understatement (as defined in sec. 6662(d)(2)) is a 
substantial understatement under section 6662(d)(1).\1029\ 
Thus, in the case of an understatement (as defined in sec. 
6662(d)(2)), the amount of the understatement (determined 
without regard to section 6662A(e)(1)(A)) is increased by the 
aggregate amount of reportable transaction understatements for 
purposes of determining whether the understatement is a 
substantial understatement. The section 6662(a) penalty applies 
only to the excess of the amount of the substantial 
understatement (if any) after section 6662A(e)(1)(A) is applied 
over the aggregate amount of reportable transaction 
understatements.\1030\ Accordingly, every understatement is 
penalized, but only under one penalty provision.
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    \1028\ Sec. 6662(b) (flush language). In addition, section 6662(b) 
provides that section 6662 does not apply to any portion of an 
underpayment on which a fraud penalty is imposed under section 6663.
    \1029\ Sec. 6662A(e)(1).
    \1030\ Sec. 6662(d)(2)(A) (flush language).
---------------------------------------------------------------------------
    The penalty imposed under section 6662A does not apply to 
any portion of an understatement to which a fraud penalty 
applies under section 6663 or to which the 40-percent penalty 
for gross valuation misstatements under section 6662(h) 
applies.\1031\
---------------------------------------------------------------------------
    \1031\ Sec. 6662A(e)(2).
---------------------------------------------------------------------------
            Erroneous claim for refund or credit
    If a claim for refund or credit with respect to income tax 
(other than a claim relating to the earned income tax credit) 
is made for an excessive amount, unless it is shown that the 
claim for such excessive amount has a reasonable basis, the 
person making such claim is subject to a penalty in an amount 
equal to 20 percent of the excessive amount.\1032\
---------------------------------------------------------------------------
    \1032\ Sec. 6676.
---------------------------------------------------------------------------
    The term ``excessive amount'' means the amount by which the 
amount of the claim for refund for any taxable year exceeds the 
amount of such claim allowable for the taxable year.
    This penalty does not apply to any portion of the excessive 
amount of a claim for refund or credit which is subject to a 
penalty imposed under the accuracy related or fraud penalty 
provisions (including the general accuracy related penalty, or 
the penalty with respect to listed and reportable transactions, 
described above).

                           Reasons for Change

    Tax avoidance transactions have relied upon the interaction 
of highly technical tax law provisions to produce tax 
consequences not contemplated by Congress. When successful, 
taxpayers who engage in these transactions enlarge the tax gap 
by gaining unintended tax relief and by undermining the overall 
integrity of the tax system.
    A strictly rule-based tax system cannot efficiently 
prescribe the appropriate outcome of every conceivable 
transaction that might be devised and is, as a result, 
incapable of preventing all unintended consequences. Thus, many 
courts have long recognized the need to supplement tax rules 
with anti-tax-avoidance standards, such as the economic 
substance doctrine, in order to assure the Congressional 
purpose is achieved. The Congress recognizes that the IRS has 
achieved a number of recent successes in litigation. The 
Congress believes it is still desirable to provide greater 
clarity and uniformity in the application of the economic 
substance doctrine in order to improve its effectiveness at 
deterring unintended consequences.
    The Congress believes that a stronger penalty under section 
6662 should be imposed on understatements attributable to non-
economic substance and similar transactions, to improve 
compliance by deterring taxpayers from entering such 
transactions. The Congress is concerned that under present law 
there is a potential to avoid penalties in such cases (based 
for example on certain levels of tax advice), and that the 
potential that a taxpayer in such cases may pay only the tax 
due plus interest is not a sufficient deterrent. The Congress 
therefore believes it is appropriate to impose a new strict 
liability penalty in such cases.

                        Explanation of Provision

    The provision clarifies and enhances the application of the 
economic substance doctrine. Under the provision, new section 
7701(o) provides that in the case of any transaction \1033\ to 
which the economic substance doctrine is relevant, such 
transaction is treated as having economic substance only if (1) 
the transaction changes in a meaningful way (apart from Federal 
income tax effects) the taxpayer's economic position, and (2) 
the taxpayer has a substantial purpose (apart from Federal 
income tax effects) for entering into such transaction. The 
provision provides a uniform definition of economic substance, 
but does not alter the flexibility of the courts in other 
respects.
---------------------------------------------------------------------------
    \1033\ The term ``transaction'' includes a series of transactions.
---------------------------------------------------------------------------
    The determination of whether the economic substance 
doctrine is relevant to a transaction is made in the same 
manner as if the provision had never been enacted. Thus, the 
provision does not change present law standards in determining 
when to utilize an economic substance analysis.\1034\
---------------------------------------------------------------------------
    \1034\ If the realization of the tax benefits of a transaction is 
consistent with the Congressional purpose or plan that the tax benefits 
were designed by Congress to effectuate, it is not intended that such 
tax benefits be disallowed. See, e.g., Treas. Reg. sec. 1.269-2, 
stating that characteristic of circumstances in which an amount 
otherwise constituting a deduction, credit, or other allowance is not 
available are those in which the effect of the deduction, credit, or 
other allowance would be to distort the liability of the particular 
taxpayer when the essential nature of the transaction or situation is 
examined in the light of the basic purpose or plan which the deduction, 
credit, or other allowance was designed by the Congress to effectuate. 
Thus, for example, it is not intended that a tax credit (e.g., section 
42 (low-income housing credit), section 45 (production tax credit), 
section 45D (new markets tax credit), section 47 (rehabilitation 
credit), section 48 (energy credit), etc.) be disallowed in a 
transaction pursuant to which, in form and substance, a taxpayer makes 
the type of investment or undertakes the type of activity that the 
credit was intended to encourage.
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    The provision is not intended to alter the tax treatment of 
certain basic business transactions that, under longstanding 
judicial and administrative practice are respected, merely 
because the choice between meaningful economic alternatives is 
largely or entirely based on comparative tax advantages. Among 
\1035\ these basic transactions are (1) the choice between 
capitalizing a business enterprise with debt or equity; \1036\ 
(2) a U.S. person's choice between utilizing a foreign 
corporation or a domestic corporation to make a foreign 
investment; \1037\ (3) the choice to enter a transaction or 
series of transactions that constitute a corporate organization 
or reorganization under subchapter C; \1038\ and (4) the choice 
to utilize a related-party entity in a transaction, provided 
that the arm's length standard of section 482 and other 
applicable concepts are satisfied.\1039\ Leasing transactions, 
like all other types of transactions, will continue to be 
analyzed in light of all the facts and circumstances.\1040\ As 
under present law, whether a particular transaction meets the 
requirements for specific treatment under any of these 
provisions is a question of facts and circumstances. Also, the 
fact that a transaction meets the requirements for specific 
treatment under any provision of the Code is not determinative 
of whether a transaction or series of transactions of which it 
is a part has economic substance.\1041\
---------------------------------------------------------------------------
    \1035\ The examples are illustrative and not exclusive.
    \1036\ See, e.g., John Kelley Co. v. Commissioner, 326 U.S. 521 
(1946) (respecting debt characterization in one case and not in the 
other, based on all the facts and circumstances).
    \1037\ See, e.g., Sam Siegel v. Commissioner, 45. T.C. 566 (1966), 
acq. 1966-2 C.B. 3. But see Commissioner v. Bollinger, 485 U.S. 340 
(1988) (agency principles applied to title-holding corporation under 
the facts and circumstances).
    \1038\ See, e.g., Rev. Proc. 2010-3 2010-1 I.R.B. 110, Secs. 
3.01(38), (39), (40), and (42) (IRS will not rule on certain matters 
relating to incorporations or reorganizations unless there is a 
``significant issue''); compare Gregory v. Helvering. 293 U.S. 465 
(1935).
    \1039\ See, e.g., National Carbide v. Commissioner, 336 U.S. 422 
(1949), Moline Properties v. Commissioner, 319 U.S. 435 (1943); 
compare, e.g. Aiken Industries, Inc. v. Commissioner, 56 T.C. 925 
(1971), acq., 1972-2 C.B. 1; Commissioner v. Bollinger, 485 U.S. 340 
(1988); see also sec. 7701(l).
    \1040\ See, e.g., Frank Lyon Co. v. Commissioner, 435 U.S. 561 
(1978); Hilton v. Commissioner, 74 T.C. 305, aff'd, 671 F. 2d 316 (9th 
Cir. 1982), cert. denied, 459 U.S. 907 (1982); Coltec Industries v. 
United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 
1261 (Mem) (2007); BB&T Corporation v. United States, 2007-1 USTC P 
50,130 (M.D.N.C. 2007), aff'd, 523 F.3d 461 (4th Cir. 2008); Wells 
Fargo & Company v. United States, No. 06-628T, 2010 WL 94544, at *60 
(Fed. Cl. Jan. 8, 2010) (distinguishing leasing case Consolidated 
Edison Company of New York, No. 06-305T, 2009 WL 3418533 (Fed. Cl. Oct. 
21, 2009) by observing that ``considerations of economic substance are 
factually specific to the transaction involved'').
    \1041\ As examples of cases in which courts have found that a 
transaction does not meet the requirements for the treatment claimed by 
the taxpayer under the Code, or does not have economic substance, See, 
e.g., BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 
2007) aff'd, 523 F.3d 461 (4th Cir. 2008); Tribune Company and 
Subsidiaries v. Commissioner, 125 T.C. 110 (2005); H.J. Heinz Company 
and Subsidiaries v. United States, 76 Fed. Cl. 570 (2007); Coltec 
Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), 
cert. denied 127 S. Ct. 1261 (Mem.) (2007); Long Term Capital Holdings 
LP v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004), aff'd, 150 
Fed. Appx. 40 (2d Cir. 2005); Klamath Strategic Investment Fund, LLC v. 
United States, 472 F. Supp. 2d 885 (E.D. Texas 2007); aff'd, 568 F. 3d 
537 (5th Cir. 2009); Santa Monica Pictures LLC v. Commissioner, 89 
T.C.M. 1157 (2005).
---------------------------------------------------------------------------
    The provision does not alter the court's ability to 
aggregate, disaggregate, or otherwise recharacterize a 
transaction when applying the doctrine. For example, the 
provision reiterates the present-law ability of the courts to 
bifurcate a transaction in which independent activities with 
non-tax objectives are combined with an unrelated item having 
only tax-avoidance objectives in order to disallow those tax-
motivated benefits.\1042\
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    \1042\ See, e.g., Coltec Industries, Inc. v. United States, 454 
F.3d 1340 (Fed. Cir. 2006), cert. denied 127 S. Ct. 1261 (Mem.) (2007) 
(``the first asserted business purpose focuses on the wrong 
transaction--the creation of Garrison as a separate subsidiary to 
manage asbestos liabilities. . . . [W]e must focus on the transaction 
that gave the taxpayer a high basis in the stock and thus gave rise to 
the alleged benefit upon sale'') 454 F.3d 1340, 1358 (Fed. Cir. 2006). 
See also ACM Partnership v. Commissioner, 157 F.3d at 256 n.48; 
Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938) (``A given 
result at the end of a straight path is not made a different result 
because reached by following a devious path.'').
---------------------------------------------------------------------------

Conjunctive analysis

    The provision clarifies that the economic substance 
doctrine involves a conjunctive analysis--there must be an 
inquiry regarding the objective effects of the transaction on 
the taxpayer's economic position as well as an inquiry 
regarding the taxpayer's subjective motives for engaging in the 
transaction. Under the provision, a transaction must satisfy 
both tests, i.e., the transaction must change in a meaningful 
way (apart from Federal income tax effects) the taxpayer's 
economic position and the taxpayer must have a substantial non-
Federal-income-tax purpose for entering into such transaction, 
in order for a transaction to be treated as having economic 
substance. This clarification eliminates the disparity that 
exists among the Federal circuit courts regarding the 
application of the doctrine, and modifies its application in 
those circuits in which either a change in economic position or 
a non-tax business purpose (without having both) is sufficient 
to satisfy the economic substance doctrine.\1043\
---------------------------------------------------------------------------
    \1043\ The provision defines ``economic substance doctrine'' as the 
common law doctrine under which tax benefits under subtitle A with 
respect to a transaction are not allowable if the transaction does not 
have economic substance or lacks a business purpose. Thus, the 
definition includes any doctrine that denies tax benefits for lack of 
economic substance, for lack of business purpose, or for lack of both.
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Non-Federal-income-tax business purpose

    Under the provision, a taxpayer's non-Federal-income-tax 
purpose \1044\ for entering into a transaction (the second 
prong in the analysis) must be ``substantial.'' For purposes of 
this analysis, any State or local income tax effect which is 
related to a Federal income tax effect is treated in the same 
manner as a Federal income tax effect. Also, a purpose of 
achieving a favorable accounting treatment for financial 
reporting purposes is not taken into account as a non-Federal-
income-tax purpose if the origin of the financial accounting 
benefit is a reduction of Federal income tax.\1045\
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    \1044\ See, e.g., Treas. Reg. sec. 1.269-2(b) (stating that a 
distortion of tax liability indicating the principal purpose of tax 
evasion or avoidance might be evidenced by the fact that ``the 
transaction was not undertaken for reasons germane to the conduct of 
the business of the taxpayer''). Similarly, in ACM Partnership v. 
Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated:
    Key to [the determination of whether a transaction has economic 
substance] is that the transaction must be rationally related to a 
useful nontax purpose that is plausible in light of the taxpayer's 
conduct and useful in light of the taxpayer's economic situation and 
intentions. Both the utility of the stated purpose and the rationality 
of the means chosen to effectuate it must be evaluated in accordance 
with commercial practices in the relevant industry. A rational 
relationship between purpose and means ordinarily will not be found 
unless there was a reasonable expectation that the nontax benefits 
would be at least commensurate with the transaction costs. [citations 
omitted]
    \1045\ Claiming that a financial accounting benefit constitutes a 
substantial non-tax purpose fails to consider the origin of the 
accounting benefit (i.e., reduction of taxes) and significantly 
diminishes the purpose for having a substantial non-tax purpose 
requirement. See, e.g., American Electric Power, Inc. v. United States, 
136 F. Supp. 2d 762, 791-92 (S.D. Ohio 2001) (``AEP's intended use of 
the cash flows generated by the [corporate-owned life insurance] plan 
is irrelevant to the subjective prong of the economic substance 
analysis. If a legitimate business purpose for the use of the tax 
savings 'were sufficient to breathe substance into a transaction whose 
only purpose was to reduce taxes, [then] every sham tax-shelter device 
might succeed,''') (citing Winn-Dixie v. Commissioner, 113 T.C. 254, 
287 (1999)); aff'd, 326 F3d 737 (6th Cir. 2003).
---------------------------------------------------------------------------

Profit potential

    Under the provision, a taxpayer may rely on factors other 
than profit potential to demonstrate that a transaction results 
in a meaningful change in the taxpayer's economic position or 
that the taxpayer has a substantial non-Federal-income-tax 
purpose for entering into such transaction. The provision does 
not require or establish a minimum return that will satisfy the 
profit potential test. However, if a taxpayer relies on a 
profit potential, the present value of the reasonably expected 
pre-tax profit must be substantial in relation to the present 
value of the expected net tax benefits that would be allowed if 
the transaction were respected.\1046\ Fees and other 
transaction expenses are taken into account as expenses in 
determining pre-tax profit. In addition, the Secretary is to 
issue regulations requiring foreign taxes to be treated as 
expenses in determining pre-tax profit in appropriate 
cases.\1047\
---------------------------------------------------------------------------
    \1046\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at 
94 (the economic substance inquiry requires an objective determination 
of whether a reasonable possibility of profit from the transaction 
existed apart from tax benefits); Compaq Computer Corp. v. 
Commissioner, 277 F.3d at 781 (applied the same test, citing Rice's 
Toyota World); IES Industries v. United States, 253 F.3d at 354 (the 
application of the objective economic substance test involves 
determining whether there was a ``reasonable possibility of profit . . 
. apart from tax benefits.'').
    \1047\ There is no intention to restrict the ability of the courts 
to consider the appropriate treatment of foreign taxes in particular 
cases, as under present law.
---------------------------------------------------------------------------

Personal transactions of individuals

    In the case of an individual, the provision applies only to 
transactions entered into in connection with a trade or 
business or an activity engaged in for the production of 
income.

Other rules

    No inference is intended as to the proper application of 
the economic substance doctrine under present law. The 
provision is not intended to alter or supplant any other rule 
of law, including any common-law doctrine or provision of the 
Code or regulations or other guidance thereunder; and it is 
intended the provision be construed as being additive to any 
such other rule of law.
    As with other provisions in the Code, the Secretary has 
general authority to prescribe rules and regulations necessary 
for the enforcement of the provision.\1048\
---------------------------------------------------------------------------
    \1048\ Sec. 7805(a).
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Penalty for underpayments and understatements attributable to 
        transactions lacking economic substance

    The provision imposes a new strict liability penalty under 
section 6662 for an underpayment attributable to any 
disallowance of claimed tax benefits by reason of a transaction 
lacking economic substance, as defined in new section 7701(o), 
or failing to meet the requirements of any similar rule of 
law.\1049\ The penalty rate is 20 percent (increased to 40 
percent if the taxpayer does not adequately disclose the 
relevant facts affecting the tax treatment in the return or a 
statement attached to the return). An amended return or 
supplement to a return is not taken into account if filed after 
the taxpayer has been contacted for audit or such other date as 
is specified by the Secretary. No exceptions (including the 
reasonable cause rules) to the penalty are available. Thus, 
under the provision, outside opinions or in-house analysis 
would not protect a taxpayer from imposition of a penalty if it 
is determined that the transaction lacks economic substance or 
fails to meet the requirements of any similar rule of law. 
Similarly, a claim for refund or credit that is excessive under 
section 6676 due to a claim that is lacking in economic 
substance or failing to meet the requirements of any similar 
rule of law is subject to the 20 percent penalty under that 
section, and the reasonable basis exception is not available.
---------------------------------------------------------------------------
    \1049\ It is intended that the penalty would apply to a transaction 
the tax benefits of which are disallowed as a result of the application 
of the similar factors and analysis that is required under the 
provision for an economic substance analysis, even if a different term 
is used to describe the doctrine.
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    The penalty does not apply to any portion of an 
underpayment on which a fraud penalty is imposed.\1050\ The new 
40-percent penalty for nondisclosed transactions is added to 
the penalties to which section 6662A will not also apply.\1051\
---------------------------------------------------------------------------
    \1050\ As under present law, the penalties under section 6662 
(including the new penalty) do not apply to any portion of an 
underpayment on which a fraud penalty is imposed.
    \1051\ As revised by the provision, new section 6662A(e)(2)(b) 
provides that section 6662A will not apply to any portion of an 
understatement due to gross valuation misstatement under section 
6662(h) or nondisclosed noneconomic substance transactions under new 
section 6662(i).
---------------------------------------------------------------------------
    As described above, under the provision, the reasonable 
cause and good faith exception of present law section 
6664(c)(1) does not apply to any portion of an underpayment 
which is attributable to a transaction lacking economic 
substance, as defined in section 7701(o), or failing to meet 
the requirements of any similar rule of law. Likewise, the 
reasonable cause and good faith exception of present law 
section 6664(d)(1) does not apply to any portion of a 
reportable transaction understatement which is attributable to 
a transaction lacking economic substance, as defined in section 
7701(o), or failing to meet the requirements of any similar 
rule of law.

                             Effective Date

    The provision applies to transactions entered into after 
the date of enactment and to underpayments, understatements, 
and refunds and credits attributable to transactions entered 
into after the date of enactment of the Act (March 30, 2010).

F. Time for Payment of Corporate Estimated Taxes (sec. 1410 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.\1052\ 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. In the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding taxable year), payments due in July, August, or 
September, 2014, are increased to 157.75 percent of the payment 
otherwise due and the next required payment is reduced 
accordingly.\1053\
---------------------------------------------------------------------------
    \1052\ Sec. 6655.
    \1053\ Hiring Incentives to Restore Employment Act, Pub. L. No. 
111-147, sec. 561, par. (1); Act to extend the Generalized System of 
Preferences and the Andean Trade Preference Act, and for other 
purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and 
Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint 
resolution approving the renewal of import restrictions contained in 
the Burmese Freedom and Democracy Act of 2003, and for other purposes, 
Pub. L. No. 111-42, sec. 202(b)(1).
---------------------------------------------------------------------------

                    Explanation of Provision \1054\

    The provision increases the required payment of estimated 
tax otherwise due in July, August, or September, 2014, by 15.75 
percentage points.
---------------------------------------------------------------------------
    \1054\ All of the public laws enacted in the 111th Congress 
affecting this provision are described in Part Twenty-One of this 
document.
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                             Effective Date

    The provision is effective on the date of enactment (March 
30, 2010).

PART NINE: REVENUE PROVISIONS OF THE PRESERVATION OF ACCESS TO CARE FOR 
 MEDICARE BENEFICIARIES AND PENSION RELIEF ACT OF 2010 (PUBLIC LAW 111-
                               192)\1055\

A. Authority to Disclose Return Information Concerning Outstanding Tax 
Debts for Purposes of Enhancing Medicare Program Integrity (sec. 103 of 
                   the Act and sec. 6103 of the Code)

                              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 such information except as provided in the Internal 
Revenue Code. Section 6103 contains a number of exceptions to 
the general rule of nondisclosure that authorize disclosure in 
specifically identified circumstances. For example, section 
6103 provides for the disclosure of certain return information 
for purposes of establishing the appropriate amount of any 
Medicare Part B premium subsidy adjustment.
---------------------------------------------------------------------------
    \1055\ H.R. 3962. The bill originated as the Affordable Health Care 
for America Act and passed the House on November 7, 2009. The Senate 
passed the bill with an amendment substituting the text of the 
Preservation of Access to Care for Medicare Beneficiaries and Pension 
Relief Act of 2010 by unanimous consent on June 18, 2010. The House 
agreed to the Senate amendment on June 24, 2010. The President signed 
the Act on June 25, 2010.
---------------------------------------------------------------------------
    Section 6103(p)(4) requires, as a condition of receiving 
returns and return information, that Federal and State agencies 
(and certain other recipients) provide safeguards as prescribed 
by the Secretary of the Treasury by regulation to be necessary 
or appropriate to protect the confidentiality of returns or 
return information. Unauthorized disclosure of a return or 
return information is a felony punishable by a fine not 
exceeding $5,000 or imprisonment of not more than five years, 
or both, together with the costs of prosecution.\1056\ The 
unauthorized inspection of a return or return information is 
punishable by a fine not exceeding $1,000 or imprisonment of 
not more than one year, or both, together with the costs of 
prosecution.\1057\ An action for civil damages also may be 
brought for unauthorized disclosure or inspection.\1058\
---------------------------------------------------------------------------
    \1056\ Sec. 7213.
    \1057\ Sec. 7213A.
    \1058\ Sec. 7431.
---------------------------------------------------------------------------

                        Explanation of Provision

    Upon written request from the Secretary of Health and Human 
Services, the IRS is permitted to disclose to officers and 
employees of the Department of Health and Human Services the 
following information with respect to a taxpayer who has 
applied to enroll, or reenroll, as a provider of services or 
supplier under the Medicare program under title XVIII of the 
Social Security Act:
           Taxpayer identity information with respect 
        to such person (i.e. the name of the person with 
        respect to whom a return is filed, that person's 
        mailing addresss, and taxpayer identifying number),
           The amount of the seriously delinquent tax 
        debt owed by that taxpayer, and
           The taxable year to which the seriously 
        delinquent debt relates.
    For purposes of the provision, the term ``seriously 
delinquent tax debt'' means an outstanding debt under Title 26 
for which a notice of lien has been filed. Such term does not 
include a debt that is being paid in a timely manner pursuant 
to an installment agreement (under section 6159) or offer in 
compromise (under section 7122). Nor does it include a debt for 
which a collection due process hearing (under section 6330) or 
innocent spouse relief (under subsections (a), (b) or (f) of 
section 6015) is requested or pending.
    The information disclosed under the provision may be used 
by officers and employees of the Department of Health and Human 
Services only for the purposes of, and to the extent necessary 
in, establishing the taxpayer's eligibility for enrollment or 
reenrollment in the Medicare program, or in any administrative 
or judicial proceeding relating to, or arising from, a denial 
of such enrollment, or in determining the level of enhanced 
oversight to be applied with respect to such taxpayer pursuant 
to section 1866(j)(3) of the Social Security Act.

                             Effective Date

    The provision is effective on the date of enactment.

                        B. Single Employer Plans


1. Extended period for single-employer defined benefit plans to 
        amortize certain shortfall amortization bases (sec. 201 of the 
        Act and sec. 430 of the Code)

                              Present Law


Minimum funding rules

            In general
    Defined benefit pension plans generally are subject to 
minimum funding rules that require the sponsoring employer to 
periodically make contributions to fund plan benefits.\1059\ 
The minimum funding rules for single-employer defined benefit 
pension plans were substantially revised by the Pension 
Protection Act of 2006 (``PPA'').\1060\ The PPA also revised 
the funding rules that apply to multiemployer defined benefit 
pension plans. The Worker, Retiree, and Employer Recovery Act 
of 2008 (``WRERA'') \1061\ made a number of technical 
corrections to the PPA. In addition, WRERA made certain 
amendments to the PPA minimum funding rules to provide funding 
relief to defined benefit plans affected by the decline in 
global financial markets during 2008.
---------------------------------------------------------------------------
    \1059\ Sec. 412. Similar rules apply to defined benefit pension 
plans under the Labor Code provisions of the Employee Retirement Income 
Security Act of 1974 (``ERISA''). A number of exceptions to the minimum 
funding rules apply. For example, governmental and church plans are not 
subject to the minimum funding rules. Under section 414(d), a 
governmental plan is generally a plan established and maintained for 
its employees by the Federal government, a State government or 
political subdivision, or an agency or instrumentality of the 
foregoing. A governmental plan also includes any plan to which the 
Railroad Retirement Act of 1935 or 1937 applies and which is financed 
by contributions required under that Act and any plan of an 
international organization that is exempt from taxation by reason of 
the International Organizations Immunities Act. A governmental plan 
includes a plan established and maintained by an Indian tribal 
government (as defined in section 7701(a)(40)), a subdivision of an 
Indian tribal government (determined in accordance with section 
7871(d)), or an agency or instrumentality of either, so long as all 
participants are employees of such entity, substantially all of whose 
services as employees are in the performance of essential governmental 
functions but not in the performance of commercial activities (whether 
or not an essential government function). Under section 414(e), a 
church plan is a plan established and maintained for its employee by a 
church or by a convention or association of churches which is exempt 
from tax under section 501. A church plan may elect to be subject to 
the minimum funding rules.
    \1060\ Pub. L. No. 109-280.
    \1061\ Pub. L. No. 110-458.
---------------------------------------------------------------------------
    The PPA minimum funding rules are generally effective for 
plan years beginning after December 31, 2007. Delayed effective 
dates apply to single-employer plans sponsored by certain large 
defense contractors, multiple employer plans of some rural 
cooperatives, and single-employer plans affected by settlement 
agreements with the Pension Benefit Guaranty Corporation 
(``PBGC'').\1062\
---------------------------------------------------------------------------
    \1062\ The PPA funding rules do not apply to eligible government 
contractor plans for plan years beginning before the earliest of: (1) 
the first plan year for which the plan ceases to be an eligible 
government contractor plan, (2) the effective date of the Cost 
Accounting Standards Pension Harmonization Rule, and (3) January 1, 
2011. The new funding rules do not apply to eligible rural cooperative 
plans for plan years beginning before the earlier of: (1) the first 
plan year for which the plan ceases to be an eligible cooperative plan, 
or (2) January 1, 2017. The new funding rules do not apply to eligible 
PBGC settlement plans for plan years beginning before January 1, 2014.
---------------------------------------------------------------------------
    The minimum funding rules for single-employer and 
multiemployer plans are different. A single-employer plan is a 
plan that is not a multiemployer plan. A multiemployer plan is 
generally a plan to which more than one employer is required to 
contribute and which is maintained pursuant to a collective 
bargaining agreement. There are also multiple employer plans, 
which are plans maintained by more than one employer and to 
which more than one employer is required to contribute, but 
that are not maintained pursuant to a collective bargaining 
agreement. The single-employer plan funding rules generally 
apply to multiple employer plans.
    The purpose of the minimum funding rules is to ensure that 
the sponsoring employer of a defined benefit pension plan makes 
periodic minimum contributions that will adequately fund 
benefits promised under the plan. The rules permit an employer 
to fund the plan over a period of time. Thus, it is possible 
that a plan may be terminated at a time when plan assets are 
not sufficient to provide all benefits accrued by employees 
under the plan.
    The due date for the payment of a minimum required 
contribution for a plan year is generally eight and one-half 
months after the end of the plan year.\1063\ If unpaid minimum 
funding contributions for a single-employer plan exceed 
$1,000,000, a lien arises in favor of the plan upon all 
property and rights to property (real or personal) belonging to 
the sponsoring employer (or member of the sponsoring employer's 
controlled group) in an amount equal to the unpaid minimum 
contributions.\1064\ Notice must be given to the PBGC \1065\ of 
a funding failure that gives rise to a lien, and generally the 
lien is enforceable by the PBGC.
---------------------------------------------------------------------------
    \1063\ Sec. 430(j).
    \1064\ Sec. 430(k).
    \1065\ The PBGC was established for the purpose of ensuring that 
benefits promised under a defined benefit pension plan are paid (up to 
specified annual limits) if the sponsoring employer is not able to 
fulfill its obligation to adequately fund the plan and the plan is 
terminated when it is underfunded. ERISA sec. 4002(a). The benefit 
protection function of the PBGC is carried out through an insurance 
program that applies to defined benefit pension plans. Sponsors of 
plans that are subject to the insurance program are liable to the PBGC 
for premium payments. PBGC termination insurance serves as a backstop 
to the minimum funding rules.
---------------------------------------------------------------------------
    In the event of a failure to comply with the minimum 
funding rules, the Code imposes a two-level excise tax on the 
plan sponsor.\1066\ The initial tax is 10 percent of aggregate 
unpaid contributions for single-employer plans and five percent 
of the plan's accumulated funding deficiency (as defined below) 
for multiemployer plans. An additional tax is imposed if the 
failure is not corrected before the date that a notice of 
deficiency with respect to the initial tax is mailed to the 
employer by the Internal Revenue Service (``IRS'') or the date 
of assessment of the initial tax. The additional tax is equal 
to 100 percent of the unpaid contribution or the accumulated 
funding deficiency, whichever is applicable. Before issuing a 
notice of deficiency with respect to the excise tax, the 
Secretary must notify the Secretary of Labor and provide the 
Secretary of Labor with a reasonable opportunity to require the 
employer responsible for contributing to, or under, the plan to 
correct the deficiency or comment on the imposition of the tax.
---------------------------------------------------------------------------
    \1066\ Sec. 4971.
---------------------------------------------------------------------------
            Funding target and shortfall amortization charges
    The minimum required contribution for a plan year for 
single-employer defined benefit plans generally depends on a 
comparison of the value of the plan's assets with the plan's 
funding target and target normal cost.\1067\ 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 to be earned during the plan 
year. WRERA clarified 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.\1068\
---------------------------------------------------------------------------
    \1067\ Sec. 430.
    \1068\ This clarification is effective for plan years beginning 
after December 31, 2008, and is elective for the preceding plan year. 
Final regulations issued under section 430 reserve the issue of the 
definition of ``plan-related expenses''. The definition of the term is 
expected to be the subject of future proposed regulations. Treas. Reg. 
sec. 1.430(d)-1(b)(2)(iii)(B).
---------------------------------------------------------------------------
    A shortfall amortization base is determined for a plan year 
based on the plan's funding shortfall for the plan year.\1069\ 
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. 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 that have been determined for the plan year and 
any succeeding plan year with respect to any shortfall 
amortization bases for preceding plan years. As a result, in 
any given plan year, a plan may have a number of shortfall 
amortization installments that relate to the current or prior 
years. The aggregate of these installments is referred to as 
the shortfall amortization charge. In the case of a plan with a 
funding shortfall for a plan year, the minimum required 
contribution is generally equal to the sum of the plan's target 
normal cost and the shortfall amortization charge for that 
year.
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    \1069\ 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 
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) was 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). 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 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. While the PPA 
provided that the transition rule did 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), WRERA amended the 
PPA rules to extend 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.
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    A shortfall amortization base may be positive or negative, 
depending on whether the present value of remaining 
installments with respect to prior year amortization bases is 
more or less than the plan's funding shortfall. In either case, 
the shortfall amortization base is amortized over a seven-year 
period beginning with the current plan year. Shortfall 
amortization installments for a particular plan year with 
respect to positive and negative shortfall amortization bases 
are netted in determining the shortfall amortization charge for 
the plan year, but the resulting shortfall amortization charge 
cannot be less than zero (i.e., negative amortization 
installments may not offset normal cost).
    If the value of the plan's assets exceeds the plan's 
funding target for a plan year, then the minimum required 
contribution is generally equal to the plan's target normal 
cost for the year. Target normal cost for this purpose is 
reduced (but not below zero) by the amount by which the value 
of the plan's assets exceed the plan's funding target.
            Actuarial assumptions
    The minimum funding rules for single-employer defined 
benefit pension plans 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 at 
the end of the 15-year period. Each segment rate is a single 
interest rate determined monthly by the Secretary on the basis 
of a corporate bond yield curve, taking into account only the 
portion of the yield curve based on corporate bonds maturing 
during the particular segment rate period. The corporate bond 
yield curve used for this purpose 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.
    The present value of liabilities under a plan is determined 
using the segment rates for the ``applicable month'' for the 
plan year. The applicable month is the month that includes the 
plan's valuation date for the plan year, or, at the election of 
the plan sponsor, any of the four months preceding the month 
that includes the valuation date. An election of a preceding 
month applies to the plan year for which it is made and all 
succeeding plan years unless revoked with the consent of the 
Secretary.
    Solely for purposes of determining minimum required 
contributions, in lieu of the segment rates described above, a 
plan sponsor may elect to use interest rates on a yield curve 
based on the yields on investment grade corporate bonds for the 
month preceding the month in which the plan year begins (i.e., 
without regard to the 24-month averaging described above) 
(``spot'' rates). In general, such an election may be revoked 
only with approval of the Secretary. However, Treasury 
regulations provide automatic approval for plan sponsors to 
make a new choice of interest rates for 2009 and 2010 
(regardless of what choices were made for earlier years).\1070\ 
In addition, for 2009, the IRS has indicated that it will allow 
plan sponsors to use the spot rate for the month that includes 
the plan's valuation date for the 2009 plan year, or, at the 
election of the plan sponsor, any of the four months preceding 
the month that includes the valuation date (rather than only 
for the month preceding the valuation date).\1071\
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    \1070\ Treas. Reg. sec. 1.430(h)(2)-1(h)(3). Final regulations 
under sections 430(d), 430(f), 430(g), 430(h)(2), 430(i), and 436 were 
issued on October 7, 2009 and published in the Federal Register on 
October 15, 2009. 74 Fed. Reg. 53004. The regulations are effective for 
plan years beginning on or after January 1, 2010, except for plans to 
which a delayed effective date applies. For plan years beginning before 
January 1, 2010, plans are permitted to rely on the final regulations 
or the proposed regulations (72 Fed. Reg. 74215) (December 31, 2007) 
for purposes of satisfying the requirements of sections 430 and 436.
    \1071\ Internal Revenue Service, Employee Plans News, March 2009 
Special Edition.
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                        Explanation of Provision


Election of extended amortization period

    The provision permits the plan sponsor of a single-employer 
defined benefit pension plan to elect to determine the 
shortfall amortization installments with respect to the 
shortfall amortization base for not more than two eligible plan 
years under two alternative extended amortization schedules.
    Under the provision, the sponsor of a single-employer 
defined benefit plan may elect to amortize the shortfall 
amortization base for an eligible plan year over a nine-year 
period beginning with the election year (``two plus seven 
amortization schedule''). The shortfall amortization 
installments for the first two plan years in the nine-year 
period are equal to the interest on the shortfall amortization 
base for the election year, determined by using the effective 
interest rate for the election year.\1072\ The shortfall 
amortization installments for the last seven plan years in the 
nine-year period are equal to the amounts necessary to amortize 
the remaining balance of the shortfall amortization base for 
the election year in level annual installments over the seven-
year period, determined by using the segment rates for the 
election year.
---------------------------------------------------------------------------
    \1072\ The effective interest rate with respect to a plan for a 
plan year is the single rate of interest which, if used to determine 
the present value of the benefits taken into account in determining the 
plan's funding target for the year, would result in an amount equal to 
the plan's funding target (as determined using the first, second, and 
third segment rates). Sec. 430(h)(2)(A).
---------------------------------------------------------------------------
    Alternatively, the sponsor of a single-employer defined 
benefit plan may elect to amortize the shortfall amortization 
base for an election year in level annual installments over a 
fifteen-year period beginning with the election year 
(``fifteen-year amortization schedule'').
    For purposes of the provision, an eligible plan year is a 
plan year beginning in 2008, 2009, 2010, or 2011, but only if 
the due date for the payment of the minimum required 
contribution for the plan year occurs on or after the date of 
enactment of the provision. A plan sponsor is not required to 
elect to use an extended amortization schedule for more than 
one eligible plan year or to make such election for consecutive 
eligible plan years; however, a plan sponsor who does make an 
election for two eligible plan years is required to elect the 
same extended amortization schedule for each year. For example, 
a plan sponsor who elects to use the fifteen-year amortization 
schedule for the plan year beginning in 2009 can make an 
election to use that same extended amortization schedule for 
the plan year beginning in 2010 or 2011; however, the plan 
sponsor is not permitted to elect the two plus seven 
amortization schedule for either of those subsequent eligible 
plan years.
    Plans sponsored by certain government contractors that are 
not subject to the PPA minimum funding rules until the plan 
year beginning in 2011 may only elect an extended amortization 
schedule for the plan year beginning in 2011.
    An election to use an extended amortization schedule may be 
revoked only with the consent of the Secretary. Prior to 
granting a revocation request the Secretary must provide the 
PBGC an opportunity to comment on the conditions applicable to 
the treatment of any portion of the election year shortfall 
amortization base that remains unamortized as of the revocation 
date.

Increase in required installments for certain plans

            In general
    Under the provision, any plan year in a restriction period 
is a year in which the shortfall amortization installment 
otherwise determined and payable for that year pursuant to an 
election to use an extended amortization period may be 
increased, subject to certain limits described below, by an 
``installment acceleration amount''. The length of the 
restriction period following an election to use an extended 
amortization schedule depends on the extended amortization 
schedule elected by the plan sponsor for the eligible plan 
year. For a plan sponsor who elects to use the two plus seven 
amortization schedule for an eligible plan year, the 
restriction period is the three year period beginning with the 
election year or, if later, the first plan year beginning after 
December 31, 2009. For a plan sponsor who elects to use the 
fifteen-year amortization schedule for an eligible plan year, 
the restriction period is the five year period beginning with 
the election year or, if later, the first plan year beginning 
after December 31, 2009.
    For example, for a plan sponsor who elects to use the two 
plus seven amortization schedule for the plan year beginning in 
2009, the restriction period with respect to that election is 
the three year period during the 2010, 2011 and 2012 plan 
years. If the same plan sponsor then elects to use the two plus 
seven amortization schedule for the plan year beginning in 
2011, the separate restriction period with respect to that 
election is the three year period during the 2011, 2012 and 
2013 plan years.
                Installment acceleration amount
    The ``installment acceleration amount'' with respect to any 
plan year in a restriction period is the aggregate amount of 
excess employee compensation with respect to all employees for 
the plan year and the aggregate amount of extraordinary 
dividends and redemptions for the plan year. For purposes of 
the provision, ``plan sponsor'' includes any member of the plan 
sponsor's controlled group (as determined for purposes of the 
minimum funding rules).
                Excess employee compensation
    Excess employee compensation is compensation (as defined 
below) with respect to any employee (including a self-employed 
individual treated as an employee under section 401(c)) for any 
plan year in excess of $1,000,000. Beginning in 2011, the 
$1,000,000 threshold is indexed to the Consumer Price Index for 
Urban Consumers, rounded to the next lowest $1,000.
    For purposes of determining excess employee compensation, 
``compensation'' includes all amounts attributable to services 
performed by an employee for a plan sponsor after February 28, 
2010 that are includable in the employee's income as 
remuneration during the calendar year in which the plan year 
begins, regardless of whether the services were performed 
during such calendar year. Compensation for any employee during 
a calendar year also includes any amount that the plan sponsor 
directly or indirectly sets aside or reserves in, or transfers 
to, a trust (or other arrangement specified by the Secretary) 
during the calendar year for purposes of paying deferred 
compensation to the employee under a nonqualified deferred 
compensation plan (as defined in section 409A) of the plan 
sponsor, unless such amount is otherwise includable in income 
as remuneration by the employee in that calendar year. To the 
extent that an amount is taken into account when set aside, 
reserved or transferred to a trust or other arrangement, that 
amount is not taken into account in calculating the excess 
employee compensation with respect to the employee in any 
subsequent calendar year. The rule for amounts set aside, 
reserved or transferred to a trust or other arrangement applies 
without regard to whether the related compensation is 
attributable to services performed by an employee for a plan 
sponsor before or after February 28, 2010.
    Compensation does not include any amount otherwise 
includable in the employee's income with respect to the 
granting of service recipient stock (as defined for purposes of 
section 409A) after February 28, 2010 that is, at the time of 
grant, subject to a substantial risk of forfeiture (within the 
meaning of section 83(c)(1)) for at least five years following 
the date of grant. A grant would not fail to satisfy this 
requirement if the grant were vested upon death, disability, or 
involuntary termination of employment before the end of the 
five-year period. Under the provision, the Secretary may 
provide for the application of this exception for restricted 
service recipient stock to persons other than corporations. In 
addition, compensation does not include any remuneration 
payable to an employee on a commission basis solely on account 
of income directly generated by that employee's individual 
performance. Finally, compensation does not include any 
remuneration consisting of nonqualified deferred compensation, 
restricted stock, restricted stock units, stock options, or 
stock appreciation rights payable or granted under a binding 
written contract in effect on March 1, 2010 and not modified in 
any material respect before the remuneration is paid.
                Extraordinary dividends and redemptions
    The aggregate amount of extraordinary dividends and 
redemptions for a plan year is equal to the amount by which the 
sum of the dividends declared during the plan year by the plan 
sponsor and the aggregate amount paid for the redemption of 
stock of the plan sponsor redeemed during the plan year exceeds 
the greater of (1) the plan sponsor's adjusted net income 
(within the meaning of section 4043 of ERISA) for the preceding 
plan year, determined without regard for any reduction by 
reason of interest, taxes, depreciation or amortization or (2) 
for a plan sponsor who determined and declared dividends in the 
same manner for at least five consecutive years immediately 
preceding the plan year, the aggregate amount of dividends 
determined and declared for the plan year in that manner. It is 
intended that dividends would be deemed to be determined in the 
same manner for the prior five years if they are at the same 
level or rate as dividends in the previous five consecutive 
years. For purposes of the provision, only dividends declared 
and redemptions occurring after February 28, 2010 are taken 
into account in determining the amount of dividends and 
redemptions for a plan year.
    In calculating the dividends declared and amounts paid for 
the redemption of stock during the plan year, the following 
amounts are disregarded: (1) dividends paid by one member of 
the plan sponsor's controlled group to another member of the 
controlled group; (2) redemptions made pursuant to an employee 
benefit plan or that are made on account of the death, 
disability or termination of employment of an employee or 
shareholder; and (3) dividends and redemptions with respect to 
applicable preferred stock on which dividends accrue at a 
specified rate in all events and without regard to the plan 
sponsor's income and with respect to which interest accrues on 
any unpaid dividends. Applicable preferred stock is preferred 
stock originally issued before March 1, 2010 (including any 
preferred stock originally issued prior to that date that is 
subsequently reissued with otherwise identical terms) and 
preferred stock issued after March 1, 2010 that is held by an 
employee benefit plan subject to Title I of ERISA.
                Limitations on installment acceleration amounts
            Annual limitation
    Under the provision, the installment acceleration amount 
for a plan year is limited to the aggregate amount of funding 
relief received by the plan sponsor in prior years as a result 
of an election to use an extended amortization period for an 
eligible plan year. To the extent that an installment 
acceleration amount is limited by application of this rule, the 
excess installment acceleration amount is generally carried 
over to the succeeding plan year.
    Thus, under the provision, the installment acceleration 
amount for any plan year may not exceed the excess (if any) of 
(1) the sum of the shortfall amortization installments for that 
plan year and all prior plan years in the nine or fifteen year 
amortization period, as elected, with respect to the shortfall 
amortization base for the election year, that would have been 
determined and payable by the plan sponsor with respect to that 
shortfall amortization base in the absence of an election to 
use an extended amortization period over (2) the sum of the 
shortfall amortization installments for such plan years, 
determined under the two and seven or fifteen year amortization 
schedule, as elected by the plan sponsor, including any 
installment acceleration amount from a preceding plan year 
(``annual limit'').
    To the extent that a carryover of excess installment 
acceleration amounts from a preceding plan year, when added to 
other installment acceleration amounts for a plan year (as 
determined prior to application of the annual limit on 
installment acceleration amounts) would cause the shortfall 
amortization installment for the plan year to exceed the annual 
limit, the excess is similarly carried over to the next 
succeeding plan year. Under the provision, the following 
ordering rule applies in applying the annual limit for a plan 
year: the installment acceleration amounts for the plan year, 
determined prior to the addition of any carryover installment 
acceleration amount from a preceding year, is applied first 
against the annual limit and then any installment acceleration 
amounts carried over to the plan year are applied against the 
annual limit on a first-in, first-out basis.
    The carryover rules apply during the restriction period 
with respect to an election year and for a limited number of 
years following the expiration of the restriction period with 
respect to an election year. Under the provision, no amount is 
carried over to a plan year that begins after the first plan 
year following the last plan year in the restriction period 
applicable to a two plus seven amortization schedule and no 
amount is carried over to a plan year that begins after the 
second plan year following the last plan year in the 
restriction period applicable to a fifteen year amortization 
schedule.
            Total installments limited to the present value of the 
                    shortfall amortization base
    Two additional rules (subject to rules prescribed by the 
Secretary) apply under the provision to insure that the 
addition of an installment acceleration amount to a shortfall 
amortization installment for a plan year results only in an 
acceleration of the payment of amounts that would otherwise be 
included in subsequent shortfall amortization installments with 
respect to the shortfall amortization base for the election 
year and not in the amortization of an amount in excess of that 
shortfall amortization base.
    Under the first rule, if the shortfall amortization 
installment with respect to the shortfall amortization base for 
an election year is required to be increased by any installment 
acceleration amount, the remaining shortfall amortization 
installments with respect that shortfall amortization base are 
reduced, in reverse order of the otherwise required 
installments, to the extent necessary to limit the present 
value of the remaining installments to the present value of the 
remaining unamortized shortfall amortization base. Under the 
second rule, the increase for any plan year is limited to the 
amount that does not cause the amount of the installment to 
exceed the present value of the installment and all succeeding 
installments with respect to the shortfall amortization base 
for the election year (determined without regard to the 
installment acceleration amount, but after application of the 
first rule reducing the remaining shortfall amortization 
installments to reflect any installment acceleration amount).
    Under the provision, any installment acceleration amount is 
disregarded for purposes of determining a plan's quarterly 
contributions.

Reporting requirement

    The provision requires a plan sponsor who elects to use an 
extended amortization schedule to give notice of the election 
to participants and beneficiaries of the plan and to inform the 
PBGC of the election in such form and manner as the Director of 
the PBGC may require.

Regulations and guidance

    The Secretary is directed to provide rules for the 
application of the provisions governing installment 
acceleration amounts to plan sponsors who elect an extended 
amortization schedule for two or more plans, including rules 
for the ratable allocation of any installment acceleration 
amount among electing plans on the basis of each plan's 
relative reduction in its shortfall amortization installment 
for the first plan year in the extended amortization period. 
The Secretary is also directed to provide rules for the 
application of those provisions and the provisions governing 
the election of an extended amortization schedule in any case 
where there is a merger or acquisition involving an electing 
plan sponsor.

                             Effective Date

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

2. Application of extended amortization period to plans subject to 
        prior law funding rules (sec. 202 of the Act)

                              Present Law


In general

    Defined benefit pension plans generally are subject to 
minimum funding requirements under ERISA and the Code.\1073\ 
PPA made significant changes to the minimum funding 
requirements for single-employer plans. Generally, those 
modifications became effective for plan years beginning after 
December 31, 2007. As discussed below, however, there are 
delayed effective dates for certain plans including multiple 
employer plans of certain cooperatives, certain PBGC settlement 
plans, and plans of certain government contractors.
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    \1073\ Secs. 302 and 412 of ERISA. Multiemployer defined benefit 
pension plans are also subject to the minimum funding requirements, but 
the rules for multiemployer plans differ in various respects from the 
rules applicable to single-employer plans. Governmental plans and 
church plans are generally exempt from the minimum funding 
requirements.
---------------------------------------------------------------------------
            Multiple employer plans of certain cooperatives
    Section 104 of PPA provides a delayed effective date for 
the PPA's single-employer plan funding rules for any plan that 
was in existence on July 26, 2005, and was an eligible 
cooperative plan for the plan year including that date. A plan 
is treated as an eligible cooperative plan for a plan year if 
it is maintained by more than one employer and at least 85 
percent of the employers are: (1) certain rural cooperatives; 
\1074\ or (2) certain cooperative organizations that are more 
than 50-percent owned by agricultural producers or by 
cooperatives owned by agricultural producers, or organizations 
that are more than 50-percent owned, or controlled by, one or 
more such cooperative organizations. A plan is also treated as 
an eligible cooperative plan for any plan year for which it is 
maintained by more than one employer and is maintained by a 
rural telephone cooperative association.
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    \1074\ This is as defined in Code section 401(k)(7)(B) without 
regard to (iv) thereof and includes (1) organizations engaged primarily 
in providing electric service on a mutual or cooperative basis, or 
engaged primarily in providing electric service to the public in its 
service area and which is exempt from tax or which is a State or local 
government, other than a municipality; (2) certain civic leagues and 
business leagues exempt from tax 80 percent of the members of which are 
described in (1); (3) certain cooperative telephone companies; and (4) 
any organization that is a national association of organizations 
described above.
---------------------------------------------------------------------------
    The PPA's funding rules do not apply with respect to an 
eligible cooperative plan for plan years beginning before the 
earlier of: (1) the first plan year for which the plan ceases 
to be an eligible cooperative plan; or (2) January 1, 2017. In 
addition, in applying the pre-PPA funding rules to an eligible 
cooperative plan to such a plan for plan years beginning after 
December 31, 2007, and before the first plan year for which the 
PPA funding rules apply, the interest rate used is the interest 
rate applicable under the PPA funding rules with respect to 
payments expected to be made from the plan after the 20-year 
period beginning on the first day of the plan year (i.e., the 
third segment rate under the PPA funding rules).\1075\
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    \1075\ PPA specifies the interest rates that must be used in 
determining a plan's target normal cost and funding target. 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.
---------------------------------------------------------------------------
            Certain PBGC settlement plans
    The PPA provides a delayed effective date for its single-
employer plan funding rules for any plan that was in existence 
on July 26, 2005, and was a ``PBGC settlement plan'' as of that 
date. The term ``PBGC settlement plan'' means a single-employer 
defined benefit plan: (1) that was sponsored by an employer in 
bankruptcy proceedings giving rise to a claim by the PBGC of 
not greater than $150 million, and the sponsorship of which was 
assumed by another employer (not a member of the same 
controlled group as the bankrupt sponsor) and the PBGC's claim 
was settled or withdrawn in connection with the assumption of 
the sponsorship; or (2) that, by agreement with the PBGC, was 
spun off from a plan subsequently terminated by the PBGC in an 
involuntary termination.
    The PPA's funding rules do not apply with respect to a PBGC 
settlement plan for plan years beginning before January 1, 
2014. In addition, in applying the pre-PPA funding rules to 
such a plan for plan years beginning after December 31, 2007, 
and before January 1, 2014, the interest rate used is the third 
segment rate under the PPA funding rules.
            Plans of certain government contractors
    The PPA provides a delayed effective date for its single-
employer plan funding rules for any eligible government 
contractor plan. A plan is treated as an eligible government 
contractor plan if it is maintained by a corporation (or member 
of the same affiliated group): (1) whose primary source of 
revenue is derived from business performed under contracts with 
the United States that are subject to the Federal Acquisition 
Regulations \1076\ and also to the Defense Federal Acquisition 
Regulation Supplement; \1077\ (2) whose revenue derived from 
such business in the previous fiscal year exceeded $5 billion; 
and (3) whose pension plan costs that are assignable under 
those contracts are subject to certain provisions of the Cost 
Accounting Standards.\1078\
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    \1076\ 48 C.F.R. 1.
    \1077\ 48 C.F.R. 2.
    \1078\ 48 C.F.R. 9904.412 and 9904.413.
---------------------------------------------------------------------------
    The PPA funding rules do not apply with respect to such a 
plan for plan years beginning before the earliest of: (1) the 
first plan year for which the plan ceases to be an eligible 
government contractor plan; (2) the effective date of the Cost 
Accounting Standards Pension Harmonization Rule; \1079\ and (3) 
the first plan year beginning after December 31, 2010. In 
addition, in applying the pre-PPA funding rules to such a plan 
for plan years beginning after December 31, 2007, and before 
the first plan year for which the PPA funding rules apply, the 
interest rate used is the third segment rate under the PPA 
funding rules.
---------------------------------------------------------------------------
    \1079\ Section 106(d) of PPA requires the Cost Accounting Standards 
Board to review and revise sections 412 and 413 of the Cost Accounting 
Standards (48 C.F.R. 9904.412 and 9904.413) to harmonize the minimum 
required contributions under ERISA of eligible government contractor 
plans and government reimbursable pension plan costs, not later than 
Jan. 1, 2010. Any final rule adopted by the Cost Accounting Standards 
Board will be considered the Cost Accounting Standards Pension 
Harmonization Rule.
---------------------------------------------------------------------------

General minimum funding rules for plans with delayed PPA effective 
        dates

            Funding standard account
    As an administrative aid in the application of the pre-PPA 
funding requirements, a defined benefit pension plan is 
required to maintain a special account called a ``funding 
standard account'' to which specified charges and credits are 
made for each plan year, including a charge for normal cost and 
credits for contributions to the plan. Other charges or credits 
may apply as a result of decreases or increases in past service 
liability as a result of plan amendments, experience gains or 
losses, gains or losses resulting from a change in actuarial 
assumptions, or a waiver of minimum required contributions.
    In determining plan funding under an actuarial cost method, 
a plan's actuary generally makes certain assumptions regarding 
the future experience of a plan. These assumptions typically 
involve rates of interest, mortality, disability, salary 
increases, and other factors affecting the value of assets and 
liabilities. If the plan's actual unfunded liabilities are less 
than those anticipated by the actuary on the basis of these 
assumptions, then the excess is an experience gain. If the 
actual unfunded liabilities are greater than those anticipated, 
then the difference is an experience loss. Experience gains and 
losses for a year are generally amortized as credits or charges 
to the funding standard account over five years.
    If the actuarial assumptions used for funding a plan are 
revised and, under the new assumptions, the accrued liability 
of a plan is less than the accrued liability computed under the 
previous assumptions, the decrease is a gain from changes in 
actuarial assumptions. If the new assumptions result in an 
increase in the plan's accrued liability, the plan has a loss 
from changes in actuarial assumptions. The accrued liability of 
a plan is the actuarial present value of projected pension 
benefits under the plan that will not be funded by future 
contributions to meet normal cost or future employee 
contributions. The gain or loss for a year from changes in 
actuarial assumptions is amortized as credits or charges to the 
funding standard account over ten years.
    If minimum required contributions are waived, the waived 
amount (referred to as a ``waived funding deficiency'') is 
credited to the funding standard account. The waived funding 
deficiency is then amortized over a period of five years, 
beginning with the year following the year in which the waiver 
is granted. Each year, the funding standard account is charged 
with the amortization amount for that year unless the plan 
becomes fully funded.
    If, as of the close of a plan year, the funding standard 
account reflects credits at least equal to charges, the plan is 
generally treated as meeting the minimum funding standard for 
the year. If, as of the close of the plan year, charges to the 
funding standard account exceed credits to the account, then 
the excess is referred to as an ``accumulated funding 
deficiency.'' Thus, as a general rule, the minimum contribution 
for a plan year is determined as the amount by which the 
charges to the funding standard account would exceed credits to 
the account if no contribution were made to the plan. For 
example, if the balance of charges to the funding standard 
account of a plan for a year would be $200,000 without any 
contributions, then a minimum contribution equal to that amount 
would be required to meet the minimum funding standard for the 
year to prevent an accumulated funding deficiency.
            Funding methods and general concepts
    A defined benefit pension plan is required to use an 
acceptable actuarial cost method to determine the elements 
included in its funding standard account for a year. Generally, 
an actuarial cost method breaks up the cost of benefits under 
the plan into annual charges consisting of two elements for 
each plan year. These elements are referred to as: (1) normal 
cost; and (2) supplemental cost.
    The plan's normal cost for a plan year generally represents 
the cost of future benefits allocated to the year by the 
funding method used by the plan for current employees and, 
under some funding methods, for separated employees. 
Specifically, it is the amount actuarially determined that 
would be required as a contribution by the employer for the 
plan year in order to maintain the plan if the plan had been in 
effect from the beginning of service of the included employees 
and if the costs for prior years had been paid, and all 
assumptions as to interest, mortality, time of payment, etc., 
had been fulfilled. The normal cost will be funded by future 
contributions to the plan: (1) in level dollar amounts; (2) as 
a uniform percentage of payroll; (3) as a uniform amount per 
unit of service (e.g., $1 per hour); or (4) on the basis of the 
actuarial present values of benefits considered accruing in 
particular plan years.
    The supplemental cost for a plan year is the cost of future 
benefits that would not be met by future normal costs, future 
employee contributions, or plan assets. The most common 
supplemental cost is that attributable to past service 
liability, which represents the cost of future benefits under 
the plan: (1) on the date the plan is first effective; or (2) 
on the date a plan amendment increasing plan benefits is first 
effective. Other supplemental costs may be attributable to net 
experience losses, changes in actuarial assumptions, and 
amounts necessary to make up funding deficiencies for which a 
waiver was obtained. Supplemental costs must be amortized 
(i.e., recognized for funding purposes) over a specified number 
of years, depending on the source. For example, the cost 
attributable to a past service liability is generally amortized 
over 30 years.
    Normal costs and supplemental costs under a plan are 
computed on the basis of an actuarial valuation of the assets 
and liabilities of a plan. An actuarial valuation is generally 
required annually and is made as of a date within the plan year 
or within one month before the beginning of the plan year. 
However, a valuation date within the preceding plan year may be 
used if, as of that date, the value of the plan's assets is at 
least 100 percent of the plan's current liability (i.e., the 
present value of benefits under the plan, as described below).
    For funding purposes, the actuarial value of plan assets 
may be used, rather than fair market value. The actuarial value 
of plan assets is the value determined on the basis of a 
reasonable actuarial valuation method that takes into account 
fair market value and is permitted under Treasury regulations. 
Any actuarial valuation method used must result in a value of 
plan assets that is not less than 80 percent of the fair market 
value of the assets and not more than 120 percent of the fair 
market value. In addition, if the valuation method uses average 
value of the plan assets, values may be used for a stated 
period not to exceed the five most recent plan years, including 
the current year.
    In applying the funding rules, all costs, liabilities, 
interest rates, and other factors are required to be determined 
on the basis of actuarial assumptions and methods, each of 
which is reasonable (taking into account the experience of the 
plan and reasonable expectations), or which, in the aggregate, 
result in a total plan contribution equivalent to a 
contribution that would be determined if each assumption and 
method were reasonable. In addition, the assumptions are 
required to offer the actuary's best estimate of anticipated 
experience under the plan.\1080\
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    \1080\ Under present law, certain changes in actuarial assumptions 
that decrease the liabilities of an underfunded single-employer plan 
must be approved by the IRS.
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Additional contributions for underfunded plans with delayed PPA 
        effective dates

            In general
    Under special funding rules (referred to as the ``deficit 
reduction contribution'' rules),\1081\ an additional charge to 
a plan's funding standard account is generally required for a 
plan year if the plan's funded current liability percentage for 
the plan year is less than 90 percent.\1082\ A plan's ``funded 
current liability percentage'' is generally the actuarial value 
of plan assets as a percentage of the plan's current 
liability.\1083\ In general, a plan's current liability means 
all liabilities to employees and their beneficiaries under the 
plan, determined on a present-value basis.
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    \1081\ The deficit reduction contribution rules apply to single-
employer plans, other than single-employer plans with no more than 100 
participants on any day in the preceding plan year. Single-employer 
plans with more than 100 but not more than 150 participants are 
generally subject to lower contribution requirements under these rules.
    \1082\ Under an alternative test, a plan is not subject to the 
deficit reduction contribution rules for a plan year if (1) the plan's 
funded current liability percentage for the plan year is at least 80 
percent, and (2) the plan's funded current liability percentage was at 
least 90 percent for each of the two immediately preceding plan years 
or each of the second and third immediately preceding plan years.
    \1083\ In determining a plan's funded current liability percentage 
for a plan year, the value of the plan's assets is generally reduced by 
the amount of any credit balance under the plan's funding standard 
account. However, this reduction does not apply in determining the 
plan's funded current liability percentage for purposes of whether an 
additional charge is required under the deficit reduction contribution 
rules.
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    The amount of the additional charge required under the 
deficit reduction contribution rules is the sum of two amounts: 
(1) the excess, if any, of (a) the deficit reduction 
contribution (as described below), over (b) the contribution 
required under the normal funding rules; and (2) the amount (if 
any) required with respect to unpredictable contingent event 
benefits. The amount of the additional charge cannot exceed the 
amount needed to increase the plan's funded current liability 
percentage to 100 percent (taking into account the expected 
increase in current liability due to benefits accruing during 
the plan year).
    The deficit reduction contribution is generally the sum of: 
(1) the ``unfunded old liability amount,'' (2) the ``unfunded 
new liability amount,'' and (3) the expected increase in 
current liability due to benefits accruing during the plan 
year.\1084\ The ``unfunded old liability amount'' is the amount 
needed to amortize certain unfunded liabilities under 1987 and 
1994 transition rules. The ``unfunded new liability amount'' is 
the applicable percentage of the plan's unfunded new liability. 
Unfunded new liability generally means the unfunded current 
liability of the plan (i.e., the amount by which the plan's 
current liability exceeds the actuarial value of plan assets), 
but determined without regard to certain liabilities (such as 
the plan's unfunded old liability and unpredictable contingent 
event benefits). The applicable percentage is generally 30 
percent, but decreases by .40 of one percentage point for each 
percentage point by which the plan's funded current liability 
percentage exceeds 60 percent. For example, if a plan's funded 
current liability percentage is 85 percent (i.e., it exceeds 60 
percent by 25 percentage points), the applicable percentage is 
20 percent (30 percent minus 10 percentage points (25 
multiplied by .4)).\1085\
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    \1084\ The deficit reduction contribution may also include an 
additional amount as a result of the use of a new mortality table 
prescribed by the Secretary of the Treasury in determining current 
liability for plan years beginning after 2006.
    \1085\ In making these computations, the value of the plan's assets 
is reduced by the amount of any credit balance under the plan's funding 
standard account.
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    A plan may provide for unpredictable contingent event 
benefits, which are benefits that depend on contingencies that 
are not reliably and reasonably predictable, such as facility 
shutdowns or reductions in workforce. The value of any 
unpredictable contingent event benefit is not considered in 
determining additional contributions until the event has 
occurred. The event on which an unpredictable contingent event 
benefit is contingent is generally not considered to have 
occurred until all events on which the benefit is contingent 
have occurred.

                        Explanation of Provision


In general

    The provision offers two types of funding relief to 
underfunded plans with delayed PPA effective dates.\1086\ Under 
the provision a plan sponsor may elect either: (1) a two year 
look-back rule for purposes of calculating the plan's deficit 
reduction contribution; or (2) a 15-year amortization period 
for purposes of determining the plan's unfunded new liability.
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    \1086\ That is, multiple employer plans of certain cooperatives (as 
defined in section 104 of PPA), certain PBGC settlement plans (as 
defined in section 105 of PPA), and plans of certain government 
contractors (as defined in section 106 of PPA).
---------------------------------------------------------------------------
    Plan sponsors of eligible plans may elect relief for not 
more than two applicable years (one year for plans of certain 
government contractors). Plan sponsors electing two years of 
relief must elect the same type of relief for each year. 
Generally, relief may be elected for any two plan years 
beginning in 2008, 2009, 2010, or 2011. A plan year beginning 
in 2008 may be an applicable year, however, only if the due 
date for payment of the plan's minimum required contribution 
occurs on or after the provision's date of enactment. A plan 
sponsor is not required to make an election for more than one 
applicable plan year or to make such election for consecutive 
applicable plan years; however, a plan sponsor that does make 
an election for two plan years is required to elect the same 
relief provision for each year. For example, a plan sponsor 
that elects to use the two year look-back rule for the plan 
year beginning in 2009 can make an election to use that same 
rule for the plan year beginning in 2010 or 2011; however, the 
plan sponsor is not permitted to elect to use the 15-year 
amortization period for purposes of determining the plan's 
unfunded new liability for either of those subsequent eligible 
plan years. A ``pre-effective date plan year'' is any plan year 
prior to the first year to which the PPA funding rules apply to 
the plan.
    The provision requires the Secretary of the Treasury to 
prescribe rules for making, and in appropriate circumstances 
revoking, elections. An election may be revoked only with the 
consent of the Secretary.

Look-back rule

    The provision permits plan sponsors of underfunded plans 
with delayed PPA effective dates to elect to use a two year 
look-back for purposes of determining their deficit reduction 
contribution. That is, an eligible underfunded plan may elect 
to use a plan's funded current liability percentage from the 
second plan year preceding the plan's first election year under 
the provision.
    In determining its deficit reduction contribution, a plan 
that elects to use the two-year look-back rule is permitted to 
use the third segment rate under the P P A funding rules \1087\ 
in calculating a portion of its unfunded new liability amount. 
Under the pre-PPA rules, the unfunded new liability amount is 
the applicable percentage of the plan's unfunded new liability. 
Under the provision, in calculating its unfunded new liability 
amount, an electing plan may use the PPA third segment rate as 
the applicable percentage rather than the pre-PPA applicable 
percentage (i.e., 30 percent decreased by .40 of one percentage 
point for each percentage point by which the plan's funded 
current liability exceeds 60 percent), but only with respect to 
the portion of the plan's unfunded new liability that is its 
``increased unfunded new liability.'' The electing plan 
continues to use the pre-PPA applicable percentage in 
calculating its unfunded new liability amount with respect to 
the excess of the unfunded new liability over the increased 
unfunded new liability. The increased unfunded new liability is 
the excess (if any) of the plan's unfunded new liability over 
the amount of unfunded new liability determined as if the value 
of the plan's assets equaled the product of the current 
liability of the plan for the year multiplied by the funded 
current liability percentage of the plan for the second plan 
year preceding the first election year of such plan.
---------------------------------------------------------------------------
    \1087\ PPA secs. 104(b), 105(b), and 106(b). The third segment rate 
is derived from a corporate bond yield curve prescribed by the 
Secretary of the Treasury which reflects the yields on investment grade 
corporate bonds with varying maturities.
---------------------------------------------------------------------------

15-year amortization

    The provision permits plan sponsors of underfunded plans 
with delayed PPA effective dates to elect to use a special 
applicable percentage for purposes of calculating a portion of 
their unfunded new liability amount for any pre-effective date 
plan year beginning with or after the first election year. The 
special applicable percentage is the ratio of: (1) the annual 
installments payable in each year if the increased unfunded new 
liability for that plan year was amortized over 15 years, using 
an interest rate equal to the third segment rate under the PPA 
funding rules; to (2) the increased unfunded new liability for 
the plan year. This special applicable percentage applies with 
respect to the portion of the plan's unfunded new liability 
that is its increased unfunded new liability. The electing plan 
continues to use the pre-PPA applicable percentage in 
calculating its unfunded new liability amount with respect to 
the excess of the unfunded new liability over the increased 
unfunded new liability.

Eligible charity plans

    The provision amends section 104 of PPA by making the 
section applicable to eligible charity plans. Under the 
provision, therefore, the delayed PPA effective date and 
special interest rates rules that apply to eligible cooperative 
plans apply to eligible charity plans. This provision was 
intended to allow plans of large national charities and their 
separately organized local chapters to have access to the 
relief whether or not they are treated as a single controlled 
group. An eligible charity plan that makes the election will 
not have violated the anti-cutback or other qualification 
requirements merely as a result of operating in accordance with 
the benefit limitation rules of section 436 for periods before 
the date of enactment.
    A plan is an eligible charity plan for a plan year if it is 
maintained by more than one employer, 100 percent of whom are 
tax exempt organizations under section 501(c)(3).\1088\ For 
purposes of the provision, the determination of whether a plan 
is maintained by more than one employer is determined without 
regard to the controlled group rules of section 414(c).
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    \1088\ Generally, an organization is exempt under section 501(c)(3) 
if it is a corporation, community chest, fund, or foundation, organized 
and operated exclusively for religious, charitable, scientific, testing 
for public safety, literary, or educational purposes, or to foster 
national or international amateur sports competition, or for the 
prevention of cruelty to children or animals, no part of the net 
earnings of which inures to the benefit of any private shareholder or 
individual, no substantial part of the activities of which is carrying 
on propaganda, or otherwise attempting, to influence legislation, and 
which does not participate in, or intervene in, any political campaign 
of any candidate for public office.
---------------------------------------------------------------------------

                             Effective Date

    In general, the provision is effective as if included in 
PPA. The provisions relating to eligible charity plans are 
effective for plan years beginning after December 31, 2007, 
except that a plan sponsor may elect to apply the provision to 
plan years beginning after December 31, 2008, pursuant to 
elections made at the time and in the manner prescribed by the 
Secretary. An election may be revoked only with the consent of 
the Secretary.

3. Lookback for certain benefit restrictions (sec. 203 of the Act and 
        sec. 436 of the Code)

                              Present Law


Benefit restrictions

    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 if a plan's 
adjusted funding target attainment percentage is below a 
certain level.\1089\ These limits were added by the PPA and are 
generally applicable to plan years beginning after December 31, 
2007. 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.
---------------------------------------------------------------------------
    \1089\ Secs. 401(a)(29) and 436. Parallel rules apply under ERISA.
---------------------------------------------------------------------------

Prohibited payments

            General rule
    A plan must provide that, if the plan's adjusted funding 
target attainment percentage for a plan year is less than 60 
percent, the plan will not make any ``prohibited payments'' 
after the valuation date for the plan year.\1090\ For purposes 
of these limitations, a prohibited payment is (1) any payment 
in excess of the monthly amount paid under a single life 
annuity (plus any social security supplement provided under the 
plan) to a participant or beneficiary whose annuity starting 
date occurs during the period, (2) any payment for the purchase 
of an irrevocable commitment from an insurer to pay benefits 
(e.g., an annuity contract), (3) any transfer of assets and 
liabilities to another plan maintained by the same employer (or 
by any member of the employer's controlled group) that is made 
in order to avoid or terminate the application of the PPA 
benefit limitations; or (4) any other payment specified by the 
Secretary by regulations.
---------------------------------------------------------------------------
    \1090\ Sec. 436(d).
---------------------------------------------------------------------------
    A plan must also provide that, if the plan's adjusted 
funding target attainment percentage for a plan year is 60 
percent or greater, but less than 80 percent, the plan may not 
pay any prohibited payments exceeding the lesser of: (1) 50 
percent of the amount otherwise payable under the plan; and (2) 
the present value of the maximum PBGC guarantee with respect to 
the participant (determined under guidance prescribed by the 
PBGC, using the interest rates and mortality table applicable 
in determining minimum lump-sum benefits). The plan must 
provide that only one payment under this exception may be made 
with respect to any participant \1091\ during any period of 
consecutive plan years to which the limitation applies.
---------------------------------------------------------------------------
    \1091\ For purposes of the prohibited payment rules, the benefits 
provided with respect to a participant and any beneficiary of the 
participant (including an alternate payee) are aggregated. If the 
participant's accrued benefit is allocated to an alternate payee and 
one or more other persons, the amount that may be distributed is 
allocated in the same manner unless the applicable qualified domestic 
relations order provides otherwise.
---------------------------------------------------------------------------
    In addition, a plan must provide that, during any period in 
which the plan sponsor is in bankruptcy proceedings, the plan 
may not make any prohibited payment. This limitation does not 
apply on or after the date the plan's enrolled actuary 
certifies that the adjusted funding target attainment 
percentage of the plan is not less than 100 percent.
    With respect to the prohibited payment rule, certain frozen 
plans, meaning plans that do not provide for any future benefit 
accruals, are grandfathered. The prohibited payment limitation 
does not apply to a plan for any plan year if the terms of the 
plan (as in effect for the period beginning on September 1, 
2005, and ending with the plan year) provide for no benefit 
accruals with respect to any participant during the period. In 
addition, in the case of a terminated plan, while any benefit 
restriction in effect immediately before the termination of the 
plan continues to apply, the limitation on prohibited payments 
does not apply to payments made to carry out the termination of 
the plan in accordance with applicable law.\1092\
---------------------------------------------------------------------------
    \1092\ Treas. Reg. sec. 1.436-1(a)(3)(ii).
---------------------------------------------------------------------------
            Definition of social security supplement
    A social security supplement is an ancillary benefit that 
is permitted to be offered under a defined benefit plan. An 
ancillary benefit is benefit provided under the plan that is 
not a retirement-type subsidy or an optional form of payment of 
a participant's accrued benefit. It is benefit that is paid in 
addition to a participant's accrued benefit or any benefit 
treated as an accrued benefit. Specifically a social security 
supplement is a benefit for plan participants that commences 
before the age and terminates before the age when participants 
are entitled to old-age insurance benefits, unreduced on 
account of age, under title II of the Social Security Act, as 
amended (see section 202(a) and (g) of such Act), and does not 
exceed such old-age insurance benefit.\1093\
---------------------------------------------------------------------------
    \1093\ Treas. Reg. sec. 1.411(a)-7(c)(4)
---------------------------------------------------------------------------
            Treatment of payments under Social Security leveling 
                    feature
    A Social Security leveling feature is a feature with 
respect to an optional form of payment of a participant's 
accrued benefit commencing prior to a participant's expected 
commencement of Social Security benefits that provides for a 
temporary period of higher payments which is designed to result 
in an approximately level amount of income when the 
participant's estimated old age benefits from Social Security 
are taken into account.\1094\ Even though an optional form of 
benefit with this feature may provide the same stream of 
payments as a single life annuity plus a social security 
supplement, the amount in excess of a single life annuity paid 
before Social Security retirement age is a prohibited payment.
---------------------------------------------------------------------------
    \1094\ Treas. Reg. sec. 1.411(d)-3(g)(16)
---------------------------------------------------------------------------

Limitation on future benefit accruals

    Among the benefit limitations is a 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 future 
benefit accrual limitation or any other section 436 limitation 
provision applies to a plan.
    A 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 future benefit accrual limitation 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.

Temporary modification of application of limitation on benefit accruals 
        under WRERA

    Under section 203 of WRERA, in the case of the first plan 
year beginning during the period of October 1, 2008, through 
September 30, 2009 (``WRERA relief plan year''), the future 
benefit accrual limitation rules under section 436 are applied 
by substituting the plan's adjusted funding target attainment 
percentage for the preceding plan year for the adjusted funding 
target attainment percentage for the WRERA relief plan year. 
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. This substitution of the plan's adjusted funding 
target attainment percentage 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 WRERA 
relief. Thus, the substitution does not apply if the adjusted 
funding target attainment percentage for the WRERA relief plan 
year is greater than the preceding year.

                        Explanation of Provision


Limitation on future benefit accruals

    The provision extends the temporary modification of the 
limitation on benefit accruals under section 203 of WRERA to 
the plan year beginning during the period of October 1, 2009 
through September 30, 2010 and provides a special rule for any 
plan for which the valuation date is not the first day of the 
plan year. Under the provision, in the case of any plan year 
beginning during the period of October 1, 2008, through 
September 30, 2010, the future benefit accrual limitation rules 
under section 436 are applied by substituting the plan's 
adjusted funding target attainment percentage for any such plan 
year with the plan's adjusted funding target attainment 
percentage for the plan year beginning on or after October 1, 
2007,\1095\ and before October 1, 2008, as determined under 
rules prescribed by the Secretary. In the case of a plan for 
which the valuation date is not the first day of the plan year, 
for any plan years beginning after December 31, 2007, and 
before January 1, 2010, the future benefit accrual limitation 
rules under section 436 are applied by substituting the plan's 
adjusted funding target attainment percentage for any such plan 
year with the plan's adjusted funding target attainment 
percentage for the last plan year beginning before November 1, 
2007, as determined under rules prescribed by the Secretary.
---------------------------------------------------------------------------
    \1095\ A technical correction may be needed to make clear that the 
plan's adjusted funding target attainment percentage that is 
substituted is the percentage for the plan year beginning on or after 
(rather than after) October 1, 2007.
---------------------------------------------------------------------------
    This substitution only applies if it results in a greater 
adjusted funding target attainment percentage for a plan for 
the relevant plan year. Thus, the future benefit accrual 
limitation of section 436 is avoided if the plan's adjusted 
funding target attainment percentage for the plan year 
beginning on or after October 1, 2007,\1096\ and before October 
1, 2008, is 60 percent or greater (or, in the case of a plan 
for which the valuation date is not the first day of the plan 
year, if the adjusted funding target attainment percentage for 
the plan year beginning before November 1, 2007 is 60 percent 
or greater). Because the provision applies to the same period 
as section 203 of WRERA, it explicitly provides that section 
203 of WRERA applies to a plan for any plan year in lieu of the 
provision only to the extent that such section produces a 
higher adjusted funding target attainment percentage for such 
plan for such year.
---------------------------------------------------------------------------
    \1096\ A technical correction may be needed to make clear that the 
plan's adjusted funding target attainment percentage that is 
substituted is the percentage for the plan year beginning on or after 
(rather than after) October 1, 2007.
---------------------------------------------------------------------------

Prohibited payments

    Under the provision, in the case of any plan year beginning 
during the period of October 1, 2008, through September 30, 
2010 (or, in the case of plan where the plan's valuation date 
is not the first day of the plan year, for any plan years 
beginning after December 31, 2007, and before January 1, 2010), 
the same substitution of the plan's adjusted funding target 
attainment percentage as applies for purposes of the limitation 
on benefit accruals also applies for purposes of determining 
whether a plan can pay a prohibited payment in the form of a 
social security leveling option. For this purpose, a social 
security leveling option is a payment option which accelerates 
payments under the plan before, and reduces payments after, a 
participant starts receiving social security payments in order 
to provide substantially similar payments before and after such 
benefits are received.

                             Effective Date

    The provision generally is effective for plan years 
beginning on or after October 1, 2008. In the case of a plan 
for which the valuation date is not the first day of the plan 
year, the provision applies to plan years beginning after 
December 31, 2007.

4. Lookback for credit balance rule for plans maintained by charities 
        (sec. 204 of the Act and sec. 430 of the Code)

                              Present Law

            In general
    Under the PPA funding rules, credit balances that 
accumulated under pre-PPA law (``funding standard carryover 
balances'') are preserved and, for plan years beginning after 
2007, new credit balances (referred to as ``prefunding 
balances'') result if a plan sponsor makes contributions 
greater than those required under the PPA funding rules. In 
general, plan sponsors may choose whether to count funding 
standard carryover balances and prefunding balances in 
determining the value of plan assets or to use the balances to 
reduce required contributions, but not both.
            Funding standard carryover balance
    The funding standard carryover balance consists of a 
beginning balance in the amount of the positive balance in the 
funding standard account as of the end of the 2007 plan year, 
decreased (as described below) and adjusted to reflect the rate 
of net gain or loss on plan assets.
    For each plan year beginning after 2008, the funding 
standard carryover balance is decreased (but not below zero) by 
the sum of: (1) any amount credited to reduce the minimum 
required contribution for the preceding plan year, plus (2) any 
amount elected by the plan sponsor as a reduction in the 
funding standard carryover balance (thus reducing the amount by 
which the value of plan assets must be reduced in determining 
minimum required contributions).
            Prefunding balance
    The prefunding balance consists of a beginning balance of 
zero for the 2008 plan year, increased and decreased (as 
described below) and adjusted to reflect the rate of net gain 
or loss on plan assets.
    For subsequent years, i.e., as of the first day of plan 
year beginning after 2008 (the ``current'' plan year), the plan 
sponsor may increase the prefunding balance by an amount, not 
to exceed: (1) the excess (if any) of the aggregate total 
employer contributions for the preceding plan year, over (2) 
the minimum required contribution for the preceding plan year. 
For this purpose, any excess contribution for the preceding 
plan year is adjusted for interest accruing for the periods 
between the first day of the current plan year and the dates on 
which the excess contributions were made, determined using the 
effective interest rate of the plan for the preceding plan year 
and treating contributions as being first used to satisfy the 
minimum required contribution.
    In determining the amount of the increase in a plan's 
prefunding balance, the amount by which the aggregate total 
employer contributions for the preceding plan year exceeds the 
minimum required contribution for the preceding plan year is 
reduced (but not below zero) by the amount of contributions an 
employer would need to make to avoid a benefit limitation that 
would otherwise be imposed for the preceding plan year under 
the rules relating to benefit limitations for single-employer 
plans (as discussed below).\1097\
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    \1097\ Any contribution that may be taken into account in 
satisfying the requirement to make additional contributions with 
respect to more than one type of benefit limitation is taken into 
account only once for purposes of this reduction.
---------------------------------------------------------------------------
    For each plan year beginning after 2008, the prefunding 
balance of a plan is decreased (but not below zero) by the sum 
of: (1) any amount credited to reduce the minimum required 
contribution for the preceding plan year, plus (2) any amount 
elected by the plan sponsor as a reduction in the prefunding 
balance (thus reducing the amount by which the value of plan 
assets must be reduced in determining minimum required 
contributions).
            Application of balances to the value of plan assets or to 
                    reduce minimum required contributions
    If a plan sponsor elects to maintain a funding standard 
carryover balance or prefunding balance, the amount of those 
balances is generally subtracted from the value of plan assets 
for purposes of determining a plan's minimum required 
contributions, including a plan's funding shortfall, and a 
plan's funding target attainment percentage (defined as the 
ratio, expressed as a percentage, that the value of the plan's 
assets bears to the plan's funding target for the year). The 
value of a plan's assets is not reduced by these balances if a 
binding written agreement with the PBGC providing that all or a 
portion of the plan's funding standard carryover balance or 
prefunding balance is not available to offset the minimum 
required contribution for a plan year is in effect. In 
addition, for purposes of determining whether a plan is 
required to establish a shortfall amortization base for a plan 
year, the funding standard carryover balance is not subtracted 
from the value of plan assets and the prefunding balance is 
required to be subtracted from the value of plan assets only if 
an election has been made to use the balance to offset the 
plan's minimum required contribution for the plan year. 
However, the plan sponsor may elect to permanently reduce a 
funding standard carryover balance or prefunding balance, so 
that the value of plan assets is not required to be reduced by 
that amount in determining the minimum required contribution 
for the plan year.
    If the value of the plan's assets (reduced by any 
prefunding balance but not by any funding standard carryover 
balance) is at least 80 percent of the plan's funding target 
for the preceding plan year, a plan sponsor is generally 
permitted to credit all or a portion of the funding standard 
carryover balance or prefunding balance against the minimum 
required contribution for the current plan year, thus reducing 
the amount that must be contributed for the current plan 
year.\1098\ If a plan sponsor has elected to permanently reduce 
a funding standard carryover balance or prefunding balance, any 
reduction of such balances applies before determining the 
amount that is available for crediting against minimum required 
contributions for the plan year.
---------------------------------------------------------------------------
    \1098\ In the case of plan years beginning in 2008, the percentage 
for the preceding plan year may be determined using such methods of 
estimation as the Secretary of the Treasury may provide.
---------------------------------------------------------------------------
            Other rules
    In determining the prefunding balance or funding standard 
carryover balance as of the first day of a plan year, the plan 
sponsor must adjust the balance in accordance with regulations 
prescribed by the Secretary to reflect the rate of return on 
plan assets for the preceding year.\1099\ The rate of return is 
determined on the basis of the fair market value of the plan 
assets and must properly take into account, in accordance with 
regulations, all contributions, distributions, and other plan 
payments made during the period.
---------------------------------------------------------------------------
    \1099\ Treas. Reg. sec. 1.430(f)-1(b)(3).
---------------------------------------------------------------------------
    To the extent that a plan has a funding standard carryover 
balance of more than zero for a plan year, none of the plan's 
prefunding balance may be credited to reduce a minimum required 
contribution, nor may an election be made to reduce the 
prefunding balance for purposes of determining the value of 
plan assets. Thus, the funding standard carryover balance must 
be used for these purposes before the prefunding balance may be 
used.
    Any election relating to the prefunding balance and funding 
standard carryover balance is to be made in such form and 
manner as the Secretary prescribes.\1100\
---------------------------------------------------------------------------
    \1100\ See Treas. Reg. sec. 1.430(f)-1(f) for the rules governing 
elections relating to prefunding balances and funding standard 
carryover balances.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, for any plan year beginning on or 
after August 31, 2009, and before September 1, 2011, for 
purposes of determining whether the plan is sufficiently funded 
so as to be permitted to credit all or a portion of its funding 
standard carryover balance or prefunding balance against the 
minimum required contribution for the plan year, the plan may 
use the greater of: (1) its funding target attainment 
percentage (determined without regard to the provision) for the 
prior plan year, or (2) the funding target attainment 
percentage for the plan year beginning after August 31, 2007 
and before September 1, 2008, as determined under rules 
prescribed by the Secretary. Thus, the provision temporarily 
permits plans whose funded status for the lookback year was at 
least equal to 80 percent to offset their minimum required 
contributions by a credit balance, even if the plan would not 
otherwise be permitted to do so.
    For plans with valuation dates other than the first day of 
the plan year, the provision applies for any plan year 
beginning after December 31, 2007, and before January 1, 2010, 
and the plan may use the funding target attainment percentage 
for the last plan year beginning before September 1, 2007, as 
determined under rules prescribed by the Secretary.
    The provision applies only to plans maintained exclusively 
by one or more charitable organizations exempt from tax under 
section 501(c)(3).

                             Effective Date

    The provision is generally effective for plan years 
beginning after August 31, 2009. For plans with valuation dates 
other than the first day of the plan year, the provision is 
effective for plan years beginning after December 31, 2008.

                         C. Multiemployer Plans


1. Adjustments to funding standard account rules (sec. 211 of the Act 
        and sec. 431 of the Code)

                              Present Law

    Defined benefit pension plans generally are subject to 
minimum funding rules under the Code that require the 
sponsoring employer to periodically make contributions to fund 
plan benefits. Similar rules apply to defined benefit pension 
plans under the Labor Code provisions of ERISA.
    The minimum funding rules for single-employer and 
multiemployer plans are different.\1101\ A single-employer plan 
is a plan that is not a multiemployer plan. A multiemployer 
plan is generally a plan to which more than one employer is 
required to contribute and which is maintained pursuant to a 
collective bargaining agreement.\1102\
---------------------------------------------------------------------------
    \1101\ The PPA modified the minimum funding rules for multiemployer 
defined benefit pension plans. These modifications are generally 
effective for plan years beginning after 2007.
    \1102\ Sec. 414(f).
---------------------------------------------------------------------------

Funding standard account

    A multiemployer defined benefit pension plan is required to 
maintain a special account called a ``funding standard 
account'' to which charges and credits (such as credits for 
plan contributions) are made for each plan year. If, as of the 
close of the plan year, charges to the funding standard account 
exceed credits to the account, the plan has an ``accumulated 
funding deficiency'' equal to the amount of such excess 
charges. For example, if the balance of charges to the funding 
standard account of a plan for a year would be $200,000 without 
any contributions, then a minimum contribution equal to that 
amount is required to meet the minimum funding standard for the 
year to prevent an accumulated funding deficiency. If credits 
to the funding standard account exceed charges, a ``credit 
balance'' results. The amount of the credit balance, increased 
with interest, can be used to reduce future required 
contributions.

Amortization periods

    A plan is required to use an acceptable actuarial cost 
method to determine the elements included in its funding 
standard account for a year. Generally, an acceptable actuarial 
cost method breaks up the cost of benefits under the plan into 
annual charges consisting of two elements for each plan year. 
These elements are referred to as the: (1) normal cost and (2) 
amortization of supplemental cost. The normal cost for a plan 
for a plan year generally represents the cost of future 
benefits allocated to the plan year under the funding method 
used by the plan for current employees. The supplemental cost 
for a plan year is the cost of future benefits that would not 
be met by future normal costs, future employee contributions, 
or plan assets, such as a net experience loss. Supplemental 
costs are amortized (i.e., recognized for funding purposes) 
over a specified number of years, depending on the source. The 
amortization period applicable to a multiemployer plan for most 
credits and charges is 15 years.\1103\ Past service liability 
under the plan is amortized over 15 years; \1104\ past service 
liability due to plan amendments is amortized over 15 years; 
and experience gains and losses resulting from a change in 
actuarial assumptions are amortized over 15 years. Experience 
gains and losses and waived funding deficiencies are also 
amortized over 15 years.
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    \1103\ Sec. 431(b)(2). Prior to the effective date of PPA, the 
amortization period was 30 years for past service liability, past 
service liability due to plan amendments, and losses and gains 
resulting from a change in actuarial assumptions.
    \1104\ In the case of a plan in existence on January 1, 1974, past 
service liability under the plan on the first day on which the plan was 
first subject to ERISA was amortized over 40 years. In the case of a 
plan which was not in existence on January 1, 1974, past service 
liability under the plan on the first day on which the plan was first 
subject to ERISA was amortized over 30 years. Past service liability 
due to plan amendments was amortized over 30 years.
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    The Secretary, upon receipt of an application, is required 
to grant an extension of the amortization period for up to five 
years with respect to any unfunded past service liability, 
investment loss, or experience loss.\1105\ There must be 
included with the application a certification by the plan's 
actuary that: (1) absent the extension, the plan would have an 
accumulated funding deficiency in the current plan year and any 
of the nine succeeding plan years; (2) the plan sponsor has 
adopted a plan to improve the plan's funding status; (3) taking 
into account the extension, the plan is projected to have 
sufficient assets to timely pay its expected benefit 
liabilities and other anticipated expenditures; and (4) 
required notice has been provided. The automatic extension 
provision does not apply with respect to any application 
submitted after December 31, 2014. The Secretary may also grant 
an additional extension of such amortization periods for an 
additional five years, using the same standards for determining 
whether such an extension may be granted as under the pre-PPA 
minimum funding rules.\1106\
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    \1105\ Sec. 431(d)(1).
    \1106\ Sec. 431(d)(2).
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Actuarial assumptions

    In applying the funding rules, all costs, liabilities, 
interest rates, and other factors are required to be determined 
on the basis of actuarial assumptions and methods, each of 
which must be reasonable (taking into account the experience of 
the plan and reasonable expectations), or which, in the 
aggregate, result in a total plan contribution equivalent to a 
contribution that would be obtained if each assumption and 
method were reasonable. In addition, the assumptions are 
required to offer the actuary's best estimate of anticipated 
experience under the plan.

Valuation of plan assets

    In determining the charges and credits to be made to the 
plan's funding standard account for a multiemployer plan, the 
value of plan assets may be determined on the basis of any 
reasonable actuarial method of valuation which takes into 
account fair market value and which is permitted under 
regulations prescribed by the Secretary.\1107\ Thus, the 
actuarial value of a plan's assets under a reasonable actuarial 
valuation method can be used instead of fair market value. A 
reasonable actuarial valuation method generally can include a 
smoothing methodology that takes into account reasonable 
expected investment returns and average values of the plan 
assets, so long as the smoothing or averaging period does not 
exceed the five most recent plan years, including the current 
plan year. In addition, in order to be reasonable, any 
actuarial valuation method used by the plan is required to 
result in a value of plan assets that is not less than 80 
percent of the current fair market value of the assets and not 
more than 120 percent of the current fair market value.\1108\ 
In determining plan funding under an acceptable actuarial cost 
method, a plan's actuary generally makes certain assumptions 
regarding the future experience of a plan.
---------------------------------------------------------------------------
    \1107\ Sec. 431(c)(2).
    \1108\ Treas. Reg. sec. 1.412(c)(2)-1(b). Rev. Proc. 2000-40, 2000-
2 CB 357, generally indicates that only an averaging period that does 
not exceed five years will be approved by the IRS. The revenue 
procedure also indicates that for a funding valuation method to be 
approved, the asset value determined under the method must be adjusted 
to be no greater than 120 percent and no less than 80 percent of the 
fair market value.
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    The actuarial valuation method is considered to be part of 
the plan's funding method. The same method must be used each 
plan year. If the valuation method is changed, the change is 
only permitted to take effect if approved by the Secretary of 
the Treasury.\1109\
---------------------------------------------------------------------------
    \1109\ Sec. 412(d)(1).
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Additional funding rules for plans in endangered or critical status

    Under section 432,\1110\ 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.
---------------------------------------------------------------------------
    \1110\ 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, except that a plan operating under a funding 
improvement or rehabilitation plan for its last year beginning 
before January 1, 2015 must continue to operate under such plan 
until the funding improvement or rehabilitation period (as 
explained below) expires or the plan emerges from endangered or 
critical status.

Failure to comply with minimum funding rules

    In the event of a failure to comply with the minimum 
funding rules, the Code imposes a two-level excise tax on the 
plan sponsor.\1111\ The initial tax is five percent of the 
plan's accumulated funding deficiency for multiemployer plans. 
An additional tax is imposed if the failure is not corrected 
before the date that a notice of deficiency with respect to the 
initial tax is mailed to the employer by the IRS or the date of 
assessment of the initial tax. The additional tax is equal to 
100 percent of the unpaid contribution or the accumulated 
funding deficiency, whichever is applicable. Before issuing a 
notice of deficiency with respect to the excise tax, the 
Secretary must notify the Secretary of Labor and provide the 
Secretary of Labor with a reasonable opportunity to require the 
employer responsible for contributing to, or under, the plan to 
correct the deficiency or comment on the imposition of the tax.
---------------------------------------------------------------------------
    \1111\ Sec. 4971. Special rules apply under section 4971 for 
multiemployer plans in endangered or critical status.
---------------------------------------------------------------------------

                        Explanation of Provision


Special funding relief rules

    A plan sponsor of a multiemployer plan that meets a 
solvency test is permitted to use either one or both of two 
special funding relief rules for either or both of two plan 
years.
            Amortization of net investment losses
    The first special funding relief rule allows the plan 
sponsor to treat the portion of its experience loss 
attributable to the net investment losses (if any) incurred in 
either or both of the first two plan years ending after August 
31, 2008, as an item separate from other experience losses, to 
be amortized in equal annual installments (until fully 
amortized) over the period beginning with the plan year in 
which such portion is first recognized in the actuarial value 
of assets and ending in the 30-plan-year period beginning with 
the plan year in which the net investment loss was incurred. If 
this treatment is used for a plan year, the plan sponsor will 
not be eligible for an extension of this amortization period 
for this separate item, and if an extension was granted before 
electing this treatment of net investment losses, such 
extension must not result in such amortization period exceeding 
30 years.
    A plan sponsor is required to determine its net investment 
losses in the manner described by the Secretary, on the basis 
of the difference between actual and expected returns 
(including any difference attributable to any criminally 
fraudulent investment). The determination as to whether an 
arrangement is a criminally fraudulent investment arrangement 
shall be made under rules substantially similar to the rules 
prescribed by the Secretary for purposes of section 165.
            Expanded smoothing period and asset valuation corridor
    Under the other special funding relief rule, a 
multiemployer plan may change its asset valuation method in a 
manner which spreads the difference between the expected 
returns and actual returns for either or both of the first two 
plan years ending after August 31, 2008 over a period of not 
more than 10 years. However, as under present law, spreading 
the difference between expected and actual returns under a 
plan's asset valuation method is only permitted if it does not 
result in a value of plan assets, when compared to the current 
fair market value of the plan assets, to be at any time outside 
an asset valuation corridor.
    Under this special funding relief rule, the asset valuation 
corridor is expanded so that, for either or both of the first 
two plan years beginning after August 31, 2008, the plan's 
asset value must be adjusted under the valuation method being 
used so the value of plan assets is not less than 80 percent of 
the current fair market value of the assets and not more than 
130 percent of the current fair market value (rather than 120 
percent). This expanded valuation corridor is available whether 
or not the plan sponsor increases the period for spreading the 
difference between expected and actual returns under its asset 
valuation method.
    If a plan sponsor uses either or both of the options 
(extending the spreading period and the expanded asset 
valuation corridor) under this special relief rule for one or 
both of these plan years, the Secretary will not treat the 
asset valuation method of the plan as unreasonable solely 
because of such change and the change will be deemed to be 
approved by the Secretary.

Amortization of reduction in unfunded accrued liability

    To the extent a plan sponsor uses both of the two special 
funding relief rules for any plan year, the plan is required to 
treat any resulting reduction in the plan's unfunded accrued 
liability as a separate experience amortization base. This 
separate experience amortization base is amortized in annual 
installments (until fully amortized) over a period of 30 plan 
years (rather than the otherwise applicable amortization 
period).

Solvency test

    The solvency test is satisfied only if the plan actuary 
certifies that the plan is projected to have sufficient assets 
to timely pay expected benefits and anticipated expenditures 
over the amortization period taking into account the changes in 
the funding standard account under the special funding relief 
rule elected.

Benefit restriction

    If a plan sponsor of a multiemployer plan uses one, or 
both, of the special funding relief rules under this provision, 
then, in addition to any other applicable restrictions on 
benefit increases, the following limit also applies. A plan 
amendment increasing benefits may not go into effect during 
either of the two plan years immediately following any plan 
year to which such election first applies unless one of the 
following conditions is satisfied. Either (1) the plan actuary 
certifies that such increase is paid for out of additional 
contributions not allocated to the plan at the time the 
election was made, and the plan's funded percentage and 
projected credit balances for such two plan years are 
reasonably expected to be generally at the same levels as such 
percentage and balances would have been if the benefit increase 
had not been adopted, or (2) the amendment is required to 
maintain the plan's status as a qualified retirement plan under 
the applicable provisions of the Code or to comply with other 
applicable law.

Reporting

    A plan sponsor of a multiemployer plan that uses one or 
both of these special funding relief rules must give notice to 
participants and beneficiary of its use of the relief and must 
inform the PBGC of its use of the relief in such form and 
manner as the Director of the PBGC may prescribe.

                             Effective Date

    The provision takes effect as of the first day of the first 
plan year ending after August 31, 2008. However, if a plan 
sponsor uses either (or both) of the special funding relief 
provisions and such use affects the plan's funding standard 
account for the first plan year beginning after August 31, 
2008, the use of the rule is disregarded for purposes of 
applying the provisions for additional funding for 
multiemployer plans in endangered or critical status under 
section 432 to such plan year. The restriction on plan 
amendments increasing benefits is effective on the date of 
enactment of this provision.

     PART TEN: REVENUE PROVISIONS OF THE HOMEBUYER ASSISTANCE AND 
          IMPROVEMENT ACT OF 2010 (PUBLIC LAW 111-198) \1112\

    A. Homebuyer Credit (sec. 2 of the Act and sec. 36 of the Code)

                              Present Law

In general
    An individual who is a first-time homebuyer is allowed a 
refundable tax credit equal to the lesser of $8,000 ($4,000 for 
a married individual filing separately) or 10 percent of the 
purchase price of a principal residence. The credit is allowed 
for qualifying home purchases on or after April 9, 2008, and 
before May 1, 2010.\1113\ The credit applies to the purchase of 
a principal residence before July 1, 2010 by any taxpayer who 
enters into a written binding contract before May 1, 2010, to 
close on the purchase of a principal residence before July 1, 
2010.
---------------------------------------------------------------------------
    \1112\ H.R. 5623. The bill passed the House on the suspension 
calendar on June 29, 2010. The Senate passed the bill by unanimous 
consent on June 30, 2010. The President signed the bill on July 2, 
2010.
    \1113\ For purchases before January 1, 2009, the dollar limits are 
$7,500 ($3,750 for a married individual filing separately).
---------------------------------------------------------------------------
    An individual (and, if married, the individual's spouse) 
who has maintained the same principal residence for any five-
consecutive year period during the eight-year period ending on 
the date of the purchase of a subsequent principal residence is 
treated as a first-time homebuyer. The maximum allowable credit 
for such taxpayers is $6,500 ($3,250 for a married individual 
filing separately).
    The credit phases out for individual taxpayers with 
modified adjusted gross income between $125,000 and $145,000 
($225,000 and $245,000 for joint filers) for the year of 
purchase.
    An individual is considered a first-time homebuyer if the 
individual had no ownership interest in a principal residence 
in the United States during the 3-year period prior to the 
purchase of the home.
    In the case of a purchase of a principal residence after 
December 31, 2008, a taxpayer may elect to treat the purchase 
as made on December 31 of the calendar year preceding the 
purchase for purposes of claiming the credit on the prior 
year's tax return.
    No District of Columbia first-time homebuyer credit \1114\ 
is allowed to any taxpayer with respect to the purchase of a 
residence after December 31, 2008, if the national first-time 
homebuyer credit is allowable to such taxpayer (or the 
taxpayer's spouse) with respect to such purchase.
---------------------------------------------------------------------------
    \1114\ Sec. 1400C.
---------------------------------------------------------------------------
Limitations
    No credit is allowed for the purchase of any residence if 
the purchase price exceeds $800,000.
    No credit is allowed unless the taxpayer is 18 years of age 
as of the date of purchase. A taxpayer who is married is 
treated as meeting the age requirement if the taxpayer or the 
taxpayer's spouse meets the age requirement.
    The definition of purchase excludes property acquired from 
a person related to the person acquiring such property or the 
spouse of the person acquiring the property, if married.
    No credit is allowed to any taxpayer if the taxpayer is a 
dependent of another taxpayer.
    No credit is allowed unless the taxpayer attaches to the 
relevant tax return a properly executed copy of the settlement 
statement used to complete the purchase.
Recapture
    For homes purchased on or before December 31, 2008, 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 an 
individual purchases a home in 2008, recapture commences with 
the 2010 tax return. If the individual sells the home (or the 
home ceases to be used as the principal residence of the 
individual or the individual's spouse) prior to complete 
recapture of the credit, the amount of any credit not 
previously recaptured is due on the tax return for the year in 
which the home is sold (or ceases to be used as the principal 
residence).\1115\ However, in the case of a sale to an 
unrelated person, the amount recaptured may not exceed the 
amount of gain from the sale of the residence. 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 an individual. 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. Recapture does not apply to a home purchased after 
December 31, 2008 that is treated (at the election of the 
taxpayer) as purchased on December 31, 2008.
---------------------------------------------------------------------------
    \1115\ If the individual sells the home (or the home ceases to be 
used as the principal residence of the individual and the individual's 
spouse) in the same taxable year the home is purchased, no credit is 
allowed.
---------------------------------------------------------------------------
    For homes purchased after December 31, 2008, the credit is 
recaptured only if the taxpayer disposes of the home (or the 
home otherwise ceases to be the principal residence of the 
taxpayer) within 36 months from the date of purchase.
Waiver of recapture for individuals on qualified official extended duty
    In the case of a disposition of principal residence by an 
individual (or a cessation of use of the residence that 
otherwise would cause recapture) after December 31, 2008, in 
connection with Government orders received by the individual 
(or the individual's spouse) for qualified official extended 
duty service, no recapture applies by reason of the disposition 
of the residence,\1116\ and any 15-year recapture with respect 
to a home acquired before January 1, 2009, ceases to apply in 
the taxable year the disposition occurs.
---------------------------------------------------------------------------
    \1116\ If the individual sells the home (or the home ceases to be 
used as the principal residence of the individual and the individual's 
spouse) in connection with such orders in the same taxable year the 
home is purchased, the credit is allowable.
---------------------------------------------------------------------------
    Qualified official extended duty service means service on 
official extended duty as a member of the uniformed services, a 
member of the Foreign Service of the United States, or an 
employee of the intelligence community.\1117\
---------------------------------------------------------------------------
    \1117\ These terms have the same meaning as under the provision for 
exclusion of gain on the sale of certain principal residences. Sec. 
121.
---------------------------------------------------------------------------
    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 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.
    The term ``member of the Foreign Service of the United 
States'' includes: (1) chiefs of mission; (2) ambassadors at 
large; (3) members of the Senior Foreign Service; (4) Foreign 
Service officers; and (5) Foreign Service personnel.
    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.

Extension of the first-time homebuyer credit for individuals on 
        qualified official extended duty outside of the United States

    In the case of any individual (and, if married, the 
individual's spouse) who serves on qualified official extended 
duty service outside of the United States for at least 90 days 
during the period beginning after December 31, 2008, and ending 
before May 1, 2010, the expiration date of the first-time 
homebuyer credit is extended for one year, through May 1, 2011 
(July 1, 2011, in the case of an individual who enters into a 
written binding contract before May 1, 2011, to close on the 
purchase of a principal residence before July 1, 2011).

Mathematical error authority

    The Act makes a number of changes to expand the definition 
of mathematical or clerical error for purposes of 
administration of the credit by the Internal Revenue Service 
(``IRS''). The IRS may assess additional tax without issuance 
of a notice of deficiency as otherwise required \1118\ in the 
case of: an omission of any increase in tax required by the 
recapture provisions of the credit; information from the person 
issuing the taxpayer identification number of the taxpayer that 
indicates that the taxpayer does not meet the age requirement 
of the credit; information provided to the Secretary by the 
taxpayer on an income tax return for at least one of the two 
preceding taxable years that is inconsistent with eligibility 
for such credit; or, failure to attach to the return a properly 
executed copy of the settlement statement used to complete the 
purchase.
---------------------------------------------------------------------------
    \1118\ Sec. 6213.
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act extends the time for closing on a principal 
residence eligible for the first-time homebuyer credit through 
September 30, 2010 for any individual who entered into a 
written binding contract before May 1, 2010, to close on the 
purchase of a principal residence before July 1, 2010. The 
eligibility period for an individual who serves on qualified 
official extended duty outside of the United States who enters 
into a written binding contract before May 1, 2011, to close on 
the purchase of a principal residence before July 1, 2011, and 
who purchases such residence before July 1, 2011, is unchanged.

                             Effective Date

    The provision is effective for residences purchased after 
June 30, 2010.

                           B. Revenue Offsets


1. Application of bad check penalty to electronic checks and other 
        payment forms (sec. 3 of the Act and sec. 6657 of the Code)

                              Present Law


In general

    Taxpayers may pay their tax liability by ``any commercially 
acceptable means'' that the Secretary deems appropriate.\1119\ 
The Code authorizes the Secretary, with certain limitations, to 
specify when and how new media may be used to pay tax 
obligations.\1120\ The Secretary has long authorized the IRS to 
accept payments by check or money order, although personal 
checks may be refused if there is good reason to believe that 
the check will not be honored when presented to the financial 
institution on which it is drawn. Regulations authorize the 
acceptance of payments by debit or credit card, as well as 
electronic funds transfers, and also prescribe procedures for 
resolution of errors in processing payments by such 
means.\1121\ Although the Secretary may permit and encourage 
tax payments by electronic funds transfers, credit card or 
debit card, the taxpayer's use of such means must be 
voluntary.\1122\
---------------------------------------------------------------------------
    \1119\ Sec. 6311(a).
    \1120\ Sec. 6311(d) requires that the Secretary identify such 
methods by regulations, and in doing so, specify when such payments are 
considered received, and provide means to ensure that tax matters may 
be resolved without involvement of financial institutions. The 
Secretary is also authorized to enter into contracts to obtain services 
related to receiving payment if it is cost-beneficial to the 
government, but may not pay ``any fee or other consideration under such 
contracts for the use of credit, debit or charge cards for the payment 
of taxes,'' such as the convenience fees charged for electronic tax 
payments. Sec. 6311(d)(2); Treas. Reg. sec. 301.6311-2(f).
    \1121\ Treas. Reg. sec. 1.6311-2.
    \1122\ Treas. Reg. sec. 301.6311-2(a)(1); Treas. Reg. sec. 31.3602-
1(j).
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    Taxpayers may pay their taxes by electronic funds 
transfers,\1123\ either by initiating instructions to financial 
institutions at which they hold accounts (i.e., electronic 
funds withdrawal), or by enrolling in the Electronic Federal 
Tax Payment System (``EFTPS''),\1124\ which is a tax payment 
system provided free by the Treasury, under which the taxpayer 
authorizes Treasury to initiate instructions for electronic 
transfers of funds from accounts held by the taxpayer to the 
IRS. Once enrolled, a taxpayer may pay all of its Federal taxes 
using EFTPS. Individuals can pay quarterly estimated taxes 
electronically using EFTPS, and can make payments weekly, 
monthly, or quarterly. Both business and individual payments 
can be scheduled in advance. Certain excise taxes are required 
to be paid by EFTPS.\1125\
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    \1123\ Treas. Reg. sec. 301.6311-2(a)(2) provides that guidance on 
electronic funds transfers other than credit or debit cards is provided 
in regulations under section 6302, which defines electronic funds 
transfers generally to include any transfer of funds other than by 
check, draft or similar paper instrument, if initiated through an 
electronic media to instruct a financial institution or intermediary to 
debit or credit an account.
    \1124\ Treas. Reg. secs. 301.6311-1(b)(1) and 301.6311-2(b) provide 
that the underlying tax obligation is not considered satisfied until 
the check or money order is paid or the electronic payment has been 
authorized by the relevant financial institution and the payment 
actually received.
    \1125\ Secs. 5061(e) and 5703(b).
---------------------------------------------------------------------------
    Payments by checks or money orders are generally considered 
made on the date the financial instrument is received by the 
IRS, not the date that the financial institution on which 
payment is drawn remits the funds to the IRS. Thus, a check 
received by mail in an IRS office on April 15, 2010, is 
credited as of that date. Payments by debit or credit card are 
deemed received when the issuer of the card authorizes the 
transaction, provided that the payment is actually received by 
the United States in the ordinary course of business.\1126\ The 
procedures under which the IRS accepts credit or debit card 
payment precludes the IRS from access to the card numbers, and 
instead require that such payments be provided through 
remittance with an electronically filed return, payment by 
phone or payment by internet. As a result, the card issuer 
authorization is contemporaneous with the IRS receiving notice 
of the payment. Payments by electronic funds transfer are 
considered paid on the date that funds are actually withdrawn 
from the taxpayer's account, i.e., the settlement date.\1127\ 
The settlement date may be subsequent to the date on which the 
payment transaction is initiated.
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    \1126\ Treas. Reg. sec. 301.6311-2(b).
    \1127\ Treas. Reg. sec. 301.6311-2(a)(2) and Treas. Reg. sec. 
31.6302-1(h)(8).
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Bad check penalty

    Any taxpayer who attempts to satisfy a tax liability with a 
check or money order that is not duly paid is subject to a 
penalty. If the dishonored check or money order is equal to or 
greater than $1,250, the penalty is two percent of the face 
amount of the check or money order. If the dishonored check or 
money order is less than $1,250, the penalty is the lesser of 
$25 or the amount of the check or money order.\1128\ The 
penalty is not applicable if the taxpayer establishes that 
payment was tendered in good faith and with reasonable cause to 
believe it would be paid.
---------------------------------------------------------------------------
    \1128\ Sec. 6657.
---------------------------------------------------------------------------
    The Code provides that this penalty applies to ``any check 
or money order,'' without mention of payment by magnetic media, 
such as electronic funds transfers from a bank account, debit 
cards, and credit cards.

                        Explanation of Provision

    The provision expands the bad check penalty to cover all 
commercially acceptable instruments of payment that are not 
duly paid.

                             Effective Date

    The provision is effective for instruments tendered after 
the date of enactment (July 2, 2010).

2. Disclosure of prisoner return information to State prisons (sec. 4 
        of the Act and sec. 6103 of the Code)

                              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.\1129\ 
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.\1130\ ``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.
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    \1129\ Sec. 6103(a).
    \1130\ 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.\1131\ 
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.
---------------------------------------------------------------------------
    \1131\ 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 6110(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.
---------------------------------------------------------------------------
    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.\1132\ 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.
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    \1132\ 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.
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    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.
    The Code permits disclosure 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 disclosures may be made to the head of the Federal 
Bureau of Prisons and redisclosed to officers and employees of 
the Federal Bureau of Prisons. The Secretary may only disclose 
such information as is necessary to permit effective tax 
administration. The authority terminates December 31, 2011. The 
Code requires the Treasury Inspector General for Tax 
Administration to report to Congress on the implementation of 
this provision no later than December 31, 2010.\1133\
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    \1133\ Sec. 7803(d)(3)(C). See Treasury Inspector General for Tax 
Administration, Significant Problems Still Exist With Internal Revenue 
Service Efforts to Identify Prisoner Tax Refund Fraud (Audit No. 2011-
40-009) (December 29, 2010).
---------------------------------------------------------------------------
    The IRS is required to publish an annual report containing 
statistics relating to the number of false and fraudulent 
returns associated with each Federal and State prisons and such 
other information as the Secretary deems appropriate.

                        Explanation of Provision

    The provision extends the disclosure authority applicable 
to the Federal Bureau of Prisons to State prisons. The 
disclosure authority terminates December 31, 2011.

                             Effective Date

    The provision is effective on the date of enactment.

 PART ELEVEN: REVENUE PROVISIONS OF THE DODD-FRANK WALL STREET REFORM 
        AND CONSUMER PROTECTION ACT (PUBLIC LAW 111-203) \1134\
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    \1134\ H.R. 4173. The bill passed the House on December 11, 2009. 
The Senate passed the bill with an amendment on May 20, 2010. The 
conference report was filed on June 29, 2010 (H.R. Rep. No. 111-517) 
and was passed by the House on June 30, 2010, and the Senate on July 
15, 2010. The President signed the bill on July 21, 2010.
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  A. Certain Swaps, etc., Not Treated as Section 1256 Contracts (sec. 
               1601 of the Act and sec. 1256 of the Code)

                              Present Law

    In general, section 1256 requires taxpayers to treat each 
section 1256 contract as if it were sold (and repurchased) for 
its fair market value on the last business day of the year 
(i.e., ``marked to market''). Any gain or loss with respect to 
a section 1256 contract which is subject to the mark-to-market 
rule is treated as if 40 percent of the gain or loss were 
short-term capital gain or loss and 60 percent were long-term 
capital gain or loss.\1135\ Gains and losses upon the 
termination (or transfer) of a section 1256 contract, by 
offsetting, taking or making delivery, by exercise or by being 
exercised, by assignment or being assigned, by lapse, or 
otherwise, also generally are treated as 40 percent short-term 
and 60 percent long-term capital gains or losses.\1136\ Section 
1256(b) provides that a ``section 1256 contract'' means (1) any 
regulated futures contract, (2) any foreign currency contract, 
(3) any nonequity option, (4) any dealer equity option, and (5) 
any dealer securities futures contract.
---------------------------------------------------------------------------
    \1135\ Sec. 1256(a)(3).
    \1136\ Sec. 1256(c)(1).
---------------------------------------------------------------------------
    The rule in section 1256(a) treating gains and losses as 60 
percent long-term capital gains and losses and 40 percent 
short-term capital gains and losses does not apply to (i) 
hedging transactions,\1137\ (ii) section 1256 contracts that 
but for section 1256(a)(3) would be ordinary income 
property,\1138\ (iii) a section 1256 contract that is part of a 
mixed straddle if the taxpayer elects to have section 1256 not 
apply to the section 1256 contract,\1139\ or (iv) any section 
1256 contract held by a dealer in commodities or by a trader in 
commodities that makes the mark-to-market election in section 
475.\1140\
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    \1137\ Sec. 1256(e)(1).
    \1138\ Sec. 1256(f)(2). Gain or loss from trading of section 1256 
contracts is treated as gain or loss from the sale of a capital asset 
except to the extent the contract is held for purposes of hedging 
ordinary loss property. (Sec. 1256(f)(3)).
    \1139\ Sec. 1256(d).
    \1140\ See sec. 475(d)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision excludes from the definition of ``section 
1256 contract'' any interest rate swap, interest rate cap, 
interest rate floor, commodity swap, equity swap, equity index 
swap, credit default swap, or similar agreement.

                             Effective Date

    The provision is effective upon the date of enactment (July 
21, 2010).

  PART TWELVE: REVENUE PROVISIONS OF THE __ ACT OF __ (PUBLIC LAW 111-
                              226) \1141\
---------------------------------------------------------------------------

    \1141\ H.R. 1586. The bill originated as a bill imposing additional 
tax on bonuses received from certain TARP recipients and passed the 
House on the suspension calendar on March 19, 2009. The bill passed the 
Senate with an amendment substituting text relating to the FAA on March 
22, 2010. The House agreed to the Senate amendment with an amendment on 
March 25, 2010. On August 5, 2010, the Senate concurred in the House 
amendment to the Senate amendment with an amendment substituting the 
text relating to education, jobs, and Medicaid for the previous 
language. On August 10, 2010, the House agreed to the Senate amendment 
to the House amendment to the Senate amendment. The President signed 
the bill on August 10, 2010. 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 the Senate Amendment to the 
House Amendment to the Senate Amendment to H.R. 1586, Scheduled for 
Consideration by the House of Representatives on August 10, 2010 (JCX-
46-10), August 10, 2010.
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 A. Rules to Prevent Splitting Foreign Tax Credits from the Income to 
  Which They Relate (sec. 211 of the Act and new sec. 909 of the Code)

                              Present Law

    The United States employs a worldwide tax system under 
which U.S. resident individuals and domestic corporations 
generally are taxed on all income, whether derived in the 
United States or abroad; the foreign tax credit provides relief 
from double taxation. Subject to the limitations discussed 
below, a U.S. taxpayer is allowed to claim a credit against its 
U.S. income tax liability for the foreign income taxes that it 
pays or accrues. A domestic corporation that owns at least 10 
percent of the voting stock of a foreign corporation is allowed 
a deemed-paid credit for foreign income taxes paid by the 
foreign corporation that the domestic corporation is deemed to 
have paid when the foreign corporation's earnings are 
distributed or included in the domestic corporation's income 
under the provisions of subpart F.\1142\
---------------------------------------------------------------------------
    \1141\ H.R. 1586. The bill originated as a bill imposing additional 
tax on bonuses received from certain TARP recipients and passed the 
House on the suspension calendar on March 19, 2009. The bill passed the 
Senate with an amendment substituting text relating to the FAA on March 
22, 2010. The House agreed to the Senate amendment with an amendment on 
March 25, 2010. On August 5, 2010, the Senate concurred in the House 
amendment to the Senate amendment with an amendment substituting the 
text relating to education, jobs, and Medicaid for the previous 
language. On August 10, 2010, the House agreed to the Senate amendment 
to the House amendment to the Senate amendment. The President signed 
the bill on August 10, 2010. 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 the Senate Amendment to the 
House Amendment to the Senate Amendment to H.R. 1586, Scheduled for 
Consideration by the House of Representatives on August 10, 2010 (JCX-
46-10), August 10, 2010.
    \1142\ Secs. 901, 902, 960. Similar rules apply under sections 
1291(g) and 1293(f) with respect to income that is includible under the 
passive foreign investment company (``PFIC'') rules.
---------------------------------------------------------------------------
    A foreign tax credit is available only for foreign income, 
war profits, and excess profits taxes, and for certain taxes 
imposed in lieu of such taxes.\1143\ Other foreign levies 
generally are treated as deductible expenses. Treasury 
regulations under section 901 provide detailed rules for 
determining whether a foreign levy is a creditable income tax.
---------------------------------------------------------------------------
    \1143\ Secs. 901(b), 903.
---------------------------------------------------------------------------
    The foreign tax credit is elective on a year-by-year basis. 
In lieu of electing the foreign tax credit, U.S. persons 
generally are permitted to deduct foreign taxes.\1144\
---------------------------------------------------------------------------
    \1144\ Sec. 164(a)(3).
---------------------------------------------------------------------------
Deemed-paid foreign tax credit
    Domestic corporations owning at least 10 percent of the 
voting stock of a foreign corporation are treated as if they 
had paid a share of the foreign income taxes paid by the 
foreign corporation in the year in which that corporation's 
earnings and profits become subject to U.S. tax as dividend 
income of the U.S. shareholder.\1145\ This credit is the 
deemed-paid or indirect foreign tax credit. A domestic 
corporation may also be deemed to have paid taxes paid by a 
second-, third-, fourth-, fifth-, or sixth-tier foreign 
corporation, if certain requirements are satisfied.\1146\ 
Foreign taxes paid below the third tier are eligible for the 
deemed-paid credit only with respect to taxes paid in taxable 
years during which the payor is a controlled foreign 
corporation (``CFC''). Foreign taxes paid below the sixth tier 
are not eligible for the deemed-paid credit. In addition, a 
deemed-paid credit generally is available with respect to 
subpart F inclusions and inclusions under the PFIC 
provisions.\1147\
---------------------------------------------------------------------------
    \1145\ Sec. 902(a).
    \1146\ Sec. 902(b).
    \1147\ Secs. 960(a), 1291(g), 1293(f).
---------------------------------------------------------------------------
    The amount of foreign tax eligible for the indirect credit 
is added to the actual dividend or inclusion (the dividend or 
inclusion is said to be ``grossed-up'') and is included in the 
domestic corporate shareholder's income; accordingly, the 
shareholder is treated as if it had received its proportionate 
share of pre-tax profits of the foreign corporation and paid 
its proportionate share of the foreign tax paid by the foreign 
corporation.\1148\
---------------------------------------------------------------------------
    \1148\ Sec. 78.
---------------------------------------------------------------------------
    For purposes of computing the deemed-paid foreign tax 
credit, dividends (or other inclusions) are considered made 
first from the post-1986 pool of all the distributing foreign 
corporation's accumulated earnings and profits.\1149\ 
Accumulated earnings and profits for this purpose include the 
earnings and profits of the current year undiminished by the 
current distribution (or other inclusion).\1150\ Dividends in 
excess of the pool of post-1986 undistributed earnings and 
profits are treated as paid out of pre-1987 accumulated profits 
and are subject to the ordering principles of pre-1986 Act 
law.\1151\
---------------------------------------------------------------------------
    \1149\ Sec. 902(c)(6)(B). Earnings and profits computations for 
these purposes are to be made under U.S. concepts. Secs. 902(c)(1), 
964(a).
    \1150\ Sec. 902(c)(1).
    \1151\ Sec. 902(c)(6).
---------------------------------------------------------------------------
Foreign tax credit limitation
    The foreign tax credit generally is limited to a taxpayer's 
U.S. tax liability on its foreign-source taxable income (as 
determined under U.S. tax accounting principles).\1152\ This 
limit is intended to ensure that the credit serves its purpose 
of mitigating double taxation of foreign-source income without 
offsetting U.S. tax on U.S.-source income. The limit is 
computed by multiplying a taxpayer's total U.S. tax liability 
for the year by the ratio of the taxpayer's foreign-source 
taxable income for the year to the taxpayer's total taxable 
income for the year. If the total amount of foreign income 
taxes paid and deemed paid for the year exceeds the taxpayer's 
foreign tax credit limitation for the year, the taxpayer may 
carry back the excess foreign taxes to the previous taxable 
year or carry forward the excess taxes to one of the succeeding 
10 taxable years.\1153\
---------------------------------------------------------------------------
    \1152\ Secs. 901, 904.
    \1153\ Sec. 904(c).
---------------------------------------------------------------------------
    The foreign tax credit limitation is generally applied 
separately for income in two different categories (referred to 
as ``baskets''), passive basket income and general basket 
income.\1154\ Passive basket income generally includes 
investment income such as dividends, interest, rents, and 
royalties.\1155\ General basket income is all income that is 
not in the passive basket. Because the foreign tax credit 
limitation must be applied separately to income in these two 
baskets, credits for foreign tax imposed on income in one 
basket cannot be used to offset U.S. tax on income in the other 
basket.
---------------------------------------------------------------------------
    \1154\ Sec. 904(d). Separate foreign tax credit limitations also 
apply to certain categories of income described in other sections. See, 
e.g., secs. 901(j), 904(h)(10), 865(h).
    \1155\ Sec. 904(d)(2)(B). Passive income is defined by reference to 
the definition of foreign personal holding company income in section 
954(c), and thus generally includes dividends, interest, rents, 
royalties, annuities, net gains from certain property or commodities 
transactions, foreign currency gains, income equivalent to interest, 
income from notional principal contracts, and income from certain 
personal service contracts. Exceptions apply for certain rents and 
royalties derived in an active business and for certain income earned 
by dealers in securities or other financial instruments. Passive 
category income also includes amounts that are includible in gross 
income under section 1293 (relating to PFICs) and dividends received 
from certain DISCs and FSCs.
---------------------------------------------------------------------------
    Income that would otherwise constitute passive basket 
income is treated as general basket income if it is earned by a 
qualifying financial services entity (and certain other 
requirements are met).\1156\ Passive income is also treated as 
general basket income if it is high-taxed income (i.e., if the 
foreign tax rate is determined to exceed the highest rate of 
tax specified in section 1 or 11, as applicable).\1157\ 
Dividends (and subpart F inclusions), interest, rents, and 
royalties received from a CFC by a U.S. person that owns at 
least 10 percent of the CFC are assigned to a separate 
limitation basket by reference to the basket of income out of 
which the dividend or other payment is made.\1158\ Dividends 
received by a 10-percent corporate shareholder from a foreign 
corporation that is not a CFC are also categorized on a look-
through basis.\1159\
---------------------------------------------------------------------------
    \1156\ Sec. 904(d)(2)(C), (D).
    \1157\ Sec. 904(d)(2)(F).
    \1158\ Sec. 904(d)(3).
    \1159\ Sec. 904(d)(4).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision adopts a matching rule to prevent the 
separation of creditable foreign taxes from the associated 
foreign income. In general, the provision states that when 
there is a foreign tax credit splitting event with respect to a 
foreign income tax paid or accrued by the taxpayer, the foreign 
income tax is not taken into account for Federal tax purposes 
before the taxable year in which the related income is taken 
into account by the taxpayer. In addition, if there is a 
foreign tax credit splitting event with respect to a foreign 
income tax paid or accrued by a section 902 corporation, that 
tax is not taken into account for purposes of section 902 or 
960, or for purposes of determining earnings and profits under 
section 964(a), before the taxable year in which the related 
income is taken into account for Federal income tax purposes by 
the section 902 corporation, or a domestic corporation that 
meets the ownership requirements of section 902(a) or (b) with 
respect to the section 902 corporation. Thus, such tax is not 
added to the section 902 corporation's foreign tax pool, and 
its earnings and profits are not reduced by such tax.
    In the case of a partnership, the provision's matching rule 
is applied at the partner level, and, except as otherwise 
provided by the Secretary, a similar rule applies in the case 
of any S corporation or trust. The Secretary may also issue 
regulations to establish the applicability of this matching 
rule to a regulated investment company that elects under 
section 853 for the foreign income taxes it pays to be treated 
as creditable to its shareholders under section 901.
    For purposes of the provision, there is a ``foreign tax 
credit splitting event'' with respect to a foreign income tax 
if the related income is (or will be) taken into account for 
Federal income tax purposes by a covered person.\1160\ A 
``foreign income tax'' is any income, war profits, or excess 
profits tax paid or accrued to any foreign country or to any 
possession of the United States. This term includes any tax 
paid in lieu of such a tax within the meaning of section 903. 
``Related income'' means, with respect to any portion of any 
foreign income tax, the income (or, as appropriate, earnings 
and profits), calculated under U.S. tax principles, to which 
such portion of foreign income tax relates. For purposes of 
determining related income, the Secretary may provide rules on 
the treatment of losses, deficits in earnings and profits, and 
certain timing differences between U.S. and foreign tax law. 
Moreover, it is not intended that differences in the timing of 
when income is taken into account for U.S. and foreign tax 
purposes (e.g., as a result of differences in the U.S. and 
foreign tax accounting rules) should create a foreign tax 
credit splitting event in cases in which the same person pays 
the foreign tax and takes into account the related income, but 
in different taxable periods.
---------------------------------------------------------------------------
    \1160\ It is not intended that there be a foreign tax credit 
splitting event when, for example, a CFC pays or accrues a foreign 
income tax and takes into account the related income in the same year, 
even though the earnings and profits to which the foreign income tax 
relates may be distributed to a covered person as a dividend or 
included in such covered person's income under subpart F.
---------------------------------------------------------------------------
    With respect to any person who pays or accrues a foreign 
income tax (hereafter referred to in this paragraph as the 
``payor''), a ``covered person'' is: (1) any entity in which 
the payor holds, directly or indirectly, at least a 10-percent 
ownership interest (determined by vote or value); (2) any 
person that holds, directly or indirectly, at least a 10-
percent ownership interest (determined by vote or value) in the 
payor; (3) any person that bears a relationship to the payor 
described in section 267(b) or 707(b) (including by application 
of the constructive ownership rules of section 267(c)); and (4) 
any other person specified by the Secretary. Accordingly, the 
Secretary may issue regulations that treat an unrelated 
counterparty as a covered person in certain sale-repurchase 
transactions and certain other transactions deemed abusive.
    A ``section 902 corporation'' is any foreign corporation 
with respect to which one or more domestic corporations meets 
the ownership requirements of section 902(a) or (b).
    Except as otherwise provided by the Secretary, in the case 
of any foreign income tax not currently taken into account by 
reason of the provision's matching rule, that tax is taken into 
account as a foreign income tax paid or accrued in the taxable 
year in which, and to the extent that, the taxpayer, the 
section 902 corporation, or a domestic corporation that meets 
the ownership requirements of section 902(a) or (b) with 
respect to the section 902 corporation (as the case may be) 
takes the related income into account under chapter 1 of the 
Code. Accordingly, for purposes of determining the carryback 
and carryover of excess foreign tax credits under section 
904(c), the deduction for foreign taxes paid or accrued under 
section 164(a), and the extended period for claim of a credit 
or refund under section 6511(d)(3)(A), foreign income taxes to 
which the provision applies are first taken into account, and 
treated as paid or accrued, in the year in which the related 
foreign income is taken into account. Notwithstanding the 
preceding rule, foreign taxes are translated into U.S. dollars 
in the year in which the taxes are paid or accrued under the 
general rules of section 986 rather than the year in which the 
related income is taken into account. The Secretary may issue 
regulations or other guidance providing additional exceptions.
    The Secretary is also granted authority to issue 
regulations or other guidance as is necessary or appropriate to 
carry out the purposes of the provision. Such guidance may 
include providing successor rules addressing circumstances such 
as where, with respect to a foreign tax credit splitting event, 
the person who pays or accrues the foreign income tax or any 
covered person is liquidated. This grant of authority also 
allows the Secretary to provide appropriate exceptions from the 
application of the provision as well as to provide guidance as 
to how the provision applies in the case of any foreign tax 
credit splitting event involving a hybrid instrument. It is 
anticipated that the Secretary may also provide guidance as to 
the proper application of the provision in cases involving 
disregarded payments, group relief, or other arrangements 
having a similar effect.
    An example of a foreign tax credit splitting event 
involving a hybrid instrument subject to the provision is as 
follows: U.S. Corp., a domestic corporation, wholly owns CFC1, 
a country A corporation. CFC1, in turn, wholly owns CFC2, a 
country A corporation. CFC2 is engaged in an active business 
that generates $100 of income. CFC2 issues a hybrid instrument 
to CFC1. This instrument is treated as equity for U.S. tax 
purposes but as debt for foreign tax purposes. Under the terms 
of the hybrid instrument, CFC2 accrues (but does not pay 
currently) interest to CFC1 equal to $100. As a result, CFC2 
has no income for country A tax purposes, while CFC1 has $100 
of income, which is subject to country A tax at a 30 percent 
rate. For U.S. tax purposes, CFC2 still has $100 of earnings 
and profits (the accrued interest is ignored since the United 
States views the hybrid instrument as equity), while CFC1 has 
paid $30 of foreign taxes. Under the provision, the related 
income with respect to the $30 of foreign taxes paid by CFC1 is 
the $100 of earnings and profits of CFC2.

                             Effective Date

    In general, the provision is effective with respect to 
foreign income taxes paid or accrued by U.S. taxpayers and 
section 902 corporations in taxable years beginning after 
December 31, 2010.
    The provision also applies to foreign income taxes paid or 
accrued by a section 902 corporation in taxable years beginning 
on or before December 31, 2010 (and not deemed paid under 
section 902(a) or section 960 on or before such date), but only 
for purposes of applying sections 902 and 960 with respect to 
periods after such date (the ``deemed-paid transition rule''). 
Accordingly, the deemed-paid transition rule applies for 
purposes of applying sections 902 and 960 to dividends paid, 
and inclusions under section 951(a) that occur, in taxable 
years beginning after December 31, 2010. However, no adjustment 
is made to a section 902 corporation's earnings and profits for 
the amount of any foreign income taxes suspended under the 
deemed-paid transition rule, either at the time of suspension 
or when such taxes are subsequently taken into account under 
the provision.

  B. Denial of Foreign Tax Credit with Respect to Foreign Income Not 
Subject to U.S. Taxation by Reason of Covered Asset Acquisitions (sec. 
              212 of the Act and sec. 901(m) of the Code)


                              Present Law


Foreign tax credit

    The United States employs a worldwide tax system under 
which U.S. resident individuals and domestic corporations 
generally are taxed on all income, whether derived in the 
United States or abroad; the foreign tax credit provides relief 
from double taxation. Subject to the limitations discussed 
below, a U.S. taxpayer is allowed to claim a credit against its 
U.S. income tax liability for the foreign income taxes that it 
pays. A domestic corporation that owns at least 10 percent of 
the voting stock of a foreign corporation is allowed a 
``deemed-paid'' credit for foreign income taxes paid by the 
foreign corporation that the domestic corporation is deemed to 
have paid when the related income is distributed or is included 
in the domestic corporation's income under the provisions of 
subpart F.\1161\
---------------------------------------------------------------------------
    \1161\ Secs. 901, 902, 960. Similar rules apply under sections 
1291(g) and 1293(f) with respect to income that is includible under the 
passive foreign investment company (``PFIC'') rules.
---------------------------------------------------------------------------
    The foreign tax credit is elective on a year-by-year basis. 
In lieu of electing the foreign tax credit, U.S. persons 
generally are permitted to deduct foreign taxes.\1162\
---------------------------------------------------------------------------
    \1162\ Sec. 164(a)(3).
---------------------------------------------------------------------------
            Deemed-paid foreign tax credit
    U.S. corporations owning at least 10 percent of the voting 
stock of a foreign corporation are treated as if they had paid 
a share of the foreign income taxes paid by the foreign 
corporation in the year in which that corporation's earnings 
and profits (``E&P'') become subject to U.S. tax as dividend 
income of the U.S. shareholder.\1163\ This credit is the 
``deemed-paid'' or ``indirect'' foreign tax credit. A U.S. 
corporation may also be deemed to have paid foreign income 
taxes paid by a second-, third-, fourth-, fifth-, or sixth-tier 
foreign corporation, if certain requirements are 
satisfied.\1164\ Foreign income taxes paid below the third tier 
are eligible for the deemed-paid credit only with respect to 
foreign income taxes paid in taxable years during which the 
payor is a controlled foreign corporation (``CFC''). Foreign 
income taxes paid below the sixth tier are not eligible for the 
deemed-paid credit. In addition, a deemed-paid credit generally 
is available with respect to subpart F inclusions.\1165\ 
Moreover, a deemed-paid credit generally is available with 
respect to inclusions under the PFIC provisions by U.S. 
corporations meeting the requisite ownership threshold.\1166\
---------------------------------------------------------------------------
    \1163\ Sec. 902(a).
    \1164\ Sec. 902(b).
    \1165\ Sec. 960(a).
    \1166\ Secs. 1291(g), 1293(f).
---------------------------------------------------------------------------
    The amount of foreign income tax eligible for the indirect 
credit is added to the actual dividend or inclusion (the 
dividend or inclusion is said to be ``grossed-up'') and is 
included in the U.S. corporate shareholder's income; 
accordingly, the shareholder is treated as if it had received 
its proportionate share of pre-tax profits of the foreign 
corporation and paid its proportionate share of the foreign 
income tax paid by the foreign corporation.\1167\
---------------------------------------------------------------------------
    \1167\ Sec. 78.
---------------------------------------------------------------------------
    For purposes of computing the deemed-paid foreign tax 
credit, dividends (or other inclusions) are considered made 
first from the post-1986 pool of all the distributing foreign 
corporation's accumulated E&P.\1168\ Accumulated E&P for this 
purpose include the E&P of the current year undiminished by the 
current distribution (or other inclusion).\1169\ Dividends in 
excess of the accumulated pool of post-1986 undistributed E&P 
are treated as paid out of pre-1987 accumulated profits and are 
subject to the ordering principles of pre-1986 Act law.\1170\
---------------------------------------------------------------------------
    \1168\ Sec. 902(c)(6)(B). Earnings and profits computations for 
these purposes are to be made under U.S. concepts. Secs. 902(c)(1), 
964(a).
    \1169\ Sec. 902(c)(1).
    \1170\ Sec. 902(c)(6).
---------------------------------------------------------------------------
            Foreign tax credit limitation
    The foreign tax credit generally is limited to a taxpayer's 
U.S. tax liability on its foreign-source taxable income (as 
determined under U.S. tax accounting principles).\1171\ This 
limit is intended to ensure that the credit serves its purpose 
of mitigating double taxation of foreign-source income without 
offsetting U.S. tax on U.S.-source income. The limit is 
computed by multiplying a taxpayer's total U.S. tax liability 
for the year by the ratio of the taxpayer's foreign-source 
taxable income for the year to the taxpayer's total taxable 
income for the year. If the total amount of foreign income 
taxes paid and deemed paid for the year exceeds the taxpayer's 
foreign tax credit limitation for the year, the taxpayer may 
carry the excess back to the previous taxable year or forward 
to one of the succeeding 10 taxable years.\1172\
---------------------------------------------------------------------------
    \1171\ Secs. 901, 904.
    \1172\ Sec. 904(c).
---------------------------------------------------------------------------
    The foreign tax credit limitation is generally applied 
separately to two different categories of income (referred to 
as ``baskets''), passive basket income and general basket 
income.\1173\ Passive basket income generally includes 
investment income such as dividends, interest, rents, and 
royalties.\1174\ General basket income is all income that is 
not in the passive category. Because the foreign tax credit 
limitation must be applied separately to income in these two 
baskets, foreign tax imposed on income in one basket cannot be 
claimed as a credit against U.S. tax on income in the other 
basket.
---------------------------------------------------------------------------
    \1173\ Sec. 904(d). Separate foreign tax credit limitations also 
apply to certain categories of income described in other sections. See, 
e.g., secs. 901(j), 904(h)(10), 865(h).
    \1174\ Sec. 904(d)(2)(B). Passive income is defined by reference to 
the definition of foreign personal holding company income in section 
954(c), and thus generally includes dividends, interest, rents, 
royalties, annuities, net gains from certain property or commodities 
transactions, foreign currency gains, income equivalent to interest, 
income from notional principal contracts, and income from certain 
personal service contracts. Exceptions apply for certain rents and 
royalties derived in an active business and for certain income earned 
by dealers in securities or other financial instruments. Passive 
category income also includes amounts that are includible in gross 
income under section 1293 (relating to PFICs) and dividends received 
from certain DISCs and FSCs.
---------------------------------------------------------------------------
    Income that would otherwise constitute passive basket 
income is treated as general basket income if it is earned by a 
qualifying financial services entity (and certain other 
requirements are met).\1175\ Passive income is also treated as 
general basket income if it is high-taxed income (i.e., if the 
foreign tax rate is determined to exceed the highest rate of 
tax specified in section 1 or 11, as applicable).\1176\ 
Dividends (and subpart F inclusions), interest, rents, and 
royalties received from a CFC by a U.S. person that owns at 
least 10 percent of the CFC are assigned to a separate 
limitation basket by reference to the basket of income out of 
which the dividend or other payment is made.\1177\ Dividends 
received by a 10-percent corporate shareholder from a foreign 
corporation that is not a CFC are also categorized on a look-
through basis.\1178\
---------------------------------------------------------------------------
    \1175\ Sec. 904(d)(2)(C), (D).
    \1176\ Sec. 904(d)(2)(F).
    \1177\ Sec. 904(d)(3).
    \1178\ Sec. 904(d)(4).
---------------------------------------------------------------------------

Items giving rise to permanent basis differences

    In general, certain elections or transactions can result in 
the creation of additional asset basis eligible for cost 
recovery for U.S. tax purposes without a corresponding increase 
in the basis of such assets for foreign tax purposes. These 
include: (1) a qualifying stock purchase of a foreign 
corporation or domestic corporation with foreign assets for 
which a section 338 election is made; (2) an acquisition of an 
interest in a partnership holding foreign assets for which a 
section 754 election is in effect; and (3) certain other 
transactions involving an entity classification (``check-the-
box'') election in which a foreign entity is treated as a 
corporation for foreign tax purposes and as a partnership or 
disregarded entity for U.S. tax purposes.\1179\
---------------------------------------------------------------------------
    \1179\ Treas. Reg. sec. 301.7701-1, et seq. 
---------------------------------------------------------------------------
            Section 338 elections
    In general, the basis of stock acquired by a U.S. taxpayer 
or a foreign subsidiary of a U.S. taxpayer is its cost,\1180\ 
and there is no adjustment to the basis of the assets held by 
the acquired corporation.\1181\ In certain circumstances, 
however, taxpayers may elect to treat a qualifying purchase of 
80 percent of the stock of a target corporation (a ``qualified 
stock purchase'') as a purchase of the underlying assets of the 
target corporation.\1182\ For this purpose, a ``qualified stock 
purchase'' is any transaction or series of transactions in 
which stock (meeting the requirements of section 1504(a)(2)) of 
one corporation is acquired by another corporation by purchase 
during the 12-month acquisition period.\1183\
---------------------------------------------------------------------------
    \1180\ Secs. 1011, 1012.
    \1181\ See sec. 1016.
    \1182\ Sec. 338(a).
    \1183\ Sec. 338(d)(3). Under section 1504(a)(2), the ownership of 
stock of any corporation meets the requirements of an affiliated group 
if it (A) possesses at least 80 percent of the total voting power of 
the stock of such corporation, and (B) has a value equal to at least 80 
percent of the total value of the stock of such corporation. Further, 
section 1504(a)(4) states that for purposes of meeting the 80-percent 
requirement, the term stock does not include any stock which (A) is not 
entitled to vote, (B) is limited and preferred as to dividends and does 
not participate in corporate growth to any significant extent, (C) has 
redemption and liquidation rights which do not exceed the issue price 
of such stock, and (D) is not convertible into another class of stock.
---------------------------------------------------------------------------
    Two alternatives exist for making a section 338 election 
when there is a qualifying stock purchase--one bilateral and 
one unilateral. A bilateral election, which is made pursuant to 
section 338(h)(10), requires a corporation to make a qualifying 
purchase of 80 percent of the stock of a domestic target 
corporation \1184\ that is a member of a selling consolidated 
group (or affiliated group if no election to file a 
consolidated return has been made), or a qualifying purchase of 
80 percent of the stock of an S corporation by a corporation 
from S corporation shareholders. The election is made jointly 
by the buyer and seller of the stock and must be made by the 
15th day of the ninth month beginning after the month in which 
the acquisition date occurs. Pursuant to this election, the 
assets (rather than the stock) of the target corporation are 
deemed to have been sold in a single transaction at the close 
of the acquisition date, and the target corporation is deemed 
to have liquidated. The asset sale is taken into account by the 
target prior to its acquisition by the purchasing 
corporation.\1185\
---------------------------------------------------------------------------
    \1184\ A foreign corporation cannot be the target corporation in 
the case of a section 338(h)(10) election. See Treas. Reg. sec. 
1.338(h)(10)-1(b)(1), (2), (3).
    \1185\ Sec. 338(h)(10); Treas. Regs. sec. 1.338(h)(10)-1(d)(3).
---------------------------------------------------------------------------
    With a unilateral election, which is made pursuant to 
section 338(g), the purchasing corporation treats a qualified 
stock purchase of a corporation (including a foreign 
corporation) as a deemed asset acquisition, whether or not the 
seller of the stock is a corporation. Pursuant to this 
election, the seller or sellers recognize gain or loss on the 
stock sale, and the target corporation also recognizes gain or 
loss on the deemed asset sale. The deemed asset acquisition 
also eliminates the historic E&P of the target corporation. In 
general, in cases in which the target corporation is foreign 
and the seller is a U.S. person or a CFC, the deemed asset sale 
has U.S. tax consequences.\1186\ However, when the seller is 
neither a U.S. person nor a CFC, generally no U.S. tax 
consequences result from the deemed asset sale.\1187\ The 
election is made by the purchasing corporation and must be made 
by the 15th day of the ninth month beginning after the month in 
which the acquisition date occurs.
---------------------------------------------------------------------------
    \1186\ Section 338(h)(16) addresses the impact of the deemed asset 
sale on the E&P of the foreign target corporation for purposes of 
determining the source and character of any amount includible in gross 
income as a dividend under section 1248 to the seller.
    \1187\ When a domestic corporation or a CFC is the purchaser with 
respect to which a section 338(g) election is made for a foreign target 
corporation, the deemed asset sale may have U.S. tax consequences. For 
example, if the foreign target becomes a CFC for an uninterrupted 
period of 30 days or more during a taxable year pursuant to Section 
951(a) prior to the purchasing corporation completing the qualified 
stock purchase, the deemed asset sale may generate subpart F income for 
any U.S. shareholder of the foreign target corporation. Treas. Reg. 
sec. 1.338-9(b).
---------------------------------------------------------------------------
    Pursuant to a section 338 election, the target corporation 
is treated as (1) having sold all of its assets at the close of 
the acquisition date at fair market value in a single 
transaction, and (2) a new corporation that purchased all of 
the assets as of the beginning of the day after the acquisition 
date.\1188\ Accordingly, the aggregate basis of the assets of 
the target equals the sum of (1) the grossed-up basis of the 
purchasing corporation's recently purchased stock, and (2) the 
basis of the purchasing corporation's nonrecently purchased 
stock, with appropriate adjustments for liabilities and other 
relevant items under the regulations.\1189\
---------------------------------------------------------------------------
    \1188\ Sec. 338(a).
    \1189\ Sec. 338(b).
---------------------------------------------------------------------------
    Since a section 338 election is relevant solely for U.S. 
tax purposes, the adjustment to the basis of the assets of a 
foreign target corporation (or a foreign branch of a domestic 
corporation) that increases the amount of depreciation, 
amortization, depletion, or gain for purposes of calculating 
U.S. taxable income or E&P results in no corresponding 
adjustment for foreign income tax purposes. As a result, cost 
recovery deductions attributable to such additional basis 
generally result in a permanent difference between (1) the 
foreign taxable income upon which foreign income tax is levied, 
and (2) the U.S. taxable income (or E&P) upon which U.S. tax is 
levied (whether currently or upon repatriation) and with 
respect to which a foreign tax credit may be allowed for any 
foreign income taxes paid.
            Section 754 election
    A partnership does not generally adjust the basis of 
partnership property following the transfer of a partnership 
interest unless the partnership has made a one-time election 
under section 754 for such purposes.\1190\ If an election is in 
effect, adjustments to the basis of partnership property are 
made with respect to the transferee partner to account for the 
difference between the transferee partner's proportionate share 
of the adjusted basis of the partnership property and the 
transferee's basis in its partnership interest.\1191\ These 
adjustments are intended to adjust the basis of partnership 
property to approximate the result of a direct purchase of the 
property by the transferee partner. Because a section 754 
election has relevance only for U.S. tax purposes, to the 
extent that the underlying assets of the partnership include 
assets generating income subject to foreign tax, the basis 
adjustments made to these assets may also result in permanent 
differences between (1) the foreign taxable income upon which 
foreign income tax is levied, and (2) the U.S. taxable income 
(or E&P) upon which U.S. tax is levied (whether currently or 
upon repatriation) and with respect to which a foreign tax 
credit may be allowed for any foreign income taxes paid.
---------------------------------------------------------------------------
    \1190\ Sec. 743(a). But see section 743(d) requiring a reduction to 
the basis of partnership property in certain cases where there is a 
substantial built-in loss.
    \1191\ Sec. 743(b).
---------------------------------------------------------------------------
            Check-the-box election
    Comparable permanent differences between foreign taxable 
income and U.S. taxable income (or E&P) may also be achieved as 
a result of making a check-the-box election. Since a check-the-
box election generally has no effect for foreign tax purposes, 
a sale of a wholly-owned foreign corporation for which an 
election to be disregarded is in effect will be respected as 
the sale of the corporation for foreign tax purposes but 
treated as the sale of branch assets for U.S. tax purposes. If 
the purchaser is a U.S. taxpayer or a foreign entity owned by a 
U.S. taxpayer, the U.S. taxpayer may have additional asset 
basis eligible for cost recovery for U.S. tax purposes without 
a corresponding increase in the tax basis of such assets for 
foreign tax purposes. In this case, there would be a permanent 
difference between (1) the foreign taxable income upon which 
foreign income tax is levied, and (2) the U.S. taxable income 
(or E&P) upon which U.S. tax is levied (whether currently or 
upon repatriation) and with respect to which a foreign tax 
credit may be allowed. Similar results may be achieved through 
other transactions in which a check-the-box election has been 
made.

                        Explanation of Provision

    The provision denies a foreign tax credit for the 
disqualified portion of any foreign income tax paid or accrued 
in connection with a covered asset acquisition.
    A ``covered asset acquisition'' means: (1) a qualified 
stock purchase (as defined in section 338(d)(3)) to which 
section 338(a) applies; \1192\ (2) any transaction that is 
treated as the acquisition of assets for U.S. tax purposes and 
as the acquisition of stock (or is disregarded) \1193\ for 
purposes of the foreign income taxes of the relevant 
jurisdiction; \1194\ (3) any acquisition of an interest in a 
partnership that has an election in effect under section 754; 
and (4) to the extent provided by the Secretary, any other 
similar transaction. It is anticipated that the Secretary will 
issue regulations identifying other similar transactions that 
result in an increase to the basis of assets for U.S. tax 
purposes without a corresponding increase for foreign tax 
purposes.
---------------------------------------------------------------------------
    \1192\ This includes transaction under section 338(g) and section 
338(h)(10).
    \1193\ For example, the deemed liquidation of a CFC as the result 
of the making of an entity classification election pursuant to Treas. 
Reg. sec. 301.7701-3 may result in a section 331 liquidation for U.S. 
tax purposes that is disregarded for foreign income tax purposes.
    \1194\ Section 336(e) provides that, to the extent provided by the 
Secretary, in cases in which (1) a corporation owns at least 80 percent 
of the vote and value of stock of another corporation (as defined in 
section 1504(a)(2)), and (2) such corporation sells, exchanges, or 
distributes all of stock of such corporation, an election may be made 
to treat this sale, exchange, or distribution as a disposition of all 
of the assets of the other corporation, and no gain or loss is 
recognized on the sale, exchange, or distribution of the stock. To 
date, the Secretary has not promulgated regulations under section 
336(e) so no election may be made. Nonetheless, to the extent 
regulations are promulgated under section 336(e) in the future 
permitting such an election to be made, a transaction to which the 
section 336(e) election relates would be a covered asset acquisition.
---------------------------------------------------------------------------
    The disqualified portion of any foreign income taxes paid 
or accrued with respect to any covered asset acquisition, for 
any taxable year, is the ratio (expressed as a percentage) of 
(1) the aggregate basis differences allocable to such taxable 
year with respect to all relevant foreign assets, divided by 
(2) the income on which the foreign income tax is determined. 
For this purpose, the income on which the foreign income tax is 
determined is the income as determined under the law of the 
relevant jurisdiction. If the taxpayer fails to substantiate 
such income to the satisfaction of the Secretary, then such 
income is determined by dividing the amount of such foreign 
income tax by the highest marginal tax rate applicable to such 
income in the relevant jurisdiction.
    For purposes of determining the aggregate basis difference 
allocable to a taxable year, the term ``basis difference'' 
means, with respect to any relevant foreign asset, the excess 
of (1) the adjusted basis of such asset immediately after the 
covered asset acquisition, over (2) the adjusted basis of such 
asset immediately before the covered asset acquisition. Thus, 
it is the tax basis for U.S. tax purposes that is relevant, and 
not the basis as determined under the law of the relevant 
foreign jurisdiction. Because CFCs are generally limited to 
straight-line cost recovery, it is anticipated that the basis 
difference applying U.S. tax principles generally is less than 
if the taxpayer were required to use the basis as determined 
under foreign law immediately before the covered asset 
acquisition. However, it is anticipated that the Secretary will 
issue regulations identifying those circumstances in which, for 
purposes of determining the adjusted basis of such assets 
immediately before the covered asset acquisition, it may be 
acceptable to utilize the basis of such asset under the law of 
the relevant jurisdiction or another reasonable method.
    A built-in loss in a relevant foreign asset (i.e., in cases 
in which the fair market value of the asset is less than its 
adjusted basis immediately before the asset acquisition) is 
taken into account in determining the aggregate basis 
difference; however, a built-in loss cannot reduce the 
aggregate basis difference allocable to a taxable year below 
zero.
    In the case of a qualified stock purchase to which section 
338(a) applies, the covered asset acquisition is treated as 
occurring at the close of the acquisition date (as defined in 
section 338(h)(2)).
    In general, the amount of the basis difference allocable to 
a taxable year with respect to any relevant foreign asset is 
determined using the applicable cost recovery method under U.S. 
tax rules. If there is a disposition of any relevant foreign 
asset before its cost has been entirely recovered or of any 
relevant foreign asset that is not eligible for cost recovery 
(e.g., land), the basis difference allocated to the taxable 
year of the disposition is the excess of the basis difference 
with respect to such asset over the aggregate basis difference 
with respect to such asset that has been allocated under this 
provision to all prior taxable years. Thus, any remaining basis 
difference is captured in the year of the sale, and there is no 
remaining basis difference to be allocated to any subsequent 
tax years. However, it is intended that this provision 
generally apply in circumstances in which there is a 
disposition of a relevant foreign asset and the associated 
income or gain is taken into account for purposes of 
determining foreign income tax in the relevant jurisdiction.
    To illustrate, assume USP, a domestic corporation, acquires 
100 percent of the stock of FT, a foreign target organized in 
Country F with a ``u'' functional currency, in a qualified 
stock purchase for which a section 338(g) election is made. The 
tax rate in Country F is 25 percent. Assume further that the 
aggregate basis difference in connection with the qualified 
stock purchase is 200u, including: (1) 150u that is 
attributable to Asset A, with a 15-year recovery period for 
U.S. tax purposes (10u of annual amortization); and (2) 50u 
that is attributable to Asset B, with a 5-year recovery period 
(10u of annual depreciation). In each of years 1 and 2, FT's 
taxable income is 100u for foreign tax purposes and FT pays 
foreign income tax of 25u (equal to $25 when translated at the 
average exchange rate for the year). As a result, the 
disqualified portion of foreign income tax in each of years 1 
and 2 is $5 ((10u + 10u of allocable basis difference / 100u of 
foreign taxable income)  $25 foreign tax paid).
    In year 3, FT's taxable income is 140u, 40u of which is 
attributable to gain on the sale of Asset B. FT's Country F tax 
is 35u (equal to $35 translated at the average exchange rate 
for the year). Accordingly, the disqualified portion of its 
foreign income taxes paid is $10 ((40u (including 10u of annual 
amortization on Asset A and 30u attributable to disposition of 
Asset B) of allocable basis difference / 140u of foreign 
taxable income)  $35 foreign tax paid).
    An asset is a ``relevant foreign asset'' with respect to 
any covered asset acquisition, whether the entity acquired is 
domestic or foreign, only if any income, deduction, gain, or 
loss attributable to the asset (including goodwill, going 
concern value, and any other intangible asset) is taken into 
account in determining foreign income tax in the relevant 
jurisdiction. For this purpose, the term ``foreign income tax'' 
means any income, war profits, or excess profits tax paid or 
accrued to any foreign country or to any possession of the 
United States, including any tax paid in lieu of such a tax 
within the meaning of section 903. In cases in which there has 
been a covered asset acquisition that involves either (1) both 
U.S. assets and relevant foreign assets, or (2) assets in 
multiple relevant jurisdictions, it is anticipated that the 
Secretary may issue regulations clarifying the manner in which 
any relevant foreign asset (such as intangible assets that may 
relate to more than one jurisdiction) are to be allocated 
between those jurisdictions. It is also anticipated that the 
Secretary may issue regulations to clarify the extent to which 
income is considered attributable to a relevant foreign asset, 
as well as the treatment of an asset that ceases to be taken 
into account in determining the foreign income tax in the 
relevant jurisdiction by some mechanism other than a 
disposition.
    To the extent that a foreign tax credit is disallowed, the 
disqualified portion is allowed as a deduction to the extent 
otherwise deductible.\1195\
---------------------------------------------------------------------------
    \1195\ Sec. 164(a)(3).
---------------------------------------------------------------------------
    The Secretary may issue regulations or other guidance as is 
necessary or appropriate to carry out the purposes of this 
provision, including to provide (1) an exemption for certain 
covered asset acquisitions, and (2) an exemption for relevant 
foreign assets with respect to which the basis difference is de 
minimis. For example, it is anticipated that the Secretary will 
exclude covered asset acquisitions that are not taxable for 
U.S. purposes, or in which the basis of the relevant foreign 
assets is also increased for purposes of the tax laws of the 
relevant jurisdiction.

                             Effective Date

    In general, the provision is effective for covered asset 
acquisitions after December 31, 2010. However, the provision 
does not apply to any covered asset acquisition with respect to 
which the transferor and transferee are not related if the 
acquisition is (1) made pursuant to a written agreement that 
was binding on January 1, 2011, and at all times thereafter, 
(2) described in a ruling request \1196\ submitted to the IRS 
on or before July 29, 2010, or (3) described in a public 
announcement or filing with the SEC on or before January 1, 
2011.
---------------------------------------------------------------------------
    \1196\ A private letter ruling may be relied upon only by the 
taxpayer requesting the ruling. Transition relief is available only 
with respect to the transaction for which the ruling is requested.
---------------------------------------------------------------------------
    For this purpose, a person is treated as related to another 
person if the relationship between such persons is described in 
section 267 or 707(b).

  C. Separate Application of Foreign Tax Credit Limitation, etc., to 
Items Resourced Under Treaties (sec. 213 of the Act and sec. 904(d) of 
                               the Code)


                              Present Law

    The United States taxes its citizens and residents 
(including domestic corporations) on 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. Subject to limitations discussed below, a U.S. 
taxpayer is allowed to claim a credit against its U.S. income 
tax liability for foreign income taxes paid or accrued.\1197\ A 
domestic corporation that owns at least 10 percent of the 
voting stock of a foreign corporation is allowed a ``deemed-
paid'' credit for foreign income taxes paid by the foreign 
corporation that the domestic corporation is deemed to have 
paid when the foreign corporation's earnings are distributed or 
included in the domestic corporation's income under the 
provisions of subpart F.\1198\
---------------------------------------------------------------------------
    \1197\ Sec. 901.
    \1198\ Secs. 901, 902, 960. Similar rules apply under sections 
1291(g) and 1293(f) with respect to income that is includible under the 
passive foreign investment company (``PFIC'') rules.
---------------------------------------------------------------------------
    A foreign tax credit is available only for foreign income, 
war profits, and excess profits taxes, and for certain taxes 
imposed in lieu of such taxes.\1199\ Other foreign levies 
generally are treated as deductible expenses. The foreign tax 
credit is elective on a year-by-year basis. In lieu of electing 
the foreign tax credit, U.S. persons generally are permitted to 
deduct foreign taxes.\1200\
---------------------------------------------------------------------------
    \1199\ Secs. 901(b), 903.
    \1200\ Sec. 164(a)(3).
---------------------------------------------------------------------------
    The foreign tax credit generally is limited to a taxpayer's 
U.S. tax liability on its foreign-source taxable income (as 
determined under U.S. tax accounting principles).\1201\ This 
limit is intended to ensure that the credit serves its purpose 
of mitigating double taxation of foreign-source income without 
offsetting U.S. tax on U.S.-source income. The limit is 
computed by multiplying a taxpayer's total U.S. tax liability 
for the year by the ratio of the taxpayer's foreign-source 
taxable income for the year to the taxpayer's total taxable 
income for the year. If the total amount of foreign income 
taxes paid and deemed paid for the year exceeds the taxpayer's 
foreign tax credit limitation for the year, the taxpayer may 
carry back the excess foreign taxes to the previous taxable 
year or carry forward the excess taxes to one of the succeeding 
10 taxable years.\1202\
---------------------------------------------------------------------------
    \1201\ Secs. 901, 904.
    \1202\ Sec. 904(c).
---------------------------------------------------------------------------
    The foreign tax credit limitation is generally applied 
separately for income in two different categories (referred to 
as ``baskets''), passive category income and general category 
income.\1203\ Passive category income generally includes 
investment income such as dividends, interest, rents, and 
royalties.\1204\ General category income is all income that is 
not in the passive category. Because the foreign tax credit 
limitation must be applied separately to income in these two 
baskets, credits for foreign tax imposed on income in one 
basket cannot be used to offset U.S. tax on income in the other 
basket.
---------------------------------------------------------------------------
    \1203\ Sec. 904(d). Separate foreign tax credit limitations also 
apply to certain categories of income described in other sections. See, 
e.g., secs. 901(j), 904(h)(10), 865(h).
    \1204\ Sec. 904(d)(2)(B). Passive income is defined by reference to 
the definition of foreign personal holding company income in section 
954(c), and thus generally includes dividends, interest, rents, 
royalties, annuities, net gains from certain property or commodities 
transactions, foreign currency gains, income equivalent to interest, 
income from notional principal contracts, and income from certain 
personal service contracts. Exceptions apply for certain rents and 
royalties derived in an active business and for certain income earned 
by dealers in securities or other financial instruments. Passive 
category income also includes amounts that are includible in gross 
income under section 1293 (relating to PFICs) and dividends received 
from certain DISCs and FSCs.
---------------------------------------------------------------------------
    Income that would otherwise constitute passive basket 
income is treated as general basket income if it is earned by a 
qualifying financial services entity (and certain other 
requirements are met).\1205\ Passive income is also treated as 
general basket income if it is high-taxed income (i.e., if the 
foreign tax rate is determined to exceed the highest rate of 
tax specified in section 1 or 11, as applicable).\1206\ 
Dividends (and subpart F inclusions), interest, rents, and 
royalties received from a CFC by a U.S. person that owns at 
least 10 percent of the CFC are assigned to a separate basket 
by reference to the basket of income out of which the dividend 
or other payment is made.\1207\ Dividends received by a 10-
percent corporate shareholder from a foreign corporation that 
is not a CFC are also categorized on a look-through 
basis.\1208\
---------------------------------------------------------------------------
    \1205\ Sec. 904(d)(2)(C), (D).
    \1206\ Sec. 904(d)(2)(F).
    \1207\ Sec. 904(d)(3).
    \1208\ Sec. 904(d)(4).
---------------------------------------------------------------------------
    In general, amounts derived from a foreign corporation 
(such as interest and dividends) are treated as foreign-source 
income for U.S. foreign tax credit limitation purposes. A 
special sourcing rule applies to amounts (such as interest and 
dividends) derived from a U.S.-owned foreign corporation that 
are attributable to U.S.-source income of the foreign 
corporation. This special sourcing rule treats such amounts, 
which would otherwise be treated as foreign source, as U.S. 
source.\1209\ For these purposes, a U.S.-owned foreign 
corporation is a foreign corporation that is at least 50-
percent owned (directly or in certain cases indirectly) by vote 
or value by U.S. persons. The effect of sourcing what under the 
general rules would be foreign-source income as U.S.-source 
income under these special rules is to prevent taxpayers from 
routing U.S.-source income through a foreign affiliate to 
increase the taxpayer's foreign-source income and, therefore, 
the taxpayer's foreign tax credit limitation.
---------------------------------------------------------------------------
    \1209\ Sec. 904(h). The special sourcing rule applies in the case 
of subpart F and passive foreign investment company inclusions to the 
extent that such amount is attributable to income of the U.S.-owned 
foreign corporation from U.S. sources; in the case of dividends, to the 
portion of the U.S.-owned foreign corporation's earnings and profits 
for the taxable year that are from U.S. sources; and in the case of 
interest paid to a U.S. shareholder or related person, to amounts 
properly allocable to the U.S.-owned foreign corporation's U.S.-source 
income. De minimis exceptions apply if the U.S.-owned foreign 
corporation has a small amount of U.S.-source income.
---------------------------------------------------------------------------
    A coordination rule applies in the case of an amount that 
would be treated as U.S.-source income under the special 
sourcing rule but which is treated as foreign source under a 
treaty. If (1) any amount derived from a U.S.-owned foreign 
corporation would be treated as U.S.-source income under the 
special sourcing rule described above, (2) a U.S. treaty 
obligation would treat such income as arising from sources 
outside the United States, and (3) the taxpayer chooses the 
benefits of this coordination rule, then the amount will be 
treated as foreign source. However, for foreign tax credit 
limitation purposes, a separate limitation applies to such 
amount and the associated foreign taxes. This coordination rule 
applies only to amounts derived from a U.S.-owned foreign 
corporation, and not to amounts derived from a foreign branch 
or disregarded entity.
    For gains from the sale of certain stock or intangibles, a 
similar special sourcing rule applies to treat any such gain as 
foreign source, while requiring the taxpayer to assign any such 
gain and associated taxes to a separate limitation category for 
purposes of computing the foreign tax credit.\1210\ This rule 
applies to the gain from sale of stock in a foreign corporation 
or an intangible that would be U.S. source but which under a 
U.S.-treaty obligation is treated as foreign source with 
respect to which the taxpayer chooses the benefits of this 
rule. This rule also applies to certain gains derived from a 
liquidating distribution from certain U.S.-possession 
corporations.
---------------------------------------------------------------------------
    \1210\ Sec. 865(h).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision applies a separate foreign tax credit 
limitation for each item (1) that is treated as derived from 
sources within the United States under U.S. tax law without 
regard to a treaty obligation, (2) that is treated as arising 
from sources outside the United States under a treaty 
obligation of the United States, and (3) for which the taxpayer 
chooses the benefits of the treaty.
    The provision does not apply to items of income to which 
the coordination rule applicable to U.S.-owned foreign 
corporations or the rule for gains from the sale of certain 
stock or intangibles (discussed above) apply. The provision 
gives the Secretary authority to issue guidance as necessary or 
appropriate to carry out the purposes of the provision, 
including guidance providing that related items of income may 
be aggregated for purposes of the provision or grouping 
together items of income from the same trade or business.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (August 10, 2010).

 D. Limitation on the Amount of Foreign Taxes Deemed Paid with Respect 
  to Section 956 Inclusions (sec. 214 of the Act and sec. 960 of the 
                                 Code)


                              Present Law

    The United States employs a worldwide tax system under 
which U.S. resident individuals and domestic corporations 
generally are taxed on all income, whether derived in the 
United States or abroad; the foreign tax credit provides relief 
from double taxation. Income earned directly or through a pass-
through entity (such as a partnership) is taxed on a current 
basis. By contrast, active foreign business earnings that a 
U.S. person derives indirectly through a foreign corporation 
generally are not subject to U.S. tax until such earnings are 
repatriated to the United States through a distribution of 
those earnings to the U.S. person. This ability of U.S. persons 
to defer income is circumscribed by various regimes intended to 
restrict or eliminate tax deferral with respect to certain 
categories of passive or highly mobile income. The main anti-
deferral regimes are the controlled foreign corporation 
(``CFC'') rules of subpart F \1211\ and the passive foreign 
investment company rules.\1212\
---------------------------------------------------------------------------
    \1211\ See secs. 951-965.
    \1212\ See secs. 1291-1298.
---------------------------------------------------------------------------

The subpart F CFC rules

    Under the subpart F CFC rules, a 10 percent-or-greater U.S. 
shareholder (a ``U.S. Shareholder'') of a CFC is subject to 
U.S. tax currently on (1) its pro rata share of certain income 
earned by the CFC \1213\ and (2) certain untaxed earnings 
invested in United States property with respect to such 
shareholder.\1214\ In each case, the U.S. Shareholder is 
subject to tax currently, whether or not such income is 
distributed. A CFC is defined generally as a foreign 
corporation with respect to which U.S. Shareholders own more 
than 50 percent of the combined voting power or total value of 
the stock of the corporation.\1215\
---------------------------------------------------------------------------
    \1213\ Sec. 951(a)(1)(A).
    \1214\ Sec. 951(a)(1)(B).
    \1215\ Sec. 957(a).
---------------------------------------------------------------------------
            United States property held by CFCs
    A U.S. Shareholder that owns stock in a CFC on the last day 
of the taxable year must include in its gross income the amount 
determined under section 956 with respect to such shareholder 
for such year (but only to the extent not previously taxed 
\1216\) (a ``section 956 inclusion'').\1217\ The section 956 
inclusion for any taxable year is generally the lesser of (1) 
the excess of such shareholder's pro rata share of the average 
of the amounts of United States property held (directly or 
indirectly) by the CFC as of the close of each quarter of such 
taxable year over the amount of previously taxed income from 
prior section 956 inclusions \1218\ with respect to such 
shareholder, or (2) such shareholder's pro rata share of the 
applicable earnings of such CFC.\1219\
---------------------------------------------------------------------------
    \1216\ Sec. 959(a)(2).
    \1217\ Sec. 951(a)(1)(B).
    \1218\ See sec. 959(c)(1)(A).
    \1219\ Sec. 956(a).
---------------------------------------------------------------------------

Foreign tax credits

    Subject to the limitations discussed below, a U.S. person 
is allowed to claim a credit against its U.S. income tax 
liability for the foreign income taxes that it pays. As 
discussed below, a domestic corporation may \1220\ also be 
allowed a ``deemed-paid'' credit for foreign income taxes paid 
by a foreign corporation that the domestic corporation is 
deemed to have paid when the related income is distributed or 
is included in the domestic corporation's income under the 
provisions of subpart F, including section 956 
inclusions.\1221\
---------------------------------------------------------------------------
    \1220\ A U.S. Shareholder includes individuals and entities. Sec. 
951(b). In contrast, only those U.S. Shareholders that are corporations 
are entitled to the deemed-paid credit.
    \1221\ Secs. 901, 902, 960. Similar rules apply under sections 
1291(g) and 1293(f) with respect to income that is includible under the 
passive foreign investment company (``PFIC'') rules.
---------------------------------------------------------------------------
    A foreign tax credit is available only for foreign income, 
war profits, and excess profits taxes, and for certain taxes 
imposed in lieu of such taxes. Other foreign levies generally 
are treated as deductible expenses. The foreign tax credit is 
elective on a year-by-year basis. In lieu of electing the 
foreign tax credit, U.S. persons generally are permitted to 
deduct foreign taxes.\1222\
---------------------------------------------------------------------------
    \1222\ Sec. 164(a)(3).
---------------------------------------------------------------------------
            Deemed-paid foreign tax credit
    Domestic corporations owning at least 10 percent of the 
voting stock of a foreign corporation are treated as if they 
had paid a share of the foreign income taxes paid by the 
foreign corporation in the year in which that corporation's 
earnings and profits (``E&P'') become subject to U.S. tax as 
dividend income of the domestic corporation.\1223\ This credit 
is the deemed-paid, or indirect, foreign tax credit. A domestic 
corporation may also be deemed to have paid taxes paid by a 
second-, third-, fourth-, fifth-, or sixth-tier foreign 
corporation, if certain requirements are satisfied.\1224\ 
Foreign taxes paid below the third tier are eligible for the 
deemed-paid credit only with respect to taxes paid in taxable 
years during which the payor is a CFC and the corporation 
claiming the credit is a U.S. Shareholder of the CFC.\1225\ 
Foreign taxes paid below the sixth tier are not eligible for 
the deemed-paid credit. In addition, a deemed-paid credit 
generally is available with respect to any inclusion of subpart 
F income or investments of earnings in United States property 
for the taxable year.\1226\ The amount of the credit is 
determined by the same formula as under section 902, except 
that the numerator of the ratio is the amount of the inclusion, 
rather than the amount of dividends received during the taxable 
year.\1227\
---------------------------------------------------------------------------
    \1223\ Sec. 902(a).
    \1224\ Sec. 902(b).
    \1225\ Sec. 902(b)(2).
    \1226\ Sec. 960(a).
    \1227\ Sec. 960(a)(1); Treas. Reg. sec. 1.960-1(i)(1).
---------------------------------------------------------------------------
    E&P is determined under the same rules for purposes of the 
deemed-paid credit fraction with respect to subpart F and 
section 956 inclusions as for dividends.\1228\ These rules 
generally \1229\ provide that the E&P of any foreign 
corporation is determined according to rules substantially 
similar to those applicable to domestic corporations, under 
regulations prescribed by the Secretary. The amount of foreign 
tax eligible for the indirect credit is added to the actual 
dividend or inclusion (the dividend or inclusion is said to be 
``grossed-up'') and is included in the domestic corporation's 
income; accordingly, the domestic corporation is treated as if 
it had received its proportionate share of pre-tax profits of 
the foreign corporation and paid its proportionate share of the 
foreign tax paid by the foreign corporation.\1230\
---------------------------------------------------------------------------
    \1228\ See secs. 902(c)(1), 964; Treas. Reg. sec. 1.964-1(a)(1).
    \1229\ For an exception, see sec. 312(k)(4).
    \1230\ Sec. 78.
---------------------------------------------------------------------------
    For purposes of computing the deemed-paid foreign tax 
credit, distributions (or other inclusions) are considered made 
first from the post-1986 pool of all the distributing foreign 
corporation's accumulated E&P.\1231\ Accumulated E&P for this 
purpose includes the E&P of the current year undiminished by 
the current distribution (or other inclusion).\1232\ 
Distributions in excess of the accumulated pool of post-1986 
undistributed E&P are treated as paid out of pre-1987 
accumulated profits and are subject to the ordering principles 
of pre-1986 Act law.\1233\
---------------------------------------------------------------------------
    \1231\ Sec. 902(c)(6)(B). E&P computations for these purposes are 
to be made under U.S. tax principles. Secs. 902(c)(1), 964(a).
    \1232\ Sec. 902(c)(1).
    \1233\ Sec. 902(c)(6).
---------------------------------------------------------------------------
            Foreign tax credit limitation
    The foreign tax credit generally is limited to a taxpayer's 
U.S. tax liability on its foreign-source taxable income (as 
determined under U.S. tax accounting principles).\1234\ This 
limit is intended to ensure that the credit serves its purpose 
of mitigating double taxation of foreign-source income without 
offsetting U.S. tax on U.S.-source income. The limit is 
computed by multiplying a taxpayer's total U.S. tax liability 
for the year by the ratio of the taxpayer's foreign-source 
taxable income for the year to the taxpayer's total taxable 
income for the year. If the total amount of foreign income 
taxes paid and deemed paid for the year exceeds the taxpayer's 
foreign tax credit limitation for the year, the taxpayer may 
carry back the excess foreign taxes to the previous taxable 
year or carry forward the excess taxes to one of the succeeding 
10 taxable years.\1235\
---------------------------------------------------------------------------
    \1234\ Secs. 901, 904.
    \1235\ Sec. 904(c).
---------------------------------------------------------------------------
    The foreign tax credit limitation is generally applied 
separately to two different categories of income, passive 
category income and general category income.\1236\ Passive 
category income generally includes investment income such as 
dividends, interest, rents, and royalties.\1237\ General 
category income is generally all income that is not in the 
passive category. Because the foreign tax credit limitation 
must be applied separately to income in these two categories, 
credits for foreign tax imposed on income in one category 
cannot be used to offset U.S. tax on income in the other 
category.
---------------------------------------------------------------------------
    \1236\ Sec. 904(d). Separate foreign tax credit limitations also 
apply to certain categories of income described in other sections. See, 
e.g., secs. 901(j), 904(h)(10), 865(h).
    \1237\ Sec. 904(d)(2)(B). Passive income is defined by reference to 
the definition of foreign personal holding company income in section 
954(c), and thus generally includes dividends, interest, rents, 
royalties, annuities, net gains from certain property or commodities 
transactions, foreign currency gains, income equivalent to interest, 
income from notional principal contracts, and income from certain 
personal service contracts. Exceptions apply for certain rents and 
royalties derived in an active business and for certain income earned 
by dealers in securities or other financial instruments. Passive 
category income also includes amounts that are includible in gross 
income under section 1293 (relating to PFICs) and dividends received 
from certain DISCs and FSCs.
---------------------------------------------------------------------------
    Income that would otherwise constitute passive category 
income is treated as general category income if it is earned by 
a qualifying financial services entity (and certain other 
requirements are met).\1238\ Passive income is also treated as 
general category income if it is high-taxed income (i.e., if 
the foreign tax rate is determined to exceed the highest rate 
of tax specified in section 1 or 11, as applicable).\1239\ 
Dividends (and subpart F inclusions), interest, rents, and 
royalties received from a CFC by a U.S. person are assigned to 
a separate limitation category by reference to the category of 
income out of which the dividend or other payment is 
made.\1240\ Dividends received by a U.S. person from a foreign 
corporation that is not a CFC are also categorized on a look-
through basis.\1241\ For purposes of determining the foreign 
tax credit limitation, section 956 inclusions are treated as 
dividends.\1242\
---------------------------------------------------------------------------
    \1238\ Sec. 904(d)(2)(C),(D).
    \1239\ Sec. 904(d)(2)(F).
    \1240\ Sec. 904(d)(3).
    \1241\ Sec. 904(d)(4).
    \1242\ Sec. 904(d)(3)(G).
---------------------------------------------------------------------------
    Under the foreign tax credit limitation rules, the total 
amount of the credit taken into account cannot exceed the same 
proportion of the tax against which such credit is taken which 
the taxpayer's taxable income from sources without the United 
States (but not in excess of the taxpayer's taxable income) 
bears to his entire taxable income for the same taxable year.

                        Explanation of Provision

    The provision imposes a limit on the amount of foreign 
taxes that a U.S. Shareholder is deemed to pay with respect to 
any section 956 inclusion.
    For section 956 inclusions attributable to United States 
property acquired by a CFC after the effective date, the amount 
of foreign taxes deemed paid in each separate category is 
determined by comparing the foreign taxes deemed paid with 
respect to the U.S. Shareholder's section 956 inclusion 
(determined without regard to the provision) (the ``tentative 
credit'') to its hypothetical amount of foreign taxes deemed 
paid as computed under the provision (the ``hypothetical 
credit''). The U.S. Shareholder's hypothetical credit is the 
amount of foreign taxes it would have been deemed to have paid 
if cash in an amount equal to the section 956 inclusion had 
been distributed through the chain of ownership that begins 
with the foreign corporation that holds the investment in 
United States property and ends with the U.S. Shareholder. If 
the hypothetical credit is less than the tentative credit, then 
the amount of foreign taxes deemed paid with respect to the 
section 956 inclusion is limited to the hypothetical credit. 
However, the amount of the tentative credit is not increased if 
the hypothetical credit would have been greater than the 
tentative credit. This limitation applies whether the U.S. 
Shareholder chooses to claim a credit \1243\ for foreign taxes 
paid or accrued, or to deduct such taxes.\1244\
---------------------------------------------------------------------------
    \1243\ Sec. 901.
    \1244\ Sec. 164(a)(3).
---------------------------------------------------------------------------
    In general, present-law foreign tax credit rules apply in 
determining the hypothetical credit. The only exception is 
that, to the extent an actual distribution would be subject to 
any income or withholding tax, such taxes are not taken into 
account in determining the hypothetical credit.\1245\ Thus, the 
generally applicable rules and definitions \1246\ apply to each 
hypothetical distribution.
---------------------------------------------------------------------------
    \1245\ Similarly, if this hypothetical distribution would be 
subject to a withholding tax upon distribution to USP, if it had been 
actually made, any such tax would not be taken into account in 
determining the hypothetical credit. However, this conclusion results 
because such taxes are described in section 901(b), thus they are 
outside the scope of the provision.
    \1246\ See, e.g., secs. 902(b), (c), and 904(d)(3)(B), (D).
---------------------------------------------------------------------------
    For example, assume that, for the relevant tax year, and 
before taking into account the hypothetical distribution under 
the provision, a U.S. parent (``USP'') owns all of the vote and 
value of CFC1, a CFC organized in Country A with post-1986 
undistributed earnings of 200u, and post-1986 foreign income 
taxes of $10.\1247\ CFC1 owns all of the vote and value of 
CFC2, a CFC organized in Country B with post-1986 undistributed 
earnings of 100u, and post-1986 foreign income taxes of $50. If 
CFC2 makes a loan to USP that results in a section 956 
inclusion of 100u, the tentative credit is $50 (equal to 100u/
100u  $50).
---------------------------------------------------------------------------
    \1247\ For purposes of this example, assume that each CFC has: (1) 
a ``u'' functional currency; (2) E&P comprising solely post-1986 
undistributed earnings or deficits in post-1986 undistributed earnings, 
such that there are no pre-1987 accumulated profits; (3) only post-1986 
foreign income taxes; (4) no previously-taxed income; (5) only E&P and 
foreign income taxes in the section 904(d) general category; and (6) no 
other attributes than those listed. Except as provided in the example, 
there are no other distributions or inclusions during the taxable year. 
In addition, Country B imposes a 10-percent withholding tax on dividend 
payments to foreign shareholders.
---------------------------------------------------------------------------
    The hypothetical distribution of 100u from CFC2 to CFC1 
would increase CFC1's current E&P by 100u, from 200u to300u, 
and increase CFC1's foreign income taxes from $10 to $60. The 
100u hypothetical distribution results in a dividend of 100u 
that is non-subpart F income of CFC1 under the subpart F look-
through rules.\1248\ Although Country B would impose a 10 
percent withholding tax on an actual distribution of 100u to 
CFC1, for a total withholding tax of 10u, this amount is not 
taken into account in determining the hypothetical credit. 
Next, the 100u hypothetical distribution from CFC1 to USP would 
result in a dividend of 100u, on which USP would be deemed to 
have paid $20 in taxes.\1249\ Because the hypothetical credit 
of $20 is less than the tentative credit of $50, USP's foreign 
taxes deemed paid with respect to its section 956 inclusion are 
limited to $20. USP's section 78 gross-up with respect to the 
section 956 inclusion is also $20.\1250\
---------------------------------------------------------------------------
    \1248\ Sec. 954(c)(6). This assumes that the subpart F look-through 
rules of section 954(c)(6) are extended, and are therefore applicable 
to the hypothetical distribution. In the event the look-through rule of 
section 954(c)(6) expires, the 100u hypothetical distribution would 
result in a dividend of 100u that would be currently included in USP's 
income as a subpart F item at the level of CFC1.
    \1249\ The hypothetical amount of foreign taxes deemed paid equals 
(100u/300u)  $60. The post-1986 undistributed earnings that is 
the denominator of the section 902(a) fraction for purposes of the 
provision equals CFC1's post-1986 undistributed earnings of 200u 
(determined without regard to the provision) plus the amount of the 
hypothetical dividend from CFC2, 100u.
    \1250\ If, in the same taxable year, CFC1 were also to make an 
actual distribution of all its accumulated E&P of 200u, the 100u 
hypothetical distribution from CFC1 to USP would have no impact on the 
calculation of USP's actual deemed paid credit from CFC1's actual 
dividend. The deemed-paid credit on the 200u dividend would be $10, 
which equals (200u/200u  $10). In addition, the calculation of 
the hypothetical credit with respect to the hypothetical distribution 
of 100u from CFC2 would be the same (100u/300u  $60 = $20) 
whether or not CFC1 paid an actual dividend.
---------------------------------------------------------------------------
    The provision is applied with regard to earnings and taxes 
in each separate category. In addition, treatment of any 
foreign taxes over the limit imposed under the provision (the 
``excess taxes'') is the same as the treatment of any other 
foreign taxes paid or accrued, but not yet deemed paid for 
purposes of the foreign tax credit rules. Thus, if a foreign 
corporation's excess taxes are in its general category post-
1986 foreign income taxes pool, the foreign corporation's 
excess taxes are still considered general category post-1986 
foreign income taxes.\1251\ Accordingly, such taxes are 
included in the computation of foreign taxes deemed paid with 
respect to a subsequent distribution from, or income inclusion 
with respect to, that foreign corporation, subject to 
applicable limitations including the limitation of the 
provision. In the example above, excess taxes that remain at 
CFC2 equal $30.\1252\
---------------------------------------------------------------------------
    \1251\ Sec. 902(c)(2).
    \1252\ The excess taxes equal the deemed paid foreign tax credit 
(determined without regard to the provision) of $50 minus the 
hypothetical credit of $20. Alternatively, if CFC2's E&P also included 
125u in previously taxed income (which is taken into account in 
determining that the section 956 inclusion is 100u), then the excess 
taxes remaining at CFC2 would be $50, because the applicable ordering 
rules would prioritize the hypothetical distribution as coming first 
from the 125u in previously taxed income over the 100u in untaxed 
earnings. See sec. 959(c).
---------------------------------------------------------------------------
    The provision applies to United States property acquired by 
a CFC after December 31, 2010. Thus, for example, any section 
956 inclusions from a CFC loan that was made to its U.S. parent 
on or before December 31, 2010, would not be subject to the 
limitation imposed by the provision. However, the limitation 
imposed by the provision would apply if, after December 31, 
2010, there is a significant modification of the debt 
instrument such that the original debt instrument is considered 
as exchanged for a modified instrument that differs materially 
from the original.\1253\
---------------------------------------------------------------------------
    \1253\ See Treas. Reg. sec. 1.1001-3.
---------------------------------------------------------------------------
    The provision requires the Secretary to issue regulations 
or guidance to carry out the purposes of the provision, 
including regulations that prevent the inappropriate use of the 
foreign corporation's foreign income taxes not deemed paid by 
reason of the provision. It is anticipated that guidance will 
prohibit the inappropriate use of excess taxes, and will 
address attempted avoidance of the provision through a series 
of transactions.

                             Effective Date

    The provision is effective for acquisitions of United 
States property after December 31, 2010.

    E. Special Rule with Respect to Certain Redemptions by Foreign 
     Subsidiaries (sec. 215 of the Act and sec. 304(b) of the Code)


                              Present Law

    Under section 304, if one corporation (the ``acquiring 
corporation'') purchases stock of a related corporation (the 
``target corporation'') in exchange for property, the 
transaction generally is recharacterized as a redemption. To 
the extent a section 304(a)(1) transaction is treated as a 
distribution under section 301, the transferor and the 
acquiring corporation are treated as if (1) the transferor had 
transferred the stock of the target corporation to the 
acquiring corporation in exchange for stock of the acquiring 
corporation in a transaction to which section 351(a) applies, 
and (2) the acquiring corporation had then transferred the 
property to the transferor in redemption of the stock it is 
deemed as having issued.\1254\ In the case of a section 304 
transaction, the amount and the source of a dividend are 
determined as if the property were distributed by the acquiring 
corporation to the extent of its earnings and profits 
(``E&P''), and then by the target corporation to the extent of 
its E&P.\1255\ To the extent the dividend is sourced from the 
E&P of the acquiring corporation, the transferor is considered 
to receive the dividend directly from the acquiring 
corporation; \1256\ this is commonly referred to as 
``hopscotching'' because the dividend bypasses any intermediary 
shareholders.
---------------------------------------------------------------------------
    \1254\ Sec. 304(a)(1).
    \1255\ Sec. 304(b)(2).
    \1256\ See H.R. Rep. No. 98-861 (1984) (Conf. Rep.), 1222-1224; 
Rev. Rul. 80-189, 1980-2 C.B. 106.
---------------------------------------------------------------------------
    Special rules apply if the acquiring corporation is 
foreign.\1257\ For purposes of determining the amount of the 
dividend to the transferor, the foreign acquiring corporation's 
E&P that is taken into account is limited to the portion of 
such E&P that (1) is attributable to stock of the foreign 
acquiring corporation held by a corporation or individual who 
is the transferor (or a person related thereto) of the target 
corporation and who is a U.S. shareholder \1258\ of the foreign 
acquiring corporation, and (2) was accumulated while such stock 
was owned by the transferor (or a person related thereto) and 
while the foreign acquiring corporation was a controlled 
foreign corporation (``CFC'').\1259\
---------------------------------------------------------------------------
    \1257\ Sec. 304(b)(5).
    \1258\ As that term is defined by section 951(b).
    \1259\ See sec. 304(b)(5).
---------------------------------------------------------------------------
    Section 1442 generally requires a 30-percent gross basis 
tax to be withheld on dividend payments to foreign persons 
unless reduced or eliminated pursuant to an applicable income 
tax treaty.

                        Explanation of Provision

    The provision generally imposes an additional limitation on 
the E&P of a foreign acquiring corporation that is taken into 
account in determining the amount (and source) of the 
distribution that is treated as a dividend.
    Under the provision, if more than 50 percent of the 
dividends arising from acquisition would (without taking into 
account the provision) not be (1) subject to U.S. tax in the 
year in which the dividend arises, or (2) includible in the E&P 
of a CFC,\1260\ then the E&P of the foreign acquiring 
corporation is not taken into account for this purpose.\1261\
---------------------------------------------------------------------------
    \1260\ For purposes of this rule, ``CFC'' is defined by reference 
to section 957, but without regard to section 953(c).
    \1261\ It is not intended that the provision apply if an amount is 
not subject to tax under this chapter for the taxable year in which the 
dividend arises solely as a result of the application of section 959.
---------------------------------------------------------------------------
    If it is determined that the special rule applies, none of 
the foreign acquiring corporation's E&P is taken into account. 
In such case, the only E&P that is taken into account to 
determine the amount constituting a dividend is the target 
corporation's E&P. The provision prevents the foreign acquiring 
corporation's E&P from permanently escaping U.S. taxation by 
being deemed to be distributed directly to a foreign person 
(i.e., the transferor) without an intermediate distribution to 
a domestic corporation in the chain of ownership between the 
acquiring corporation and the transferor corporation. 
Generally, if the transferor is a foreign corporation (and not 
a CFC) and the acquiring corporation is a CFC, it is not 
relevant whether the target corporation is a domestic or a 
foreign corporation. However, if the target is a U.S. 
corporation, the 30-percent gross basis withholding tax applies 
to the amount constituting a dividend from the target, unless 
reduced or eliminated by treaty.\1262\
---------------------------------------------------------------------------
    \1262\ Sec. 1442; Rev. Rul. 92-85; 1992-2 C.B. 69.
---------------------------------------------------------------------------
    It is anticipated that regulations will provide rules to 
prevent the avoidance of the provision, including through the 
use of partnerships, options, or other arrangements to cause a 
foreign corporation to be treated as a CFC.

                             Effective Date

    The provision is effective for acquisitions after the date 
of enactment (August 10, 2010).

 F. Modification of Affiliation Rules for Purposes of Rules Allocating 
    Interest Expense (sec. 216 of the Act and sec. 864 of the Code)


                              Present Law


In general

    The United States employs a worldwide tax system under 
which U.S. resident individuals and domestic corporations 
generally are taxed on all income, whether derived in the 
United States or abroad; the foreign tax credit provides relief 
from double taxation. The foreign tax credit generally is 
limited to the U.S. tax liability on a taxpayer's foreign-
source income, in order 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.\1263\
---------------------------------------------------------------------------
    \1263\ Secs. 901, 904.
---------------------------------------------------------------------------
    To compute the foreign tax credit limitation, a taxpayer 
must determine the amount of its taxable income from foreign 
sources by allocating and apportioning deductions between items 
of U.S.-source gross income, on the one hand, and items of 
foreign-source gross income, on the other. There are no 
specific rules for most types of deductions.\1264\ Specific 
provisions govern the allocation and apportionment of 
interest.\1265\
---------------------------------------------------------------------------
    \1264\ See, e.g., secs. 861(b), 862(b), and 863(a), which require 
that a taxpayer properly allocate and apportion expenses, losses, or 
other deductions, without containing any specific rules for allocating 
and apportioning particular types of deductions.
    \1265\ Sec. 864(e). In the case of interest expense, the rules 
generally are based on the premise 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. Temp. Treas. Reg. 
sec. 1.861-9T(a).
---------------------------------------------------------------------------
    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.\1266\
---------------------------------------------------------------------------
    \1266\ Secs. 864(e)(1), 864(e)(2).
---------------------------------------------------------------------------
            Foreign corporations owned by an affiliated group of 
                    corporations
    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.\1267\ 
These rules exclude all foreign corporations from an affiliated 
group.\1268\ 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.
---------------------------------------------------------------------------
    \1267\ Secs. 864(e)(5)(A), sec. 1504. The affiliated group for 
interest allocation purposes generally excludes certain corporations 
that are financial institutions. These corporate financial institutions 
are not treated as members of the regular affiliated group for purposes 
of applying the one-taxpayer rule to other non-financial members of 
that group. Instead, all such corporate financial institutions that 
would be so affiliated are treated as a separate single corporation for 
interest allocation purposes. Sec. 864(e)(5)(B).
    \1268\ Sec. 1504(b)(3).
---------------------------------------------------------------------------
    Under Treasury regulations, however, certain foreign 
corporations are treated as affiliated corporations, in certain 
respects, if (1) at least 80 percent of either the vote or 
value of the corporation's outstanding stock is owned directly 
or indirectly by members of an affiliated group, and (2) more 
than 50 percent of the corporation's gross income for the 
taxable year is effectively connected with the conduct of a 
U.S. trade or business (also known as effectively connected 
income).\1269\
---------------------------------------------------------------------------
    \1269\ Temp. Treas. Reg. sec. 1.861-11T(d)(6)(ii). The question as 
to whether a foreign person is engaged in a U.S. trade or business has 
generated a significant body of case law. Basic issues involved in the 
determination include whether the activity constitutes business rather 
than investing, whether sufficient activities in connection with the 
business are conducted in the United States, and whether the 
relationship between the foreign person and persons performing 
functions in the United States with respect to the business is 
sufficient to attribute those functions to the foreign person. 
Generally, only U.S.-source income is treated as effectively connected 
with the conduct of a U.S. trade or business. However, certain limited 
categories of foreign-source income are treated as effectively 
connected if the income is attributable to an office or other fixed 
place of business maintained by the foreign person in the United 
States. Sec. 864(c).
---------------------------------------------------------------------------
    In the case of a foreign corporation that is treated as an 
affiliated corporation for interest allocation and 
apportionment purposes, the percentage of its assets and income 
that is taken into account varies depending on the percentage 
of the corporation's gross income that is effectively connected 
income. If 80 percent or more of the foreign corporation's 
gross income is effectively connected income, then all the 
corporation's assets and interest expense are taken into 
account. If, instead, between 50 percent and 80 percent of the 
foreign corporation's gross income is effectively connected 
income, then only the corporation's assets that generate 
effectively connected income and a percentage of its interest 
expense equal to the percentage of its assets that generate 
effectively connected income are taken into account.\1270\
---------------------------------------------------------------------------
    \1270\ Temp. Treas. Reg. sec. 1.861-11T(d)(6)(ii).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision treats a foreign corporation as a member of 
an affiliated group, for interest allocation and apportionment 
purposes, if (1) more than 50 percent of the gross income of 
such foreign corporation for the taxable year is effectively 
connected income, and (2) at least 80 percent of either the 
vote or value of all outstanding stock of such foreign 
corporation is owned directly or indirectly by members of the 
affiliated group (determined with regard to this sentence). 
Thus, under the provision, if more than 50 percent of a foreign 
corporation's gross income is effectively connected income and 
at least 80 percent of either the vote or value of all 
outstanding stock of such foreign corporation is owned directly 
or indirectly by members of the affiliated group, then all of 
the foreign corporation's assets and interest expense are taken 
into account for the purposes of allocating and apportioning 
the interest expense of the affiliated group.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (August 10, 2010).

  G. Termination of Special Rules for Interest and Dividends Received 
from Persons Meeting the 80-Percent Foreign Business Requirements (sec. 
     217 of the Act and secs. 861(a)(1)(A) and 871(i) of the Code)


                              Present Law

    The source of interest and dividend income generally is 
determined by reference to the country of residence of the 
payor.\1271\ Thus, an interest or dividend payment from a U.S. 
payor to a foreign person generally is treated as U.S.-source 
income and is subject to the 30-percent gross-basis U.S. 
withholding tax.\1272\ However, if a resident alien individual 
or domestic corporation satisfies an 80-percent active foreign 
business income requirement (the ``80/20 test''), all or a 
portion of any interest paid by the resident alien individual 
or the domestic corporation (a so-called ``80/20 company'') is 
exempt from U.S. withholding tax. Interest paid by a resident 
alien individual that satisfies the 80/20 test or by an 80/20 
company is treated as foreign-source income and is therefore 
exempt from the 30-percent withholding tax if it is paid to 
unrelated parties.\1273\ When a resident alien individual or 
80/20 company pays interest to a related party, the resourcing 
rule applies only to the percentage of the interest that is 
equal to the percentage of the resident alien individual's or 
80/20 company's foreign-source income (described below) as a 
portion of the resident alien individual's or 80/20 company's 
total gross income during the three-year testing period (a so-
called ``look-through'' approach).\1274\
---------------------------------------------------------------------------
    \1271\ Secs. 861(a)(1), (2), 862(a)(1), (2).
    \1272\ Secs. 871(a)(1)(A), 881(a)(1), 1441(b), and 1442(a).
    \1273\ Sec. 861(a)(1)(A).
    \1274\ Sec. 861(c)(2).
---------------------------------------------------------------------------
    In addition to interest, all or part of a dividend paid by 
an 80/20 company may also be exempt from U.S. withholding tax. 
The percentage of the dividend paid by an 80/20 company that 
equals the percentage of the 80/20 company's total gross income 
during the testing period that is foreign source is exempt from 
U.S. withholding tax.\1275\ Unlike interest, a dividend paid by 
an 80/20 company remains U.S. source (for example, for foreign 
tax credit limitation purposes).
---------------------------------------------------------------------------
    \1275\ Sec. 871(i).
---------------------------------------------------------------------------
    In general, a resident alien individual or domestic 
corporation meets the 80/20 test if at least 80 percent of the 
gross income of the resident alien individual or corporation 
during the testing period is derived from foreign sources and 
is attributable to the active conduct of a trade or business in 
a foreign country (or a U.S. possession) by the resident alien 
individual or corporation or, in the case of a corporation, a 
50-percent owned subsidiary of that corporation. The testing 
period generally is the three-year period preceding the year in 
which the interest or dividend is paid.\1276\
---------------------------------------------------------------------------
    \1276\ Sec. 861(c)(1). The income of a subsidiary is attributed to 
the tested company only to the extent that the tested company actually 
receives income from the subsidiary in the form of dividends. 
Conference Report to the 1986 Tax Reform Act, Pub. L. No. 99-514, Vol. 
II, 602; see also Rev. Rul. 73-63, 1973-1 C.B. 336; P.L.R. 6905161160A 
(May 16, 1969).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision repeals the present-law rule that treats as 
foreign-source all or a portion of any interest paid by a 
resident alien individual or domestic corporation that meets 
the 80/20 test. The provision also repeals the present-law rule 
that exempts from U.S. withholding tax all or a portion of any 
dividends paid by a domestic corporation that meets the 80/20 
test.
    The provision provides a grandfather rule for any domestic 
corporation that (1) meets the 80/20 test (as in effect before 
the enactment of this provision) (hereinafter ``the present law 
80/20 test'') for its last taxable year beginning before 
January 1, 2011 (``an existing 80/20 company''), (2) meets a 
new 80/20 test with respect to each taxable year beginning 
after December 31, 2010, and (3) has not added a substantial 
line of business with respect to such corporation after the 
date of enactment of this provision. Any payment of dividend or 
interest after December 31, 2010 by an existing 80/20 company 
that meets the grandfather rule is exempt from withholding tax 
to the extent of the existing 80/20 company's active foreign 
business percentage. Nonetheless, any payment of interest will 
be treated as U.S.-source income.
    As with the present law 80/20 test, a corporation meets the 
80-percent foreign business requirements of the 80/20 test 
under the grandfather rule if it is shown to the satisfaction 
of the Secretary that at least 80-percent of the gross income 
from all sources of such corporation for the testing period is 
active foreign business income. This percentage--active foreign 
business income of the company for the testing period as a 
percentage of total gross income of the company for the testing 
period--is also the company's active foreign business 
percentage for purposes of determining the portion of any 
dividend or interest paid by an existing 80/20 company that is 
exempt from withholding tax. However, except as modified by the 
transition rule below, the existing 80/20 company and all of 
its subsidiaries are aggregated and treated as one corporation. 
For this purpose, a subsidiary means any corporation in which 
the existing 80/20 company owns (directly or indirectly) stock 
meeting the requirements of section 1504(a)(2), determined by 
substituting 50 percent for 80 percent and without regard to 
section 1504(b)(3). As a result, an existing 80/20 company must 
take into account the gross income of any domestic or foreign 
subsidiary. The Secretary may issue guidance as is necessary or 
appropriate to carry out the purpose of this provision, 
including guidance providing for the proper application of the 
aggregation rules.
    Under the 80/20 test provided by the grandfather rule, the 
testing period is the three-year period ending with the close 
of the taxable year of the corporation preceding the payment 
(or such part of such period as may be applicable). If the 
corporation has no gross income for such three-year period (or 
part thereof), the testing period is the taxable year in which 
the payment is made.
    The grandfather rule includes a transition rule that 
applies in the case of any taxable year for which the testing 
period includes one or more taxable years beginning before 
January 1, 2011. Under this transition rule, a corporation 
meets the 80-percent foreign business requirements if, and only 
if, the weighted average of (1) the percentage of the 
corporation's gross income from all sources that is active 
foreign business income (as defined in subparagraph (B) of 
section 861(c)(1) (as in effect before the date of enactment of 
this provision)) for the portion of the testing period that 
includes taxable years beginning before January 1, 2011,\1277\ 
and (2) the percentage of the corporation's gross income from 
all sources that is active foreign business income for the 
portion of the testing period, if any, that includes taxable 
years beginning on or after January 1, 2011, is at least 80 
percent. Accordingly, this transition rule applies instead of 
the new 80/20 test for the relevant tax years. This weighted 
average percentage is also treated as the active foreign 
business percentage for purposes of determining the amount of 
withholding for such taxable years.
---------------------------------------------------------------------------
    \1277\ Hence, this percentage is determined without application of 
the new aggregation rule.
---------------------------------------------------------------------------
    The following example illustrates the operation of this 
transition rule. Assume a domestic corporation has $100 of 
active foreign business income and no other income on a 
separate company basis (i.e., without regard to the income of 
any affiliate) for each of the 2008, 2009, and 2010 tax years. 
For the 2011, 2012, and 2013 tax years, the domestic company 
has $700 of active foreign business income and $300 of other 
income on an aggregate basis (including the income of its 50-
percent owned domestic and foreign subsidiaries). Under the 
provision, the domestic company's weighted average percentage 
for the 2011 tax year is 100 percent, determined by considering 
the 2008, 2009, and 2010 tax years on a separate company basis 
(($100 + $100 + $100)/($100 + $100 + $100)). Therefore, for the 
2011 tax year, the domestic company meets the 80-percent active 
foreign business requirements, and its active foreign business 
percentage is 100 percent for the 2011 tax year.
    For the 2012 tax year, the weighted average percentage is 
90 percent, determined by considering the 2009 and 2010 tax 
years on a separate company basis ((($100 + $100)/($100 + $100) 
 \2/3\)) or 66.7 percent) and the 2011 tax year on an 
aggregate basis ((($700/$1,000)  \1/3\) or 23.3 
percent). As a result, the domestic company meets the 80-
percent active foreign business requirements, and its active 
foreign business percentage is 90 percent for the 2012 tax 
year.
    For the 2013 tax year, the weighted average percentage is 
80 percent, determined by considering the 2010 tax year on a 
separate company basis ((($100/$100)  \1/3\) or 33.3 
percent) and the 2011 and 2012 tax years on an aggregate basis 
((($700 + $700)/($1,000 + $1,000)  \2/3\) or 46.7 
percent). Therefore, for the 2013 tax year, the domestic 
company meets the 80-percent active foreign business 
requirements, and its active foreign business percentage is 80 
percent.
    For the 2014 tax year, the transition rule does not apply 
since none of the years within the three-year testing period 
begin before January 1, 2011. As a result, the domestic company 
does not meet the 80-percent foreign business requirements for 
the 2014 tax year since only 70 percent (($700 + $700 + $700)/
($1,000 + $1,000 + $1,000)) of its gross income from all 
sources for the testing period is active foreign business 
income.
    An existing 80/20 company does not meet the grandfather 
rule if there has been an addition of a substantial line of 
business with respect to such corporation after the date of 
enactment of this provision. For purposes of determining 
whether a substantial line of business has been added, rules 
similar to those of section 7704(g) and the Treasury 
regulations thereunder (relating to certain publicly-traded 
partnerships treated as corporations and including specifically 
Treas. Reg. section 1.7704-2(c) to (e)) apply. It is 
anticipated that the Secretary will issue guidance providing 
that the acquisition of foreign operating assets or stock of a 
foreign corporation by the existing 80/20 company for the 
purpose of increasing its active foreign business percentage 
will be treated as the addition of a substantial line of 
business.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.
    The repeal of the 80/20 company provisions relating to the 
payment of interest does not apply to payments of interest to 
persons not related to the 80/20 company (applying rules 
similar to those of section 954(d)(3)) on obligations issued 
before the date of enactment.\1278\ For this purpose, a 
significant modification of the terms of any obligation 
(including any extension of the term of such obligation) is 
treated as the issuance of a new obligation.
---------------------------------------------------------------------------
    \1278\ A person will be treated as a related person with respect to 
a controlled foreigh corporation if (A) such person is an individual, 
corporation, partnership, trust, or estate which controls, or is 
controlled by, the controlled foreign corporation, or (B) such person 
is a corporation, partnership, trust or estate which is controlled by 
the same person or persons which control the resident controlled 
foreign corporation. For purposes of the preceding sentence, control 
means, with respect to a corporation, the ownership, directly or 
indirectly, of stock possessing more than 50 percent of the total 
voting power of all classes of stock entitled to vote or of the total 
value of stock of such corporation. In the case of a partnership, 
trust, or estate, control means the ownership, directly or indirectly, 
of more than 50 percent (by value) of the beneficial interests in such 
partnership, trust, or estate. For purposes of this paragraph, rules 
similar to the rules of section 958 shall apply. Sec. 954(d)(3).
---------------------------------------------------------------------------

  H. Limitation on Extension of Statute of Limitations for Failure to 
Notify Secretary of Certain Foreign Transfers (sec. 218 of the Act and 
                       sec. 6501(c) of the Code)


                              Present Law

    Taxes are generally required to be assessed within three 
years after a taxpayer's return is filed, whether or not it was 
timely filed.\1279\ In the case of a false or fraudulent return 
filed with the intent to evade tax, or if the taxpayer fails to 
file a required return, the tax may be assessed, or a 
proceeding in court for collection of such tax may be begun 
without assessment, at any time.\1280\ The limitation period 
also may be extended by taxpayer consent.\1281\ If a taxpayer 
engages in a listed transaction but fails to include any of the 
information required under section 6011 on any return or 
statement for a taxable year, the limitation period with 
respect to such transaction will not expire before the date 
which is one year after the earlier of (1) the date on which 
the Secretary is provided the information so required, or (2) 
the date that a ``material advisor'' (as defined in section 
6111) makes its section 6112(a) list available for inspection 
pursuant to a request by the Secretary under section 
6112(b)(1)(A).\1282\ In addition to the exceptions described 
above, there are also circumstances under which the three-year 
limitation period is suspended.\1283\
---------------------------------------------------------------------------
    \1279\ Sec. 6501(a). Returns that are filed before the date they 
are due are deemed filed on the due date. See sec. 6501(b)(1) and (2).
    \1280\ Sec. 6501(c).
    \1281\ Sec. 6501(c)(4).
    \1282\ Sec. 6501(c)(10).
    \1283\ For example, service of an administrative summons triggers 
the suspension either (1) beginning six months after service (in the 
case of John Doe summonses) or (2) when a proceeding to quash a summons 
is initiated by a taxpayer named in a summons to a third-party record-
keeper. Judicial proceedings initiated by the government to enforce a 
summons generally do not suspend the limitation period.
---------------------------------------------------------------------------
    Section 6501(c)(8) provides an exception to the three-year 
period of limitations due to failures to provide information 
about cross-border transactions or foreign assets. Under this 
exception, as amended by the Hiring Incentives to Restore 
Employment Act,\1284\ the limitation period for assessment of 
tax does not expire any earlier than three years after the 
required information about certain cross-border transactions or 
foreign assets is actually provided to the Secretary by the 
person required to file the return.\1285\ In general, such 
information reporting is due with the taxpayer's return; thus, 
the three-year limitation period commences when a timely and 
complete return (including all information reporting) is filed. 
Without the inclusion of the information reporting with the 
return, the limitation period does not commence until such time 
as the information reports are subsequently provided to the 
Secretary, even though the return has been filed. The taxes 
that may be assessed during this suspended or extended period 
are not limited to those attributable to adjustments to items 
related to the information required to be reported by one of 
the enumerated sections.
---------------------------------------------------------------------------
    \1284\ Sec. 513, Pub. L. No. 111-147.
    \1285\ Required information reporting subject to this three-year 
rule is reporting under sections 6038 (certain foreign corporations and 
partnerships), 6038A (certain foreign-owned corporations), 6038B 
(certain transfers to foreign persons), 6038D (individuals with foreign 
financial assets), 6046 (organizations, reorganizations, and 
acquisitions of stock of foreign corporations), 6046A (interests in 
foreign partnerships), and 6048 (certain foreign trusts), as well as 
information required with respect to elections under sections 1295(b) 
passive foreign investment corporations.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the scope of the exception to the 
limitations period if a failure to provide information on 
cross-border transactions or foreign assets is shown to be due 
to reasonable cause and not willful neglect. In the absence of 
reasonable cause or the presence of willful neglect, the 
suspension of the limitations period and the subsequent three-
year period that begins after information is ultimately 
supplied apply to all issues with respect to the income tax 
return. In cases in which a taxpayer establishes reasonable 
cause, the limitations period is suspended only for the item or 
items related to the failure to disclose. To prove reasonable 
cause, it is anticipated that a taxpayer must establish that 
the failure was objectively reasonable (i.e., the existence of 
adequate measures to ensure compliance with rules and 
regulations), and in good faith.
    For example, the limitations period for assessing taxes 
with respect to a tax return filed on March 31, 2011 ordinarily 
expires on March 31, 2014. In order to assess tax with respect 
to any issue on the return after March 31, 2014, the IRS must 
be able to establish that one of the exceptions applies. If the 
taxpayer fails to attach to that return one of multiple 
information returns required, the limitations period does not 
begin to run unless and until that missing information return 
is supplied. Assuming that the missing report is supplied to 
the IRS on January 1, 2013, the limitations period for the 
entire return begins, and elapses no earlier than three years 
later, on January 1, 2016. All items are subject to adjustment 
during that time, unless the taxpayer can prove that reasonable 
cause for the failure to file existed. If the taxpayer 
establishes reasonable cause, the only adjustments to tax 
permitted after March 31, 2014 are those related to the failure 
to file the information return. For this purpose, related items 
include (1) adjustments made to the tax consequences claimed on 
the return with respect to the transaction that was the subject 
of the information return, (2) adjustments to any item to the 
extent the item is affected by the transaction even if it is 
otherwise unrelated to the transaction, and (3) interest and 
penalties that are related to the transaction or the 
adjustments made to the tax consequences.

                             Effective Date

    The provision is effective as if included in section 513 of 
the Hiring Incentives to Restore Employment Act.\1286\ Thus, 
the provision applies for returns filed after March 18, 2010, 
the date of enactment of that Act, as well as for any other 
return for which the assessment period specified in section 
6501 had not yet expired as of that date.
---------------------------------------------------------------------------
    \1286\ Pub. L. No. 111-147.
---------------------------------------------------------------------------

  I. Elimination of Advance Refundability of Earned Income Tax Credit 
  (sec. 219 of the Act and secs. 32(g), 3507, and 6051(a) of the Code)


                              Present Law


Overview

    Low- and moderate-income workers may be eligible for the 
refundable earned income tax credit (``EITC''). Eligibility for 
the EITC is based on earned income, adjusted gross income, 
investment income, filing status, number of qualifying children 
and immigration and work status in the United States. The 
amount of the EITC 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.
    The EITC generally equals a specified percentage of earned 
income \1287\ up to a maximum dollar amount. The maximum amount 
applies over a certain income range and then diminishes to zero 
over a specified phaseout range. For taxpayers with earned 
income (or AGI, if greater) in excess of the beginning of the 
phaseout range, the maximum EITC amount is reduced by the 
phaseout rate multiplied by the amount of earned income (or 
AGI, if greater) in excess of the beginning of the phaseout 
range. For taxpayers with earned income (or AGI, if greater) in 
excess of the end of the phaseout range, no credit is allowed.
---------------------------------------------------------------------------
    \1287\ 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.
---------------------------------------------------------------------------
    The EITC is a refundable credit, meaning that if the amount 
of the credit exceeds the taxpayer's Federal income tax 
liability, the excess is payable to the taxpayer as a direct 
transfer payment. Under an advance payment system, eligible 
taxpayers may elect to receive the credit in their paychecks, 
rather than waiting to claim a refund on their tax returns 
filed by April 15 of the following year.

Advance payment system

    Under the advance payment system, available since 1979, 
eligible taxpayers may elect to receive the credit in their 
paychecks, rather than waiting to claim a refund on their tax 
return filed by April 15 of the following year. This means that 
the taxpayer's paycheck is adjusted to include not only the 
nonrefundable portion of the EITC (i.e., by reducing otherwise 
applicable tax liability) but also a portion of the refundable 
EITC (i.e., an outlay rather than a reduction in otherwise 
applicable tax liability). The portion of the EITC eligible for 
advance payment is limited to 60 percent of the maximum EITC 
for one qualifying child. A taxpayer electing the advance 
payment option is required to file a tax return for the taxable 
year (regardless of the otherwise applicable filing thresholds) 
in order to reconcile any advance payment with the actual 
allowable EITC.
    Beginning in 1993, Congress required the IRS to notify 
eligible taxpayers of the advance payment option, but 
participation in the advance payment option has remained 
limited to a small percentage of eligible taxpayers.

                        Explanation of Provision

    The provision repeals the advance payment option for the 
EITC. The taxpayer may still receive the nonrefundable portion 
of the EITC through the taxpayer's paycheck, by adjusting 
withholding, to the extent the taxpayer otherwise has positive 
tax liability.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

PART THIRTEEN: FIREARMS EXCISE TAX IMPROVEMENT ACT OF 2010 (PUBLIC LAW 
                            111-237) \1288\

   A. Time for Payment of Manufacturers' Excise Tax on Recreational 
        Equipment (sec. 2 of the Act and sec. 6302 of the Code)

                              Present Law

    Excise tax is imposed on the sale by the manufacturer, 
producer or importer of firearms.\1289\ The amount of the tax 
is 10 percent of the sales price of pistols and revolvers and 
11 percent of the sales price of firearms (other than pistols 
and revolvers), shells, and cartridges. Sales made by small 
firearms manufacturers or importers (less than 50 firearms 
annually) and sales made to the Department of Defense are 
exempt from tax.
---------------------------------------------------------------------------
    \1288\ H.R. 5552. The bill passed the House on the suspension 
calendar on June 29, 2010. The Senate passed the bill by unanimous 
consent on August 5, 2010. The President signed the bill on August 16, 
2010.
    \1289\ Sec. 4181.
---------------------------------------------------------------------------
    Firearms and ammunition manufacturers, importers, or 
producers are generally required to file quarterly excise tax 
returns if they have excise tax liability of more than $2,000 
in a quarter and are generally required to make semimonthly 
deposits of excise tax.\1290\
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    \1290\ 27 CFR 53.159(b).
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                        Explanation of Provision

    The provision amends the due date for the payment of excise 
tax on firearms and ammunition to correspond with the due date 
for filing excise tax returns, generally requiring payments to 
be made by the last day of the first calendar month following 
the end of each calendar quarter.

                             Effective Date

    The provision applies to articles sold by the manufacturer, 
producer, or importer after the date of enactment (August 16, 
2010).

 B. Allow Assessment of Criminal Restitution as Tax (sec. 3 of the Act 
                       and sec. 6213 of the Code)

                              Present Law

    The IRS has responsibility for investigation of criminal 
offenses under the Code \1291\ as well as tax-related offenses 
under Title 18 of the United States Code.\1292\ Criminal 
investigations may involve income from legal sources or from 
illegal sources. When an investigation results in a 
recommendation to prosecute, after appropriate internal review, 
the case is referred to the Tax Division of the U.S. Department 
of Justice, where it is reviewed by prosecutors in one of the 
Criminal Enforcement Sections. If that office agrees with the 
recommendation and authorizes prosecution, the case may be 
handled by a prosecutor from that office or referred to a U.S. 
Attorney Office for prosecution.\1293\
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    \1291\ Secs. 7201 through 7275.
    \1292\ For example, aiding and abetting (18 U.S.C. sec 2); 
conspiracy to defraud the United States (18 U.S.C. sec. 286); false, 
fictitious or fraudulent claims (18 U.S.C. sec. 287); or conspiracy to 
commit an offense or to defraud the United States (18 U.S.C. sec. 371).
    \1293\ Internal Revenue Manual (``IRM'') par. 9.5.12.4.1, July 25, 
2007. Note that IRS investigators also support the development of 
financial crime investigations by Department of Justice related to 
organized crime, drug enforcement and counterterrorism programs.
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    Upon conviction after trial or as a result of a plea 
agreement, the taxpayer may be ordered to pay restitution, in 
addition to a fine, a term of incarceration, or as a condition 
of probation.\1294\ Although the statutes do not specify that 
restitution is available for Code offenses, it is mandated in 
tax-related offenses arising under Title 18,\1295\ and is 
permitted in any case concluded by plea agreement if the 
agreement so provides.\1296\ In addition, the sentencing 
guidelines include restitution as a possible variable 
warranting a departure from the otherwise recommended 
sentence.\1297\
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    \1294\ 18 U.S.C. sec. 3556, which authorizes restitution orders 
both for cases in which restitution is mandatory as described in 
section 3663A and for those cases in which restitution is at the 
discretion of the court as described in section 3663. In either case, 
any order must comply with the procedures of section 3664.
    \1295\ 18 U.S.C. sec. 3663A(c)(A)(ii) requires restitution for all 
crimes against property arising under Title 18. Tax-related charges may 
arise under 18 U.S.C. secs. 286, 287, 371 and 1001.
    \1296\ 18 U.S.C. sec. 3663(a)(3).
    \1297\ 18 U.S.C. Appendix, Chapter 5E1.1, United States Sentencing 
Guidelines.
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    In criminal tax cases, the IRS is the victim to whom 
restitution is due.\1298\ The amount of restitution is intended 
to compensate the IRS for the tax losses that arose from the 
charges, including interest. Because restitution is limited to 
the actual loss that the victim suffered,\1299\ it does not 
include civil penalties. The amount to be paid is determined by 
the court, after a presentencing report is prepared by the 
probation office. The process by which restitution for a tax 
crime is collected is shared by the court that ordered 
restitution, the Financial Litigation Unit of the local U. S. 
Attorney's Office, and the IRS, working through Criminal 
Investigation and the Small-Business/Self-Employed Operating 
Division. The order of restitution gives rise to a lien, which 
may be filed and is entitled to the same priority as a Federal 
tax lien.\1300\ Payments are made to the Financial Litigation 
Unit, which reports them to the Court and transfers the funds 
to the IRS. Return information from taxpayer delinquent account 
files of the defendant may be provided to a U.S. Probation 
Officer for the purpose of informing the court of noncompliance 
with the terms of the taxpayer's sentence or restitution 
order.\1301\
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    \1298\ United States v. Leahy, 464 F.3d 773 (7th Cir. 2006); United 
States v. Ekanem, 383 F.3d 40 (2d Cir. 2004).
    \1299\ Dept. of Justice Criminal Tax Manual, par. 44.03 explains 
that in determining the principle amount to be paid as restitution, the 
court may include an amount representing pre-judgment interest to 
compensate for the failure to pay the tax when due under the Code, 
citing United States v. Gordon, 393 F. 3d 1044, 1057 (9th Cir. 2004); 
United States v. Helmsley, 941 F.2d 71 (2d Cir. 1991).
    \1300\ 18 U.S.C. secs. 3613(c) and 3613(d).
    \1301\ Sec. 6103(h)(4).
---------------------------------------------------------------------------
    Although the amount of restitution ordered is computed by 
reference to the taxes that would have been owed but for the 
criminal offenses charged, restitution is not itself a 
determination of tax within the meaning of the Code and does 
not provide a basis on which tax may be assessed. The IRS must 
comply with the provisions of the Code to assess the proper 
tax, which may exceed the amounts on which a prosecution 
proceeded.\1302\ Because work on the civil aspects of 
determining the tax liability is generally deferred until after 
the conclusion of criminal proceedings, unless the Department 
of Justice has agreed otherwise,\1303\ the IRS often has not 
yet assessed the relevant civil tax liability at the time the 
restitution is ordered. Thus, the IRS has no account receivable 
against which the restitution payments can be credited. After 
the tax and any penalties are properly determined and assessed, 
either by agreement or at the conclusion of civil proceedings, 
payments that were received in satisfaction of a restitution 
order are applied to reduce the civil tax liability.\1304\
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    \1302\ Morse v. United States, 419 F.3d 829 (8th Cir. 2005), held 
that the criminal prosecution did not require proof of a specific tax 
liability as an element of the crime, and therefore the government was 
not estopped from pursuing civil proceedings to collect an amount 
greater than any tax loss identified as part of the criminal sentence.
    \1303\ IRS Policy Statement 4-26 (formerly P-4-84), in IRM par. 
5.1.5.2, explains the extent to which civil and criminal investigations 
may proceed in parallel. Once the IRS has referred a case and asked the 
Department of Justice to prosecute, authority to resolve the 
liabilities for the years that are the subject of the referral rests 
exclusively with the Department of Justice. Sec. 7122(a).
    \1304\ United States v. Helmsley, 941 F.2d 71 (2d Cir. 1991).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows the IRS and Treasury Department to 
immediately assess, without issuing a statutory notice of 
deficiency, and collect as a tax debt court-ordered 
restitution. The taxpayer may not collaterally attack the 
amount of restitution ordered by the court, but retains the 
ability to challenge the method of collection.

                             Effective Date

    The provision is effective for orders entered after date of 
enactment (August 16, 2010).

C. Time for Payment of Corporate Estimated Taxes (sec. 4 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.\1305\ 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. In the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding taxable year):
---------------------------------------------------------------------------
    \1305\ Sec. 6655.
---------------------------------------------------------------------------
          (i) payments due in July, August, or September, 2014, 
        are increased to 174.25 percent of the payment 
        otherwise due; \1306\
---------------------------------------------------------------------------
    \1306\ Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, 
sec. 12(a); Health Care and Education Reconciliation Act of 2010, Pub 
L. No. 111-152, sec. 1410; Hiring Incentives to Restore Employment Act, 
Pub. L. No. 111-147, sec.561(1); Act to extend the Generalized System 
of Preferences and the Andean Trade Preference Act, and for other 
purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and 
Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint 
resolution approving the renewal of import restrictions contained in 
the Burmese Freedom and Democracy Act of 2003, and for other purposes, 
Pub. L. No. 111-42, sec. 202(b)(1).
---------------------------------------------------------------------------
          (ii) payments due in July, August or September, 2015, 
        are increased to 123.00 percent of the payment 
        otherwise due; \1307\ and
---------------------------------------------------------------------------
    \1307\ United States Manufacturing Enhancement Act of 2010, Pub. L. 
No. 111-227, sec. 4002; Joint resolution approving the renewal of 
import restrictions contained in the Burmese Freedom and Democracy Act 
of 2003, and for other purposes, Pub. L. No. 111-210; sec. 3; Haiti 
Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(b); Hiring 
Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561(2).
---------------------------------------------------------------------------
          (iii) payments due in July, August or September, 
        2019, are increased to 106.50 percent of the payment 
        otherwise due.\1308\
---------------------------------------------------------------------------
    \1308\ Hiring Incentives to Restore Employment Act, Pub. L. No. 
111-147, sec. 561(3).
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For each of the periods impacted, the next required payment is 
reduced accordingly.

                    Explanation of Provision \1309\

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    \1309\ All the public laws enacted in the 111th Congress affecting 
this provision are described in Part Twenty-One of this document.
---------------------------------------------------------------------------
    The provision increases the required payment of estimated 
tax otherwise due in July, August, or September, 2015, by 0.25 
percentage points.

                             Effective Date

    The provision is effective on the date of enactment (August 
16, 2010).

  PART FOURTEEN: REVENUE PROVISIONS OF THE SMALL BUSINESS JOBS ACT OF 
                    2010 (PUBLIC LAW 111-240) \1310\
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    \1310\ H.R. 5297. The House Committee on Ways and Means reported 
H.R. 4849 on March 19, 2010 (H.R. Rep. 111-447). The House passed H.R. 
4849 on March 24, 2010. The House passed H.R. 5297 on June 17, 2010. 
The Senate passed H.R. 5297 with an amendment on September 16, 2010. On 
September 23, 2010, the House agreed to the Senate amendment. The 
President signed the bill on September 27, 2010. For a technical 
explanation of the bill prepared by the staff of the Joint Committee on 
Taxation, see Technical Explanation of the Tax Provisions in Senate 
Amendment 4594 to H.R. 5297, the ``Small Business Jobs Act of 2010,'' 
Scheduled for Consideration by the United States Senate on September 
16, 2010 (JCX-47-10), September 16, 2010.
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                        I. SMALL BUSINESS RELIEF

                     A. Providing Access to Capital

1. Temporary exclusion of 100 percent of gain on certain small business 
        stock (sec. 2011 of the Act and sec. 1202 of the Code)

                              Present Law

In general
    Individuals generally may exclude 50 percent (60 percent 
for certain empowerment zone businesses) of the gain from the 
sale of certain small business stock acquired at original issue 
and held for at least five years.\1311\ The amount of gain 
eligible for the exclusion by an individual with respect to any 
corporation is the greater of (1) ten times the taxpayer's 
basis in the stock or (2) $10 million. To qualify as a small 
business, when the stock is issued, the gross assets of the 
corporation may not exceed $50 million. The corporation also 
must meet certain active trade or business requirements.
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    \1311\ Sec. 1202.
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    The portion of the gain includible in taxable income is 
taxed at a maximum rate of 28 percent under the regular 
tax.\1312\ A percentage of the excluded gain is an alternative 
minimum tax preference; \1313\ the portion of the gain 
includible in alternative minimum taxable income is taxed at a 
maximum rate of 28 percent under the alternative minimum tax.
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    \1312\ Sec. 1(h).
    \1313\ Sec. 57(a)(7). In the case of qualified small business 
stock, the percentage of gain excluded from gross income which is an 
alternative minimum tax preference is (i) seven percent in the case of 
stock disposed of in a taxable year beginning before 2011; (ii) 42 
percent in the case of stock acquired before January 1, 2001, and 
disposed of in a taxable year beginning after 2010; and (iii) 28 
percent in the case of stock acquired after December 31, 2000, and 
disposed of in a taxable year beginning after 2010.
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    Gain from the sale of qualified small business stock 
generally is taxed at effective rates of 14 percent under the 
regular tax \1314\ and (i) 14.98 percent under the alternative 
minimum tax for dispositions before January 1, 2011; (ii) 19.88 
percent under the alternative minimum tax for dispositions 
after December 31, 2010, in the case of stock acquired before 
January 1, 2001; and (iii) 17.92 percent under the alternative 
minimum tax for dispositions after December 31, 2010, in the 
case of stock acquired after December 31, 2000.\1315\
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    \1314\ The 50 percent of gain included in taxable income is taxed 
at a maximum rate of 28 percent.
    \1315\ The amount of gain included in alternative minimum tax is 
taxed at a maximum rate of 28 percent. The amount so included is the 
sum of (i) 50 percent (the percentage included in taxable income) of 
the total gain and (ii) the applicable preference percentage of the 
one-half gain that is excluded from taxable income.
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Temporary increase in exclusion
    The percentage exclusion for qualified small business stock 
acquired after February 17, 2009, and before January 1, 2011, 
is increased to 75 percent. As a result of the increased 
exclusion, gain from the sale of this qualified small business 
stock held at least five years is taxed at effective rates of 
seven percent under the regular tax \1316\ and 12.88 percent 
under the alternative minimum tax.\1317\
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    \1316\ The 25 percent of gain included in taxable income is taxed 
at a maximum rate of 28 percent.
    \1317\ The 46 percent of gain included in alternative minimum tax 
is taxed at a maximum rate of 28 percent. Forty-six percent is the sum 
of 25 percent (the percentage of total gain included in taxable income) 
plus 21 percent (the percentage of total gain which is an alternative 
minimum tax preference).
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                           Reasons for Change

    The Congress believes that increasing the exclusion of gain 
for small business stock will encourage new and additional 
investment in small businesses. Access to additional capital 
will help these small businesses expand and create jobs.

                    Explanation of Provision \1318\
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    \1318\ The provision was subsequently amended by section 760 of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Pub. L. No. 111-312, described in Part Sixteen.
---------------------------------------------------------------------------
    Under the provision, the percentage exclusion for qualified 
small business stock acquired during 2010 is increased to 100 
percent and the minimum tax preference does not apply. Thus, no 
regular tax or alternative minimum tax is imposed on the sale 
of this stock held at least five years.

                             Effective Date

    The provision is effective for stock issued after the date 
of enactment (September 27, 2010) and before January 1, 2011.

2. Five-year carryback of general business credit of eligible small 
        business (sec. 2012 of the Act and sec. 39 of the Code)

                              Present Law

    The general business credit generally may not exceed the 
excess of the taxpayer's net income tax over the greater of the 
taxpayer's tentative minimum tax or 25 percent of so much of 
the taxpayer's net regular tax liability as exceeds 
$25,000.\1319\ General business credits in excess of this 
limitation may be carried back one year and forward up to 20 
years.\1320\
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    \1319\ Sec. 38(c). The general business credit is the sum of the 
credits allowed under sec. 38(b).
    \1320\ Sec. 39.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the carryback period for eligible 
small business credits from one to five years. Under the 
provision, eligible small business credits are defined as the 
sum of the general business credits determined for the taxable 
year with respect to an eligible small business. An eligible 
small business is, with respect to any taxable year, a 
corporation, the stock of which is not publicly traded, or a 
partnership which meets the gross receipts test of section 
448(c), substituting $50 million for $5 million each place it 
appears.\1321\ In the case of a sole proprietorship, the gross 
receipts test is applied as if it were a corporation. Credits 
determined with respect to a partnership or S corporation are 
not treated as eligible small business credits by a partner or 
shareholder unless the partner or shareholder meets the gross 
receipts test for the taxable year in which the credits are 
treated as current year business credits.
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    \1321\ For example, a calendar year corporation meets the $50 
million gross receipts test for the 2010 taxable year, if as of January 
1, 2010, its average annual gross receipts for the 3-taxable-year 
period ending December 31, 2009, does not exceed $50 million. The 
aggregation and special rules under sections 448(c)(2) and (3) apply in 
applying the test.
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                             Effective Date

    The provision is effective for credits determined in the 
taxpayer's first taxable year beginning after December 31, 
2009.

3. General business credit of eligible small business not subject to 
        alternative minimum tax (sec. 2013 of the Act and sec. 38 of 
        the Code)

                              Present Law

    For any taxable year, the general business credit, which is 
the sum of the various business credits, generally may not 
exceed the excess of the taxpayer's net income tax over the 
greater of the taxpayer's tentative minimum tax or 25 percent 
of so much of the taxpayer's net regular tax liability as 
exceeds $25,000. Any general business credit in excess of this 
limitation may be carried back one year and forward 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. However, in 
applying the tax liability limitation to certain specified 
credits that are part of the general business credit, the 
tentative minimum tax is treated as being zero.\1322\ Thus, the 
specified credits may offset both regular and alternative 
minimum tax liability.
---------------------------------------------------------------------------
    \1322\ See section 38(c)(4)(B) for a list of the specified credits.
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act provides that the tentative minimum tax is treated 
as being zero for eligible small business credits. Thus, an 
eligible small business credit may offset both regular and 
alternative minimum tax liability. Under the provision, 
eligible small business credits are defined as the sum of the 
general business credits determined for the taxable year with 
respect to an eligible small business. An eligible small 
business is, with respect to any taxable year, a corporation, 
the stock of which is not publicly traded, or a partnership, 
which meets the gross receipts test of section 448(c), 
substituting $50 million for $5 million each place it 
appears.\1323\ In the case of a sole proprietorship, the gross 
receipts test is applied as if it were a corporation. Credits 
determined with respect to a partnership or S corporation are 
not treated as eligible small business credits by a partner or 
shareholder unless the partner or shareholder meets the gross 
receipts test for the taxable year in which the credits are 
treated as current year business credits.
---------------------------------------------------------------------------
    \1323\ For example, a calendar year corporation meets the $50 
million gross receipts test for the 2010 taxable year, if as of January 
1, 2010, if its average annual gross receipts for the 3-taxable-year 
period ending December 31, 2009, does not exceed $50 million. The 
aggregation and special rules under sections 448(c)(2) and (3) apply 
for purposes of the test.
---------------------------------------------------------------------------

                             Effective Date

    The proposal is effective for credits determined in a 
taxpayer's first taxable year beginning after December 31, 
2009.

4. Temporary reduction in recognition period for S corporation built-in 
        gains tax (sec. 2014 of the Act and sec. 1374 of the Code)

                              Present Law

    A ``small business corporation'' (as defined in section 
1361(b)) may elect to be treated as an S corporation. Unlike C 
corporations, S corporations generally pay no corporate-level 
tax. Instead, items of income and loss of an S corporation pass 
though to its shareholders. Each shareholder takes into account 
separately its share of these items on its individual income 
tax return.\1324\
---------------------------------------------------------------------------
    \1324\ Sec. 1366.
---------------------------------------------------------------------------
    A corporate level tax, at the highest marginal rate 
applicable to corporations (currently 35 percent) is imposed on 
an S corporation's gain that arose prior to the conversion of 
the C corporation to an S corporation and is recognized by the 
S corporation during the recognition period, i.e., the 10-year 
period beginning with the first day of the first taxable year 
for which the S election is in effect.\1325\ For any taxable 
year beginning in 2009 and 2010, no tax is imposed on an S 
corporation under section 1374 if the seventh taxable year in 
the corporation's recognition period preceded such taxable 
year.\1326\ Thus, with respect to gain that arose prior to the 
conversion of a C corporation to an S corporation, for taxable 
years beginning in 2009 and 2010, no tax is imposed under 
section 1374 after the seventh taxable year the S corporation 
election is in effect.
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    \1325\ Sec. 1374(d)(7)(A). The 10-year period refers to ten 
calendar years from the first day of the first taxable year for which 
the corporation was an S corporation.
    \1326\ Sec. 1374(d)(7)(B).
---------------------------------------------------------------------------
    The built-in gains tax also applies to gains with respect 
to net recognized built-in gain attributable to property 
received by an S corporation from a C corporation in a 
carryover basis transaction.\1327\ In the case of built-in gain 
attributable to an asset received by an S corporation from a C 
corporation in a carryover basis transaction, the recognition 
period rules are applied by substituting the date such asset 
was acquired by the S corporation in lieu of the beginning of 
the first taxable year for which the corporation was an S 
corporation.\1328\
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    \1327\ Sec. 1374(d)(8). With respect to such assets, the 
recognition period runs from the day on which such assets were acquired 
(in lieu of the beginning of the first taxable year for which the 
corporation was an S corporation). Sec. 1374(d)(8)(B).
    \1328\ Shareholders continue to take into account all items of gain 
and loss under section 1366.
---------------------------------------------------------------------------
    Gains recognized in the recognition period are not built-in 
gains to the extent they are shown to have arisen while the S 
election was in effect or are offset by recognized built-in 
losses. The amount of the built-in gains tax is treated as a 
loss taken into account by the shareholders in computing their 
individual income tax.\1329\
---------------------------------------------------------------------------
    \1329\ Sec. 1366(f)(2).
---------------------------------------------------------------------------

                        Explanation of Provision

    For taxable years beginning in 2011, the provision provides 
that for purposes of computing the built-in gains tax, the 
``recognition period'' is the five-year period \1330\ beginning 
with the first day of the first taxable year for which the 
corporation was an S corporation.
---------------------------------------------------------------------------
    \1330\ The five-year period refers to five calendar years from the 
first day of the first taxable year for which the corporation was an S 
corporation.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

                       B. Encouraging Investment


1. Increase and expand expensing of certain depreciable business assets 
        (sec. 2021 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.\1331\ For taxable years 
beginning in 2010, the maximum amount that a taxpayer may 
expense is $250,000 of the cost of qualifying property placed 
in service for the taxable year. 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.\1332\ 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.
---------------------------------------------------------------------------
    \1331\ Additional section 179 incentives are provided with respect 
to qualified property meeting applicable requirements that is used by a 
business in an enterprise zone (sec. 1397A), a renewal community (sec. 
1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
    \1332\ The temporary $250,000 and $800,000 amounts were enacted in 
the Economic Stimulus Act of 2008, Pub. L. No. 110-185, extended for 
taxable years beginning in 2009 by the American Recovery and 
Reinvestment Act of 2009, Pub. L. No. 111-5, and extended for taxable 
years beginning in 2010 by the Hiring Incentives to Restore Employment 
Act of 2010, Pub. L. No. 111-147.
---------------------------------------------------------------------------
    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).
    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.\1333\
---------------------------------------------------------------------------
    \1333\ Sec. 179(c)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision increases the maximum amount a taxpayer may 
expense under section 179 to $500,000 and increases the phase-
out threshold amount to $2 million for taxable years beginning 
in 2010 and 2011.\1334\ Thus, the provision provides that the 
maximum amount a taxpayer may expense, for taxable years 
beginning after 2009 and before 2012, is $500,000 of the cost 
of qualifying property placed in service for the taxable year. 
The $500,000 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 $2 million.
---------------------------------------------------------------------------
    \1334\ The provision was modified and extended for taxable years 
beginning in 2012 by section 402 of the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 
111-312, described in Part Sixteen.
---------------------------------------------------------------------------
    The provision permits a taxpayer to elect to temporarily 
expand the definition of property qualifying for section 179 to 
include certain real property--specifically, qualified 
leasehold improvement property, qualified restaurant property, 
and qualified retail improvement property--purchased by the 
taxpayer.\1335\ The maximum amount with respect to real 
property that may be expensed under the proposal is 
$250,000.\1336\ In addition, section 179 deductions 
attributable to qualified real property that are disallowed 
under the trade or business income limitation may only be 
carried over to taxable years in which the definition of 
eligible section 179 property includes qualified real property. 
Thus under the provision, if a taxpayer's section 179 deduction 
for 2010 with respect to qualified real property is limited by 
the taxpayer's active trade or business income, such disallowed 
amount may be carried over to 2011 in the manner under present 
law. Any such amounts that are not used in 2011, plus any 2011 
disallowed section 179 deductions attributable to qualified 
real property, are treated as property placed in service in 
2011 for purposes of computing depreciation. The carryover 
amount from 2010 is considered placed in service on the first 
day of the 2011 taxable year.\1337\
---------------------------------------------------------------------------
    \1335\ For purposes of the provision, qualified leasehold 
improvement property has the meaning given such term under section 
168(e)(6), qualified restaurant property has the meaning given such 
term under section 168(e)(7) (and includes a building described in 
section 168(e)(7)(A)(i) that is placed in service after December 31, 
2009 and before January 1, 2012), and qualified retail improvement 
property has the meaning given such term under section 168(e)(8) 
(without regard to section 168(e)(8)(E)).
    \1336\ For example, assume that during 2010, a company's only asset 
purchases are section 179-eligible equipment costing $100,000 and 
qualifying leasehold improvements costing $350,000. Assuming the 
company has no other asset purchases during 2010, and is not subject to 
the taxable income limitation, the maximum section 179 deduction the 
company can claim for 2010 is $350,000 ($100,000 with respect to the 
equipment and $250,000 with respect to the qualifying leasehold 
improvements).
    \1337\ For example, assume that during 2010, a company's only asset 
purchases are section 179-eligible equipment costing $100,000 and 
qualifying leasehold improvements costing $200,000. Assume the company 
has no other asset purchases during 2010, and has a taxable income 
limitation of $150,000. The maximum section 179 deduction the company 
can claim for 2010 is $150,000, which is allocated pro rata between the 
properties, such that the carryover to 2011 is allocated $100,000 to 
the qualified leasehold improvements and $50,000 to the equipment.
---------------------------------------------------------------------------

                             Effective Date

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

2. Extend the additional first-year depreciation allowance (sec. 2022 
        of the Act and sec. 168(k) of the Code)

                              Present Law


In general

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
placed in service during 2008 and 2009 (2009 and 2010 for 
certain longer-lived and transportation property).\1338\ The 
additional first-year depreciation deduction is allowed for 
both regular tax and alternative minimum tax purposes, but is 
not allowed for purposes of computing earnings and profits. 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. 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.
---------------------------------------------------------------------------
    \1338\ Sec. 168(k). The additional first-year depreciation 
deduction is subject to the general rules regarding whether an item 
must be capitalized under section 263 or section 263A.
---------------------------------------------------------------------------
    The interaction of the additional first-year depreciation 
allowance with the otherwise applicable depreciation allowance 
may be illustrated as follows. Assume that in 2009, a taxpayer 
purchased new depreciable property and places it in 
service.\1339\ 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 is $500. The 
remaining $500 of the cost of the property is depreciable under 
the rules applicable to five-year property. Thus, 20 percent, 
or $100, is also allowed as a depreciation deduction in 2009. 
The total depreciation deduction with respect to the property 
for 2009 is $600. The remaining $400 adjusted basis of the 
property generally is recovered through otherwise applicable 
depreciation rules.
---------------------------------------------------------------------------
    \1339\ Assume that the cost of the property is not eligible for 
expensing under section 179.
---------------------------------------------------------------------------
    Property qualifying for the additional first-year 
depreciation deduction 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)).\1340\ Second, the 
original use \1341\ of the property must commence with the 
taxpayer after December 31, 2007.\1342\ Third, the taxpayer 
must acquire the property within the applicable time period. 
Finally, the property must be placed in service after December 
31, 2007, and before January 1, 2010. An extension of the 
placed in service date of one year (i.e., to January 1, 2011) 
is provided for certain property with a recovery period of ten 
years or longer and certain transportation property.\1343\ 
Transportation property is defined as tangible personal 
property used in the trade or business of transporting persons 
or property.
---------------------------------------------------------------------------
    \1340\ The additional first-year depreciation deduction is not 
available for any property that is required to be depreciated under the 
alternative depreciation system of MACRS. The additional first-year 
depreciation deduction is also not available for qualified New York 
Liberty Zone leasehold improvement property as defined in section 
1400L(c)(2).
    \1341\ 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).
    \1342\ 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, 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.
    \1343\ Property qualifying for the extended placed in service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million.
---------------------------------------------------------------------------
    The applicable time period for acquired property is (1) 
after December 31, 2007, and before January 1, 2010, 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, 2010.\1344\ 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, 2010. 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, 
2010, (``progress expenditures'') is eligible for the 
additional first-year depreciation.\1345\
---------------------------------------------------------------------------
    \1344\ 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.
    \1345\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 apply.
---------------------------------------------------------------------------
    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 under section 280F on the amount of 
depreciation deductions allowed with respect to certain 
passenger automobiles is increased in the first year by $8,000 
for automobiles that qualify (and for which the taxpayer does 
not elect out of the additional first-year deduction). The 
$8,000 increase is not indexed for inflation.

                        Explanation of Provision

    The provision extends the additional first-year 
depreciation deduction for one year to apply to qualified 
property acquired and placed in service during 2010 (or placed 
in service during 2011 for certain long-lived property and 
transportation property).\1346\
---------------------------------------------------------------------------
    \1346\ The provision was temporarily expanded and extended for two 
years generally through 2012 (through 2013 for certain longer-lived and 
transportation property) by section 401 of the Tax Relief, Unemployment 
Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 
111-312, described in Part Sixteen of this document.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to property placed in service in 
taxable years ending after December 31, 2009.

3. Disregard bonus depreciation in computing percentage completion 
        (sec. 2023 of the Act and new sec. 460(c)(6) of the Code)

                              Present Law


Percentage-of-completion method

    In general, in the case of a long-term contract, the 
taxable income from the contract is determined under the 
percentage-of-completion method.\1347\ Under such method, the 
percentage of completion is determined by comparing costs 
allocated to the contract and incurred before the end of the 
taxable year with the estimated total contract costs. Costs 
allocated to the contract typically include all costs 
(including depreciation) that directly benefit or are incurred 
by reason of the taxpayer's long-term contract activities. The 
allocation of the costs to a contract is made in accordance 
with regulations.\1348\
---------------------------------------------------------------------------
    \1347\ Sec. 460(a).
    \1348\ Treas. Reg. sec. 1.460-5.
---------------------------------------------------------------------------

Additional first-year depreciation deduction (``bonus depreciation'')

    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 generally is determined under 
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 (tangible 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.\1349\ In general, the recovery periods for 
real property are 39 years for non-residential real property 
and 27.5 years for residential rental property. The 
depreciation method for real property is the straight-line 
method.
---------------------------------------------------------------------------
    \1349\ For certain property, including tangible property used 
predominantly outside of the United States, tax-exempt use property, 
tax-exempt bond-financed property, and certain other property, the 
MACRS ``alternative depreciation system'' of section 168(g) applies, 
generally increasing recovery periods and requiring straight-line 
depreciation.
---------------------------------------------------------------------------
    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
placed in service during 2008 and 2009 (2009 and 2010 for 
certain longer-lived and transportation property),\1350\ and 
for property placed in service in 2010 (2011 for certain 
longer-lived and transportation property) under section 2022 of 
the Act. The additional first-year depreciation deduction is 
allowed for both regular tax and alternative minimum tax 
purposes, but is not allowed for purposes of computing earnings 
and profits. 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. 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.
---------------------------------------------------------------------------
    \1350\ Sec. 168(k). The additional first-year depreciation 
deduction is subject to the general rules regarding whether an item 
must be capitalized under section 263 or section 263A.
---------------------------------------------------------------------------
    Property qualifying for the additional first-year 
depreciation deduction 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)).\1351\ Second, the 
original use \1352\ of the property must commence with the 
taxpayer after December 31, 2007.\1353\ 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, 2011. An extension of the 
placed in service date of one year (i.e., to January 1, 2012) 
is provided for certain property with a recovery period of ten 
years or longer, and certain transportation property.\1354\ 
Transportation property is defined as tangible personal 
property used in the trade or business of transporting persons 
or property.
---------------------------------------------------------------------------
    \1351\ The additional first-year depreciation deduction is not 
available for any property that is required to be depreciated under the 
alternative depreciation system of MACRS. The additional first-year 
depreciation deduction is also not available for qualified New York 
Liberty Zone leasehold improvement property as defined in section 
1400L(c)(2).
    \1352\ 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).
    \1353\ 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.
    \1354\ Property qualifying for the extended placed in service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million.
---------------------------------------------------------------------------
    The applicable time period for acquired property is (1) 
after December 31, 2008, and before January 1, 2011, but only 
if no binding written contract for the acquisition is in effect 
before January 1, 2010, or (2) pursuant to a binding written 
contract which was entered into after December 31, 2008, and 
before January 1, 2011.\1355\ 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, 
2008, and before January 1, 2010. 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, 
2011 (``progress expenditures'') is eligible for the additional 
first-year depreciation.\1356\
---------------------------------------------------------------------------
    \1355\ 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.
    \1356\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 apply.
---------------------------------------------------------------------------
    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. In addition, the limitation 
under section 280F on the amount of depreciation deductions 
allowed with respect to certain passenger automobiles is 
increased in the first year by $8,000 for automobiles that 
qualify (and for which the taxpayer does not elect out of the 
additional first-year deduction). The $8,000 increase is not 
indexed for inflation.

                        Explanation of Provision

    The Act provides that solely for purposes of determining 
the percentage of completion under section 460(b)(1)(A), the 
cost of qualified property is taken into account as a cost 
allocated to the contract as if bonus depreciation had not been 
enacted.\1357\ Qualified property is property otherwise 
eligible for bonus depreciation that has a MACRS recovery 
period of 7 years or less and that is placed in service after 
December 31, 2009, and before January 1, 2011 (January 1, 2012, 
in the case of property described in section 168(k)(2)(B) 
\1358\ ).
---------------------------------------------------------------------------
    \1357\ For example, assume a calendar year taxpayer is required to 
use the percentage-of-completion method to account for a long-term 
contract during 2010. Assume further that during 2010 the taxpayer 
purchases and places into service equipment with a cost basis of 
$500,000 and MACRS recovery period of 5 years. The taxpayer uses the 
equipment exclusively in performing its obligation under the contract. 
In computing the percentage of completion under section 460(b)(1)(A), 
the depreciation on the equipment (assuming a half-year convention) 
taken into account as a cost allocated to the contract for 2010 is 
$100,000 [$500,000/5*200%*.5]. The amount of the depreciation deduction 
that may be claimed by the taxpayer in 2010 with respect to the 
equipment is $300,000 [($500,000 * 50%) + (($500,000-(500,000*50%))/
5*200%*.5)].
    \1358\ Sec. 168(k)(2)(B) generally applies to property having 
longer production periods.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2009.

                     C. Promoting Entrepreneurship


1. Increase amount allowed as deduction for start-up expenditures (sec. 
        2031 of the Act and sec. 195 of the Code)

                              Present Law


Start-up expenditures

    A taxpayer can elect to deduct up to $5,000 of start-up 
expenditures in the taxable year in which the active trade or 
business begins.\1359\ However, the $5,000 amount is reduced 
(but not below zero) by the amount by which the cumulative cost 
of start-up expenditures exceeds $50,000.\1360\ Start-up 
expenditures that are not deductible in the year in which the 
active trade or business begins are, at the taxpayer's 
election, amortized over a 15-year period beginning with the 
month the active trade or business begins.\1361\ Start-up 
expenditures are amounts that would have been deductible as 
trade or business expenses, had they not been paid or incurred 
before business began, including amounts paid or incurred in 
connection with (1) investigating the creation or acquisition 
of an active trade or business, (2) creating an active trade or 
business, or (3) any activity engaged in for profit and for the 
production of income before the day on which the active trade 
or business begins, in anticipation of such activity becoming 
an active trade or business.\1362\
---------------------------------------------------------------------------
    \1359\ Sec. 195(b)(1)(A).
    \1360\ Ibid.
    \1361\ Sec. 195(b)(1)(B).
    \1362\ Sec. 195(c).
---------------------------------------------------------------------------
    Treasury regulations \1363\ provide that a taxpayer is 
deemed to have made an election under section 195(b) to 
amortize its start-up expenditures for the taxable year in 
which the active trade or business to which the expenditures 
relate begins. A taxpayer that chooses to forgo the deemed 
election must clearly elect to capitalize its start-up 
expenditures on its timely filed Federal income tax return for 
the taxable year the active trade or business commences. The 
election either to amortize or capitalize start-up expenditures 
is irrevocable and applies to all start-up expenditures related 
to the active trade or business.
---------------------------------------------------------------------------
    \1363\ Temp. Treas. Reg. sec. 1.195-1T(b).
---------------------------------------------------------------------------

                        Explanation of Provision

    For taxable years beginning in 2010, the provision 
increases the amount of start-up expenditures a taxpayer can 
elect to deduct from $5,000 to $10,000 and increases the 
deduction phase-out threshold such that the $10,000 is reduced 
(but not below zero) by the amount by which the cumulative cost 
of start-up expenditures exceeds $60,000.

                           Reasons for Change

    Congress believes that increasing the amount of start-up 
expenditures that a taxpayer can elect to deduct, rather than 
requiring their amortization, may help encourage the formation 
of new businesses.\1364\
---------------------------------------------------------------------------
    \1364\ H.R. Rep. No. 111-447.
---------------------------------------------------------------------------

                             Effective Date

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

                  D. Promoting Small Business Fairness


1. Limitation on penalty for failure to disclose certain information 
        (sec. 2041 of the Act and sec. 6707A of the Code)

                              Present Law

    The reporting requirements of sections 6011 through 6112 
create interlocking disclosure obligations for both taxpayers 
and advisors. Each of these disclosure statutes has a parallel 
penalty provision that enforces it. Prior to enactment of the 
American Jobs Creation Act of 2004 (``AJCA''),\1365\ no penalty 
was imposed on taxpayers who failed to disclose participation 
in transactions subject to section 6011. For disclosures that 
were due after enactment of that legislation, a strict 
liability penalty under section 6707A applies to any failure to 
disclose a reportable transaction.
---------------------------------------------------------------------------
    \1365\ Pub. L. No. 108-357.
---------------------------------------------------------------------------
    Regulations under section 6011 require a taxpayer to 
disclose with its tax return certain information with respect 
to each ``reportable transaction'' in which the taxpayer 
participates.\1366\ A reportable transaction is defined as one 
that the Secretary determines is required to be disclosed 
because it is determined to have a potential for tax avoidance 
or evasion.\1367\ There are five categories of reportable 
transactions: listed transactions, confidential transactions, 
transactions with contractual protection, certain loss 
transactions and transactions of interest.\1368\
---------------------------------------------------------------------------
    \1366\ Treas. Reg. sec. 1.6011-4.
    \1367\ Sec. 6707A(c)(1).
    \1368\ Treas. Reg. sec. 1.6011-4(b)(2)-(6).
---------------------------------------------------------------------------
    Transactions falling under the first and last categories of 
reportable transactions are transactions that are described in 
publications issued by the Treasury Department and identified 
as one of these types of transaction. A listed transaction is 
defined as a reportable transaction which is the same as, or 
substantially similar \1369\ to, a transaction specifically 
identified by the Secretary as a tax avoidance transaction for 
purposes of the reporting disclosure requirements.\1370\ A 
``transaction of interest'' is one that is the same as or 
substantially similar to a transaction identified by the 
Secretary as one about which the Secretary is concerned but 
does not yet have sufficient knowledge to determine that the 
transaction is abusive.\1371\
---------------------------------------------------------------------------
    \1369\ The regulations clarify that the term ``substantially 
similar'' includes any transaction that is expected to obtain the same 
or similar types of tax consequences and that is either factually 
similar or based on the same or similar tax strategy. Further, the term 
must be broadly construed in favor of disclosure. Treas. Reg. sec. 
1.6011-4(c)(4).
    \1370\ Sec. 6707A(c)(2).
    \1371\ Treas. Reg. sec. 1.6011-4(b)(6).
---------------------------------------------------------------------------
    The other categories of reportable transactions are not 
specifically identified in published guidance, but are defined 
as classes of transactions sharing certain characteristics. In 
general, a transaction is considered to be offered to a 
taxpayer under conditions of confidentiality if an advisor who 
is paid a minimum fee places a limitation on disclosure by the 
taxpayer of the tax treatment or tax structure of the 
transaction and the limitation on disclosure protects the 
confidentiality of that advisor's tax strategies (irrespective 
if such terms are legally binding).\1372\ A transaction 
involves contractual protection if (1) the taxpayer has the 
right to a full or partial refund of fees if the intended tax 
consequences from the transaction are not sustained, or (2) the 
fees are contingent on the intended tax consequences from the 
transaction being sustained.\1373\ A reportable loss 
transaction generally includes any transaction that results in 
a taxpayer claiming a loss (under section 165) of at least (1) 
$10 million in any single year or $20 million in any 
combination of years by a corporate taxpayer or a partnership 
with only corporate partners; (2) $2 million in any single year 
or $4 million in any combination of years by all other 
partnerships, S corporations, trusts, and individuals; or (3) 
$50,000 in any single year for individuals or trusts if the 
loss arises with respect to foreign currency translation 
losses.\1374\ Treasury has announced its intention to add a 
sixth category of reportable transactions, patented 
transactions, but has not yet done so.\1375\
---------------------------------------------------------------------------
    \1372\ Treas. Reg. sec. 1.6011-4(b)(3).
    \1373\ Treas. Reg. sec. 1.6011-4(b)(4).
    \1374\ Treas. Reg. sec. 1.6011-4(b)(5).
    \1375\ Prop. Treas. Reg. sec. 1.6011-4(b)(7), published September 
26, 2007 (REG-129916-07).
---------------------------------------------------------------------------
    Section 6707A imposes a penalty for failure to comply with 
the reporting requirements of 6011. A single reportable 
transaction may have to be reported by multiple taxpayers in 
connection with multiple tax returns. For example, a reportable 
transaction entered into by a partnership may have to be 
reported under section 6011 by both the partnership and its 
partners.\1376\ The amount of the penalty due for each 
taxpayer's failure to comply varies depending upon whether or 
not the transaction is a listed transaction and whether the 
relevant taxpayer is an individual. For listed transactions, 
the maximum penalty is $100,000 for natural persons and 
$200,000 for all other persons. For reportable transactions 
other than listed transactions, the maximum penalty is $10,000 
for natural persons and $50,000 for all other persons.
---------------------------------------------------------------------------
    \1376\ See, e.g., Treas. Reg. sec. 1.6011-4(c)(3)(ii), Example 2.
---------------------------------------------------------------------------
    A public entity that is required to pay a penalty for an 
undisclosed listed or reportable transaction must disclose the 
imposition of the penalty in reports to the Securities and 
Exchange Commission (``SEC'') for such periods specified by the 
Secretary. Disclosure to the SEC applies without regard to 
whether the taxpayer determines the amount of the penalty to be 
material to the reports in which the penalty must appear, and 
any failure to disclose such penalty in the reports is treated 
as a failure to disclose a listed transaction. A taxpayer must 
disclose a penalty in reports to the SEC once the taxpayer has 
exhausted its administrative and judicial remedies with respect 
to the penalty (or if earlier, when paid).\1377\ However, the 
taxpayer is only required to report the penalty one time. A 
public entity that is subject to a gross valuation misstatement 
penalty under section 6662(h) attributable to a non-disclosed 
listed transaction or non-disclosed reportable avoidance 
transaction may also be required to make disclosures in its SEC 
filings.\1378\
---------------------------------------------------------------------------
    \1377\ Sec. 6707A(e).
    \1378\ Sec. 6707A(e)(2)(C); Rev. Proc. 2005-51, 2005-2 CB 296.
---------------------------------------------------------------------------
    For reportable transactions other than listed transactions, 
the Commissioner of the Internal Revenue (``Commissioner'') or 
his delegate can rescind (or abate) the penalty only if 
rescinding the penalty would promote compliance with the tax 
laws and effective tax administration.\1379\ The decision to 
rescind a penalty must be accompanied by a record describing 
the facts and reasons for the action and the amount rescinded. 
Determinations by the Commissioner regarding rescission are not 
subject to judicial review.\1380\ The Internal Revenue Service 
(``IRS'') also is required to submit an annual report to 
Congress summarizing the application of the disclosure 
penalties and providing a description of each penalty rescinded 
under this provision and the reasons for the rescission. The 
section 6707A penalty cannot be waived with respect to a listed 
transaction.
---------------------------------------------------------------------------
    \1379\ In determining whether to rescind (or abate) the penalty for 
failing to disclose a reportable transaction on the grounds that doing 
so would promote compliance with the tax laws and effective tax 
administration, it is intended that the Commissioner take into account 
whether: (1) the person on whom the penalty is imposed has a history of 
complying with the tax laws; (2) the violation is due to an 
unintentional mistake of fact; and (3) imposing the penalty would be 
against equity and good conscience.
    \1380\ This does not limit the ability of a taxpayer to challenge 
whether a penalty is appropriate (e.g., a taxpayer may litigate the 
issue of whether a transaction is a reportable transaction (and thus 
subject to the penalty if not disclosed) or not a reportable 
transaction (and thus not subject to the penalty)).
---------------------------------------------------------------------------
    The section 6707A penalty is assessed in addition to any 
accuracy-related penalties. If the taxpayer does not adequately 
disclose a reportable transaction, the strengthened reasonable 
cause exception to the accuracy-related penalty is not 
available, and the taxpayer is subject to an increased penalty 
equal to 30 percent of the understatement.\1381\ However, a 
taxpayer will be treated as having adequately disclosed a 
transaction for this purpose if the Commissioner has separately 
rescinded the separate penalty under section 6707A for failure 
to disclose a reportable transaction.\1382\ The Commissioner is 
authorized to do this only if the failure does not relate to a 
listed transaction and only if rescinding the penalty would 
promote compliance and effective tax administration.\1383\
---------------------------------------------------------------------------
    \1381\ Sec. 6662A(c).
    \1382\ Sec. 6664(d).
    \1383\ Sec. 6707A(d).
---------------------------------------------------------------------------

                           Reasons for Change

    At the time that this penalty was enacted in 2004, Congress 
believed that a penalty for failing to make the required 
disclosures, when the imposition of such penalty is not 
dependent on the tax treatment of the underlying transaction 
ultimately being sustained, would provide an additional 
incentive for taxpayers to satisfy their reporting obligations 
under the new disclosure provisions.\1384\ In the years since 
enactment, the Congress has learned that this penalty is very 
often applicable to small businesses and individuals in amounts 
that exceed the tax savings claimed on these returns, if any. 
These taxpayers often were not advised that the transactions 
are reportable to the IRS. In her annual report,\1385\ the 
National Taxpayer Advocate informed Congress that the penalties 
cause unconscionable hardship on taxpayers as there are 
individuals facing bankruptcy and loss of a business as a 
result of the magnitude of the penalty for failure to disclose 
a reportable transaction. The statute allows penalties of up to 
$300,000 per year on taxpayers with no underpayment of tax and 
no knowledge that they entered into a transaction required to 
be reported. Such individuals generally invested in 
transactions (often a pension plan) that were required to be 
disclosed through their small businesses often organized as 
pass-through entities and claimed benefits for several years. 
Thus, once the IRS determined that the transaction should have 
been reported, the penalties applied to both the small business 
and the owner over several years, which resulted in some 
penalties exceeding over $1 million. The Congress believes that 
it is appropriate to provide a mechanism for establishing a 
penalty amount that will be proportionate to the misconduct to 
be penalized, without discouraging compliance with the 
requirement to disclose reportable transactions.
---------------------------------------------------------------------------
    \1384\ See, ``Reasons for Change'' in discussion of section 811 of 
the American Jobs Creation Act of 2004 (``AJCA''), Pub. L. No. 108-357, 
p. 361 of the Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in the 108th Congress (JCS-5-05), May 2005.
    \1385\ See, discussion of ``Legislative Recommendations with 
Legislative Action: Modify Internal Revenue Code Section 6707A to 
Ameliorate Unconscionable Impact,'' Vol. 1 National Taxpayer Advocate 
2008 Annual Report to Congress, p. 419.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision changes the general rule for determining the 
amount of the applicable penalty to achieve proportionality 
between the penalty and the tax savings that were the object of 
the transaction, retains the current penalty amounts as the 
maximum penalty that may be imposed, and establishes a minimum 
penalty.
    First, it provides a general rule that a participant in a 
reportable transaction who fails to disclose the reportable 
transaction as required under section 6011 is subject to a 
penalty equal to 75 percent of the reduction in tax reported on 
the participant's income tax return as a result of 
participation in the transaction, or that would result if the 
transaction were respected for federal tax purposes. Regardless 
of the amount determined under the general rule, the penalty 
for each such failure may not exceed certain maximum amounts. 
The maximum annual penalty that a taxpayer may incur for 
failing to disclose a particular reportable transaction other 
than a listed transaction is $10,000 in the case of a natural 
person and $50,000 for all other persons. The maximum annual 
penalty that a taxpayer may incur for failing to disclose a 
listed transaction is $100,000 in the case of a natural person 
and $200,000 for all other persons.
    The provision also establishes a minimum penalty with 
respect to failure to disclose a reportable or listed 
transaction. That minimum penalty is $5,000 for natural persons 
and $10,000 for all other persons.
    The following examples illustrate the operation of the 
maximum and minimum penalties with respect to a partnership or 
a corporation. First, assume that two individuals participate 
in a listed transaction through a partnership formed for that 
purpose. Both partners, as well as the partnership, are 
required to disclose the transaction. All fail to do so. The 
failure by the partnership to disclose its participation in a 
listed or otherwise reportable transaction is subject to the 
minimum penalty of $10,000, because income tax liability is not 
incurred at the partnership level nor reported on a partnership 
return. The individual partners in such partnership who also 
failed to comply with the reporting requirements of section 
6011 are each subject to a penalty of no less than $5,000 and 
no more than $100,000, based on the reduction in tax reported 
on their respective returns.
    In the second example, assume that a corporation 
participates in a single listed transaction over the course of 
three taxable years. The decrease in tax shown on the corporate 
returns is $1 million in the first year, $100,000 in the second 
year, and $10,000 in the third year. If the corporation fails 
to disclose the listed transaction in all three years, the 
corporation is subject to three separate penalties: a penalty 
of $200,000 in the first year (as a result of the cap on 
penalties), a $75,000 penalty in the second year (computed 
under the general rule) and a $10,000 penalty in the third year 
(as a result of the minimum penalty) for total penalties of 
$285,000.

                             Effective Date

    The provision applies to all penalties assessed under 
section 6707A after December 31, 2006.

  2. Temporary deduction for health insurance costs in computing self-
  employment income (sec. 2042 of the Act and sec. 162(l) of the Code)


                              Present Law


Deduction for health insurance premiums of self-employed individuals

    In calculating adjusted gross income for income tax 
purposes, self-employed individuals may deduct the cost of 
health insurance for themselves and their spouses, dependents, 
and any children who have not attained age 27 as of the end of 
the taxable year.\1386\ The deduction is not available for any 
month in which the self-employed individual is eligible to 
participate in an employer-subsidized health plan (maintained 
by the employer of the taxpayer or the taxpayer's spouse). 
Moreover, the deduction may not exceed the earned income 
(within the meaning of section 401(c)(2)) derived by the self-
employed individual from the trade or business with respect to 
which the plan providing the health insurance coverage is 
established.\1387\ The deduction applies only to the cost of 
insurance (i.e., it does not apply to out-of-pocket expenses 
that are not reimbursed by insurance).
---------------------------------------------------------------------------
    \1386\ Sec. 162(l)(1). See Notice 2010-38 for a discussion of the 
deduction for children who have not attained age 27 as of the end of 
the taxable year.
    \1387\ Sec. 162(l)(2).
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Self-Employment Contributions Act tax

    The Self-Employment Contributions Act (``SECA'') imposes 
taxes on the net earnings from self-employment of self-employed 
individuals (``self-employment income''). The tax is composed 
of two parts: (1) the old age, survivors, and disability 
insurance (``OASDI'') tax; and (2) the hospital insurance 
(``HI'') tax. The rate of the OASDI portion of SECA taxes is 
equal to 12.4 percent of self-employment income and generally 
applies to self-employment income up to the Federal Insurance 
Contributions Act (``FICA'') taxable wage base ($106,800 in 
2010). The rate of the HI portion is equal to 2.9 percent 
\1388\ of self-employment income and there is no cap on the 
amount of self-employment income to which the rate 
applies.\1389\ The deduction allowable for the cost of health 
insurance for the self-employed individual and the individual's 
spouse, dependents, and children who have not attained age 27 
as of the end of the taxable year for income taxes is not taken 
into account in determining an individual's net earnings from 
self-employment for purposes of SECA taxes.\1390\
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    \1388\ Sec. 1401. However, under section 9015 of the Patient 
Protection and Affordable Care Act, Pub. L. No. 111-148, for 
remuneration and self-employment income received for taxable years 
beginning after December 31, 2012, the HI tax under SECA is increased 
by an additional tax of 0.9 percent on self-employment income received 
in excess of a threshold amount. However, unlike the general 1.45 
percent HI tax on self-employment income, this additional tax is on the 
combined wages and self-employment income of the self-employed 
individual and spouse, in the case of a joint return. The threshold 
amount is $250,000 in the case of a joint return or surviving spouse, 
$125,000 in the case of a married individual filing a separate return, 
and $200,000 in any other case.
    \1389\ For purposes of computing net earnings from self-employment, 
taxpayers are permitted a deduction equal to the product of the 
taxpayer's earnings (determined without regard to this deduction) and 
one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 
percent), i.e., 7.65 percent of net earnings. This deduction reflects 
the fact that the FICA rates apply to an employee's wages, which do not 
include FICA taxes paid by the employer, whereas the self-employed 
individual's net earnings are economically equivalent to an employee's 
wages plus the employer share of FICA taxes.
    \1390\ Sec. 162(l)(4).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the deduction for income tax purposes 
allowed to self-employed individuals for the cost of health 
insurance for themselves, their spouses, dependents, and 
children who have not attained age 27 as of the end of the 
taxable year is taken into account, and thus also allowed, in 
calculating net earnings from self-employment for purposes of 
SECA taxes.
    It is intended that earned income within the meaning of 
section 401(c)(2) be computed without regard to this deduction 
for the cost of health insurance.\1391\ Thus, earned income for 
purposes of the limitation applicable to the health insurance 
deduction is computed without regard to this deduction.
---------------------------------------------------------------------------
    \1391\ A technical correction may be necessary so that the statute 
reflects this intent.
---------------------------------------------------------------------------
    The provision only applies for the taxpayer's first taxable 
year beginning after December 31, 2009.

                            Effective Date 

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

3. Remove cellular phones and similar telecommunications equipment from 
 the definition of listed property (sec. 2043 of the Act and sec. 280F 
                             of the Code) 


                              Present Law 


Employer deduction 

    Property, including cellular telephones and similar 
telecommunications equipment (hereinafter collectively ``cell 
phones''), used in carrying on a trade or business is subject 
to the general rules for deducting ordinary and necessary 
expenses under section 162. Under these rules, a taxpayer may 
properly claim depreciation deductions under the applicable 
cost recovery rules for only the portion of the cost of the 
property that is attributable to use in a trade or 
business.\1392\ Similarly, the business portion of monthly 
telecommunication service is generally deductible, subject to 
capitalization rules, as an ordinary and necessary expense of 
carrying on a trade or business.
---------------------------------------------------------------------------
    \1392\ Sec. 212 allows deductions for ordinary and necessary 
expenses paid or incurred for the production or collection of income.
---------------------------------------------------------------------------
    In the case of certain listed property, special rules 
apply. Listed property generally is defined as (1) any 
passenger automobile; (2) any other property used as a means of 
transportation; (3) any property of a type generally used for 
purposes of entertainment, recreation, or amusement; (4) any 
computer or peripheral equipment; (5) any cellular telephone 
(or other similar telecommunications equipment); \1393\ and (6) 
any other property of a type specified in Treasury 
regulations.\1394\
---------------------------------------------------------------------------
    \1393\ Cellular telephones (or other similar telecommunications 
equipment) were added as listed property as in section 7643 of the 
Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239.
    \1394\ Sec. 280F(d)(4)(A).
---------------------------------------------------------------------------
    For listed property, no deduction is allowed unless the 
taxpayer adequately substantiates the expense and business 
usage of the property.\1395\ A taxpayer must substantiate the 
elements of each expenditure or use of listed property, 
including (1) the amount (e.g., cost) of each separate 
expenditure and the amount of business or investment use, based 
on the appropriate measure (e.g., mileage for automobiles), and 
the total use of the property for the taxable period, (2) the 
date of the expenditure or use, and (3) the business purposes 
for the expenditure or use.\1396\ The level of substantiation 
for business or investment use of listed property varies 
depending on the facts and circumstances. In general, the 
substantiation must contain sufficient information as to each 
element of every business or investment use.\1397\
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    \1395\ Sec. 274(d)(4).
    \1396\ Temp. Treas. Reg. sec. 1.274-5T(b)(6).
    \1397\ Temp. Treas. Reg. sec. 1.274-5T(c)(2)(ii)(C).
---------------------------------------------------------------------------
    With respect to the business use of listed property made 
available by an employer for use by an employee, the employer 
must substantiate that all or a portion of the use of the 
listed property is by employees in the employer's trade or 
business.\1398\ If any employee used the listed property for 
personal use, the employer must substantiate that it included 
an appropriate amount in the employee's income.\1399\ An 
employer generally may rely on adequate records maintained and 
retained by the employee or on the employee's own statement if 
it is corroborated by other sufficient evidence, unless the 
employer knows or has reason to know that the statement, 
records, or other evidence are not accurate.\1400\
---------------------------------------------------------------------------
    \1398\ Temp. Treas. Reg. sec. 1.274-5T(e)(2)(i)(A).
    \1399\ Ibid. 
    \1400\ Temp. Treas. Reg. sec. 1.274-5T(e)(2)(ii). In Notice 2009-
46, 2009-23 I.R.B. 1068, the Service requested comments regarding 
several proposals to simplify the procedures for employers to 
substantiate an employee's business use of certain employer-provided 
telecommunications equipment (including cellular telephones).
---------------------------------------------------------------------------

Cost recovery 

    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.
    In the case of certain listed property, special 
depreciation rules apply. First, if for the taxable year that 
the property is placed in service the use of the property for 
trade or business purposes does not exceed 50 percent of the 
total use of the property, then the depreciation deduction with 
respect to such property is determined under the alternative 
depreciation system.\1401\ The alternative depreciation system 
generally requires the use of the straight-line method and a 
recovery period equal to the class life of the property.\1402\ 
Second, if an individual owns or leases listed property that is 
used by the individual in connection with the performance of 
services as an employee, no depreciation deduction, expensing 
allowance, or deduction for lease payments is available with 
respect to such use unless the use of the property is for the 
convenience of the employer and required as a condition of 
employment.\1403\
---------------------------------------------------------------------------
    \1401\ Sec. 280F(b)(1). If for any taxable year after the year in 
which the property is placed in service the use of the property for 
trade or business purposes decreases to 50 percent or less of the total 
use of the property, then the amount of depreciation allowed in prior 
years in excess of the amount of depreciation that would have been 
allowed for such prior years under the alternative depreciation system 
is recaptured (i.e., included in gross income) for such taxable year.
    \1402\ Sec. 168(g).
    \1403\ Sec. 280F(d)(3).
---------------------------------------------------------------------------

                       Explanation of Provision 

    The provision removes cell phones from the definition of 
listed property. Thus, under the provision, the heightened 
substantiation requirements and special depreciation rules that 
apply to listed property do not apply to cell phones.\1404\
---------------------------------------------------------------------------
    \1404\ The provision does not affect Treasury's authority to 
determine the appropriate characterization of cell phones as a working 
condition fringe benefit under section 132(d) or that the personal use 
of such devices that are provided primarily for business purposes may 
constitute a de minimis fringe benefit, the value of which is so small 
as to make accounting for it administratively impracticable, under 
section 132(e).
---------------------------------------------------------------------------

                            Effective Date 

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

                         II. REVENUE PROVISIONS


                        A. Reducing the Tax Gap


  1. Information reporting for rental property expense payments (sec. 
               2101 of the Act and sec. 6041 of the Code)


                              Present Law

    A variety of information reporting requirements apply under 
present law.\1405\ The primary provision governing information 
reporting by payors requires an information return by every 
person engaged in a trade or business who makes payments to any 
one payee aggregating $600 or more in any taxable year in the 
course of that payor's trade or business.\1406\ Reportable 
payments include compensation for both goods and services, and 
may include gross proceeds. Certain enumerated types of 
payments that are subject to other specific reporting 
requirements are carved out of reporting under this general 
rule.\1407\
---------------------------------------------------------------------------
    \1405\ Secs. 6031 through 6060.
    \1406\ Sec. 6041(a). The information return is generally submitted 
electronically as a Form 1096 and Form 1099, although certain payments 
to beneficiaries or employees may require use of Forms W-3 and W-2, 
respectively. Treas. Reg. sec. 1.6041-1(a)(2).
    \1407\ Sec. 6041(a) requires reporting ``other than payments to 
which section 6042(a)(1), 6044(a)(1), 6047(c), 6049(a) or 6050N(a) 
applies and other than payments with respect to which a statement is 
required under authority of section 6042(a), 6044(a)(2) or 6045[.]'' 
The payments thus excepted include most interest, royalties, and 
dividends.
---------------------------------------------------------------------------
    One such regulatory exception carved out payments to 
corporations,\1408\ but was expressly overridden by the 
addition of new section 6041(h) by section 9006 of the Patient 
Protection and Affordable Health Care Act (``PPACA'').\1409\ 
New section 6041(h) expanded information reporting requirements 
to include gross proceeds paid in consideration for property 
and to subject payments to corporations to all of the reporting 
requirements under section 6041. The payor is required to 
provide the recipient of the payment with an annual statement 
showing the aggregate payments made and contact information for 
the payor.\1410\ The regulations generally except from 
reporting payments to exempt organizations, governmental 
entities, international organizations, or retirement 
plans.\1411\ Additionally, the requirement that businesses 
report certain payments is not applicable to persons engaged in 
a passive investment activity. Thus, a taxpayer whose rental 
real estate activity is a trade or business is subject to this 
reporting requirement, but a taxpayer whose rental real estate 
activity is not considered a trade or business is not subject 
to such requirement.
---------------------------------------------------------------------------
    \1408\ Treas. Reg. sec. 1.6041-3(p).
    \1409\ Pub. L. No. 111-148, sec. 9006 (effective for payments made 
after December 31, 2011).
    \1410\ Sec. 6041(d). Specifically, the recipient of the payment is 
required to provide a Form W-9 to the payor, which enables the payee to 
provide the recipient of the payment with an annual statement showing 
the aggregate payments made and contact information for the payor. If a 
Form W-9 is not provided, the payor is required to ``backup withhold'' 
tax at a rate of 28 percent of the gross amount of the payment unless 
the payee has otherwise established that the income is exempt from 
backup withholding. The backup withholding tax may be credited by the 
payee against regular income tax liability, i.e., it is effectively an 
advance payment of tax, similar to the withholding of tax from wages. 
This combination of reporting and backup withholding is designed to 
ensure that U.S. persons pay an appropriate amount of tax with respect 
to investment income, either by providing the IRS with the information 
that it needs to audit payment of the tax or, in the absence of such 
information, requiring collection of the tax on payment.
    \1411\ Treas. Reg. sec. 1.6041-3(p).
---------------------------------------------------------------------------
    In addition, financial institutions are required to report 
to both taxpayers and the IRS the amount of interest taxpayers 
paid during the year on mortgages they held on their rental 
properties.\1412\
---------------------------------------------------------------------------
    \1412\ Sec. 6050H. This information is provided on Form 1098.
---------------------------------------------------------------------------
    A person that fails to comply with the information 
reporting requirements is subject to penalties, which may 
include a penalty for failure to file the information 
return,\1413\ for failure to furnish payee statements,\1414\ or 
for failure to comply with other various reporting 
requirements.\1415\
---------------------------------------------------------------------------
    \1413\ Sec. 6721.
    \1414\ Sec. 6722.
    \1415\ Sec. 6723. The penalty for failure to timely comply with a 
specified information reporting requirement is $50 per failure, not to 
exceed $100,000 for a calendar year.
---------------------------------------------------------------------------

                           Reasons for Change

    One of the principal methods of improving tax compliance is 
to require information reporting by the third-party payor. The 
Congress believes that requiring information reporting by 
taxpayers receiving rental income and deducting expenses on 
rental activities would improve tax compliance of both the 
payor and the recipient by reducing opportunities for error and 
fraud. If the payors are required to provide the IRS 
information with respect to taxable payments, the recipients 
are more likely to include the payment in income.\1416\ The 
increased third-party reporting of payments to those who 
provide services with respect to rental property will assist 
such contractors in properly reporting their income.
---------------------------------------------------------------------------
    \1416\ See http://www.irs.gov/pub/irs-news/tax_gap_figures.pdf.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, recipients of rental income from real 
estate generally are subject to the same information reporting 
requirements as taxpayers engaged in a trade or business. In 
particular, rental income recipients making payments of $600 or 
more to a service provider (such as a plumber, painter, or 
accountant) in the course of earning rental income are required 
to provide an information return (typically Form 1099-MISC) to 
the IRS and to the service provider. Exceptions to this 
reporting requirement are made for (i) individuals who rent 
their principal residence on a temporary basis, including 
members of the military or employees of the intelligence 
community (as defined in section 121(d)(9)), (ii) individuals 
who receive only minimal amounts of rental income, as 
determined by the Secretary in accordance with regulations, and 
(iii) individuals for whom the requirements would cause 
hardship, as determined by the Secretary in accordance with 
regulations.

                            Effective Date 

    The provision applies to payments made after December 31, 
2010.

2. Increase in information return penalties (sec. 2102 of Act and secs. 
                      6721 and 6722 of the Code) 


                              Present Law 

    Present law imposes information reporting requirements on 
participants in certain transactions. Under section 6721, any 
person who is 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. If a person files a 
correct information return after the prescribed filing date but 
on or before the date that is 30 days after the prescribed 
filing date, the amount of the penalty is $15 per return (the 
``first-tier penalty''), with a maximum penalty of $75,000 per 
calendar year. If a person files a correct information return 
after the date that is 30 days after the prescribed filing date 
but on or before August 1, the amount of the penalty is $30 per 
return (the ``second-tier penalty''), with a maximum penalty of 
$150,000 per calendar year. If a correct information return is 
not filed on or before August 1 of any year, the amount of the 
penalty is $50 per return (the ``third-tier penalty''), with a 
maximum penalty of $250,000 per calendar year. If a failure is 
due to intentional disregard of a filing requirement, the 
minimum penalty for each failure is $100, with no calendar year 
limit.
    Special lower maximum levels for this penalty apply to 
small businesses. Small businesses are defined as firms having 
average annual gross receipts for the most recent three taxable 
years that do not exceed $5 million. The maximum penalties for 
small businesses are: $25,000 (instead of $75,000) if the 
failures are corrected on or before 30 days after the 
prescribed filing date; $50,000 (instead of $150,000) if the 
failures are corrected on or before August 1; and $100,000 
(instead of $250,000) if the failures are not corrected on or 
before August 1.
    Section 6722 imposes penalties for failing to furnish 
correct payee statements to taxpayers. The penalty amount is 
$50 for each failure to furnish a payee statement, up to a 
maximum of $100,000. If the failure is due to intentional 
disregard, the amount of the penalty per failure is increased 
\1417\ and the cap on the penalty is not applicable. In 
addition, section 6723 imposes a penalty of $50 for failing to 
comply with other information reporting requirements, up to a 
maximum of $100,000.
---------------------------------------------------------------------------
    \1417\ Section 6722(c)(1) provides that the penalty per failure is 
the greater of $100 or a fixed percentage of the aggregate items to be 
shown on the payee statements. The fixed amount is 10 percent for 
statements other than those required under sections 6045(b), 6041A(e), 
6050H(d), 6050J(e), 6050K(b), or 6050L(c). The penalty is the greater 
of $100 or five percent of the amount required to be shown on 
statements required under sections 6045(b), 6050K(b) or 6050L(c).
---------------------------------------------------------------------------

                          Reasons for Change 

    The amount of the penalties imposed for failure to file 
information returns was last amended in 1989.\1418\ Since then, 
the importance of reliable third-party information reporting to 
the administration of the Code has greatly increased. The 
Congress believes that it is important to increase the 
penalties to ensure that they encourage compliance with the 
reporting obligations.
---------------------------------------------------------------------------
    \1418\ The penalty was originally $50 for each failure, up to a 
maximum of $100,000 per year, as enacted by section 150 of the Tax 
Reform Act of 1986, Pub. L. No. 99-514. In 1989, the present penalty 
amounts in three tiers were enacted. Section 7711 of the Omnibus Budget 
Reconciliation Act of 1989, Pub. L. No. 101-239.
---------------------------------------------------------------------------

                       Explanation of Provision 

    The provision amends section 6721 to increase the first-
tier penalty from $15 to $30, and increase the calendar year 
maximum from $75,000 to $250,000. The second-tier penalty is 
increased from $30 to $60, and the calendar year maximum is 
increased from $150,000 to $500,000. The third-tier penalty is 
increased from $50 to $100, and the calendar year maximum is 
increased from $250,000 to $1,500,000. For small business 
filers, the calendar year maximum is increased from $25,000 to 
$75,000 for the first-tier penalty, from $50,000 to $200,000 
for the second-tier penalty, and from $100,000 to $500,000 for 
the third-tier penalty. The minimum penalty for each failure 
due to intentional disregard is increased from $100 to $250.
    The penalty for failure to furnish a payee statement is 
revised to provide tiers and caps similar to those applicable 
to the penalty for failure to file the information return. A 
first-tier penalty is $30, subject to a maximum of $250,000; a 
second-tier penalty is $60 per statement, up to $500,000, and 
the third-tier penalty is $100, up to a maximum of $1,500,000. 
The penalty is also amended to provide limitations on penalties 
for small businesses and increased penalties for intentional 
disregard that parallel the penalty for failure to furnish 
information returns.
    Both the failure to file and failure to furnish penalties 
will be adjusted to account for inflation every five years with 
the first adjustment to take place after 2012, effective for 
each year thereafter.

                            Effective Date 

    The provision applies with respect to information returns 
required to be filed on or after January 1, 2011.

 3. Annual reports on penalties and certain other enforcement actions 
                        (sec. 2103 of the Act) 


                              Present Law 

    Transactions that have the potential for tax avoidance are 
required to be disclosed by both the taxpayers who engage in 
the transaction and the various professionals who provide 
advice with respect to such transactions. Failure to comply 
with the reporting and disclosure requirements may result in 
assessment of penalties against both the taxpayer and material 
advisor and the use of special enforcement measures.

Reporting obligations 

    These disclosure requirements \1419\ create interlocking 
disclosure obligations for both taxpayers and advisors. A 
taxpayer is required to disclose with its tax return certain 
information with respect to each ``reportable transaction,'' as 
defined in regulations.\1420\ Each advisor who provides 
material advice with respect to any reportable transaction 
(including any listed transaction) is required to file an 
information return with the Secretary (in such form and manner 
as the Secretary may prescribe).\1421\ Finally, the advisor is 
required to maintain a list of those persons he has advised 
with respect to a reportable transaction and to provide the 
list to the IRS upon request.\1422\
---------------------------------------------------------------------------
    \1419\ Secs. 6011, 6111 and 6112.
    \1420\ Treas. Reg. sec. 1.6011-4.
    \1421\ Sec. 6111.
    \1422\ Sec. 6112.
---------------------------------------------------------------------------
    A reportable transaction is defined as one that the 
Secretary requires to be disclosed based on its potential for 
tax avoidance or evasion.\1423\ There are five categories of 
reportable transactions: listed transactions, confidential 
transactions, transactions with contractual protection, certain 
loss transactions and transactions of interest.\1424\
---------------------------------------------------------------------------
    \1423\ Sec. 6707A(c)(1) states that the term means ``any 
transaction with respect to which information is required to be 
included with a return or statement because, as determined under 
regulations prescribed under section 6011, such transaction is of a 
type which the Secretary determines as having a potential for tax 
avoidance or evasion.'' Sections 6111(b)(2) and 6112 both define 
``reportable transaction'' by reference to the definition in section 
6707A(c). The definition of ``listed transaction'' similarly depends 
upon identification of transactions by the Secretary as tax avoidance 
transactions for purposes of section 6011.
    \1424\ Treas. Reg. sec. 1.6011-4(b)(2)-(6).
---------------------------------------------------------------------------

Penalties and other enforcement tools related to reportable 
        transactions 

    Each of the disclosure statutes has a parallel penalty 
provision to aid enforcement. The taxpayer who participates in 
a reportable transaction and fails to disclose it is subject to 
a strict liability penalty.\1425\ The penalty is assessed in 
addition to any accuracy-related penalties. It may be rescinded 
with respect to reportable transactions other than listed 
transactions. Rescission is discretionary and conditioned upon 
a determination by the Commissioner that rescinding the penalty 
would promote compliance and effective tax 
administration.\1426\ The Code also imposes a penalty on any 
material advisor who fails to file an information return, or 
who files a false or incomplete information return, with 
respect to a reportable transaction (including a listed 
transaction). It may be rescinded, subject to limitations 
similar to those applicable to rescission of the penalty 
imposed on investors.\1427\ The IRS may also submit a written 
request that a material advisor make available the list 
required to be maintained under section 6112(a). A failure to 
make the list available upon written request is subject to a 
penalty of $10,000 per day for as long as the failure 
continues, unless the advisor can establish reasonable cause 
for the failure.\1428\
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    \1425\ Section 6707A imposes a penalty for failure to comply with 
the reporting requirements of section 6011. A single reportable 
transaction may have to be reported by multiple taxpayers in connection 
with multiple tax returns. For example, a reportable transaction 
entered into by a partnership may have to be reported under section 
6011 by both the partnership and its partners. The amount of the 
penalty due for each taxpayer's failure to comply varies depending upon 
whether or not the transaction is a listed transaction and whether the 
relevant taxpayer is an individual. For listed transactions, the 
maximum penalty is $100,000 for natural persons and $200,000 for all 
other persons. For reportable transactions other than listed 
transactions, the maximum penalty is $10,000 for natural persons and 
$50,000 for all other persons. A public entity that is required to pay 
a penalty for an undisclosed listed or reportable transaction must 
disclose the imposition of the penalty in reports to the SEC for such 
periods specified by the Secretary. Failure to comply with this 
reporting requirement may result in assessment of a second tier 
penalty.
    \1426\ Sec. 6707A(d). In determining whether to rescind (or abate) 
the penalty for failing to disclose a reportable transaction on the 
grounds that doing so would promote compliance with the tax laws and 
effective tax administration, it is intended that the Commissioner take 
into account whether: (1) the person on whom the penalty is imposed has 
a history of complying with the tax laws; (2) the violation is due to 
an unintentional mistake of fact; and (3) imposing the penalty would be 
against equity and good conscience.
    \1427\ Section 6707 provides a penalty in the amount of $50,000. If 
the penalty is with respect to a listed transaction, the amount of the 
penalty is increased to the greater of (1) $200,000, or (2) 50 percent 
of the gross income of such person with respect to aid, assistance, or 
advice which is provided with respect to the transaction before the 
date the information return that includes the transaction is filed. 
Intentional disregard by a material advisor of the requirement to 
disclose a listed transaction increases the penalty to 75 percent of 
the gross income.
    \1428\ Sec. 6708.
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    In addition to the penalties that specifically address the 
failure to comply with the disclosure and reporting 
obligations, other special enforcement provisions are 
applicable to reportable transactions. An understatement 
arising from any listed transactions or from a reportable 
transaction for which a significant purpose is avoidance or 
evasion of Federal income tax will be subject to an accuracy-
related penalty,\1429\ unless the taxpayer can establish that 
the failure was due to reasonable cause as determined under a 
standard that is more stringent than that applicable to other 
accuracy-related penalties.\1430\
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    \1429\ Sec. 6662A.
    \1430\ Sec. 6664(d).
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    If the taxpayer does not adequately disclose a reportable 
transaction, the strengthened reasonable cause exception is not 
available and the taxpayer is subject to an increased penalty 
equal to 30 percent of the understatement.\1431\ However, a 
taxpayer will be treated as having adequately disclosed a 
transaction for this purpose if the Commissioner has separately 
rescinded the separate penalty under section 6707A for failure 
to disclose a reportable transaction.\1432\ Finally, a new 
exception to the statute of limitations provides that the 
period is suspended if a listed transaction is not properly 
disclosed.\1433\ If the transaction is disclosed either because 
the taxpayer files the proper disclosure form or a material 
advisor identifies the transaction to the IRS in a list 
maintained under section 6112, the period will remain open for 
at least one year from the earlier of date of the disclosure by 
the investor or the disclosure by the material advisor with 
respect to that transaction.
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    \1431\ Sec. 6662A(c).
    \1432\ Sec. 6664(d).
    \1433\ Sec. 6501(c)(10).
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    The Code authorizes civil actions to enjoin any person from 
specified conduct relating to tax shelters or reportable 
transactions.\1434\ The specified conduct includes failure to 
comply with respect to the requirements relating to the 
reporting of reportable transactions \1435\ and the keeping of 
lists of investors by material advisors.\1436\ Thus, an 
injunction may be sought against a material advisor to enjoin 
the advisor from (1) failing to file an information return with 
respect to a reportable transaction, or (2) failing to 
maintain, or to timely furnish upon written request by the 
Secretary, a list of investors with respect to each reportable 
transaction. In addition, injunctions, monetary penalties and 
suspension or disbarment are authorized with respect to 
violations of any of the rules under Circular 230, which 
regulates the practice of representatives of persons before the 
Department of the Treasury.
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    \1434\ Sec. 7408.
    \1435\ Sec. 6707.
    \1436\ Sec. 6708.
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Reports to Congress by the Secretary 

    The Secretary is required to maintain records and report on 
the administration of the penalties for failure to disclose a 
reportable transaction in two ways. First, each decision to 
rescind a penalty imposed under section 6707 or section 6707A 
must be memorialized in a record maintained in the Officer of 
the Commissioner.\1437\ That record must include a description 
of the facts and circumstances of the violation, the reasons 
for the decision to rescind, and the amount rescinded. Second, 
the IRS is required to submit an annual report to Congress on 
the administration of the rescission authority under both 
sections 6707 and 6707A. The information with respect to the 
latter is to be in summary form, while the information on 
rescission of penalties imposed against material advisors is to 
be more detailed.\1438\ The report is not required to address 
administration of the other enforcement tools described above.
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    \1437\ Section 6707(c) incorporates by reference the provisions of 
section 6707A(d), which details the extent of the Commissioner's 
authority to rescind the penalty.
    \1438\ AJCA provides:
    ``The Commissioner of Internal Revenue shall annually report to the 
Committee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate--
    ``(1) a summary of the total number and aggregate amount of 
penalties imposed, and rescinded, under section 6707A of the Internal 
Revenue Code of 1986, and
    ``(2) a description of each penalty rescinded under section 6707(c) 
of such Code and the reasons therefor.'' Pub. L. No. 108-357, Title 
VIII, Subtitle B, Part I, 811(d), 118 Stat. 1577, Oct. 22, 2004.
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                          Reasons for Change 

    Since the enactment of a number of enforcement measures 
intended to support IRS efforts to combat abusive tax avoidance 
transactions, there has been little data available to determine 
whether the measures have the desired effect. Congress believes 
that an annual report on administrative experience with all of 
the enforcement measures modified or added by AJCA will better 
enable it to assess the efficacy of those measures.

                       Explanation of Provision 

    The provision requires that the IRS, in consultation with 
the Secretary, submit an annual report on administration of 
certain penalty provisions of the Code to the Committee on Ways 
and Means of the House of Representatives and the Committee on 
Finance of the Senate. A summary of penalties assessed the 
preceding year is required. In addition, the Secretary must 
report actions taken against practitioners appearing before the 
Treasury or IRS with respect to a reportable transaction \1439\ 
and instances in which the IRS attempted to rely on the 
exception to the limitations period for assessment based on 
failure to disclose a listed transaction.\1440\ The penalties 
that are subject to this reporting requirement are those 
assessed in the preceding year with respect to (1) a 
participant's failure to disclose a reportable 
transaction,\1441\ (2) reportable transaction 
understatements,\1442\ (3) promotion of abusive shelters,\1443\ 
(4) failure of a material advisor to furnish information on a 
reportable transaction,\1444\ and (5) material advisors' 
failure to maintain or produce a list of reportable 
transactions.\1445\
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    \1439\ 31 U.S.C. sec. 330(b) authorizes the Secretary to impose 
sanctions on those who appear before the Department, including monetary 
penalties and suspension or disbarment from practice before the 
Department.
    \1440\ Sec. 6501(c)(10) provides that the limitations period with 
respect to tax attributable to a listed transaction shall not expire 
less than one year after the required disclosure of that transaction is 
furnished by the taxpayer or by the material advisor, whichever is 
earlier.
    \1441\ Sec. 6707A.
    \1442\ Sec. 6662A.
    \1443\ Sec. 6700.
    \1444\ Sec. 6707.
    \1445\ Sec. 6708.
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                            Effective Date 

    The first annual report is required to be submitted not 
later than December 31, 2010.

4. Application of continuous levy to employment tax liability of 
        certain Federal contractors (sec. 2104 of the Act and sec. 6330 
        of the Code) 

                              Present Law 


In general 

    Levy is the IRS' administrative authority to seize a 
taxpayer's property or rights to property to pay the taxpayer's 
tax liability.\1446\ Generally, the IRS is entitled to seize a 
taxpayer's property by levy if a Federal tax lien has attached 
to such property,\1447\ and the IRS has provided both notice of 
intention to levy \1448\ and notice of the right to an 
administrative hearing (referred to as a collections due 
process notice or ``CDP'' notice) \1449\ at least thirty days 
before the levy is made. 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.\1450\
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    \1446\ Sec. 6331(a). Levy specifically refers to the legal process 
by which the IRS orders a third party to turn over property in its 
possession that belongs to the delinquent taxpayer named in a notice of 
levy.
    \1447\ Sec. 6331(a).
    \1448\ Sec. 6331(d).
    \1449\ Sec. 6330. The administrative hearing is referred to as the 
CDP hearing.
    \1450\ Secs. 6321 and 6331(a).
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    The 30-day pre-levy notice requirements, the taxpayer's 
rights before, during, and following the CDP hearing, and the 
Federal payment levy program are discussed below.

Pre-levy notice requirements 

    The notice of intent to levy and the CDP notice must 
include a brief statement describing the following: (1) the 
statutory provisions and procedures for levy; (2) the 
administrative appeals available to the taxpayer; (3) the 
alternatives available to avoid levy; and (4) the provisions 
and procedures regarding redemption of levied property.\1451\ 
In addition, the collection due process notice must include the 
following: (1) the amount of the unpaid tax; and (2) the right 
to request a hearing during the 30-day period before the IRS 
serves the levy.
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    \1451\ Secs. 6330(a)(3) and 6331(d)(4). In practice, the notice of 
intent to levy and the collections due process notice is provided 
together in one document, Letter 1058, Final Notice, Notice of Intent 
to Levy and Notice of Your Right to a Hearing. Chief Couns. Adv. 
2009041 (November 28, 2008).
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    Upon receipt of this information, the taxpayer may stay the 
levy action by requesting in writing a hearing before the IRS 
Appeals Office.\1452\ Otherwise, the IRS will levy to collect 
the amount owed after expiration of 30 days from the notice.
---------------------------------------------------------------------------
    \1452\ Sec. 6330(b).
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    The notice of intent to levy is not required if the 
Secretary finds that collection would be jeopardized by delay. 
The standard for determining whether jeopardy exists is similar 
to the standard applicable in permitting the IRS to assess a 
tax without following the normal deficiency procedures.\1453\
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    \1453\ Secs. 6331(d)(3) and 6861.
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    The CDP notice (and pre-levy CDP hearing) is not required 
if the Secretary finds that collection would be jeopardized by 
delay or the Secretary has served a levy on a State to collect 
a Federal tax liability from a State tax refund. In addition, a 
levy issued to collect Federal employment taxes is excepted 
from the CDP notice and 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. The taxpayer, 
however, in each of these three cases, is provided an 
opportunity for a hearing within a reasonable period of time 
after the levy.\1454\
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    \1454\ Sec. 6330(f).
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CDP hearing

    At the CDP hearing, the taxpayer may present defenses to 
collection as well as arguments disputing the merits of the 
underlying tax debt if the taxpayer had no prior opportunity to 
present such arguments.\1455\ In addition, the taxpayer is 
required to be provided the opportunity to negotiate an 
alternative form of payment, such as an offer-in-compromise, 
under which the IRS would accept less than the full amount, or 
an installment agreement under which payments in satisfaction 
of the debt may be made over time rather than in one lump sum, 
or some combination of such measures.\1456\ If a taxpayer 
exercises any of these rights in response to the notice of 
intent to levy, the IRS may not proceed with its levy.
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    \1455\ Sec. 6330(c).
    \1456\ Sec. 6330(c)(2).
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    After the CDP hearing, a taxpayer also has a right to seek, 
within 30 days, judicial review in the U.S. Tax Court of the 
determination of the CDP hearing to ascertain whether the IRS 
abused its discretion in reaching its determination.\1457\ 
During this time period, the IRS may not proceed with its levy.
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    \1457\ Sec. 6330(d).
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Federal payment levy program

    To help the IRS collect taxes more effectively, the 
Taxpayer Relief Act of 1997 \1458\ authorized the establishment 
of the Federal Payment Levy Program (``FPLP''), which allows 
the IRS to continuously levy up to 15 percent of certain 
``specified payments,'' such as government payments to Federal 
contractors that are delinquent on their tax obligations. The 
levy generally continues in effect until the liability is paid 
or the IRS releases the levy.\1459\
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    \1458\ Pub. L. No. 105-34.
    \1459\ Sec. 6331(h). With respect to Federal payments to vendors of 
goods or services (not defined), the continuous levy may be up to 100 
percent of each payment. Sec. 6331(h)(3).
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    Under FPLP, the IRS matches its accounts receivable records 
with Federal payment records maintained by the Department of 
the Treasury's Financial Management Service (``FMS''), such as 
certain Social Security benefit and Federal wage records. When 
the records match, the delinquent taxpayer is provided both 
notice of intention to levy and notice of the right to the CDP 
hearing 30 days before the levy is made. If the taxpayer does 
not respond after 30 days, the IRS can instruct FMS to levy its 
Federal payments. Subsequent payments are continuously levied 
until the tax debt is paid or IRS releases the levy.
    Upon receipt of this information, however, the taxpayer may 
stay the levy action by requesting in writing a hearing before 
the IRS Appeals Office. Following the CDP hearing, a taxpayer 
has a right to seek, within 30 days, judicial review in the 
U.S. Tax Court of the determination of the CDP hearing to 
ascertain whether the IRS abused its discretion in reaching its 
determination. During this time period, the IRS may not proceed 
with its levy.

                           Reasons for Change

    The Congress believes that permitting Federal contractors 
to delay collection until completion of CDP procedures may 
deprive the Federal government of the opportunity to levy 
payments because Treasury likely will have paid the Federal 
contractor before the CDP requirements are met. This lost 
opportunity is especially true in cases where taxpayers abuse 
CDP procedures and raise frivolous arguments simply for the 
purpose of delaying or evading collection of tax. By changing 
current law to allow the IRS to proceed with its levy for any 
Federal tax liabilities earlier in the debt collection process, 
the Congress believes that the IRS will collect more unpaid 
taxes.\1460\
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    \1460\ Government Accountability Office, Tax Compliance: Thousands 
of Federal Contractors Abuse the Federal Tax System (GAO-07-742T), 
April 19, 2007 (approximately 60,000 Federal contractors were 
delinquent on over $7 billion in Federal taxes).
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    To the extent that the delinquent taxes are employment tax 
liabilities, delay 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. In addition, much of an employer's 
employment tax liability consists of the employees' share of 
FICA tax withheld from employees' wages paid to the government 
on behalf of the employees. The risk for the government is that 
the employees are entitled to credits for amounts actually 
withheld, even if the employer ultimately fails to remit these 
amounts to the government.

                        Explanation of Provision

    The provision allows the IRS to issue levies prior to a CDP 
hearing with respect to Federal tax liabilities of Federal 
contractors identified under the Federal Payment Levy Program. 
When a levy is issued prior to a CDP hearing under this 
proposal, the taxpayer has an opportunity for a CDP hearing 
within a reasonable time after the levy.

                             Effective Date

    The provision applies to levies issued after the date of 
enactment (September 27, 2010).

                  B. Promoting Retirement Preparation


1. Allow participants in government section 457 plans to treat elective 
        deferrals as Roth contributions (sec. 2111 of the Act and sec. 
        402A of the Code)

                              Present Law

    Section 401(k) plans and section 403(b) plans are permitted 
to have qualified Roth contribution programs under which 
participants may elect to make non-excludable contributions to 
``designated Roth accounts'' and, if certain conditions are 
met, to exclude from gross income distributions from these 
accounts.
    A qualified Roth contribution program is a program under 
which a participant may elect to make designated Roth 
contributions in lieu of all or a portion of the elective 
deferrals that he or she otherwise would be eligible to make 
under the applicable retirement plan. To qualify as a qualified 
Roth contribution program a plan must: (1) establish a separate 
designated Roth account for the designated Roth contributions 
of each participant (and for the earnings allocable to these 
contributions); (2) maintain separate records for each account; 
and (3) refrain from allocating to the designated Roth account 
amounts from non-designated Roth accounts.
    Generally, if an ``applicable retirement plan'' includes a 
qualified Roth contribution program then any contribution that 
a participant makes under the program is treated as an 
``elective deferral,'' but is not excludable from gross 
income.\1461\ For purposes of the qualified Roth contribution 
program rules, the term ``applicable retirement plan'' means: 
(1) an employee trust described in section 401(a) which is tax-
exempt under section 501(a); \1462\ and (2) a plan under which 
amounts are contributed by an individual's employer for a 
section 403(b) annuity contract.\1463\ An ``elective deferral'' 
is any deferral described in: (1) section 402(g)(3)(A) 
(employer contributions to section 401(k) plans not includible 
in employee's gross income); or (2) section 402(g)(3)(C) 
(employer contributions to purchase an annuity contract under a 
section 403(b) salary reduction agreement).
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    \1461\ Sec. 402A(a)(1).
    \1462\ That is, a trust created or organized in the United States 
and forming part of a stock bonus, pension, or profit-sharing plan of 
an employer for the exclusive benefit of its employees or their 
beneficiaries.
    \1463\ That is, an annuity purchased by a section 501(c)(3) 
organization or a public school.
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                        Explanation of Provision

    The provision amends the definition of ``applicable 
retirement plan'' to include eligible deferred compensation 
plans (as defined under section 457(b)) maintained by a State, 
a political subdivision of a State, an agency or 
instrumentality of a State, or an agency or instrumentality of 
a political subdivision of a State (collectively, 
``governmental 457(b) plans''). The provision also amends the 
definition of ``elective deferral'' in section 402A to include 
amounts deferred under governmental 457(b) plan.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

2. Allow rollovers from elective deferral plans to designated Roth 
        accounts (sec. 2112 of the Act and sec. 402A of the Code)

                              Present law


Individual retirement arrangements

            General rules
    There are two basic types of individual retirement 
arrangements (``IRAs'') under present law: traditional 
IRAs,\1464\ to which both deductible and nondeductible 
contributions may be made,\1465\ and Roth IRAs, to which only 
nondeductible contributions may be made.\1466\ The principal 
difference between these two types of IRAs is the timing of 
income tax inclusion. For a traditional IRA, an eligible 
contributor may deduct the contributions made for the year, but 
distributions are includible in gross income. For a Roth IRA, 
all contributions are after-tax (no deduction is allowed) but, 
if certain requirements are satisfied, distributions are not 
includable in gross income.
---------------------------------------------------------------------------
    \1464\ Sec. 408.
    \1465\ Sec. 219.
    \1466\ Sec. 408A.
---------------------------------------------------------------------------
    An annual limit applies to contributions to IRAs. The 
contribution limit is coordinated so that the aggregate maximum 
amount that can be contributed to all of an individual's IRAs 
(both traditional and Roth IRAs) for a taxable year is the 
lesser of a certain dollar amount ($5,000 for 2010) \1467\ or 
the individual's compensation. In the case of a married couple, 
contributions can be made up to the dollar limit for each 
spouse if the combined compensation of the spouses is at least 
equal to the contributed amount.
---------------------------------------------------------------------------
    \1467\ The dollar limit is indexed for inflation.
---------------------------------------------------------------------------
    An individual who has attained age 50 before the end of the 
taxable year may also make catch-up contributions to an IRA. 
For this purpose, the aggregate dollar limit is increased by 
$1,000. Thus for example, if an individual over age 50 
contributes $6,000 to a Roth IRA for 2010 ($5,000 plus $1,000 
catch-up), the individual will not be permitted to make any 
contributions to a traditional IRA for the year. In addition, 
deductible contributions to traditional IRAs and after tax 
contributions to Roth IRAs generally are subject to AGI limits. 
IRA contributions generally must be made in cash.
            Roth IRAs
    Individuals with adjusted gross income below certain levels 
may make nondeductible contributions to a Roth IRA. 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 2010 are: (1) for single taxpayers, 
$109,000 to $124,000; (2) for married taxpayers filing joint 
returns, $167,000 to $177,000; and (3) for married taxpayers 
filing separate returns, $0 to $10,000. Contributions to a Roth 
IRA may be made even after the account owner has attained age 
70\1/2\.
    Taxpayers generally may convert a traditional IRA into a 
Roth IRA.\1468\ A conversion may be accomplished by means of a 
rollover, trustee-to-trustee transfer, or account 
redesignation. Regardless of the means used to convert, any 
amount converted from a traditional IRA to a Roth IRA is 
treated as distributed from the traditional IRA and rolled over 
to the Roth IRA. The amount converted is includible in income 
as if a withdrawal had been made, except that the 10-percent 
early withdrawal tax does not apply.
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    \1468\ For taxable years beginning before January 1, 2010, such a 
conversion is not permitted to be made by a taxpayer whose modified 
adjusted gross income for the year of the distribution exceeds $100,000 
(or who, if married, does not file jointly). For taxable years 
beginning before January 1, 2010, a rollover from an eligible employer 
plan not made from a designated Roth account is available only to a 
taxpayer whose modified adjusted gross income for the year of the 
distribution does not exceed $100,000 (and who, if married, files 
jointly).
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    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable year period beginning with the first taxable 
year for which the individual made a contribution to a Roth 
IRA, and (2) is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
    Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings. Under special ordering rules, after-
tax contributions are recovered before income.\1469\ The amount 
includible in income is also subject to the 10-percent early 
withdrawal tax unless an exception applies. The same exceptions 
to the early withdrawal tax that apply to traditional IRAs 
apply to Roth IRAs.
---------------------------------------------------------------------------
    \1469\ Sec. 408A(d)(4).
---------------------------------------------------------------------------

Cash or deferred arrangements

            Section 401(k) plans and section 403(b) plans
    A qualified retirement plan \1470\ that is a profit-sharing 
plan may allow an employee to make an election between cash and 
an employer contribution to the plan pursuant to a qualified 
cash or deferred arrangement. A plan with this feature is 
generally referred to as a section 401(k) plan. A section 
403(b) plan may allow a similar salary reduction agreement 
under which an employee may make an election between cash and 
an employer contribution to the plan.\1471\ Amounts contributed 
pursuant to these qualified cash or deferred arrangements and 
salary reduction agreements generally are referred to as 
elective contributions and generally are excludable from gross 
income. There is a dollar limit on the aggregate amount of 
elective contributions that an employee is permitted to 
contribute to either of these plans for a taxable year which is 
$16,500 for 2010. There is an additional catch up amount that 
employees over age 50 are allowed to contribute which is $5,500 
for 2010.
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    \1470\ Qualified retirement plans include plans qualified under 
section 401(a) and section 403(a) annuity plans.
    \1471\ Section 403(b) plans may be maintained only by (1) tax-
exempt charitable organizations, and (2) educational institutions of 
State or local governments (including public schools). Many of the 
rules that apply to section 403(b) plans are similar to the rules 
applicable to qualified retirement plans, including section 401(k) 
plans.
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    Elective contributions under a section 401(k) plan are 
subject to distribution restrictions under the plan. Such 
contributions generally may only be distributed after 
attainment of age 59\1/2\, death of the employee, termination 
of the plan, or severance from employment with the employer 
maintaining the plan. These contributions are also permitted to 
be distributed on account of hardship. These limitations also 
apply to certain other contributions to the plan except that 
such distributions cannot be distributed on account of 
hardship. Similar distribution restrictions apply to salary 
reduction contributions under section 403(b) plans.
    Amounts under a profit sharing plan that are not subject to 
these specific distribution restrictions are distributable only 
as permitted under the plan terms. In order to meet the 
definition of profit-sharing plan, the plan may allow 
distribution of an amount contributed to a profit sharing plan 
after a fixed number of years (but not less than two).\1472\
---------------------------------------------------------------------------
    \1472\ Rev. Rul. 71-295, 1971-2, C.B. 184 and Treas. Reg. sec. 
1.401(b)(1)(ii).
---------------------------------------------------------------------------
            Designated Roth accounts
    A qualified retirement plan or a section 403(b) plan with a 
cash or deferred arrangement can include a Designated Roth 
program under which an employee is permitted to designate any 
elective contribution as a designated Roth contribution in lieu 
of making a pre-tax elective contribution. Although such a plan 
is permitted to offer only the opportunity to make pre-tax 
elective contributions, a plan that allows designated Roth 
contributions must offer a choice of both pre-tax elective 
contributions and designated Roth contributions.\1473\ The 
designated contributions are generally treated the same under 
the plan as pre-tax elective contributions (e.g. the 
nondiscrimination requirements and contribution limits) except 
a designated Roth contribution is not excluded from gross 
income.
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    \1473\ Treas. Reg. sec. 1.401(k)-1(f)(1)(i).
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    All designated Roth contributions made under the plan must 
be maintained in a separate account (a designated Roth 
account). Any distribution from a designated Roth account 
(other than a qualified distribution) is taxable under section 
402 by treating the designated Roth account as a separate 
contract for purpose of section 72. The distribution is 
included in the distributee's gross income to the extent 
allocable to income under the contract and excluded from gross 
income to the extent allocable to investment in the contract 
(commonly referred to as basis), taking into account only the 
designated Roth contributions as basis. The special basis-first 
recovery rule for Roth IRAs does not apply to distributions 
from designated Roth accounts.
    A qualified distribution from a designated Roth account is 
excludable from gross income. A qualified distribution is a 
distribution that is made after completion of a specified 5-
year period and the satisfaction of one of three other 
requirements. The three other requirements are the same as the 
other requirements for a qualified distribution from a Roth 
account except that the first-time home buyer provision does 
not apply.
    Eligible rollover distributions from designated Roth 
accounts may only be rolled over tax free to another designated 
Roth account or a Roth IRA.

Rollovers from eligible retirement plans

    An eligible rollover distribution from an eligible employer 
plan that is not from a designated Roth account may be rolled 
over to an eligible retirement plan that is not a Roth IRA or a 
designated Roth account. An eligible employer plan is a 
qualified retirement plan, a section 403(b) plan, and a 
``governmental section 457(b) plan.'' \1474\ In such a case, 
the distribution generally is not currently includible in the 
distributee's gross income. An eligible retirement plan means 
an individual retirement plan or an eligible employer plan. An 
eligible rollover distribution is any distribution from an 
eligible employer plan with certain exceptions. Distributions 
that are not eligible rollover distributions generally are 
certain periodic payments, any distribution to the extent the 
distribution is a minimum required distribution, and any 
distribution made on account of hardship of the employee.\1475\ 
Only an employee or a surviving spouse of an employee is 
allowed to roll over an eligible rollover distribution from an 
eligible employer plan to another eligible employer plan.\1476\
---------------------------------------------------------------------------
    \1474\ A governmental section 457(b) plan is an eligible section 
457(b) plan maintained by a governmental employer described in section 
457(e)(1)(A).
    \1475\ Sec. 402(c)(4).
    \1476\ Section 402(c)(10) allows nonspouse beneficiaries to make a 
direct rollover to an IRA but not another eligible employer plan.
---------------------------------------------------------------------------
    Distributions from an eligible employer plan are also 
permitted to be rolled over into a Roth IRA, subject to the 
present law rules that apply to conversions from a traditional 
IRA into a Roth IRA.\1477\ Thus, a rollover from an eligible 
employer plan into a Roth IRA is includible in gross income 
(except to the extent it represents a return of after-tax 
contributions), and the 10-percent early distribution tax does 
not apply.\1478\ In the case of a distribution and rollover of 
property, the amount of the distribution for purposes of 
determining the amount includable in gross income is generally 
the fair market value of the property on the date of the 
distribution.\1479\ The special rules relating to net 
unrealized appreciation and certain optional methods for 
calculating tax available to participants born on or before 
January 1, 1936 are not applicable.\1480\ A special recapture 
rule relating to the 10-percent additional tax on early 
distributions applies for distributions made from a Roth IRA 
within a specified five-year period after a rollover.\1481\
---------------------------------------------------------------------------
    \1477\ For taxable years beginning before January 1, 2010, a 
rollover from an eligible employer plan not made from a designated Roth 
account is available only to a taxpayer whose modified adjusted gross 
income for the year of the distribution does not exceed $100,000 (and 
who, if married, files jointly).
    \1478\ Prior to enactment of section 824 of the Pension Protection 
Act of 2006, P.L. No. 109-280, an eligible rollover distribution from 
an eligible employer plan not made from a designated Roth account could 
be rolled over to a non-Roth IRA and then converted to a Roth IRA, but 
could not be rolled over to a Roth IRA without an intervening rollover 
to a non-Roth IRA followed by a conversion to a Roth IRA. See Notice 
2008-30, 2008-12 I.R.B. 638.
    \1479\ Treas. Reg. sec. 1.402(a)-1(a)(iii).
    \1480\ Notice 2009-75, 2009-39 I.R.B. 436.
    \1481\ Sec. 408A(d)(3)(F), Treas. Reg. sec. 1.408A-6 A-5, and 
Notice 2008-30, Q&A-3.
---------------------------------------------------------------------------

Special rule for 2010 conversions or rollovers

    In the case of a rollover from a tax-qualified retirement 
plan (other than a designated Roth account) into a Roth IRA, 
unless the taxpayer elects to include the distribution in 
income in 2010, any amount otherwise required to be included in 
gross income for the 2010 taxable year is not included in that 
taxable year but is instead included in gross income in equal 
amounts for the 2011 and 2012 taxable years. The same rule 
applies to a conversion of a traditional IRA into a Roth IRA in 
2010. However, in both cases, the special recapture rule 
relating to the 10-percent additional tax on early 
distributions applies for distributions made from a Roth IRA 
within a specified five-year period after a rollover.

                        Explanation of Provision

    Under the provision, if a section 401(k) plan, section 
403(b) plan, or governmental section 457(b) plan \1482\ has a 
qualified designated Roth contribution program, a distribution 
to an employee (or a surviving spouse) from an account under 
the plan that is not a designated Roth account is permitted to 
be rolled over into a designated Roth account under the plan 
for the individual. However, a plan that does not otherwise 
have a designated Roth program is not permitted to establish 
designated Roth accounts solely to accept these rollover 
contributions. Thus, for example, a qualified employer plan 
that does not include a qualified cash or deferred arrangement 
with a designated Roth program cannot allow rollover 
contributions from accounts that are not designated Roth 
accounts to designated Roth accounts established solely for 
purposes of accepting these rollover contributions. Further, 
the distribution to be rolled over must be otherwise allowed 
under the plan. For example, an amount under a section 401(k) 
plan subject to distribution restrictions cannot be rolled over 
to a designated Roth account under this provision. However, if 
an employer decides to expand its distribution options beyond 
those currently allowed under its plan, such as by adding in-
service distributions or distributions prior to normal 
retirement age, in order to allow employees to make the 
rollover contributions permitted under this provision, the plan 
may condition eligibility for such a new distribution option on 
an employee's election to have the distribution directly rolled 
over to the designated Roth program within that plan.
---------------------------------------------------------------------------
    \1482\ The bill includes a provision which adds governmental 
section 457(b) plans to the plans that are permitted to include a 
designated Roth program. See explanation of section 211 of the bill.
---------------------------------------------------------------------------
    In the case of a permitted rollover contribution to a 
designated Roth account under this provision, the individual 
must include the distribution in gross income (subject to basis 
recovery) in the same manner as if the distribution were rolled 
over into a Roth IRA. Thus the special rule for distributions 
from eligible retirement plans (other than from designated Roth 
accounts) that are contributed to a Roth IRA in 2010 applies 
for these rollover contributions to a designated Roth account. 
Under this special rule, the taxpayer is allowed to include the 
amount in income in equal parts in 2011 and 2012. The special 
recapture rule for the 10-percent early distribution tax also 
applies if distributions are made from the designated Roth 
account in the relevant five year period.
    This rollover contribution may be accomplished at the 
election of the employee (or surviving spouse) through a direct 
rollover (operationally through a transfer of assets from the 
account that is not a designated Roth account to the designated 
Roth account). However, such a direct rollover is only 
permitted if the employee (or surviving spouse) is eligible for 
a distribution in that amount and in that form (if property is 
transferred) and the distribution is an eligible rollover 
distribution. If the direct rollover is accomplished by a 
transfer of property to the designated Roth account (rather 
than cash), the amount of the distribution is the fair market 
value of the property on the date of the transfer.
    A plan that includes a designated Roth program is permitted 
but not required to allow employees (and surviving spouses) to 
make the rollover contribution described in this provision to a 
designated Roth account. If a plan allows these rollover 
contributions to a designated Roth account, the plan must be 
amended to reflect this plan feature. It is intended that the 
IRS will provide employers with a remedial amendment period 
that allows the employers to offer this option to employees 
(and surviving spouses) for distributions during 2010 and then 
have sufficient time to amend the plan to reflect this 
feature.\1483\
---------------------------------------------------------------------------
    \1483\ See section 401(b), Treas. Reg. sec 1.401(b)-1, and Rev. 
Proc. 2007-44, 2007-2 CB 54, regarding remedial amendment periods for 
plan amendments.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for distributions made after the 
date of enactment.

3. Permit partial annuitization of a nonqualified annuity contract 
        (sec. 2113 of the Act and sec. 72 of the Code)

                              Present Law


Treatment of annuity contracts

    In general, earnings and gains on a deferred annuity 
contract are not subject to tax during the deferral period in 
the hands of the holder of the contract.\1484\ When payout 
commences under a deferred annuity contract, the tax treatment 
of amounts distributed depends on whether the amount is 
received as an annuity (generally, as periodic payments under 
contract terms) or not.\1485\
---------------------------------------------------------------------------
    \1484\ If an annuity contract is held by a corporation or by any 
other person that is not a natural person, the income on the contract 
is treated as ordinary income accrued by the contract owner and is 
subject to current taxation. The contract is not treated as an annuity 
contract. Sec. 72(u).
    \1485\ Sec. 72.
---------------------------------------------------------------------------
    For amounts received as an annuity by an individual, an 
exclusion ratio is provided for determining the taxable portion 
of each payment.\1486\ The portion of each payment that is 
attributable to recovery of the taxpayer's investment in the 
contract is not taxed. The taxable portion of each payment is 
ordinary income. The exclusion ratio is the ratio of the 
taxpayer's investment in the contract to the expected return 
under the contract, that is, the total of the payments expected 
to be received under the contract. The ratio is determined as 
of the taxpayer's annuity starting date. Once the taxpayer has 
recovered his or her investment in the contract, all further 
payments are included in income. If the taxpayer dies before 
the full investment in the contract is recovered, a deduction 
is allowed on the final return for the remaining investment in 
the contract. Section 72 uses the term ``investment in the 
contract'' in lieu of the more generally applicable term 
``basis.''
---------------------------------------------------------------------------
    \1486\ Sec. 72(b).
---------------------------------------------------------------------------
    Amounts not received as an annuity generally are included 
as ordinary income if received on or after the annuity starting 
date, and are included in income to the extent allocable to 
income on the contract if received before the annuity starting 
date (i.e., as income first).\1487\
---------------------------------------------------------------------------
    \1487\ Sec. 72(e). By contrast to distributions under an annuity 
contract, distributions from a life insurance contract (other than a 
modified endowment contract) that are made prior to the death of the 
insured generally are includible in income, to the extent that the 
amounts distributed exceed the taxpayer's basis in the contract; such 
distributions generally are treated first as a tax-free recovery of 
basis, and then as income (sec. 72(e)). In the case of a modified 
endowment contract, however, in general, distributions are treated as 
income first, loans are treated as distributions (i.e., income rather 
than basis recovery first), and an additional 10 percent tax is imposed 
on the income portion of distributions made before age 59\1/2\ and in 
certain other circumstances (secs. 72(e) and (v)). A modified endowment 
contract is a life insurance contract that does not meet a statutory 
``7-pay'' test, i.e., generally is funded more rapidly than seven 
annual level premiums. Sec. 7702A.
---------------------------------------------------------------------------
    Specific rules for recovering the investment in the 
contract for amounts received as an annuity are provided for 
plans qualified under section 401(a), plans described in 
section 403(a), and section 403(b) tax-deferred 
annuities.\1488\ In addition, specific rules apply to amounts 
not received as an annuity under these plans and individual 
retirement plans.\1489\
---------------------------------------------------------------------------
    \1488\ Sec. 72(d).
    \1489\ Sec. 72(e)(8).
---------------------------------------------------------------------------

Tax-free exchanges of annuity contracts

    Present law provides for the exchange of certain insurance 
contracts without recognition of gain or loss.\1490\ No gain or 
loss is recognized on the exchange of: (1) a life insurance 
contract for another life insurance contract or for an 
endowment or annuity contract or for a qualified long-term care 
insurance contract; or (2) an endowment contract for another 
endowment contract (that provides for regular payments 
beginning no later than under the exchanged contract) or for an 
annuity contract or for a qualified long-term care insurance 
contract; (3) an annuity contract for an annuity contract or 
for a qualified long-term care insurance contract; or (4) a 
qualified long-term care insurance contract for a qualified 
long-term care insurance contract. The basis of the contract 
received in the exchange generally is the same as the basis of 
the contract exchanged.\1491\
---------------------------------------------------------------------------
    \1490\ Sec. 1035.
    \1491\ Sec. 1031(d).
---------------------------------------------------------------------------
    In interpreting section 1035, case law holds that an 
exchange of a portion of an annuity contract for another 
annuity contract qualifies as a tax-free exchange.\1492\ 
Treasury guidance provides rules for determining whether a 
direct transfer of a portion of the cash surrender value of an 
annuity contract for a second annuity contract qualifies as a 
section 1035 tax-free exchange. Under the Treasury guidance, 
either the annuity contract received, or the contract partially 
exchanged, in the tax-free exchange may be annuitized without 
jeopardizing the tax-free exchange (or amounts withdrawn from 
it or received in surrender of it) after the period ending 12 
months from the receipt of the premium in the exchange.\1493\
---------------------------------------------------------------------------
    \1492\ Conway v. Comm'r, 111 T.C. 350 (1998), acq., 1999-2 C.B. 
xvi.
    \1493\ Rev. Proc. 2008-24, 2008-13 I.R.B. 684. The Rev. Proc. 
further provides that a transfer does not, however, qualify as a tax-
free exchange if the payment is a distribution that is part of a series 
of substantially equal periodic payments, or if the payment is a 
distribution under an immediate annuity. The Treasury guidance further 
provides that if a direct transfer of a portion of an annuity contract 
for a second annuity contract does not qualify as a tax-free exchange 
under section 1035, it is treated as a taxable distribution followed by 
a payment for the second contract. The 2011 Priority Guidance Plan for 
the Treasury Department and IRS anticipates further guidance on this 
issue.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision permits a portion of an annuity, endowment, 
or life insurance contract to be annuitized while the balance 
is not annuitized, provided that the annuitization period is 
for 10 years or more, or is for the lives of one or more 
individuals.
    The provision provides that if any amount is received as an 
annuity for a period of 10 years or more, or for the lives of 
one or more individuals, under any portion of an annuity, 
endowment, or life insurance contract, then that portion of the 
contract is treated as a separate contract for purposes of 
section 72.
    The investment in the contract is allocated on a pro rata 
basis between each portion of the contract from which amounts 
are received as an annuity and the portion of the contract from 
which amounts are not received as an annuity. This allocation 
is made for purposes of applying the rules relating to the 
exclusion ratio, the determination of the investment in the 
contract, the expected return, the annuity starting date, and 
amounts not received as an annuity.\1494\ A separate annuity 
starting date is determined with respect to each portion of the 
contract from which amounts are received as an annuity.
---------------------------------------------------------------------------
    \1494\ Secs. 72(b), (c), and (e).
---------------------------------------------------------------------------
    The provision is not intended to change the present-law 
rules with respect either to amounts received as an annuity, or 
to amounts not received as an annuity, in the case of plans 
qualified under section 401(a), plans described in section 
403(a), section 403(b) tax-deferred annuities, or individual 
retirement plans.

                             Effective Date

    The provision is effective for amounts received in taxable 
years beginning after December 31, 2010.

                    C. Closing Unintended Loopholes


1. Make crude tall oil ineligible for the cellulosic biofuel producer 
        credit (sec. 2121 of the Act and sec. 40 of the Code)

                              Present Law

    The ``cellulosic biofuel producer credit'' is a 
nonrefundable income tax credit for each gallon of qualified 
cellulosic biofuel production of the producer for the taxable 
year. The amount of the credit is generally $1.01 per 
gallon.\1495\
---------------------------------------------------------------------------
    \1495\ In the case of cellulosic biofuel that is alcohol, the $1.01 
credit amount is reduced by the credit amount of the alcohol mixture 
credit, and for ethanol, the credit amount for small ethanol producers, 
as in effect at the time the cellulosic biofuel fuel is produced.
---------------------------------------------------------------------------
    ``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 cellulosic 
biofuel 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 
cellulosic biofuel at retail to another person and places such 
cellulosic biofuel in the fuel tank of such other person; or 
(2) used by the producer for any purpose described in (1)(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, (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 (``EPA'') under section 211 of the Clean Air 
Act. The cellulosic biofuel producer credit cannot be claimed 
unless the taxpayer is registered by the IRS as a producer of 
cellulosic biofuel.
    Cellulosic biofuel does not include certain unprocessed 
fuel. Unprocessed fuels are fuels which (1) are more than four 
percent (determined by weight) water and sediment in any 
combination, or (2) have an ash content of more than one 
percent (determined by weight).\1496\ Cellulosic biofuel 
eligible for the section 40 credit is precluded from qualifying 
as biodiesel, renewable diesel, or alternative fuel for 
purposes of the applicable income tax credit, excise tax 
credit, or payment provisions relating to those fuels.\1497\
---------------------------------------------------------------------------
    \1496\ Water content (including both free water and water in 
solution with dissolved solids) is determined by distillation, using 
for example ASTM method D95 or a similar method suitable to the 
specific fuel being tested. Sediment consists of solid particles that 
are dispersed in the liquid fuel and is determined by centrifuge or 
extraction using, for example, ASTM method D1796 or D473 or similar 
method that reports sediment content in weight percent. Ash is the 
residue remaining after combustion of the sample using a specified 
method, such as ASTM D3174 or a similar method suitable for the fuel 
being tested.
    \1497\ See sections 40A(d)(1), 40A(f)(3), and 6426(h).
---------------------------------------------------------------------------
    Because it is a credit under section 40(a), the cellulosic 
biofuel producer credit is part of the general business credits 
in section 38. However, unlike other general business credits, 
the cellulosic biofuel producer credit can only be carried 
forward three taxable years after the termination of the 
credit. The credit is also allowable against the alternative 
minimum tax. Under section 87, the credit is included in gross 
income. The cellulosic biofuel producer credit terminates on 
December 31, 2012.
    The kraft process for making paper produces a byproduct 
called black liquor, which has been used for decades by paper 
manufacturers as a fuel in the papermaking process. Black 
liquor is composed of water, lignin and the spent chemicals 
used to break down the wood. The amount of the biomass in black 
liquor varies. The portion of the black liquor that is not 
consumed as a fuel source for the paper mills is recycled back 
into the papermaking process. Black liquor has ash content 
(mineral and other inorganic matter) significantly above that 
of other fuels.
    Crude tall oil is generated by reacting acid with black 
liquor soap. Crude tall oil is used in various applications, 
such as adhesives, resins and inks. It also can be burned and 
used as a fuel.

                        Explanation of Provision

    The provision modifies the cellulosic biofuel producer 
credit to exclude from the definition of cellulosic biofuel 
fuels with an acid number of greater than 25. The acid number 
is the amount of base required to neutralize the acid in the 
sample. The acid number is reported as weight of the base 
(typically potassium hydroxide) per weight of sample, or 
milligram (``mg'') potassium hydroxide per gram. The normal 
acid number for crude tall oil is between 100 and 175. As a 
comparison, ASTM D6751 for biodiesel specifies that the acid 
number be less than 0.5 mg potassium hydroxide. ASTM D4806 for 
ethanol does not have acid value but instead limits ``acidity'' 
to 0.007 mg of acetic acid per liter, which is significantly 
below an acid number of 25.

                             Effective Date

    The provision is effective for fuels sold or used on or 
after January 1, 2010.

2. Source rules for income on guarantees (sec. 2122 of the Act and 
        secs. 861, 862, and 864 of the Code)

                              Present Law

    The United States taxes U.S. citizens and residents 
(including domestic corporations) on their worldwide income, 
whether derived in the United States or abroad. The United 
States generally taxes nonresident alien individuals and 
foreign corporations engaged in a trade or business in the 
United States on income that is effectively connected with the 
conduct of such trade or business (sometimes referred to as 
``effectively connected income''). The United States also taxes 
nonresident alien individuals and foreign corporations on 
certain U.S.-source income that is not effectively connected 
with the conduct of a U.S. trade or business.
    Income of a nonresident alien individual or foreign 
corporation that is effectively connected with the conduct of a 
trade or business in the United States generally is subject to 
U.S. tax in the same manner and at the same rates as income of 
a U.S. person. Deductions are allowed to the extent that they 
are connected with effectively connected income.\1498\ A 
foreign corporation also is subject to a flat 30-percent branch 
profits tax on its ``dividend equivalent amount,'' which is a 
measure of the effectively connected earnings and profits of 
the corporation that are removed in any year from the conduct 
of its U.S. trade or business.\1499\ In addition, a foreign 
corporation is subject to a flat 30-percent branch-level excess 
interest tax on the excess of the amount of interest that is 
deducted by the foreign corporation in computing its 
effectively connected income over the amount of interest that 
is paid by its U.S. trade or business.\1500\
---------------------------------------------------------------------------
    \1498\ Secs. 864(c), 871(b), 873, 882(a) and 882(c).
    \1499\ Sec. 884.
    \1500\ Sec. 884(f).
---------------------------------------------------------------------------
    Subject to a number of exceptions, U.S.-source fixed or 
determinable, annual or periodical income (``FDAP'') of a 
nonresident alien individual or foreign corporation that is not 
effectively connected with the conduct of a U.S. trade or 
business is subject to U.S. tax at a rate of 30 percent of the 
gross amount paid.\1501\ Items of income within the scope of 
FDAP include, for example, interest, dividends, rents, 
royalties, salaries, and annuities. The tax generally is 
collected by means of withholding.\1502\
---------------------------------------------------------------------------
    \1501\ Secs. 871(a), 881(a).
    \1502\ Secs. 1441 and 1442 provide for collection from nonresident 
aliens and foreign corporations, respectively.
---------------------------------------------------------------------------
    Present law provides detailed rules for the determination 
of whether income is from U.S. sources or foreign sources. For 
example, the source of compensation for services is generally 
determined by the location in which the services were 
performed, regardless of the country of residence of the 
payor.\1503\ In contrast, the source of interest income is 
generally determined by reference to the country of residence 
of the obligor.\1504\ As a result, interest paid by a U.S. 
obligor typically is considered U.S.-source income, while 
interest paid by a foreign obligor is treated as foreign-source 
income. Rents and royalties paid for the use of property 
located in the United States are considered to be U.S.-source 
income.\1505\
---------------------------------------------------------------------------
    \1503\ Under section 861(a)(3), compensation for personal services 
performed in the United States is U.S. source, unless the individual 
performing the services is a nonresident alien who is temporarily 
present in the United States, receives no more than $3,000 of 
compensation and is performing the services for a foreign person not 
engaged in a U.S. trade or business. Conversely, section 862(a)(3) 
provides that compensation for labor or services performed outside the 
United States is foreign source.
    \1504\ Secs. 861(a)(1), 862(a)(1).
    \1505\ Sec. 861(a)(4).
---------------------------------------------------------------------------
    To the extent that the source of income is not specified in 
the statute, the Secretary may promulgate regulations that 
explain the appropriate treatment. Many items of income are not 
explicitly addressed by either the statute or the regulations. 
On several occasions, courts have determined the source of such 
items by applying the rule for the type of income to which the 
disputed income is most closely analogous, based on all facts 
and circumstances.\1506\ Items as dissimilar as alimony and 
letters of credit commissions were sourced by analogy to 
interest.\1507\ The U.S. Tax Court, in Container Corp. v. 
Commissioner, recently rejected IRS arguments that fees paid by 
a domestic corporation to its foreign parent with respect to 
guarantees issued by the parent for the debts of the domestic 
corporation were analogous to interest. The Tax Court held that 
the payments were more closely analogous to compensation for 
services, and determined that the source of the fees should be 
determined by reference to the residence of the foreign parent-
guarantor. As a result, the income was treated as income from 
foreign sources.\1508\
---------------------------------------------------------------------------
    \1506\ Hunt v. Commissioner, 90 T.C. 1289 (1988).
    \1507\ Manning v. Commissioner, 614 F.2d 815 (1st Cir. 1980); Bank 
of America v. United States, 230 Ct. Cl. 679, 680 F.2d 142 (1982), 
aff'g in part, rev'g in part, 47 AFTR 2d 81-652 (Ct. Cl. 1981).
    \1508\ Container Corp. v. Commissioner, 134 T.C. No. 5 (February 
17, 2010), gov't notice of appeal filed (5th Cir. June 1, 2010).
---------------------------------------------------------------------------

                        Explanation of Provision

    This provision effects a legislative override of the 
opinion in Container Corp. v. Commissioner, supra, by amending 
the source rules of section 861 and 862 to address income from 
guarantees issued after the date of enactment. Under new 
section 861(a)(9), income from sources within the United States 
includes amounts received, whether directly or indirectly, from 
a noncorporate resident or a domestic corporation for the 
provision of a guarantee of indebtedness of such person. The 
scope of the provision includes payments that are made 
indirectly for the provision of a guarantee. For example, the 
provision would treat as income from U.S. sources a guarantee 
fee paid by a foreign bank to a foreign corporation for the 
foreign corporation's guarantee of indebtedness owed to the 
bank by the foreign corporation's domestic subsidiary, where 
the cost of the guarantee fee is passed on to the domestic 
subsidiary through, for example, additional interest charged on 
the indebtedness.
    Such U.S.-source income also includes amounts received from 
a foreign person, whether directly or indirectly, for the 
provision of a guarantee of indebtedness of that foreign person 
if the payments received are connected with income of such 
person which is effectively connected with conduct of a U.S. 
trade or business. A conforming amendment to section 862 
provides that amounts received from a foreign person, whether 
directly or indirectly, for the provision of a guarantee of 
that person's debt, are treated as foreign source income if 
they are not from sources within the United States as 
determined under new section 861(a)(9).
    For purposes of this provision, the phrase ``noncorporate 
residents'' has the same meaning as for purposes of section 
861(a)(1), except that foreign partnerships are not included. 
Payments received from a foreign partnership for the provision 
of a guarantee of indebtedness of that foreign partnership are 
U.S. source if the amounts received are connected with income 
which is effectively connected with the conduct of a U.S. trade 
or business. A conforming amendment to section 864 provides 
that amounts received, whether directly or indirectly, for the 
provision of a guarantee are deemed to be effectively connected 
with the conduct of a U.S. trade or business if derived in the 
active conduct of a banking, financing or similar business.
    Although this provision overturns the opinion in Container 
Corp. v. Commissioner, supra, no inference is intended with 
respect to the source of income received for the provision of a 
guarantee issued before the date of enactment. The Secretary 
may provide rules for determining the source of other types of 
payments that are not within the scope of this provision.

                             Effective Date

    The provision applies to guarantees issued after the date 
of enactment. No inference is intended with respect to the 
source of income received with respect to guarantees issued 
before the date of enactment.

D. Time for Payment of Corporate Estimated Taxes (sec. 2131 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.\1509\ 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. In the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding taxable year):

    \1509\ Sec. 6655.
---------------------------------------------------------------------------
          (iv) payments due in July, August, or September, 
        2014, are increased to 174.25 percent of the payment 
        otherwise due; \1510\
---------------------------------------------------------------------------
    \1510\ Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, 
sec. 12(a); Health Care and Education Reconciliation Act of 2010, Pub 
L. No. 111-152, sec. 1410; Hiring Incentives to Restore Employment Act, 
Pub. L. No. 111-147, sec.561(1); Act to extend the Generalized System 
of Preferences and the Andean Trade Preference Act, and for other 
purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and 
Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint 
resolution approving the renewal of import restrictions contained in 
the Burmese Freedom and Democracy Act of 2003, and for other purposes, 
Pub. L. No. 111-42, sec. 202(b)(1).
---------------------------------------------------------------------------
          (ii) payments due in July, August or September, 2015, 
        are increased to 123.25 percent of the payment 
        otherwise due; \1511\ and
---------------------------------------------------------------------------
    \1511\ Firearms Excise Tax Improvement Act of 2010, Pub. L. No. 
111-237, sec. 4(a); United States Manufacturing Enhancement Act of 
2010, Pub. L. No. 111-227, sec. 4002; Joint resolution approving the 
renewal of import restrictions contained in the Burmese Freedom and 
Democracy Act of 2003, and for other purposes, Pub. L. No. 111-210; 
sec. 3; Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 
12(b); Hiring Incentives to Restore Employment Act, Pub. L. No. 111-
147, sec. 561(2).
---------------------------------------------------------------------------
          (v) payments due in July, August or September, 2019, 
        are increased to 106.50 percent of the payment 
        otherwise due.\1512\
---------------------------------------------------------------------------
    \1512\ Hiring Incentives to Restore Employment Act, Pub. L. No. 
111-147, sec. 561(3).

For each of the periods impacted, the next required payment is 
reduced accordingly.

                     Explanation of Provision\1513\

---------------------------------------------------------------------------
    \1513\ All the public laws enacted in the 111th Congress affecting 
this provision are described in Part Twenty-One of this document.
---------------------------------------------------------------------------
    The provision increases the required payment of estimated 
tax otherwise due in July, August, or September, 2015, by 36.00 
percentage points.

                             Effective Date

    The provision is effective on the date of enactment 
(September 26, 2010).

    PART FIFTEEN: THE CLAIMS RESOLUTION ACT OF 2010 (PUBLIC LAW 111-
                               291)\1514\
---------------------------------------------------------------------------

    \1514\ H.R. 4783. The bill passed the House on March 10, 2010. The 
Senate passed the bill with amendments on November 19, 2010. The House 
agreed to the Senate amendments on November 30, 2010. The President 
signed the bill on December 8, 2010.
---------------------------------------------------------------------------

A. The Individual Indian Money Account Litigation (sec. 101 of the Act)

                              Present Law

    Under section 61 of the Code, gross income includes all 
income from whatever source derived. The Code includes a number 
of exceptions from this rule, including exceptions for amounts 
of any damages received on account of personal physical 
injuries under section 104(a)(2). There is no specific 
exclusion from gross income for amounts received by individual 
Indians pursuant to the proposed settlement reached on December 
7, 2009 between Elouise Cobell, et al. and the Secretary of 
Interior, et al. (the ``Settlement'').
    In general, individual Indians, regardless of tribal 
affiliation, are subject to Federal income taxes and section 61 
of the Code, even if the income is distributed to individual 
Indians out of income otherwise immune from taxation when first 
received by the tribe.\1515\ However, certain types of income 
earned by individual Indians are not subject to Federal tax 
such as income derived from certain fishing activities.\1516\ 
As another example, income derived directly from individually 
allotted land held in trust by the Federal government for the 
benefit of an individual Indian is excluded.\1517\ Income is 
derived directly from trust land if it is generated principally 
from the use of allotted land and resources rather than from 
capital improvements upon the land, and includes income from 
logging, mining, farming, or ranching activities.\1518\
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    \1515\ Squire v. Capoeman, 351 U.S. 1, 6 (1956). Per capita 
payments of net revenues from gaming activities conducted or licensed 
by any Indian tribe are specifically made subject to Federal taxes by 
the Indian Gaming Regulatory Act, 25 U.S.C. sec. 2710(b)(3)(D), Pub. L. 
No. 100-497 (Oct. 17, 1988).
    \1516\ Sec. 7873 (exemption of income from treaty fishing rights).
    \1517\ Section 5 of the General Allotment Act of 1887, as amended, 
provided for tribal lands to be allotted to individual Indians in trust 
for a period of years, after which the lands were to be conveyed to the 
allottees in fee ``free of all charge or incumbrance whatsoever.'' 25 
U.S.C. sec. 348. This provision has been interpreted to prevent 
taxation of income or capital gains ``derived directly'' from allotted 
land while it remains in trust. Squire v. Capoeman, 351 U.S. 1 (1956); 
Rev. Rul. 57-407, 1957-2 C.B. 45 (any gain from the sale or exchange of 
the land while it is still held in trust is not subject to tax); Rev. 
Rul. 67-284, 1967-2 C.B. 55 (lists several types of income that will be 
treated as ``derived directly'' from allotted land, including rentals 
(including crop rentals), royalties, and proceeds from the sale of 
natural resources from the land. A number of courts have held that the 
exclusion is only available for income derived from land allotted to 
the individual earning the income and is not available for income 
derived from land leased from the tribe or another individual to whom 
the land is allotted. See Kieffer v. Comm'r, T.C. 1998-202; Anderson v. 
United States, 845 F.2d 206 (9th Cir. 1988); Holt v. Comm'r, 364 F.2d 
38 (8th Cir. 1966); but see Campbell v. Comm'r, T.C. Memo 1997-502 at 
19. The exclusion does not extend to income derived from the 
reinvestment of income derived from allotted land. Capoeman, 351 U.S. 
at 9.
    \1518\ Capoeman applies to allotments issued pursuant to tribe-
specific allotment statues, regardless of whether the General Allotment 
Act applies to those allotments. See United States v. Hallam, 304 F.2d 
629 (10th Cir. 1962) (income from Quapaw allotments in form of rents, 
royalties, and proceeds from restricted allotted lands exempt); Stevens 
v. Commissioner, 452 F.2d 741 (9th Cir. 1971) (construing Ft. Belknap 
Allotment Act to find farming and ranching income exempt); Big Eagle v. 
United States, 300 F.2d 765 (Ct. Cl. 1962) (receiving royalties from 
tribal mineral deposits exempt by virtue of Osage Allotment Act); Rev. 
Rul. 74-13, 1974-1 C.B. 14 (exemption described as applying to 
restricted lands generally rather than specifically to General 
Allotment Act lands).
---------------------------------------------------------------------------
    A proposed Settlement has been reached in a class action 
lawsuit filed in 1996 against the Federal government for 
mismanagement of individual Indian trust accounts and trust 
assets. The lawsuit seeks a complete historical accounting as 
well as the correction of all individual Indian trust account 
balances due to this mismanagement. The Settlement is with the 
Secretary of the Interior, the Assistant Secretary of the 
Interior--Indian Affairs, and the Secretary of the Treasury. 
The individual Indian trust accounts relate to land, oil, 
natural gas, mineral, timber, grazing, water and other 
resources and rights on or under individual Indian lands.
    Under the terms of the Settlement, the government will 
create a $1.412 billion Accounting/Trust Administration Fund 
and a $2 billion Trust Land Consolidation Fund. The Settlement 
also creates a federal Indian Education Scholarship Fund of up 
to $60 million to improve access to higher education for Indian 
youth.

                        Explanation of Provision

    The provision approves the Settlement, including the 
appropriation and payment of Federal funds. As required under 
the Settlement, the provision confirms that the amounts 
received by an individual Indian as a lump sum or a periodic 
payment pursuant to the Settlement will not be included in 
gross income and will not be taken into consideration for 
purposes of applying any provision of the Code that takes into 
account excludible income in computing adjusted gross income or 
modified adjusted gross income. The provision also provides 
that for purposes of determining eligibility under any Federal 
assisted program, the amounts received will not be treated as 
income for the month during which the amounts were received or 
as a resource during the 1-year period beginning on the date of 
receipt.

                            Effective Date 

    The provision is effective upon date of enactment (December 
8, 2010).

B. Collection of Past-Due, Legally Enforceable State Debts (sec. 801 of 
                 the Act and sec. 6402(f) of the Code)


                              Present Law 

    Under present law, the IRS has the authority to credit 
Federal tax overpayments payable on or before September 30, 
2018 against any other Federal tax liability owed by the person 
who made the overpayment. The balance of the overpayment is 
generally refunded, unless a claim has been made for payment of 
certain non-tax debts of that person, including certain 
unemployment compensation debts.\1519\ Unemployment 
compensation debts subject to offset include those arising from 
uncollected contributions due to the State's Federal 
Unemployment Insurance Trust Fund that remain unpaid due to 
fraud and erroneous payments of unemployment compensation that 
were obtained by fraud on the part of the taxpayer who made the 
overpayment of tax, as well as the penalty and interest 
attributable to these 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.\1520\ In 
addition, a State may only seek an offset for unemployment 
compensation debts owed by residents of the requesting 
State.\1521\
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    \1519\ Sec. 6402(f) authorizes offsets of unemployment compensation 
debts against refunds payable for the ten year period beginning after 
September 30, 2008. Other non-Federal tax debts that may be claimed 
against overpayments of Federal tax liability include past-due support 
within the meaning of the Social Security Act, debts owed to Federal 
agencies and State income tax obligations. Sec. 6402(c)-(e).
    \1520\ Sec. 6402(f)(5)(A).
    \1521\ Sec. 6402(f)(3).
---------------------------------------------------------------------------
    Offsets for unemployment compensation and/or State income 
tax debts occur only after a taxpayer's overpayment has been 
reduced for any of the following debts, in the following order 
and before any amount is credited to estimated tax for a future 
Federal tax liability: (1) Federal tax debts, (2) past-due 
support within the meaning of the Social Security Act, and (3) 
debts owed to Federal agencies.\1522\ If more than one 
unemployment compensation or State income tax debt is owed by 
the same resident to his State, the debts are satisfied by the 
overpayment in the order in which the debts accrued, without 
regard to whether they arise from State income tax or 
unemployment compensation. The actions of the IRS in reducing 
the overpayment to satisfy the foregoing debts are not subject 
to judicial review.\1523\ In the event that a payment to a 
State is determined to have been made erroneously by the IRS in 
the exercise of its authority to offset for unemployment 
compensation debt, the State is required to promptly repay upon 
notice from the IRS.\1524\
---------------------------------------------------------------------------
    \1522\ Sec. 6402(f)(2).
    \1523\ Sec. 6402(g).
    \1524\ Sec. 6402(f)(7).
---------------------------------------------------------------------------
    Certain safeguards apply to the offset of unemployment 
compensation debt. 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 and provide at least 
60 days for the person to submit a response, with any 
supporting evidence, which the State will then consider.\1525\ 
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. If such a debt is claimed by the creditor 
agency to which the debt is owed, the IRS notifies 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.
---------------------------------------------------------------------------
    \1525\ Sec. 6402(f)(4).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision expands the ability of a State to collect 
benefit overpayments from a benefit recipient's Federal income 
tax overpayment in two ways. It removes the requirement that 
the excessive or erroneous payment of State benefits have been 
attributable to fraud. It also no longer requires that the 
State provide notice to the taxpayer by certified mail of the 
State's intent to submit a request for offset to the IRS.
    In addition, the authority for such offsets is now 
permanent. The provision does not change the present-law 
provision under which a State's ability to request offset of 
unemployment compensation debts against Federal income tax 
refunds is limited to requests with respect to residents of the 
requesting State.

                             Effective Date

    The provision is effective with respect to refunds under 
section 6402 payable on or after the date of enactment 
(December 8, 2010).

    PART SIXTEEN: REVENUE PROVISONS OF THE TAX RELIEF, UNEMPLOYMENT 
  INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010 (PUBLIC LAW 
                            111-312) \1526\
---------------------------------------------------------------------------

    \1526\ H.R. 4853. The Act originated as a bill relating to the 
Airport and Airway Trust Fund and passed the House on the suspension 
calendar on March 17, 2010. The Senate passed the bill with an 
amendment on September 23, 2010. The House agreed to the Senate 
amendment with an amendment substituting the text of the ``Middle Class 
Tax Relief Act of 2010'' on December 2, 2010. The Senate agreed to the 
House amendment to the Senate amendment with an amendment substituting 
the text of the ``Tax Relief, Unemployment Insurance Reauthorization, 
and Jobs Creation Act of 2010'' on December 15, 2010. The House agreed 
to the Senate amendment to the House amendment to the Senate amendment 
on December 16, 2010. The President signed the bill on December 17, 
2010. For a technical explanation of the Act prepared by the staff of 
the Joint Committee on Taxation, see Technical Explanation of the 
Revenue Provisions Contained in the ``Tax Relief, Unemployment 
Insurance Reauthorization, and Jobs Creation Act of 2010'' Scheduled 
for Consideration by the United States Senate (JCX 55-10), December 10, 
2010.
---------------------------------------------------------------------------

              TITLE I--TEMPORARY EXTENSION OF TAX RELIEF 

A. Marginal Individual Income Tax Rate Reductions (sec. 101 of the Act 
                        and sec. 1 of the Code) 

                              Present Law 

In general 
    The Economic Growth and Tax Relief Reconciliation Act of 
2001 \1527\ (``EGTRRA'') created a new 10-percent regular 
income tax bracket for a portion of taxable income that was 
previously taxed at 15 percent. EGTRRA also reduced the other 
regular income tax rates. The otherwise applicable regular 
income tax rates of 28 percent, 31 percent, 36 percent and 39.6 
percent were reduced to 25 percent, 28 percent, 33 percent, and 
35 percent, respectively. These provisions of EGTRRA shall 
cease to apply for taxable years beginning after December 31, 
2010.
---------------------------------------------------------------------------
    \1527\ Pub. L. No. 107-16.
---------------------------------------------------------------------------
Tax rate schedules 
    To determine regular tax liability, a taxpayer generally 
must apply the tax rate schedules (or the tax tables) to his or 
her regular taxable income. The rate schedules are broken into 
several ranges of income, known as income brackets, and the 
marginal tax rate increases as a taxpayer's income increases. 
Separate rate schedules apply based on an individual's filing 
status. For 2010, the regular individual income tax rate 
schedules are as follows:

          TABLE 1--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2010
------------------------------------------------------------------------
         If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
 
Not over $8,375........................  10% of the taxable income.
Over $8,375 but not over $34,000.......  $837.50 plus 15% of the excess
                                          over $8,375.
Over $34,000 but not over $82,400......  $4,681.25 plus 25% of the
                                          excess over $34,000.
Over $82,400 but not over $171,850.....  $16,781.25 plus 28% of the
                                          excess over $82,400.
Over $171,850 but not over $373,650....  $41,827.25 plus 33% of the
                                          excess over $171,850.
Over $373,650..........................  $108,421.25 plus 35% of the
                                          excess over $373,650.
 
                           Heads of Households
 
Not over $11,950.......................  10% of the taxable income.
Over $11,950 but not over $45,550......  $1,195 plus 15% of the excess
                                          over $11,950.
Over $45,550 but not over $117,650.....  $6,235 plus 25% of the excess
                                          over $45,550.
Over $117,650 but not over $190,550....  $24,260 plus 28% of the excess
                                          over $117,650.
Over $190,550 but not over $373,650....  $44,672 plus 33% of the excess
                                          over $190,550.
Over $373,650..........................  $105,095 plus 35% of the excess
                                          over $373,650.
 
     Married Individuals Filing Joint Returns and Surviving Spouses
 
Not over $16,750.......................  10% of the taxable income.
Over $16,750 but not over $68,000......  $1,675 plus 15% of the excess
                                          over $16,750.
Over $68,000 but not over $137,300.....  $9,362.50 plus 25% of the
                                          excess over $68,000.
Over $137,300 but not over $209,250....  $26,687.50 plus 28% of the
                                          excess over $137,300.
Over $209,250 but not over $373,650....  $46,833.50 plus 33% of the
                                          excess over $209,250.
Over $373,650..........................  $101,085.50 plus 35% of the
                                          excess over $373,650.
 
               Married Individuals Filing Separate Returns
 
Not over $8,375........................  10% of the taxable income.
Over $8,375 but not over $34,000.......  $837.50 plus 15% of the excess
                                          over $8,375.
Over $34,000 but not over $68,650......  $4,681.25 plus 25% of the
                                          excess over $34,000.
Over $68,650 but not over $104,625.....  $13,343.75 plus 28% of the
                                          excess over $68,650.
Over $104,625 but not over $186,825....  $23,416.75 plus 33% of the
                                          excess over $104,625.
Over $186,825..........................  $50,542.75 plus 35% of the
                                          excess over $186,825.
------------------------------------------------------------------------

                       Explanation of Provision 

    The provision extends the 10-percent, 15-percent, 25-
percent, 28-percent, 33-percent and 35-percent individual 
income tax rates for two years (through 2012).
    The rate structure is indexed for inflation.
    A comparison of Table 2, below, with Table 1, above, 
illustrates the tax rate changes. Note that Table 2 also 
incorporates the provision to retain the marriage penalty 
relief with respect to the size of the 15 percent rate bracket, 
as discussed below.

         TABLE 2.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2011
------------------------------------------------------------------------
         If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
 
Not over $8,500........................  10% of the taxable income.
Over $8,500 but not over $34,500.......  $850 plus 15% of the excess
                                          over $8,500.
Over $34,500 but not over $83,600......  $4,750 plus 25% of the excess
                                          over $34,500.
Over $83,600 but not over $174,400.....  $17,025 plus 28% of the excess
                                          over $83,600.
Over $174,400 but not over $379,150....  $42,449 plus 33% of the excess
                                          over $174,400.
Over $379,150..........................  $110,016.50 plus 35% of the
                                          excess over $379,150.
 
                           Heads of Households
 
Not over $12,150.......................  10% of the taxable income.
Over $12,150 but not over $46,250......  $1,215 plus 15% of the excess
                                          over $12,150.
Over $46,250 but not over $119,400.....  $6,330 plus 25% of the excess
                                          over $46,250.
Over $119,400 but not over $193,350....  $24,617.50 plus 28% of the
                                          excess over $119,400.
Over $193,350 but not over $379,150....  $45,323.50 plus 33% of the
                                          excess over $193,350.
Over $379,150..........................  $106,637.50 plus 35% of the
                                          excess over $379,150.
 
     Married Individuals Filing Joint Returns and Surviving Spouses
 
Not over $17,000.......................  10% of the taxable income.
Over $17,000 but not over $69,000......  $1,700 plus 15% of the excess
                                          over $17,000.
Over $69,000 but not over $139,350.....  $9,500 plus 25% of the excess
                                          over $69,000.
Over $139,350 but not over $212,300....  $27,087.50 plus 28% of the
                                          excess over $139,350.
Over $212,300 but not over $379,150....  $47,513.50 plus 33% of the
                                          excess over $212,300.
Over $379,150..........................  $102,574 plus 35% of the excess
                                          over $379,150.
 
               Married Individuals Filing Separate Returns
 
Not over $8,500........................  10% of the taxable income.
Over $8,500 but not over $34,500.......  $850 plus 15% of the excess
                                          over $8,500.
Over $34,500 but not over $69,675......  $4,750 plus 25% of the excess
                                          over $34,500.
Over $69,675 but not over $106,150.....  $13,543.75 plus 28% of the
                                          excess over $69,675.
Over $106,150 but not over $189,575....  $23,756.75 plus 33% of the
                                          excess over $106,150.
Over $189,575..........................  $51,287 plus 35% of the excess
                                          over $189,575.
------------------------------------------------------------------------

                            Effective Date 

    The provision applies to taxable years beginning after 
December 31, 2010.

   B. The Overall Limitation on Itemized Deductions and the Personal 
 Exemption Phase-Out (sec. 101 of the Act and secs. 68 and 151 of the 
                                 Code)


                              Present Law 


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

    Unless an individual elects to claim the standard deduction 
for a taxable year, the taxpayer is allowed to deduct his or 
her itemized deductions. Itemized deductions generally are 
those deductions which are not allowed in computing adjusted 
gross income (``AGI''). Itemized deductions include 
unreimbursed medical expenses, investment interest, casualty 
and theft losses, wagering losses, charitable contributions, 
qualified residence interest, State and local income and 
property taxes, unreimbursed employee business expenses, and 
certain other miscellaneous expenses.
    Prior to 2010, the total amount of otherwise allowable 
itemized deductions (other than medical expenses, investment 
interest, and casualty, theft, or wagering losses) was limited 
for upper-income taxpayers. In computing this reduction of 
total itemized deductions, all limitations applicable to such 
deductions (such as the separate floors) were first applied 
and, then, the otherwise allowable total amount of itemized 
deductions was reduced by three percent of the amount by which 
the taxpayer's AGI exceeded a threshold amount which was 
indexed annually for inflation. The otherwise allowable 
itemized deductions could not be reduced by more than 80 
percent.
    EGTRRA repealed this overall limitation on itemized 
deductions with the repeal phased-in over five years. EGTRRA 
provided: (1) a one-third reduction of the otherwise applicable 
limitation in 2006 and 2007; (2) a two-thirds reduction in 
2008, and 2009; and (3) no overall limitation on itemized 
deductions in 2010. Thus in 2009, for example, the total amount 
of otherwise allowable itemized deductions (other than medical 
expenses, investment interest, and casualty, theft, or wagering 
losses) was reduced by three percent of the amount of the 
taxpayer's AGI in excess of $166,800 ($83,400 for married 
couples filing separate returns). Then the overall reduction in 
itemized deductions was phased-down to 1/3 of the full 
reduction amount (that is, the limitation was reduced by two-
thirds).
    Pursuant to the general EGTRRA sunset, the phased-in repeal 
of the Pease limitation sunsets and the limitation becomes 
fully effective again in 2011. Adjusting for inflation, the AGI 
threshold is $169,550 for 2011.

Personal exemption phase-out for certain taxpayers (``PEP'') 

    Personal exemptions generally are allowed for the taxpayer, 
his or her spouse, and any dependents. For 2010, the amount 
deductible for each personal exemption is $3,650. This amount 
is indexed annually for inflation.
    Prior to 2010, the deduction for personal exemptions was 
reduced or eliminated for taxpayers with incomes over certain 
thresholds, which were indexed annually for inflation. 
Specifically, the total amount of exemptions that could be 
claimed by a taxpayer was reduced by two percent for each 
$2,500 (or portion thereof) by which the taxpayer's AGI 
exceeded the applicable threshold. (The phase-out rate was two 
percent for each $1,250 for married taxpayers filing separate 
returns.) Thus, the deduction for personal exemptions was 
phased out over a $122,500 range (which was not indexed for 
inflation), beginning at the applicable threshold.
    In 2009, for example, the applicable thresholds were 
$166,800 for single individuals, $250,200 for married 
individuals filing a joint return and surviving spouses, 
$208,500 for heads of households, and $125,100 for married 
individuals filing separate returns.
    EGTRRA repealed PEP with the repeal phased-in over five 
years. EGTRRA provided: (1) a one-third reduction of the 
otherwise applicable limitation in 2006 and 2007: (2) a two-
thirds reduction in 2008, and 2009; and (3) no PEP in 2010. 
However, under the EGTRRA sunset, the PEP becomes fully 
effective again in 2011. Adjusted for inflation, the PEP 
thresholds for 2011 are: (1) $169,550 for unmarried 
individuals; (2) $254,350 for married couples filing joint 
returns; and (3) $211,950 for heads of households.

                       Explanation of Provision 


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

    Under the provision the overall limitation on itemized 
deductions does not apply for two additional years (through 
2012).

Personal exemption phase-out for certain taxpayers (``PEP'')

    Under the provision the personal exemption phase-out does 
not apply for two additional years (through 2012).

                            Effective Date 

    The provision applies to taxable years beginning after 
December 31, 2010.

 C. Child Tax Credit (secs. 101 and 103 of the Act and sec. 24 of the 
                                 Code)


                              Present Law

    An individual may claim a tax credit for each qualifying 
child under the age of 17. The maximum 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 aggregate amount of child credits that may be claimed 
is phased out for individuals with income over certain 
threshold amounts. Specifically, the otherwise allowable 
aggregate child tax credit amount is reduced by $50 for each 
$1,000 (or fraction thereof) of modified adjusted gross income 
(``modified AGI'') 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 AGI 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, for 
taxable years beginning before January 1, 2011, is allowed 
against the alternative minimum tax (``AMT''). To the extent 
the child tax 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). EGTRRA provided, in general, that this threshold 
dollar amount is $10,000 indexed for inflation from 2001. The 
American Recovery and Reinvestment Act of 2009 (``ARRA'') 
\1528\ set the threshold at $3,000 for both 2009 and 2010. 
After 2010, the ability to determine the refundable child 
credit based on earned income in excess of the threshold dollar 
amount expires.
---------------------------------------------------------------------------
    \1528\ Pub. L. No. 111-5.
---------------------------------------------------------------------------
    Families with three or more qualifying 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 tax credit (``EITC''). After 2010, due 
to the expiration of the earned income formula, this is the 
only manner of obtaining a refundable child credit.
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EITC, 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 EITC, but are excluded from gross 
income for individual income tax purposes. Therefore, these 
allowances are not considered earned income for purposes of the 
additional child tax credit.

                        Explanation of Provision

    The provision extends the $1,000 child tax credit and 
allows the child tax credit against the individual's regular 
income tax and AMT for two years (through 2012). The provision 
also extends the EGTRRA repeal of a prior-law provision that 
reduced the refundable child credit by the amount of the AMT 
for two years (through 2012). The provision extends the earned 
income formula for determining the refundable child credit, 
with the earned income threshold of $3,000 (also, the provision 
stops indexation for inflation of the $3,000 earnings 
threshold) for two years (through 2012).\1529\ Finally, the 
provision extends the rule that the refundable portion of the 
child tax credit does not constitute income and shall not be 
treated as resources for purposes of determining eligibility or 
the amount or nature of benefits or assistance under any 
Federal program or any State or local program financed with 
Federal funds for two years (through 2012).
---------------------------------------------------------------------------
    \1529\ Section 101 of the Act extends the EGTRRA modifications to 
the provision. Section 103 of the Act extends the modifications to the 
provision (including reduction in the earnings threshold for the 
refundable portion of the child tax credit to $3,000). See Title I, 
section J for additional discussion of the child tax credit, below.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2010.

D. Marriage Penalty Relief and Earned Income Tax Credit Simplification 
       (sec. 101 of the Act and secs. 1, 32, and 63 of the Code)


                              Present Law


Marriage penalty

    A married couple generally is treated as one tax unit that 
must pay tax on the couple's total taxable income. Although 
married couples may elect to file separate returns, the rate 
schedules and other provisions are structured so that filing 
separate returns usually results in a higher tax than filing a 
joint return. Other rate schedules apply to single persons and 
to single heads of households.
    A ``marriage penalty'' exists when the combined tax 
liability of a married couple filing a joint return is greater 
than the sum of the tax liabilities of each individual computed 
as if they were not married. A ``marriage bonus'' exists when 
the combined tax liability of a married couple filing a joint 
return is less than the sum of the tax liabilities of each 
individual computed as if they were not married.

Basic standard deduction

    EGTRRA increased the basic standard deduction for a married 
couple filing a joint return to twice the basic standard 
deduction for an unmarried individual filing a single return. 
The basic standard deduction for a married taxpayer filing 
separately continued to equal one-half of the basic standard 
deduction for a married couple filing jointly; thus, the basic 
standard deduction for unmarried individuals filing a single 
return and for married couples filing separately are the same.

Fifteen percent rate bracket

    EGTRRA increased the size of the 15-percent regular income 
tax rate bracket for a married couple filing a joint return to 
twice the size of the corresponding rate bracket for an 
unmarried individual filing a single return.

Earned income tax credit

    The earned income tax credit (``EITC'') is a refundable 
credit available to certain low-income taxpayers. Generally, 
the amount of an individual's allowable earned income credit is 
dependent on the individual's earned income, adjusted gross 
income, the number of qualifying children and (through 2010) 
filing status.

                        Explanation of Provision


Basic standard deduction

    The provision increases the basic standard deduction for a 
married couple filing a joint return to twice the basic 
standard deduction for an unmarried individual filing a single 
return for two years (through 2012).

Fifteen percent rate bracket

    The provision increases the size of the 15-percent regular 
income tax rate bracket for a married couple filing a joint 
return to twice the 15-percent regular income tax rate bracket 
for an unmarried individual filing a single return for two 
years (through 2012).

Earned income tax credit

    The provision extends certain EITC provisions adopted by 
EGTRRA for two years (through 2012). These include: (1) a 
simplified definition of earned income; (2) a simplified 
relationship test; (3) use of AGI instead of modified AGI; (4) 
a simplified tie-breaking rule; (5) additional math error 
authority for the Internal Revenue Service; (6) a repeal of the 
prior-law provision that reduced an individual's EITC by the 
amount of his alternative minimum tax liability; and (7) 
increases in the beginning and ending points of the credit 
phase-out for married taxpayers by $5,000.\1530\
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    \1530\ The $5,000 amount, which is indexed for inflation annually, 
also reflects the increase from $3,000 to $5,000 described more fully 
in Title I, section K of this document, below.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2010.

 E. Education Incentives (sec. 101 of the Act and secs. 117, 127, 142, 
                   146-148, 221, and 530 of the Code)


                              Present Law


Income and wage exclusion for awards under the National Health Service 
        Corps Scholarship Program and the F. Edward Hebert Armed Forces 
        Health Professions Scholarship and Financial Assistance Program

    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarships, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations. Amounts excludable from 
gross income under section 117 are also excludable from wages 
for payroll tax purposes.\1531\
---------------------------------------------------------------------------
    \1531\ Sec. 3121(a)(20).
---------------------------------------------------------------------------
    The exclusion for qualified scholarships and qualified 
tuition reductions does not apply to any amount received by a 
student that represents payment for teaching, research, or 
other services by the student required as a condition for 
receiving the scholarship or tuition reduction. An exception to 
this rule applies in the case of the National Health Service 
Corps Scholarship Program (the ``NHSC Scholarship Program'') 
and the F. Edward Hebert Armed Forces Health Professions 
Scholarship and Financial Assistance Program (the ``Armed 
Forces Scholarship Program'').
    The NHSC Scholarship Program and the Armed Forces 
Scholarship Program provide education awards to participants on 
the condition that the participants provide certain services. 
In the case of the NHSC Scholarship Program, the recipient of 
the scholarship is obligated to provide medical services in a 
geographic area (or to an underserved population group or 
designated facility) identified by the Public Health Service as 
having a shortage of health care professionals. In the case of 
the Armed Forces Scholarship Program, the recipient of the 
scholarship is obligated to serve a certain number of years in 
the military at an armed forces medical facility.
    Under the sunset provisions of EGTRRA, the exclusion from 
gross income and wages for the NHSC Scholarship Program and the 
Armed Forces Scholarship Program will no longer apply for 
taxable years beginning after December 31, 2010.

Income and wage exclusion for employer-provided educational assistance

    If certain requirements are satisfied, up to $5,250 
annually of educational assistance provided by an employer to 
an employee is excludable from gross income for income tax 
purposes and from wages for employment tax purposes.\1532\ This 
exclusion applies to both graduate and undergraduate 
courses.\1533\ For the exclusion to apply, certain requirements 
must be satisfied. The educational assistance must be provided 
pursuant to a separate written plan of the employer. The 
employer's educational assistance program must not discriminate 
in favor of highly compensated employees. In addition, no more 
than five percent of the amounts paid or incurred by the 
employer during the year for educational assistance under a 
qualified educational assistance program can be provided for 
the class of individuals consisting of more than five-percent 
owners of the employer and the spouses or dependents of such 
more than five-percent owners.
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    \1532\ Secs. 127, 3121(a)(18).
    \1533\ The exclusion has not always applied to graduate courses. 
The exclusion was first made inapplicable to graduate-level courses by 
the Technical and Miscellaneous Revenue Act of 1988. The exclusion was 
reinstated with respect to graduate-level courses by the Omnibus Budget 
Reconciliation Act of 1990, effective for taxable years beginning after 
December 31, 1990. The exclusion was again made inapplicable to 
graduate-level courses by the Small Business Job Protection Act of 
1996, effective for courses beginning after June 30, 1996. The 
exclusion for graduate-level courses was reinstated by EGTRRA, although 
that change does not apply to taxable years beginning after December 
31, 2010 (under EGTRRA's sunset provision).
---------------------------------------------------------------------------
    For purposes of the exclusion, educational assistance means 
the payment by an employer of expenses incurred by or on behalf 
of the employee for education of the employee including, but 
not limited to, tuition, fees, and similar payments, books, 
supplies, and equipment. Educational assistance also includes 
the provision by the employer of courses of instruction for the 
employee (including books, supplies, and equipment). 
Educational assistance does not include (1) tools or supplies 
that may be retained by the employee after completion of a 
course, (2) meals, lodging, or transportation, or (3) any 
education involving sports, games, or hobbies. The exclusion 
for employer-provided educational assistance applies only with 
respect to education provided to the employee (e.g., it does 
not apply to education provided to the spouse or a child of the 
employee).
    In the absence of the specific exclusion for employer-
provided educational assistance under section 127, employer-
provided educational assistance is excludable from gross income 
and wages only if the education expenses qualify as a working 
condition fringe benefit.\1534\ In general, education qualifies 
as a working condition fringe benefit if the employee could 
have deducted the education expenses under section 162 if the 
employee paid for the education. In general, education expenses 
are deductible by an individual under section 162 if the 
education (1) maintains or improves a skill required in a trade 
or business currently engaged in by the taxpayer, or (2) meets 
the express requirements of the taxpayer's employer, applicable 
law, or regulations imposed as a condition of continued 
employment. However, education expenses are generally not 
deductible if they relate to certain minimum educational 
requirements or to education or training that enables a 
taxpayer to begin working in a new trade or business. In 
determining the amount deductible for this purpose, the two-
percent floor on miscellaneous itemized deductions is 
disregarded.
---------------------------------------------------------------------------
    \1534\ Sec. 132(d).
---------------------------------------------------------------------------
    The specific exclusion for employer-provided educational 
assistance was originally enacted on a temporary basis and was 
subsequently extended 10 times.\1535\ EGTRRA deleted the 
exclusion's explicit expiration date and extended the exclusion 
to graduate courses. However, those changes are subject to 
EGTRRA's sunset provision so that the exclusion will not be 
available for taxable years beginning after December 31, 2010. 
Thus, at that time, educational assistance will be excludable 
from gross income only if it qualifies as a working condition 
fringe benefit (i.e., the expenses would have been deductible 
as business expenses if paid by the employee). As previously 
discussed, to meet such requirement, the expenses must be 
related to the employee's current job.\1536\
---------------------------------------------------------------------------
    \1535\ The exclusion was first enacted as part of the Revenue Act 
of 1978 (with a 1983 expiration date).
    \1536\ Treas. Reg. sec. 1.162-5.
---------------------------------------------------------------------------

Deduction for student loan interest

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deduction 
limit.\1537\ Required payments of interest generally do not 
include voluntary payments, such as interest payments made 
during a period of loan forbearance. No deduction is allowed to 
an individual if that individual is claimed as a dependent on 
another taxpayer's return for the taxable year.
---------------------------------------------------------------------------
    \1537\ Sec. 221.
---------------------------------------------------------------------------
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for the costs of attendance 
(including room and board) of the taxpayer, the taxpayer's 
spouse, or any dependent of the taxpayer as of the time the 
indebtedness was incurred in attending an eligible educational 
institution on at least a half-time basis. Eligible educational 
institutions are (1) post-secondary educational institutions 
and certain vocational schools defined by reference to section 
481 of the Higher Education Act of 1965, or (2) institutions 
conducting internship or residency programs leading to a degree 
or certificate from an institution of higher education, a 
hospital, or a health care facility conducting postgraduate 
training. Additionally, to qualify as an eligible educational 
institution, an institution must be eligible to participate in 
Department of Education student aid programs.
    The maximum allowable deduction per year is $2,500. For 
2010, the deduction is phased out ratably for single taxpayers 
with AGI between $60,000 and $75,000 and between $120,000 and 
$150,000 for married taxpayers filing a joint return. The 
income phaseout ranges are indexed for inflation and rounded to 
the next lowest multiple of $5,000.
    Effective for taxable years beginning after December 31, 
2010, the changes made by EGTRRA to the student loan provisions 
no longer apply. The EGTRRA changes scheduled to expire are: 
(1) increases that were made in the AGI phaseout ranges for the 
deduction and (2) rules that extended deductibility of interest 
beyond the first 60 months that interest payments are required. 
With the expiration of EGTRRA, the phaseout ranges will revert 
to a base level of $40,000 to $55,000 ($60,000 to $75,000 in 
the case of a married couple filing jointly), but with an 
adjustment for inflation occurring since 2002.

Coverdell education savings accounts

    A Coverdell education savings account is a trust or 
custodial account created exclusively for the purpose of paying 
qualified education expenses of a named beneficiary.\1538\ 
Annual contributions to Coverdell education savings accounts 
may not exceed $2,000 per designated beneficiary and may not be 
made after the designated beneficiary reaches age 18 (except in 
the case of a special needs beneficiary). The contribution 
limit is phased out for taxpayers with modified AGI between 
$95,000 and $110,000 ($190,000 and $220,000 for married 
taxpayers filing a joint return); the AGI of the contributor, 
and not that of the beneficiary, controls whether a 
contribution is permitted by the taxpayer.
---------------------------------------------------------------------------
    \1538\ Sec. 530.
---------------------------------------------------------------------------
    Earnings on contributions to a Coverdell education savings 
account generally are subject to tax when withdrawn.\1539\ 
However, distributions from a Coverdell education savings 
account are excludable from the gross income of the distributee 
(i.e., the student) to the extent that the distribution does 
not exceed the qualified education expenses incurred by the 
beneficiary during the year the distribution is made. The 
earnings portion of a Coverdell education savings account 
distribution not used to pay qualified education expenses is 
includible in the gross income of the distributee and generally 
is subject to an additional 10-percent tax.\1540\
---------------------------------------------------------------------------
    \1539\ In addition, Coverdell education savings accounts are 
subject to the unrelated business income tax imposed by section 511.
    \1540\ This 10-percent additional tax does not apply if a 
distribution from an education savings account is made on account of 
the death or disability of the designated beneficiary, or if made on 
account of a scholarship received by the designated beneficiary.
---------------------------------------------------------------------------
    Tax-free (including free of additional 10-percent tax) 
transfers or rollovers of account balances from one Coverdell 
education savings account benefiting one beneficiary to another 
Coverdell education savings account benefiting another 
beneficiary (as well as redesignations of the named 
beneficiary) are permitted, provided that the new beneficiary 
is a member of the family of the prior beneficiary and is under 
age 30 (except in the case of a special needs beneficiary). In 
general, any balance remaining in a Coverdell education savings 
account is deemed to be distributed within 30 days after the 
date that the beneficiary reaches age 30 (or, if the 
beneficiary dies before attaining age 30, within 30 days of the 
date that the beneficiary dies).
    Qualified education expenses include ``qualified higher 
education expenses'' and ``qualified elementary and secondary 
education expenses.''
    The term ``qualified higher education expenses'' includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis.\1541\ 
Moreover, qualified higher education expenses include certain 
room and board expenses for any period during which the 
beneficiary is at least a half-time student. Qualified higher 
education expenses include expenses with respect to 
undergraduate or graduate-level courses. In addition, qualified 
higher education expenses include amounts paid or incurred to 
purchase tuition credits (or to make contributions to an 
account) under a qualified tuition program for the benefit of 
the beneficiary of the Coverdell education savings 
account.\1542\
---------------------------------------------------------------------------
    \1541\ Qualified higher education expenses are defined in the same 
manner as for qualified tuition programs.
    \1542\ Sec. 530(b)(2)(B).
---------------------------------------------------------------------------
    The term ``qualified elementary and secondary education 
expenses,'' means expenses for: (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and other 
equipment incurred in connection with the enrollment or 
attendance of the beneficiary at a public, private, or 
religious school providing elementary or secondary education 
(kindergarten through grade 12) as determined under State law; 
(2) room and board, uniforms, transportation, and supplementary 
items or services (including extended day programs) required or 
provided by such a school in connection with such enrollment or 
attendance of the beneficiary; and (3) the purchase of any 
computer technology or equipment (as defined in section 
170(e)(6)(F)(i)) or Internet access and related services, if 
such technology, equipment, or services are to be used by the 
beneficiary and the beneficiary's family during any of the 
years the beneficiary is in elementary or secondary school. 
Computer software primarily involving sports, games, or hobbies 
is not considered a qualified elementary and secondary 
education expense unless the software is predominantly 
educational in nature.
    Qualified education expenses generally include only out-of-
pocket expenses. Such qualified education expenses do not 
include expenses covered by employer-provided educational 
assistance or scholarships for the benefit of the beneficiary 
that are excludable from gross income. Thus, total qualified 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under section 117, as well 
as any other tax-free educational benefits, such as employer-
provided educational assistance, that are excludable from the 
employee's gross income under section 127.
    Effective for taxable years beginning after December 31, 
2010, the changes made by EGTRRA to Coverdell education savings 
accounts no longer apply. The EGTRRA changes scheduled to 
expire are: (1) the increase in the contribution limit to 
$2,000 from $500; (2) the increase in the phaseout range for 
married taxpayers filing jointly to $190,000-$220,000 from 
$150,000-$160,000; (3) the expansion of qualified expenses to 
include elementary and secondary education expenses; (4) 
special age rules for special needs beneficiaries; (5) 
clarification that corporations and other entities are 
permitted to make contributions, regardless of the income of 
the corporation or entity during the year of the contribution; 
(6) certain rules regarding when contributions are deemed made 
and extending the time during which excess contributions may be 
returned without additional tax; (7) certain rules regarding 
coordination with the Hope and Lifetime Learning credits; and 
(8) certain rules regarding coordination with qualified tuition 
programs.

Amount of governmental bonds that may be issued by governments 
        qualifying for the ``small governmental unit'' arbitrage rebate 
        exception

    To prevent State and local governments from issuing more 
Federally subsidized tax-exempt bonds than is necessary for the 
activity being financed or from issuing such bonds earlier than 
needed for the purpose of the borrowing, the Code includes 
arbitrage restrictions limiting the ability to profit from 
investment of tax-exempt bond proceeds.\1543\ The Code also 
provides certain exceptions to the arbitrage restrictions. 
Under one such exception, small issuers of governmental bonds 
issued for local governmental activities are not subject to the 
rebate requirement.\1544\ To qualify for this exception the 
governmental bonds must be issued by a governmental unit with 
general taxing powers that reasonably expects to issue no more 
than $5 million of tax-exempt governmental bonds in a calendar 
year.\1545\ Prior to EGTRRA, the $5 million limit was increased 
to $10 million if at least $5 million of the bonds are used to 
finance public schools. EGTRRA provided the additional amount 
of governmental bonds for public schools that small 
governmental units may issue without being subject to the 
arbitrage rebate requirements is increased from $5 million to 
$10 million.\1546\ Thus, these governmental units may issue up 
to $15 million of governmental bonds in a calendar year 
provided that at least $10 million of the bonds are used to 
finance public school construction expenditures. This increase 
is subject to the EGTRRA sunset.
---------------------------------------------------------------------------
    \1543\ The exclusion from gross income for interest on State and 
local bonds does not apply to any arbitrage bond (sec. 103(a), (b)(2)). 
A bond is an arbitrage bond if it is part of an issue that violates the 
restrictions against investing in higher-yielding investments under 
section 148(a) or that fails to satisfy the requirement to rebate 
arbitrage earnings under section 148(f).
    \1544\ Ninety-five percent or more of the net proceeds of 
governmental bond issue are to be used for local governmental 
activities of the issuer. Sec. 148(f)(4)(D).
    \1545\ Under the Treasury regulations, an issuer may apply a fact-
based rather than an expectations-based test. Treas. Reg. sec. 1.148-
8(c)(1).
    \1546\ Sec. 148(f)(4)(D)(vii).
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Issuance of tax-exempt private activity bonds for public school 
        facilities

    Interest on 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 a private person is taxable unless 
the purpose of the borrowing is approved specifically in the 
Code or in a non-Code provision of a revenue act. These bonds 
are called ``private activity bonds.'' \1547\ The term 
``private person'' includes the Federal government and all 
other individuals and entities other than State or local 
governments.
---------------------------------------------------------------------------
    \1547\ The Code provides that the exclusion from gross income does 
not apply to interest on private activity bonds that are not qualified 
bonds within the meaning of section 141. See secs. 103(b)(1), 141.
---------------------------------------------------------------------------
    Only specified private activity bonds are tax-exempt. 
EGTRRA added a new type of private activity bond that is 
subject to the EGTRRA sunset. This category is bonds for 
elementary and secondary public school facilities that are 
owned by private, for-profit corporations pursuant to public-
private partnership agreements with a State or local 
educational agency.\1548\ The term school facility includes 
school buildings and functionally related and subordinate land 
(including stadiums or other athletic facilities primarily used 
for school events) and depreciable personal property used in 
the school facility. The school facilities for which these 
bonds are issued must be operated by a public educational 
agency as part of a system of public schools.
---------------------------------------------------------------------------
    \1548\ Sec. 142(a)(13), (k).
---------------------------------------------------------------------------
    A public-private partnership agreement is defined as an 
arrangement pursuant to which the for-profit corporate party 
constructs, rehabilitates, refurbishes, or equips a school 
facility for a public school agency (typically pursuant to a 
lease arrangement). The agreement must provide that, at the end 
of the contract term, ownership of the bond-financed property 
is transferred to the public school agency party to the 
agreement for no additional consideration.
    Issuance of these bonds is subject to a separate annual 
per-State private activity bond volume limit equal to $10 per 
resident ($5 million, if greater) in lieu of the present-law 
State private activity bond volume limits. As with the present-
law State private activity bond volume limits, States can 
decide how to allocate the bond authority to State and local 
government agencies. Bond authority that is unused in the year 
in which it arises may be carried forward for up to three years 
for public school projects under rules similar to the 
carryforward rules of the present-law private activity bond 
volume limits.

                        Explanation of Provision

    The provision delays the EGTRRA sunset as it applies to the 
NHSC Scholarship Program and the Armed Forces Scholarship 
Program, the section 127 exclusion from income and wages for 
employer-provided educational assistance, the student loan 
interest deduction, and Coverdell education savings accounts 
for two years. The provision also delays the EGTRRA sunset as 
it applies to the expansion of the small government unit 
exception to arbitrage rebate and allowing issuance of tax-
exempt private activity bonds for public school facilities. 
Thus, all of these tax benefits for education continue to be 
available through 2012.

                             Effective Date

    The provision is effective on the date of enactment.

 F. Other Incentives for Families and Children (includes extension of 
 the adoption tax credit, employer-provided child care tax credit, and 
dependent care tax credit) (sec. 101 of the Act and secs. 21, 23, 36C, 
                       45D, and 137 of the Code)


                              Present Law


Adoption credit and exclusion from income for employer-provided 
        adoption assistance

    Present law for 2010 provides: (1) a maximum adoption 
credit of $13,170 per eligible child (both special needs and 
non-special needs adoptions); and (2) a maximum exclusion of 
$13,170 per eligible child (both special needs and non-special 
needs adoptions).\1549\ These dollar amounts are adjusted 
annually for inflation. These benefits are phased-out over a 
$40,000 range for taxpayers with modified adjusted gross income 
(``modified AGI'') in excess of certain dollar levels. For 
2010, the phase-out range is between $182,520 and $222,520. The 
phase-out threshold is adjusted for inflation annually, but the 
phase-out range remains a $40,000 range.
---------------------------------------------------------------------------
    \1549\ EGTRRA increased the maximum credit and exclusion to $10,000 
(indexed for inflation after 2002) for both non-special needs and 
special needs adoptions, increased the phase-out starting point to 
$150,000 (indexed for inflation after 2002), and allowed the credit 
against the AMT. Section 10909 of the Patient Protection and Affordable 
Care Act, Pub. L. No. 111-148: (1) extended the EGTRRA expansion of the 
adoption credit and exclusion from income for employer-provided 
adoption assistance for one year (for 2011); (2) increased by $1,000 
(to $13,170, indexed for inflation) the maximum adoption credit and 
exclusion from income for employer-provided adoption assistance for two 
years (2010 and 2011); and (3) made the credit refundable for two years 
(2010 and 2011).
---------------------------------------------------------------------------
    For taxable years beginning after December 31, 2011, the 
adoption credit and employer-provided adoption assistance 
exclusion are available only to special needs adoptions and the 
maximum credit and exclusion are reduced to $6,000, 
respectively. The phase-out range is reduced to lower income 
levels (i.e., between $75,000 and $115,000). The maximum 
credit, exclusion, and phase-out range are not indexed for 
inflation.

Employer-provided child care tax credit

    Taxpayers receive a tax credit equal to 25 percent of 
qualified expenses for employee child care and 10 percent of 
qualified expenses for child care resource and referral 
services. The maximum total credit that may be claimed by a 
taxpayer cannot exceed $150,000 per taxable year.
    Qualified child care expenses include costs paid or 
incurred: (1) to acquire, construct, rehabilitate or expand 
property that is to be used as part of the taxpayer's qualified 
child care facility; (2) for the operation of the taxpayer's 
qualified child care facility, including the costs of training 
and certain compensation for employees of the child care 
facility, and scholarship programs; or (3) under a contract 
with a qualified child care facility to provide child care 
services to employees of the taxpayer. To be a qualified child 
care facility, the principal use of the facility must be for 
child care (unless it is the principal residence of the 
taxpayer), and the facility must meet all applicable State and 
local laws and regulations, including any licensing laws. A 
facility is not treated as a qualified child care facility with 
respect to a taxpayer unless: (1) it has open enrollment to the 
employees of the taxpayer; (2) use of the facility (or 
eligibility to use such facility) does not discriminate in 
favor of highly compensated employees of the taxpayer (within 
the meaning of section 414(q) of the Code); and (3) at least 30 
percent of the children enrolled in the center are dependents 
of the taxpayer's employees, if the facility is the principal 
trade or business of the taxpayer. Qualified child care 
resource and referral expenses are amounts paid or incurred 
under a contract to provide child care resource and referral 
services to the employees of the taxpayer. Qualified child care 
services and qualified child care resource and referral 
expenditures must be provided (or be eligible for use) in a way 
that does not discriminate in favor of highly compensated 
employees of the taxpayer (within the meaning of section 414(q) 
of the Code).
    Any amounts for which the taxpayer may otherwise claim a 
tax deduction are reduced by the amount of these credits. 
Similarly, if the credits are taken for expenses of acquiring, 
constructing, rehabilitating, or expanding a facility, the 
taxpayer's basis in the facility is reduced by the amount of 
the credits.
    Credits taken for the expenses of acquiring, constructing, 
rehabilitating, or expanding a qualified facility are subject 
to recapture for the first ten years after the qualified child 
care facility is placed in service. The amount of recapture is 
reduced as a percentage of the applicable credit over the 10-
year recapture period. Recapture takes effect if the taxpayer 
either ceases operation of the qualified child care facility or 
transfers its interest in the qualified child care facility 
without securing an agreement to assume recapture liability for 
the transferee. The recapture tax is not treated as a tax for 
purposes of determining the amount of other credits or 
determining the amount of the alternative minimum tax. Other 
rules apply.
    This tax credit expires for taxable years beginning after 
December 31, 2010.

Dependent care tax credit

    The maximum dependent care tax credit is $1,050 (35 percent 
of up to $3,000 of eligible expenses) if there is one 
qualifying individual, and $2,100 (35 percent of up to $6,000 
of eligible expenses) if there are two or more qualifying 
individuals. The 35-percent credit rate is reduced, but not 
below 20 percent, by one percentage point for each $2,000 (or 
fraction thereof) of adjusted gross income (``AGI'') above 
$15,000. Therefore, the credit percentage is reduced to 20 
percent for taxpayers with AGI over $43,000.
    The level of this credit is reduced for taxable years 
beginning after December 31, 2010, under the EGTRRA sunset.

                        Explanation of Provision


Adoption credit and exclusion from income for employer-provided 
        adoption assistance

    The provision extends the EGTRRA expansion of these two 
benefits for one year (2012). Therefore, for 2012, the maximum 
benefit is $12,170 (indexed for inflation after 2010). The 
adoption credit and exclusion are phased out ratably for 
taxpayers with modified adjusted gross income between $182,520 
and $222,520 (indexed for inflation after 2010).\1550\
---------------------------------------------------------------------------
    \1550\ The changes to the adoption credit and exclusion from 
employer-provided adoption assistance for 2010 and 2011 (relating to 
the $1,000 increase in the maximum credit and exclusion and the 
refundability of the credit) enacted as part of the Patient Protection 
and Affordable Care Act, Pub. L. No. 111-148, are not extended by the 
provision.
---------------------------------------------------------------------------

Employer-provided child care tax credit

    The provision extends this tax benefit for two years 
(through 2012).

Expansion of dependent care tax credit

    The provision extends the dependent care tax credit EGTRRA 
expansion for two years (through 2012).

                             Effective Date

    The provisions apply to taxable years beginning after 
December 31, 2010.

G. Alaska Native Settlement Trusts (sec. 101 of the Act and sec. 646 of 
                               the Code)


                              Present Law

    The Alaska Native Claims Settlement Act (``ANCSA'') \1551\ 
established Alaska Native Corporations to hold property for 
Alaska Natives. Alaska Natives are generally the only permitted 
common shareholders of those corporations under section 7(h) of 
ANCSA, unless an Alaska Native Corporation specifically allows 
other shareholders under specified procedures.
---------------------------------------------------------------------------
    \1551\ 43 U.S.C. 1601 et. seq.
---------------------------------------------------------------------------
    ANCSA permits an Alaska Native Corporation to transfer 
money or other property to an Alaska Native Settlement Trust 
(``Settlement Trust'') for the benefit of beneficiaries who 
constitute all or a class of the shareholders of the Alaska 
Native Corporation, to promote the health, education and 
welfare of beneficiaries and to preserve the heritage and 
culture of Alaska Natives.\1552\
---------------------------------------------------------------------------
    \1552\ With certain exceptions, once an Alaska Native Corporation 
has made a conveyance to a Settlement Trust, the assets conveyed shall 
not be subject to attachment, distraint, or sale or execution of 
judgment, except with respect to the lawful debts and obligations of 
the Settlement Trust.
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    Alaska Native Corporations and Settlement Trusts, as well 
as their shareholders and beneficiaries, are generally subject 
to tax under the same rules and in the same manner as other 
taxpayers that are corporations, trusts, shareholders, or 
beneficiaries.
    Special tax rules enacted in 2001 allow an election to use 
a more favorable tax regime for transfers of property by an 
Alaska Native Corporation to a Settlement Trust and for income 
taxation of the Settlement Trust. There is also simplified 
reporting to beneficiaries.
    Under the special tax rules, a Settlement Trust may make an 
irrevocable election to pay tax on taxable income at the lowest 
rate specified for individuals (rather than the highest rate 
that is generally applicable to trusts) and to pay tax on 
capital gains at a rate consistent with being subject to such 
lowest rate of tax. As described further below, beneficiaries 
may generally thereafter exclude from gross income 
distributions from a trust that has made this election. Also, 
contributions from an Alaska Native Corporation to an electing 
Settlement Trust generally will not result in the recognition 
of gross income by beneficiaries on account of the 
contribution. An electing Settlement Trust remains subject to 
generally applicable requirements for classification and 
taxation as a trust.
    A Settlement Trust distribution is excludable from the 
gross income of beneficiaries to the extent of the taxable 
income of the Settlement Trust for the taxable year and all 
prior taxable years for which an election was in effect, 
decreased by income tax paid by the Trust, plus tax-exempt 
interest from State and local bonds for the same period. 
Amounts distributed in excess of the amount excludable is taxed 
to the beneficiaries as if distributed by the sponsoring Alaska 
Native Corporation in the year of distribution by the Trust, 
which means that the beneficiaries must include in gross income 
as dividends the amount of the distribution, up to the current 
and accumulated earnings and profits of the Alaska Native 
Corporation. Amounts distributed in excess of the current and 
accumulated earnings and profits are not included in gross 
income by the beneficiaries.
    A special loss disallowance rule reduces (but not below 
zero) any loss that would otherwise be recognized upon 
disposition of stock of a sponsoring Alaska Native Corporation 
by a proportion, determined on a per share basis, of all 
contributions to all electing Settlement Trusts by the 
sponsoring Alaska Native Corporation. This rule prevents a 
stockholder from being able to take advantage of a decrease in 
value of an Alaska Native Corporation that is caused by a 
transfer of assets from the Alaska Native Corporation to a 
Settlement Trust.
    The fiduciary of an electing Settlement Trust is obligated 
to provide certain information relating to distributions from 
the trust in lieu of reporting requirements under Section 
6034A.
    The earnings and profits of an Alaska Native Corporation 
are not reduced by the amount of its contributions to an 
electing Trust at the time of the contributions. However, the 
Alaska Native Corporation earnings and profits are reduced as 
and when distributions are thereafter made by the electing 
Trust that are taxed to the beneficiaries as dividends from the 
Alaska Native Corporation to the beneficiaries.
    The election to pay tax at the lowest rate is not available 
in certain disqualifying cases: (a) where transfer restrictions 
have been modified either to allow a transfer of a beneficial 
interest that would not be permitted by section 7(h) of the 
Alaska Native Claims Settlement Act if the interest were 
Settlement Common stock, or (b) where transfer restrictions 
have been modified to allow a transfer of any Stock in an 
Alaska Native Corporation that would not be permitted by 
section 7(h) if it were Settlement Common Stock and the Alaska 
Native Corporation thereafter makes a transfer to the Trust. 
Where an election is already in effect at the time of such 
disqualifying situations, the special rules applicable to an 
electing trust cease to apply and rules generally applicable to 
trusts apply. In addition, the distributable net income of the 
trust is increased by undistributed current and accumulated 
earnings and profits of the trust, limited by the fair market 
value of trust assets at the date the trust becomes so 
disposable. The effect is to cause the trust to be taxed at 
regular trust rates on the amount of recomputed distributable 
net income not distributed to beneficiaries, and to cause the 
beneficiaries to be taxed on the amount of any distributions 
received consistent with the applicable tax rate bracket.\1553\
---------------------------------------------------------------------------
    \1553\ These provisions were enacted by section 671 of the Economic 
Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 
scheduled to sunset in taxable years beginning after December 31, 2010. 
See H.R. Rep. No. 107-84 (2001).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision delays for two years the EGTRRA sunset as it 
applies to electing Settlement Trusts.

                             Effective Date

    The provision is effective for taxable years of electing 
Settlement Trusts, their beneficiaries, and sponsoring Alaska 
Native Corporations beginning after December 31, 2010.

H. Reduced Rate on Dividends and Capital Gains (sec. 102 of the Act and 
                         sec. 1(h) of the Code)


                              Present Law


Dividends

            In general
    A dividend is the distribution of property made by a 
corporation to its shareholders out of its after-tax earnings 
and profits.
            Tax rates before 2011
    An individual's qualified dividend income is taxed at the 
same rates that apply to net capital gain. This treatment 
applies for purposes of both the regular tax and the 
alternative minimum tax. Thus, for taxable years beginning 
before 2011, an individual's qualified dividend income is taxed 
at rates of zero and 15 percent. The zero-percent rate applies 
to qualified dividend income which otherwise would be taxed at 
a 10- or 15-percent rate if the special rates did not apply.
    Qualified dividend income generally includes dividends 
received from domestic corporations and qualified foreign 
corporations. The term ``qualified foreign corporation'' 
includes a foreign corporation that is eligible for the 
benefits of a comprehensive income tax treaty with the United 
States which the Treasury Department determines to be 
satisfactory and which includes an exchange of information 
program. In addition, a foreign corporation is treated as a 
qualified foreign corporation for any dividend paid by the 
corporation with respect to stock that is readily tradable on 
an established securities market in the United States.
    If a shareholder does not hold a share of stock for more 
than 60 days during the 121-day period beginning 60 days before 
the ex-dividend date (as measured under section 246(c)), 
dividends received on the stock are not eligible for the 
reduced rates. Also, the reduced rates are not available for 
dividends to the extent that the taxpayer is obligated to make 
related payments with respect to positions in substantially 
similar or related property.
    Dividends received from a corporation that is a passive 
foreign investment company (as defined in section 1297) in 
either the taxable year of the distribution, or the preceding 
taxable year, are not qualified dividends.
    Special rules apply in determining a taxpayer's foreign tax 
credit limitation under section 904 in the case of qualified 
dividend income. For these purposes, rules similar to the rules 
of section 904(b)(2)(B) concerning adjustments to the foreign 
tax credit limitation to reflect any capital gain rate 
differential will apply to any qualified dividend income.
    If a taxpayer receives an extraordinary dividend (within 
the meaning of section 1059(c)) eligible for the reduced rates 
with respect to any share of stock, any loss on the sale of the 
stock is treated as a long-term capital loss to the extent of 
the dividend.
    A dividend is treated as investment income for purposes of 
determining the amount of deductible investment interest only 
if the taxpayer elects to treat the dividend as not eligible 
for the reduced rates.
    The amount of dividends qualifying for reduced rates that 
may be paid by a regulated investment company (``RIC'') for any 
taxable year in which the qualified dividend income received by 
the RIC is less than 95 percent of its gross income (as 
specially computed) may not exceed the sum of (1) the qualified 
dividend income of the RIC for the taxable year and (2) the 
amount of earnings and profits accumulated in a non-RIC taxable 
year that were distributed by the RIC during the taxable year.
    The amount of dividends qualifying for reduced rates that 
may be paid by a real estate investment trust (``REIT'') for 
any taxable year may not exceed the sum of (1) the qualified 
dividend income of the REIT for the taxable year, (2) an amount 
equal to the excess of the income subject to the taxes imposed 
by section 857(b)(1) and the regulations prescribed under 
section 337(d) for the preceding taxable year over the amount 
of these taxes for the preceding taxable year, and (3) the 
amount of earnings and profits accumulated in a non-REIT 
taxable year that were distributed by the REIT during the 
taxable year.
    The reduced rates do not apply to dividends received from 
an organization that was exempt from tax under section 501 or 
was a tax-exempt farmers' cooperative in either the taxable 
year of the distribution or the preceding taxable year; 
dividends received from a mutual savings bank that received a 
deduction under section 591; or deductible dividends paid on 
employer securities.\1554\
---------------------------------------------------------------------------
    \1554\ In addition, for taxable years beginning before 2011, 
amounts treated as ordinary income on the disposition of certain 
preferred stock (sec. 306) are treated as dividends for purposes of 
applying the reduced rates; the tax rate for the accumulated earnings 
tax (sec. 531) and the personal holding company tax (sec. 541) is 
reduced to 15 percent; and the collapsible corporation rules (sec. 341) 
are repealed.
---------------------------------------------------------------------------
            Tax rates after 2010
    For taxable years beginning after 2010, dividends received 
by an individual are taxed at ordinary income tax rates.

Capital gains

            In general
    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of a capital 
asset, any gain generally is included in income. Any net 
capital gain of an individual generally is taxed at rates lower 
than rates applicable to ordinary income. Net capital gain is 
the excess of the net long-term capital gain for the taxable 
year over the net short-term capital loss for the year. Gain or 
loss is treated as long-term if the asset is held for more than 
one year.
    Capital losses generally are deductible in full against 
capital gains. In addition, individual taxpayers may deduct 
capital losses against up to $3,000 of ordinary income in each 
year. Any remaining unused capital losses may be carried 
forward indefinitely to another taxable year.
    A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
(5) certain U.S. publications, (6) certain commodity derivative 
financial instruments, (7) hedging transactions, and (8) 
business supplies. In addition, the net gain from the 
disposition of certain property used in the taxpayer's trade or 
business is treated as long-term capital gain. Gain from the 
disposition of depreciable personal property is not treated as 
capital gain to the extent of all previous depreciation 
allowances. Gain from the disposition of depreciable real 
property is generally not treated as capital gain to the extent 
of the depreciation allowances in excess of the allowances 
available under the straight-line method of depreciation.
            Tax rates before 2011
    Under present law, for taxable years beginning before 
January 1, 2011, the maximum rate of tax on the adjusted net 
capital gain of an individual is 15 percent. Any adjusted net 
capital gain which otherwise would be taxed at a 10- or 15-
percent rate is taxed at a zero rate. These rates apply for 
purposes of both the regular tax and the AMT.
    Under present law, the ``adjusted net capital gain'' of an 
individual is the net capital gain reduced (but not below zero) 
by the sum of the 28-percent rate gain and the unrecaptured 
section 1250 gain. The net capital gain is reduced by the 
amount of gain that the individual treats as investment income 
for purposes of determining the investment interest limitation 
under section 163(d).
    The term ``28-percent rate gain'' means the excess of the 
sum of the amount of net gain attributable to long-term capital 
gains and losses from the sale or exchange of collectibles (as 
defined in section 408(m) without regard to paragraph (3) 
thereof) and the amount of gain equal to the additional amount 
of gain that would be excluded from gross income under section 
1202 (relating to certain small business stock) if the 
percentage limitations of section 1202(a) did not apply, over 
the sum of the net short-term capital loss for the taxable year 
and any long-term capital loss carryover to the taxable year.
    ``Unrecaptured section 1250 gain'' means any long-term 
capital gain from the sale or exchange of section 1250 property 
(i.e., depreciable real estate) held more than one year to the 
extent of the gain that would have been treated as ordinary 
income if section 1250 applied to all depreciation, reduced by 
the net loss (if any) attributable to the items taken into 
account in computing 28-percent rate gain. The amount of 
unrecaptured section 1250 gain (before the reduction for the 
net loss) attributable to the disposition of property to which 
section 1231 (relating to certain property used in a trade or 
business) applies may not exceed the net section 1231 gain for 
the year.
    An individual's unrecaptured section 1250 gain is taxed at 
a maximum rate of 25 percent, and the 28-percent rate gain is 
taxed at a maximum rate of 28 percent. Any amount of 
unrecaptured section 1250 gain or 28-percent rate gain 
otherwise taxed at a 10- or 15-percent rate is taxed at the 
otherwise applicable rate.
            Tax rates after 2010
    For taxable years beginning after December 31, 2010, the 
maximum rate of tax on the adjusted net capital gain of an 
individual is 20 percent. Any adjusted net capital gain which 
otherwise would be taxed at the 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 capital gain rate is taxed at an 8-percent 
rate. Any gain from the sale or exchange of property held more 
than five years and the holding period for which began after 
December 31, 2000, that would otherwise have been taxed at a 
20-percent rate is taxed at an 18-percent rate.
    The tax rates on 28-percent gain and unrecaptured section 
1250 gain are the same as for taxable years beginning before 
2011.

                        Explanation of Provision

    Under the provision, the regular and minimum tax rates for 
qualified dividend income and capital gain in effect before 
2011 are extended for two additional years (through 2012).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2010.

I. Extend American Opportunity Tax Credit (sec. 103 of the Act and sec. 
                            25A of the Code)


                              Present Law


Hope credit

    For taxable years beginning before 2009 and after 2010, 
individual taxpayers are allowed to claim a nonrefundable 
credit, the Hope credit, against Federal income taxes of up to 
$1,800 (for 2008) per eligible student per year for qualified 
tuition and related expenses paid for the first two years of 
the student's post-secondary education in a degree or 
certificate program. The Hope credit rate is 100 percent on the 
first $1,200 of qualified tuition and related expenses, and 50 
percent on the next $1,200 of qualified tuition and related 
expenses; these dollar amounts are indexed for inflation, with 
the amount rounded down to the next lowest multiple of $100. 
Thus, for example, a taxpayer who incurs $1,200 of qualified 
tuition and related expenses for an eligible student is 
eligible (subject to the adjusted gross income phaseout 
described below) for a $1,200 Hope credit. If a taxpayer incurs 
$2,400 of qualified tuition and related expenses for an 
eligible student, then he or she is eligible for a $1,800 Hope 
credit.
    The Hope credit that a taxpayer may otherwise claim is 
phased out ratably for taxpayers with modified AGI between 
$48,000 and $58,000 ($96,000 and $116,000 for married taxpayers 
filing a joint return) for 2008. The beginning points of the 
AGI phaseout ranges are indexed for inflation, with the amount 
rounded down to the next lowest multiple of $1,000. The size of 
the phaseout ranges are always $10,000 and $20,000 
respectively.
    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, 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 EGTRRA no longer 
apply. The principal EGTRRA change scheduled to expire is the 
change that permits a taxpayer to claim a Hope credit in the 
same year that he or she claims 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.

American opportunity tax credit

    The American Opportunity Tax Credit refers to modifications 
to the Hope credit that apply for taxable years beginning in 
2009 or 2010. The maximum allowable modified credit is $2,500 
per eligible student per year for qualified tuition and related 
expenses paid for each of the first four years of the student's 
post-secondary education in a degree or certificate program. 
The modified credit rate is 100 percent on the first $2,000 of 
qualified tuition and related expenses, and 25 percent on the 
next $2,000 of qualified tuition and related expenses. For 
purposes of the modified credit, the definition of qualified 
tuition and related expenses is expanded to include course 
materials.
    Under the provision, the modified credit is available with 
respect to an individual student for four years, provided that 
the student has not completed the first four years of post-
secondary education before the beginning of the fourth taxable 
year. Thus, the modified credit, in addition to other 
modifications, extends the application of the Hope credit to 
two more years of post-secondary education.
    The modified credit that a taxpayer may otherwise claim is 
phased out ratably for taxpayers with modified AGI between 
$80,000 and $90,000 ($160,000 and $180,000 for married 
taxpayers filing a joint return). The modified credit may be 
claimed against a taxpayer's AMT liability.
    Forty percent of a taxpayer's otherwise allowable modified 
credit is refundable. However, no portion of the modified 
credit is refundable if the taxpayer claiming the credit is a 
child to whom section 1(g) applies for such taxable year 
(generally, any child who has at least one living parent, does 
not file a joint return, and is either under age 18 or under 
age 24 and a student providing less than one-half of his or her 
own support).
    Bona fide residents of the U.S. possessions are not 
permitted to claim the refundable portion of the modified 
credit in the United States. Rather, a bona fide resident of a 
mirror code possession (Commonwealth of the Northern Mariana 
Islands, Guam, and the Virgin Islands) may claim the refundable 
portion of the credit in the possession in which the individual 
is a resident. Similarly, a bona fide resident of a non-mirror 
code possession (Commonwealth of Puerto Rico and American 
Samoa) may claim the refundable portion of the credit in the 
possession in which the individual is resident, but only if the 
possession establishes a plan for permitting the claim under 
its internal law. The U.S. Treasury will make payments to the 
possession in respect of credits allowable to their residents 
under their internal laws.

                        Explanation of Provision

    The provision extends for two years (through 2012) the 
temporary modifications to the Hope credit for taxable years 
beginning in 2009 and 2010 that are known as the American 
Opportunity Tax Credit, including the rules governing the 
treatment of the U.S. possessions.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2010.

   J. Child Tax Credit (sec. 103 of the Act and sec. 24 of the Code) 


                              Present Law 

    An individual may claim a tax credit for each qualifying 
child under the age of 17. The maximum 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 aggregate amount of child credits that may be claimed 
is phased out for individuals with income over certain 
threshold amounts. Specifically, the otherwise allowable 
aggregate child tax credit amount is reduced by $50 for each 
$1,000 (or fraction thereof) of modified adjusted gross income 
(``modified AGI'') 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 AGI 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, for 
taxable years beginning before January 1, 2011, is allowed 
against the alternative minimum tax (``AMT''). To the extent 
the child tax 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). EGTRRA provided, in general, that this threshold 
dollar amount is $10,000 indexed for inflation from 2001. The 
American Recovery and Reinvestment Act of 2009 set the 
threshold at $3,000 for both 2009 and 2010. After 2010, the 
ability to determine the refundable child credit based on 
earned income in excess of the threshold dollar amount expires.
    Families with three or more qualifying 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 tax credit (``EITC''). After 2010, due 
to the expiration of the earned income formula, this is the 
only manner of obtaining a refundable child credit.
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EITC, 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 EITC, 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.

                       Explanation of Provision 

    The provision extends for two years the earned income 
threshold of $3,000. Also, the provision stops indexation for 
inflation of the $3,000 earnings threshold for that period.

                            Effective Date 

    The provision applies to taxable years beginning after 
December 31, 2010.

 K. Increase in the Earned Income Tax Credit (sec. 103 of the Act and 
                         sec. 32 of the Code) 


                              Present Law 


Overview 

    Low- and moderate-income workers may be eligible for the 
refundable earned income tax credit (``EITC''). Eligibility for 
the EITC is based on earned income, adjusted gross income, 
investment income, filing status, number of children, and 
immigration and work status in the United States. The amount of 
the EITC 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.
    The EITC generally equals a specified percentage of earned 
income up to a maximum dollar amount. The maximum amount 
applies over a certain income range and then diminishes to zero 
over a specified phaseout range. For taxpayers with earned 
income (or adjusted gross income (``AGI''), if greater) in 
excess of the beginning of the phaseout range, the maximum EITC 
amount is reduced by the phaseout rate multiplied by the amount 
of earned income (or AGI, if greater) in excess of the 
beginning of the phaseout range. For taxpayers with earned 
income (or AGI, if greater) in excess of the end of the 
phaseout range, no credit is allowed.
    An individual is not eligible for the EITC if the aggregate 
amount of disqualified income of the taxpayer for the taxable 
year exceeds $3,100 (for 2010). This threshold is indexed for 
inflation. Disqualified income is the sum of: (1) interest 
(both taxable and tax exempt); (2) dividends; (3) net rent and 
royalty income (if greater than zero); (4) capital gains net 
income; and (5) net passive income that is not self-employment 
income (if greater than zero).
    The EITC is a refundable credit, meaning that if the amount 
of the credit exceeds the taxpayer's Federal income tax 
liability, the excess is payable to the taxpayer as a direct 
transfer payment.

Filing status 

    An unmarried individual may claim the EITC if he or she 
files as a single filer or as a head of household. Married 
individuals generally may not claim the EITC unless they file 
jointly. An exception to the joint return filing requirement 
applies to certain spouses who are separated. Under this 
exception, a married taxpayer who is separated from his or her 
spouse for the last six months of the taxable year is not 
considered to be married (and, accordingly, may file a return 
as head of household and claim the EITC), provided that the 
taxpayer maintains a household that constitutes the principal 
place of abode for a dependent child (including a son, stepson, 
daughter, stepdaughter, adopted child, or a foster child) for 
over half the taxable year, and pays over half the cost of 
maintaining the household in which he or she resides with the 
child during the year.

Presence of qualifying children and amount of the earned income credit 

    Four separate credit schedules apply: one schedule for 
taxpayers with no qualifying children, one schedule for 
taxpayers with one qualifying child, one schedule for taxpayers 
with two qualifying children, and one schedule for taxpayers 
with three or more qualifying children.
    Taxpayers with no qualifying children may claim a credit if 
they are over age 24 and below age 65. The credit is 7.65 
percent of earnings up to $5,980, resulting in a maximum credit 
of $457 for 2010. The maximum is available for those with 
incomes between $5,980 and $7,480 ($12,490 if married filing 
jointly). The credit begins to phase out at a rate of 7.65 
percent of earnings above $7,480 ($12,480 if married filing 
jointly) resulting in a $0 credit at $13,460 of earnings 
($18,470 if married filing jointly).
    Taxpayers with one qualifying child may claim a credit in 
2010 of 34 percent of their earnings up to $8,970, resulting in 
a maximum credit of $3,050. The maximum credit is available for 
those with earnings between $8,970 and $16,450 ($21,460 if 
married filing jointly). The credit begins to phase out at a 
rate of 15.98 percent of earnings above $16,450 ($21,460 if 
married filing jointly). The credit is completely phased out at 
$35,535 of earnings ($40,545 if married filing jointly).
    Taxpayers with two qualifying children may claim a credit 
in 2010 of 40 percent of earnings up to $12,590, resulting in a 
maximum credit of $5,036. The maximum credit is available for 
those with earnings between $12,590 and $16,450 ($21,460 if 
married filing jointly). The credit begins to phase out at a 
rate of 21.06 percent of earnings above $16,450 ($21,460 if 
married filing jointly). The credit is completely phased out at 
$40,363 of earnings ($45,373 if married filing jointly).
    A temporary provision enacted by ARRA allows taxpayers with 
three or more qualifying children to claim a credit of 45 
percent for 2009 and 2010. For example, in 2010 taxpayers with 
three or more qualifying children may claim a credit of 45 
percent of earnings up to $12,590, resulting in a maximum 
credit of $5,666. The maximum credit is available for those 
with earnings between $12,590 and $16,450 ($21,460 if married 
filing jointly). The credit begins to phase out at a rate of 
21.06 percent of earnings above $16,450 ($21,460 if married 
filing jointly). The credit is completely phased out at $43,352 
of earnings ($48,362 if married filing jointly).
    Under another provision of ARRA, the phase-out thresholds 
for married couples were raised to an amount $5,000 above that 
for other filers for 2009 (and indexed for inflation). The 
increase is $5,010 for 2010. Formerly, the phase-out thresholds 
for married couples were $3,000 (indexed for inflation from 
2008) greater than those for other filers as provided for in 
EGTRRA.
    If more than one taxpayer lives with a qualifying child, 
only one of these taxpayers may claim the child for purposes of 
the EITC. If multiple eligible taxpayers actually claim the 
same qualifying child, then a tiebreaker rule determines which 
taxpayer is entitled to the EITC with respect to the qualifying 
child. Any eligible taxpayer with at least one qualifying child 
who does not claim the EITC with respect to qualifying children 
due to failure to meet certain identification requirements with 
respect to such children (i.e., providing the name, age and 
taxpayer identification number of each of such children) may 
not claim the EITC for taxpayers without qualifying children.

                       Explanation of Provision 

    The provision extends the EITC at a rate of 45 percent for 
three or more qualifying children for two years (through 2012).
    The provision extends the higher phase-out thresholds for 
married couples filing joint returns enacted as part of ARRA 
for two years (through 2012).

                            Effective Date 

    The provision applies to taxable years beginning after 
December 31, 2010.

  TITLE II--TEMPORARY EXTENSION OF INDIVIDUAL ALTERNATIVE MINIMUM TAX 
                                 RELIEF


   A. Extension of Alternative Minimum Tax Relief for Nonrefundable 
Personal Credits and Increased Alternative Minimum Tax Exemption Amount 
     (secs. 201 and 202 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 exemption amounts are: (1) $70,950 for taxable years 
beginning in 2009 and $45,000 in taxable years beginning after 
2009 in the case of married individuals filing a joint return 
and surviving spouses; (2) $46,700 for taxable years beginning 
in 2009 and $33,750 in taxable years beginning after 2009 in 
the case of other unmarried individuals; (3) $35,475 for 
taxable years beginning in 2009 and $22,500 in taxable years 
beginning after 2009 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 child 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, the credit for certain plug-in electric 
vehicles, the credit for alternative motor vehicles, the credit 
for new qualified plug-in electric drive motor vehicles, and 
the D.C. first-time homebuyer credit).
    For taxable years beginning before 2010, 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 2009, the nonrefundable 
personal credits (other than the child credit, the credit for 
savers, the credit for residential energy efficient property, 
the credit for certain plug-in electric drive motor vehicles, 
the credit for alternative motor vehicles, and credit for new 
qualified plug-in electric drive motor vehicles) 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 remaining nonrefundable personal credits are 
allowed to the full extent of the individual's regular tax and 
alternative minimum tax.\1555\
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    \1555\ The rule applicable to the child credit after 2010 is 
subject to the EGTRRA sunset. The adoption credit is refundable in 2010 
and 2011 and beginning in 2012 is nonrefundable and treated for 
purposes of the AMT in the same manner as the child credit.
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                       Explanation of Provisions

    The provision allows an individual to offset the entire 
regular tax liability and alternative minimum tax liability by 
the nonrefundable personal credits for 2010 and 2011.
    The provision provides that the individual AMT exemption 
amount for taxable years beginning in 2010 is (1) $72,450, in 
the case of married individuals filing a joint return and 
surviving spouses; (2) $47,450 in the case of other unmarried 
individuals; and (3) $36,225 in the case of married individuals 
filing separate returns.
    The provision provides that the individual AMT exemption 
amount for taxable years beginning in 2011 is (1) $74,450, in 
the case of married individuals filing a joint return and 
surviving spouses; (2) $48,450 in the case of other unmarried 
individuals; and (3) $37,225 in the case of married individuals 
filing separate returns.

                             Effective Date

    The provision is effective for taxable years beginning 
after 2009.

                 TITLE III--TEMPORARY ESTATE TAX RELIEF


A. Modify and Extend the Estate, Gift, and Generation Skipping Transfer 
Taxes After 2009 (sections 301-304 of the Act and sections 2001, 2010, 
             2502, 2505, 2511, 2631, and 6018 of the Code)


                         Present and Prior Law


In general

    In general, a gift tax is imposed on certain lifetime 
transfers and an estate tax is imposed on certain transfers at 
death. A generation skipping transfer tax generally is imposed 
on certain transfers, either directly or in trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation younger than that of the 
transferor). Transfers subject to the generation skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions.
    The estate and generation skipping transfers taxes are 
repealed for decedents dying and gifts made during 2010, but 
are reinstated for decedents dying and gifts made after 2010.

Exemption equivalent amounts and applicable tax rates

            In general
    Under present law in effect through 2009 and after 2010, a 
unified credit is available with respect to taxable transfers 
by gift and at death.\1556\ The unified credit offsets tax 
computed at the lowest estate and gift tax rates.
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    \1556\ Sec. 2010.
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    Before 2004, the estate and gift taxes were fully unified, 
such that a single graduated rate schedule and a single 
effective exemption amount of the unified credit applied for 
purposes of determining the tax on cumulative taxable transfers 
made by a taxpayer during his or her lifetime and at death. For 
years 2004 through 2009, the gift tax and the estate tax 
continued to be determined using a single graduated rate 
schedule, but the effective exemption amount allowed for estate 
tax purposes was higher than the effective exemption amount 
allowed for gift tax purposes. In 2009, the highest estate and 
gift tax rate was 45 percent. The unified credit effective 
exemption amount was $3.5 million for estate tax purposes and 
$1 million for gift tax purposes.
    For 2009 and after 2010, the generation skipping transfer 
tax is imposed using a flat rate equal to the highest estate 
tax rate on cumulative generation skipping transfers in excess 
of the exemption amount in effect at the time of the transfer. 
The generation skipping transfer tax exemption for a given year 
(prior to and after repeal, discussed below) is equal to the 
unified credit effective exemption amount for estate tax 
purposes.
            Repeal of estate and generation skipping transfer taxes in 
                    2010; modifications to gift tax
    Under EGTRRA, the estate and generation skipping transfer 
taxes are repealed for decedents dying and generation skipping 
transfers made during 2010. The gift tax remains in effect 
during 2010, with a $1 million exemption amount and a gift tax 
rate of 35 percent. Also in 2010, except as provided in 
regulations, certain transfers in trust are treated as 
transfers of property by gift, unless the trust is treated as 
wholly owned by the donor or the donor's spouse under the 
grantor trust provisions of the Code.
            Reinstatement of the estate and generation skipping 
                    transfer taxes for decedents dying and generation 
                    skipping transfers made after December 31, 2010
    The estate, gift, and generation skipping transfer tax 
provisions of EGTRRA sunset at the end of 2010, such that those 
provisions (including repeal of the estate and generation 
skipping transfer taxes) do not apply to estates of decedents 
dying, gifts made, or generation skipping transfers made after 
December 31, 2010. As a result, in general, the estate, gift, 
and generation skipping transfer tax rates and exemption 
amounts that would have been in effect had EGTRRA not been 
enacted apply for estates of decedents dying, gifts made, or 
generation skipping transfers made in 2011 or later years. A 
single graduated rate schedule with a top rate of 55 percent 
and a single effective exemption amount of $1 million applies 
for purposes of determining the tax on cumulative taxable 
transfers by lifetime gift or bequest.

Basis in property received

            In general
    Gain or loss, if any, on the disposition of property is 
measured by the taxpayer's amount realized (i.e., gross 
proceeds received) on the disposition, less the taxpayer's 
basis in such property.\1557\ Basis generally represents a 
taxpayer's investment in property, with certain adjustments 
required after acquisition. For example, basis is increased by 
the cost of capital improvements made to the property and 
decreased by depreciation deductions taken with respect to the 
property.
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    \1557\ Sec. 1001.
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            Basis in property received by lifetime gift
    Property received from a donor of a lifetime gift generally 
takes a carryover basis.\1558\ ``Carryover basis'' means that 
the basis in the hands of the donee is the same as it was in 
the hands of the donor. The basis of property transferred by 
lifetime gift also is increased, but not above fair market 
value, by any gift tax paid by the donor. The basis of a 
lifetime gift, however, generally cannot exceed the property's 
fair market value on the date of the gift. If the basis of 
property is greater than the fair market value of the property 
on the date of the gift, then, for purposes of determining 
loss, the basis is the property's fair market value on the date 
of the gift.
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    \1558\ Sec. 1015.
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            Basis in property received from a decedent who died in 2009
    Property passing from a decedent who died during 2009 
generally takes a ``stepped-up'' basis.\1559\ In other words, 
the basis of property passing from such a decedent's estate 
generally is the fair market value on the date of the 
decedent's death (or, if the alternate valuation date is 
elected, the earlier of six months after the decedent's death 
or the date the property is sold or distributed by the 
estate).\1560\ This step up in basis generally eliminates the 
recognition of income on any appreciation of the property that 
occurred prior to the decedent's death. If the value of 
property on the date of the decedent's death was less than its 
adjusted basis, the property takes a stepped-down basis when it 
passes from a decedent's estate. This stepped-down basis 
eliminates the tax benefit from any unrealized loss.
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    \1559\ Sec. 1014.
    \1560\ There is an exception to the rule that assets subject to the 
Federal estate tax receive stepped-up basis in the case of ``income in 
respect of a decedent.'' Sec. 1014(c). The basis of assets that are 
``income in respect of a decedent'' is a carryover basis (i.e., the 
basis of such assets to the estate or heir is the same as it was in the 
hands of the decedent) increased by estate tax paid on that asset. 
Income in respect of a decedent includes rights to income that has been 
earned, but not recognized, by the date of death (e.g., wages that were 
earned, but not paid, before death), individual retirement accounts 
(IRAs), and assets held in accounts governed by section 401(k).
    In community property states, a surviving spouse's one-half share 
of community property held by the decedent and the surviving spouse 
generally is treated as having passed from the decedent and, thus, is 
eligible for stepped-up basis. Under 2009 law, this rule applies if at 
least one-half of the whole of the community interest is includible in 
the decedent's gross estate.
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            Basis in property received from a decedent who dies during 
                    2010
    The rules providing for stepped-up basis in property 
acquired from a decedent are repealed for assets acquired from 
decedents dying in 2010, and a modified carryover basis regime 
applies.\1561\ Under this regime, recipients of property 
acquired from a decedent at the decedent's death receive a 
basis equal to the lesser of the decedent's adjusted basis or 
the fair market value of the property on the date of the 
decedent's death. The modified carryover basis rules apply to 
property acquired by bequest, devise, or inheritance, or 
property acquired by the decedent's estate from the decedent, 
property passing from the decedent to the extent such property 
passed without consideration, and certain other property to 
which the prior law rules apply, other than property that is 
income in respect of a decedent. Property acquired from a 
decedent is treated as if the property had been acquired by 
gift. Thus, the character of gain on the sale of property 
received from a decedent's estate is carried over to the heir. 
For example, real estate that has been depreciated and would be 
subject to recapture if sold by the decedent will be subject to 
recapture if sold by the heir.
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    \1561\ Sec. 1022.  
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    An executor generally may increase the basis in assets 
owned by the decedent and acquired by the beneficiaries at 
death, subject to certain special rules and exceptions. Under 
these rules, each decedent's estate generally is permitted to 
increase the basis of assets transferred by up to a total of 
$1.3 million. The $1.3 million is increased by the amount of 
unused capital losses, net operating losses, and certain 
``built-in'' losses of the decedent. Nonresidents who are not 
U.S. citizens may be allowed to increase the basis of property 
by up to $60,000. In addition, the basis of property 
transferred to a surviving spouse may be increased by an 
additional $3 million.
            Repeal of modified carryover basis regime for determining 
                    basis in property received from a decedent who dies 
                    after December 31, 2010
    As a result of the EGTRRA sunset at the end of 2010, the 
modified carryover basis regime in effect for determining basis 
in property acquired from a decedent who dies during 2010 does 
not apply for purposes of determining basis in property 
received from a decedent who dies after December 31, 2010. 
Instead, the law in effect prior to 2010, which generally 
provides for stepped-up basis in property passing from a 
decedent, applies.

State death tax credit; deduction for State death taxes paid

            State death tax credit under prior law
    Before 2005, a credit was allowed against the Federal 
estate tax for any estate, inheritance, legacy, or succession 
taxes (``death taxes'') actually paid to any State or the 
District of Columbia with respect to any property included in 
the decedent's gross estate.\1562\ The maximum amount of credit 
allowable for State death taxes was determined under a 
graduated rate table, the top rate of which was 16 percent, 
based on the size of the decedent's adjusted taxable estate. 
Most States imposed a ``pick-up'' or ``soak-up'' estate tax, 
which served to impose a State tax equal to the maximum Federal 
credit allowed.
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    \1562\ Sec. 2011.
---------------------------------------------------------------------------
            Phase-out of State death tax credit; deduction for State 
                    death taxes paid
    Under EGTRRA, the amount of allowable State death tax 
credit was reduced from 2002 through 2004. For decedents dying 
after 2004, the State death tax credit was repealed and 
replaced with a deduction for death taxes actually paid to any 
State or the District of Columbia, in respect of property 
included in the gross estate of the decedent.\1563\ Such State 
taxes must have been paid and claimed before the later of: (1) 
four years after the filing of the estate tax return; or (2)(a) 
60 days after a decision of the U.S. Tax Court determining the 
estate tax liability becomes final, (b) the expiration of the 
period of extension to pay estate taxes over time under section 
6166, or (c) the expiration of the period of limitations in 
which to file a claim for refund or generally 60 days after a 
decision of a court in which such refund suit has become final.
---------------------------------------------------------------------------
    \1563\ Sec. 2058.
---------------------------------------------------------------------------
            Reinstatement of State death tax credit for decedents dying 
                    after December 31, 2010
    As described above, the estate, gift, and generation 
skipping transfer tax provisions of EGTRRA sunset at the end of 
2010, such that those provisions will not apply to estates of 
decedents dying, gifts made, or generation skipping transfers 
made after December 31, 2010. As a result, neither the EGTRRA 
modifications to the State death tax credit nor the replacement 
of the credit with a deduction applies for decedents dying 
after December 31, 2010. Instead, the State death tax credit as 
in effect for decedents who died prior to 2002 applies.

Exclusions and deductions

            Gift tax annual exclusion
    Donors of lifetime gifts are provided an annual exclusion 
of $13,000 (for 2010 and 2011) on transfers of present 
interests in property to each donee during the taxable 
year.\1564\ If the non-donor spouse consents to split the gift 
with the donor spouse, then the annual exclusion is $26,000 for 
2010 and 2011. The dollar amounts are indexed for inflation.
---------------------------------------------------------------------------
    \1564\ Sec. 2503(b).
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            Transfers to a surviving spouse
    In general.--A 100-percent marital deduction generally is 
permitted for estate and gift tax purposes for the value of 
property transferred between spouses.\1565\ Transfers of 
``qualified terminable interest property'' are eligible for the 
marital deduction. ``Qualified terminable interest property'' 
is property: (1) that passes from the decedent; (2) in which 
the surviving spouse has a ``qualifying income interest for 
life''; and (3) to which an election applies. A ``qualifying 
income interest for life'' exists if: (1) the surviving spouse 
is entitled to all the income from the property (payable 
annually or at more frequent intervals) or has the right to use 
the property during the spouse's life; and (2) no person has 
the power to appoint any part of the property to any person 
other than the surviving spouse.
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    \1565\ Secs. 2056 & 2523.
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    Transfers to surviving spouses who are not U.S. citizens.--
A marital deduction generally is denied for property passing to 
a surviving spouse who is not a citizen of the United 
States.\1566\ A marital deduction is permitted, however, for 
property passing to a qualified domestic trust of which the 
noncitizen surviving spouse is a beneficiary. A qualified 
domestic trust is a trust that has as its trustee at least one 
U.S. citizen or U.S. corporation. No corpus may be distributed 
from a qualified domestic trust unless the U.S. trustee has the 
right to withhold any estate tax imposed on the distribution.
---------------------------------------------------------------------------
    \1566\ Secs. 2056(d)(1) & 2523(i)(1).
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    For years when the estate tax is in effect, the estate tax 
is imposed on (1) any distribution from a qualified domestic 
trust before the date of the death of the noncitizen surviving 
spouse and (2) the value of the property remaining in a 
qualified domestic trust on the date of death of the noncitizen 
surviving spouse. The tax is computed as an additional estate 
tax on the estate of the first spouse to die.
            Conservation easements
    For years when an estate tax is in effect, an executor 
generally may elect to exclude from the taxable estate 40 
percent of the value of any land subject to a qualified 
conservation easement, up to a maximum exclusion of 
$500,000.\1567\ The exclusion percentage is reduced by two 
percentage points for each percentage point (or fraction 
thereof) by which the value of the qualified conservation 
easement is less than 30 percent of the value of the land 
(determined without regard to the value of such easement and 
reduced by the value of any retained development right).
---------------------------------------------------------------------------
    \1567\ Sec. 2031(c).
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    Before 2001, a qualified conservation easement generally 
was one that met the following requirements: (1) the land was 
located within 25 miles of a metropolitan area (as defined by 
the Office of Management and Budget) or a national park or 
wilderness area, or within 10 miles of an Urban National Forest 
(as designated by the Forest Service of the U.S. Department of 
Agriculture); (2) the land had been owned by the decedent or a 
member of the decedent's family at all times during the three-
year period ending on the date of the decedent's death; and (3) 
a qualified conservation contribution (within the meaning of 
sec. 170(h)) of a qualified real property interest (as 
generally defined in sec. 170(h)(2)(C)) was granted by the 
decedent or a member of his or her family. Preservation of a 
historically important land area or a certified historic 
structure does not qualify as a conservation purpose.
    Effective for estates of decedents dying after December 31, 
2000, EGTRRA expanded the availability of qualified 
conservation easements by eliminating the requirement that the 
land be located within a certain distance of a metropolitan 
area, national park, wilderness area, or Urban National Forest. 
A qualified conservation easement may be claimed with respect 
to any land that is located in the United States or its 
possessions. EGTRRA also clarifies that the date for 
determining easement compliance is the date on which the 
donation is made.
    As a result of the EGTRRA sunset at the end of 2010, the 
EGTRRA modifications to expand the availability of qualified 
conservation contributions do not apply for decedents dying 
after December 31, 2010.

Provisions affecting small and family-owned businesses and farms

            Special-use valuation
    For years when an estate tax is in effect, an executor may 
elect to value for estate tax purposes certain ``qualified real 
property'' used in farming or another qualifying closely-held 
trade or business at its current-use value, rather than its 
fair market value.\1568\ The maximum reduction in value for 
such real property was $1 million for 2009. Real property 
generally can qualify for special-use valuation if at least 50 
percent of the adjusted value of the decedent's gross estate 
consists of a farm or closely-held business assets in the 
decedent's estate (including both real and personal property) 
and at least 25 percent of the adjusted value of the gross 
estate consists of farm or closely-held business real property. 
In addition, the property must be used in a qualified use 
(e.g., farming) by the decedent or a member of the decedent's 
family for five of the eight years immediately preceding the 
decedent's death.
---------------------------------------------------------------------------
    \1568\ Sec. 2032A.
---------------------------------------------------------------------------
    If, after a special-use valuation election is made, the 
heir who acquired the real property ceases to use it in its 
qualified use within 10 years of the decedent's death, an 
additional estate tax is imposed in order to recapture the 
entire estate-tax benefit of the special-use valuation.
            Family-owned business deduction
    Prior to 2004, an estate was permitted to deduct the 
adjusted value of a qualified family-owned business interest of 
the decedent, up to $675,000.\1569\ A qualified family-owned 
business interest generally is defined as any interest in a 
trade or business (regardless of the form in which it is held) 
with a principal place of business in the United States if the 
decedent's family owns at least 50 percent of the trade or 
business, two families own 70 percent, or three families own 90 
percent, as long as the decedent's family owns, in the case of 
the 70-percent and 90-percent rules, at least 30 percent of the 
trade or business.
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    \1569\ Sec. 2057. The qualified family-owned business deduction and 
the unified credit effective exemption amount are coordinated. If the 
maximum deduction amount of $675,000 is elected, then the unified 
credit effective exemption amount is $625,000, for a total of $1.3 
million. Because of the coordination between the qualified family-owned 
business deduction and the unified credit effective exemption amount, 
the qualified family-owned business deduction would not provide a 
benefit in any year in which the applicable exclusion amount exceeds 
$1.3 million.
---------------------------------------------------------------------------
    To qualify for the deduction, the decedent (or a member of 
the decedent's family) must have owned and materially 
participated in the trade or business for at least five of the 
eight years preceding the decedent's date of death. In 
addition, at least one qualified heir (or member of the 
qualified heir's family) is required to materially participate 
in the trade or business for at least 10 years following the 
decedent's death. The qualified family-owned business rules 
provide a graduated recapture based on the number of years 
after the decedent's death within which a disqualifying event 
occurred.
    In general, there is no requirement that the qualified heir 
(or members of his or her family) continue to hold or 
participate in the trade or business more than 10 years after 
the decedent's death. However, the 10-year recapture period can 
be extended for a period of up to two years if the qualified 
heir does not begin to use the property for a period of up to 
two years after the decedent's death.
    EGTRRA repealed the qualified family-owned business 
deduction for estates of decedents dying after December 31, 
2003. As a result of the EGTRRA sunset at the end of 2010, the 
qualified family-owned business deduction applies to estates of 
decedents dying after December 31, 2010.
            Installment payment of estate tax for closely held 
                    businesses
    Estate tax generally is due within nine months of a 
decedent's death. However, an executor generally may elect to 
pay estate tax attributable to an interest in a closely held 
business in two or more installments (but no more than 
10).\1570\ An estate is eligible for payment of estate tax in 
installments if the value of the decedent's interest in a 
closely held business exceeds 35 percent of the decedent's 
adjusted gross estate (i.e., the gross estate less certain 
deductions). If the election is made, the estate may defer 
payment of principal and pay only interest for the first five 
years, followed by up to 10 annual installments of principal 
and interest. This provision effectively extends the time for 
paying estate tax by 14 years from the original due date of the 
estate tax. A special two-percent interest rate applies to the 
amount of deferred estate tax attributable to the first $1.34 
million \1571\ (as adjusted annually for inflation occurring 
after 1998; the original amount for 1998 was $1 million) in 
taxable value of a closely held business. The interest rate 
applicable to the amount of estate tax attributable to the 
taxable value of the closely held business in excess of $1.34 
million is equal to 45 percent of the rate applicable to 
underpayments of tax under section 6621 of the Code (i.e., 45 
percent of the Federal short-term rate plus two percentage 
points). Interest paid on deferred estate taxes is not 
deductible for estate or income tax purposes.
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    \1570\ Sec. 6166.
    \1571\ Rev. Proc. 2009-50, I.R.B. 2009-45 (Nov. 9, 2009).
---------------------------------------------------------------------------
    Under pre-EGTRRA law, for purposes of these rules an 
interest in a closely held business was: (1) an interest as a 
proprietor in a sole proprietorship; (2) an interest as a 
partner in a partnership carrying on a trade or business if 20 
percent or more of the total capital interest of such 
partnership was included in the decedent's gross estate or the 
partnership had 15 or fewer partners; and (3) stock in a 
corporation carrying on a trade or business if 20 percent or 
more of the value of the voting stock of the corporation was 
included in the decedent's gross estate or such corporation had 
15 or fewer shareholders.
    Under present and pre-EGTRRA law, the decedent may own the 
interest directly or, in certain cases, indirectly through a 
holding company. If ownership is through a holding company, the 
stock must be non-readily tradable. If stock in a holding 
company is treated as business company stock for purposes of 
the installment payment provisions, the five-year deferral for 
principal and the two-percent interest rate do not apply. The 
value of any interest in a closely held business does not 
include the value of that portion of such interest attributable 
to passive assets held by such business.
    Effective for estates of decedents dying after December 31, 
2001, EGTRRA expands the definition of a closely held business 
for purposes of installment payment of estate tax. EGTRRA 
increases from 15 to 45 the maximum number of partners in a 
partnership and shareholders in a corporation that may be 
treated as a closely held business in which a decedent held an 
interest, and thus will qualify the estate for installment 
payment of estate tax.
    EGTRRA also expands availability of the installment payment 
provisions by providing that an estate of a decedent with an 
interest in a qualifying lending and financing business is 
eligible for installment payment of the estate tax. EGTRRA 
provides that an estate with an interest in a qualifying 
lending and financing business that claims installment payment 
of estate tax must make installment payments of estate tax 
(which will include both principal and interest) relating to 
the interest in a qualifying lending and financing business 
over five years.
    EGTRRA clarifies that the installment payment provisions 
require that only the stock of holding companies, not the stock 
of operating subsidiaries, must be non-readily tradable to 
qualify for installment payment of the estate tax. EGTRRA 
provides that an estate with a qualifying property interest 
held through holding companies that claims installment payment 
of estate tax must make all installment payments of estate tax 
(which will include both principal and interest) relating to a 
qualifying property interest held through holding companies 
over five years.
    As a result of the EGTRRA sunset at the end of 2010, the 
EGTRRA modifications to the estate tax installment payment 
rules described above do not apply for estates of decedents 
dying after December 31, 2010.

Generation-skipping transfer tax rules

            In general
    For years before and after 2010, a generation skipping 
transfer tax generally is imposed on transfers, either directly 
or in trust or similar arrangement, to a ``skip person'' (as 
defined above).\1572\ Transfers subject to the generation 
skipping transfer tax include direct skips, taxable 
terminations, and taxable distributions.\1573\ An exemption 
generally equal to the estate tax effective exemption amount is 
provided for each person making generation skipping transfers. 
The exemption may be allocated by a transferor (or his or her 
executor) to transferred property.
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    \1572\ Sec. 2601.
    \1573\ Sec. 2611.
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    A direct skip is any transfer subject to estate or gift tax 
of an interest in property to a skip person.\1574\ Natural 
persons or certain trusts may be skip persons. All persons 
assigned to the second or more remote generation below the 
transferor are skip persons (e.g., grandchildren and great-
grandchildren). Trusts are skip persons if (1) all interests in 
the trust are held by skip persons, or (2) no person holds an 
interest in the trust and at no time after the transfer may a 
distribution (including distributions and terminations) be made 
to a non-skip person. A taxable termination is a termination 
(by death, lapse of time, release of power, or otherwise) of an 
interest in property held in trust unless, immediately after 
such termination, a non-skip person has an interest in the 
property, or unless at no time after the termination may a 
distribution (including a distribution upon termination) be 
made from the trust to a skip person.\1575\ A taxable 
distribution is a distribution from a trust to a skip person 
(other than a taxable termination or direct skip).\1576\ If a 
transferor allocates generation skipping transfer tax exemption 
to a trust prior to the taxable distribution, generation 
skipping transfer tax may be avoided.
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    \1574\ Sec. 2612(c).
    \1575\ Sec. 2612(a).
    \1576\ Sec. 2612(b).
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    The tax rate on generation skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate in 
effect at the time of the transfer multiplied by the 
``inclusion ratio.'' The inclusion ratio with respect to any 
property transferred in a generation skipping transfer is a 
function of the amount of ``generation skipping transfer tax 
exemption'' allocated to a trust. The allocation of generation 
skipping transfer tax exemption effectively reduces the tax 
rate on a generation skipping transfer.
    If an individual makes a direct skip during his or her 
lifetime, any unused generation-skipping transfer tax exemption 
is automatically allocated to a direct skip to the extent 
necessary to make the inclusion ratio for such property equal 
to zero. An individual can elect out of the automatic 
allocation for lifetime direct skips.
    Under pre-EGTRRA law, for lifetime transfers made to a 
trust that were not direct skips, the transferor had to make an 
affirmative allocation of generation skipping transfer tax 
exemption; the allocation was not automatic. If generation 
skipping transfer tax exemption was allocated on a timely filed 
gift tax return, then the portion of the trust that was exempt 
from generation skipping transfer tax was based on the value of 
the property at the time of the transfer. If, however, the 
allocation was not made on a timely filed gift tax return, then 
the portion of the trust that was exempt from generation 
skipping transfer tax was based on the value of the property at 
the time the allocation of generation skipping transfer tax 
exemption was made.
    An election to allocate generation skipping transfer tax to 
a specific transfer generally may be made at any time up to the 
time for filing the transferor's estate tax return.
            Modifications to the generation skipping transfer tax rules 
                    under EGTRRA
    Generally effective after 2000, EGTRRA modifies and adds 
certain mechanical rules related to the generation skipping 
transfer tax. First, EGTRRA generally provides that generation 
skipping transfer tax exemption will be allocated automatically 
to transfers made during life that are ``indirect skips.'' An 
indirect skip is any transfer of property (that is not a direct 
skip) subject to the gift tax that is made to a generation 
skipping transfer trust, as defined in the Code. If any 
individual makes an indirect skip during the individual's 
lifetime, then any unused portion of such individual's 
generation skipping transfer tax exemption is allocated to the 
property transferred to the extent necessary to produce the 
lowest possible inclusion ratio for such property. An 
individual can elect out of the automatic allocation or may 
elect to treat a trust as a generation skipping transfer trust 
attracting the automatic allocation.
    Second, EGTRRA provides that, under certain circumstances, 
generation skipping transfer tax exemption can be allocated 
retroactively when there is an unnatural order of death. In 
general, if a lineal descendant of the transferor predeceases 
the transferor, then the transferor can allocate any unused 
generation skipping transfer exemption to any previous transfer 
or transfers to the trust on a chronological basis.
    Third, EGTRRA provides that a trust that is only partially 
subject to generation skipping transfer tax because its 
inclusion ratio is less than one can be severed in a 
``qualified severance.'' A qualified severance generally is 
defined as the division of a single trust and the creation of 
two or more trusts, one of which would be exempt from 
generation skipping transfer tax and another of which would be 
fully subject to generation skipping transfer tax, if (1) the 
single trust was divided on a fractional basis, and (2) the 
terms of the new trusts, in the aggregate, provide for the same 
succession of interests of beneficiaries as are provided in the 
original trust.
    Fourth, EGTRRA provides that in connection with timely and 
automatic allocations of generation skipping transfer tax 
exemption, the value of the property for purposes of 
determining the inclusion ratio shall be its finally determined 
gift tax value or estate tax value depending on the 
circumstances of the transfer. In the case of a generation 
skipping transfer tax exemption allocation deemed to be made at 
the conclusion of an estate tax inclusion period, the value for 
purposes of determining the inclusion ratio shall be its value 
at that time.
    Fifth, under EGTRRA, the Secretary of the Treasury 
generally is authorized and directed to grant extensions of 
time to make the election to allocate generation skipping 
transfer tax exemption and to grant exceptions to the time 
requirement, without regard to whether any period of 
limitations has expired. If such relief is granted, then the 
gift tax or estate tax value of the transfer to trust would be 
used for determining generation skipping transfer tax exemption 
allocation.
    Sixth, EGTRRA provides that substantial compliance with the 
statutory and regulatory requirements for allocating generation 
skipping transfer tax exemption will suffice to establish that 
generation skipping transfer tax exemption was allocated to a 
particular transfer or a particular trust. If a taxpayer 
demonstrates substantial compliance, then so much of the 
transferor's unused generation skipping transfer tax exemption 
will be allocated as produces the lowest possible inclusion 
ratio.
            Sunset of EGTRRA modifications to the generation skipping 
                    transfer tax rules
    The estate and generation skipping transfer taxes are 
repealed for decedents dying and gifts made in 2010. As a 
result of the EGTRRA sunset at the end of 2010, the generation 
skipping transfer tax again will apply after December 31, 2010. 
However, the EGTRRA modifications to the generation skipping 
transfer tax rules described above do not apply to generation 
skipping transfers made after December 31, 2010. Instead, in 
general, the rules as in effect prior to 2001 apply.

                       Explanation of Provision 


In general 

    The provision reinstates the estate and generation skipping 
transfer taxes effective for decedents dying and transfers made 
after December 31, 2009. The estate tax applicable exclusion 
amount is $5 million under the provision and is indexed for 
inflation for decedents dying in calendar years after 2011, and 
the maximum estate tax rate is 35 percent. For gifts made in 
2010, the applicable exclusion amount for gift tax purposes is 
$1 million, and the gift tax rate is 35 percent. For gifts made 
after December 31, 2010, the gift tax is reunified with the 
estate tax, with an applicable exclusion amount of $5 million 
and a top estate and gift tax rate of 35 percent.\1577\
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    \1577\ The provision clarifies current law regarding the 
computation of estate and gift taxes. Under present law, the gift tax 
on taxable transfers for a year is determined by computing a tentative 
tax on the cumulative value of current year transfers and all gifts 
made by a decedent after December 31, 1976, and subtracting from the 
tentative tax the amount of gift tax that would have been paid by the 
decedent on taxable gifts after December 31, 1976, if the tax rate 
schedule in effect in the current year had been in effect on the date 
of the prior-year gifts. Under the provision, for purposes of 
determining the amount of gift tax that would have been paid on one or 
more prior year gifts, the estate tax rates in effect under section 
2001(c) at the time of the decedent's death are used to compute both 
(1) the gift tax imposed by chapter 12 with respect to such gifts, and 
(2) the unified credit allowed against such gifts under section 2505 
(including in computing the applicable credit amount under section 
2505(a)(1) and the sum of amounts allowed as a credit for all preceding 
periods under section 2505(a)(2)).
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    The generation skipping transfer tax exemption for 
decedents dying or gifts made after December 31, 2009, is equal 
to the applicable exclusion amount for estate tax purposes 
(e.g., $5 million for 2010).\1578\ Therefore, up to $5 million 
in generation skipping transfer tax exemption may be allocated 
to a trust created or funded during 2010, depending upon the 
amount of such exemption used by the taxpayer before 2010. 
Although the generation skipping transfer tax is applicable in 
2010, the generation skipping transfer tax rate for transfers 
made during 2010 is zero percent. The generation skipping 
transfer tax rate for transfers made after 2010 is equal to the 
highest estate and gift tax rate in effect for such year (35 
percent for 2011 and 2012).
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    \1578\ The $5 million generation skipping transfer tax exemption is 
available in 2010 regardless of whether the executor of an estate of a 
decedent who dies in 2010 makes the election described below to apply 
the EGTRRA 2010 estate tax rules and section 1022 basis rules.
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    The provision allows a deduction for certain death taxes 
paid to any State or the District of Columbia for decedents 
dying after December 31, 2009.
    The provision generally repeals the modified carryover 
basis rules that, under EGTRRA, would apply for purposes of 
determining basis in property acquired from a decedent who dies 
in 2010. Under the provision, a recipient of property acquired 
from a decedent who dies after December 31, 2009, generally 
will receive fair market value basis (i.e., ``stepped up'' 
basis) under the basis rules applicable to assets acquired from 
decedents who died in 2009.\1579\
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    \1579\ See generally sec. 1014.
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    The provision extends the EGTRRA modifications to the rules 
regarding (1) qualified conservation easements, (2) installment 
payment of estate taxes, and (3) various technical aspects of 
the generation skipping transfer tax, described in the present-
law section, above.

Election for decedents who die during 2010 

    In the case of a decedent who dies during 2010, the 
provision generally allows the executor of such decedent's 
estate to elect to apply the Internal Revenue Code as if the 
new estate tax and basis step-up rules described in the 
preceding section had not been enacted. In other words, instead 
of applying the above-described new estate tax and basis step-
up rules of the provision, the executor may elect to have 
present law (as enacted under EGTRRA) apply. In general, if 
such an election is made, the estate would not be subject to 
estate tax, and the basis of assets acquired from the decedent 
would be determined under the modified carryover basis rules of 
section 1022.\1580\ This election will have no effect on the 
continued applicability of the generation skipping transfer 
tax. In addition, in applying the definition of transferor in 
section 2652(a)(1), the determination of whether any property 
is subject to the tax imposed by chapter 11 of the Code is made 
without regard to an election made under this provision.
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    \1580\ Therefore, an heir who acquires an asset from the estate of 
a decedent who died in 2010 and whose executor elected application of 
the 2010 EGTRRA rules has a basis in the asset determined under the 
modified carryover basis rules of section 1022. Such basis is 
applicable for the determination of any gain or loss on the sale or 
disposition of the asset in any future year regardless of the status of 
the sunset provision described below.
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    The Secretary of the Treasury or his delegate shall 
determine the time and manner for making the election. The 
election, once made, is revocable only with the consent of the 
Secretary or his delegate.

Extension of certain filing deadlines 

    The provision also provides for the extension of filing 
deadlines for certain transfer tax returns. Specifically, in 
the case of a decedent dying after December 31, 2009, and 
before the date of enactment, the due date shall not be earlier 
than the date which is nine months after the date of enactment 
for: (1) filing an estate tax return required under section 
6018; (2) making the payment of estate tax under Chapter 11; 
and (3) making any disclaimer described in section 2518(b) of 
an interest in property passing by reason the death of such a 
decedent. In the case of a generation skipping transfer made 
after December 31, 2009, and before the date of enactment, the 
due date for filing any return required under section 2662 
(including the making of any election required to be made on 
the return) shall not be earlier than the date which is nine 
months after the date of enactment.

Portability of unused exemption between spouses 

    Under the provision, any applicable exclusion amount that 
remains unused as of the death of a spouse who dies after 
December 31, 2010 (the ``deceased spousal unused exclusion 
amount''), generally is available for use by the surviving 
spouse, as an addition to such surviving spouse's applicable 
exclusion amount.\1581\
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    \1581\ The provision does not allow a surviving spouse to use the 
unused generation skipping transfer tax exemption of a predeceased 
spouse.
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    If a surviving spouse is predeceased by more than one 
spouse, the amount of unused exclusion that is available for 
use by such surviving spouse is limited to the lesser of $5 
million or the unused exclusion of the last such deceased 
spouse.\1582\ A surviving spouse may use the predeceased 
spousal carryover amount in addition to such surviving spouse's 
own $5 million exclusion for taxable transfers made during life 
or at death.
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    \1582\ The last deceased spouse limitation applies whether or not 
the last deceased spouse has any unused exclusion or the last deceased 
spouse's estate makes a timely election.
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    A deceased spousal unused exclusion amount is available to 
a surviving spouse only if an election is made on a timely 
filed estate tax return (including extensions) of the 
predeceased spouse on which such amount is computed, regardless 
of whether the estate of the predeceased spouse otherwise is 
required to file an estate tax return. In addition, 
notwithstanding the statute of limitations for assessing estate 
or gift tax with respect to a predeceased spouse, the Secretary 
of the Treasury may examine the return of a predeceased spouse 
for purposes of determining the deceased spousal unused 
exclusion amount available for use by the surviving spouse. The 
Secretary of the Treasury shall prescribe regulations as may be 
appropriate and necessary to carry out the rules described in 
this paragraph.
    Example 1.--Assume that Husband 1 dies in 2011, having made 
taxable transfers of $3 million and having no taxable estate. 
An election is made on Husband 1's estate tax return to permit 
Wife to use Husband 1's deceased spousal unused exclusion 
amount. As of Husband 1's death, Wife has made no taxable 
gifts. Thereafter, Wife's applicable exclusion amount is $7 
million (her $5 million basic exclusion amount plus $2 million 
deceased spousal unused exclusion amount from Husband 1), which 
she may use for lifetime gifts or for transfers at death.
    Example 2.--Assume the same facts as in Example 1, except 
that Wife subsequently marries Husband 2. Husband 2 also 
predeceases Wife, having made $4 million in taxable transfers 
and having no taxable estate. An election is made on Husband 
2's estate tax return to permit Wife to use Husband 2's 
deceased spousal unused exclusion amount. Although the combined 
amount of unused exclusion of Husband 1 and Husband 2 is $3 
million ($2 million for Husband 1 and $1 million for Husband 
2), only Husband 2's $1 million unused exclusion is available 
for use by Wife, because the deceased spousal unused exclusion 
amount is limited to the lesser of the basic exclusion amount 
($5 million) or the unused exclusion of the last deceased 
spouse of the surviving spouse (here, Husband 2's $1 million 
unused exclusion). Thereafter, Wife's applicable exclusion 
amount is $6 million (her $5 million basic exclusion amount 
plus $1 million deceased spousal unused exclusion amount from 
Husband 2), which she may use for lifetime gifts or for 
transfers at death.
    Example 3.--Assume the same facts as in Examples 1 and 2, 
except that Wife predeceases Husband 2. Following Husband 1's 
death, Wife's applicable exclusion amount is $7 million (her $5 
million basic exclusion amount plus $2 million deceased spousal 
unused exclusion amount from Husband 1). Wife made no taxable 
transfers and has a taxable estate of $3 million. An election 
is made on Wife's estate tax return to permit Husband 2 to use 
Wife's deceased spousal unused exclusion amount, which is $4 
million (Wife's $7 million applicable exclusion amount less her 
$3 million taxable estate). Under the provision, Husband 2's 
applicable exclusion amount is increased by $4 million, i.e., 
the amount of deceased spousal unused exclusion amount of Wife.

Sunset provision 

    Under the Act, the sunset of the EGTRRA estate, gift, and 
generation skipping transfer tax provisions, scheduled to apply 
to estates of decedents dying, gifts made, or generation 
skipping transfers after December 31, 2010, is extended to 
apply to estates of decedents dying, gifts made, or generation 
skipping transfers after December 31, 2012. The EGTRRA sunset, 
as extended by the Act, applies to the amendments made by the 
provision. Therefore, neither the EGTRRA rules nor the new 
rules of the provision will apply to estates of decedents 
dying, gifts made, or generation skipping transfers made after 
December 31, 2012.

                            Effective Date 

    The estate and generation skipping transfer tax provisions 
generally are effective for decedents dying, gifts made, and 
generation skipping transfers made after December 31, 2009. The 
modifications to the gift tax exemption and rate generally are 
effective for gifts made after December 31, 2010. The new rules 
providing for portability of unused exemption between spouses 
generally are effective for decedents dying and gifts made 
after December 31, 2010.

        TITLE IV--TEMPORARY EXTENSION OF INVESTMENT INCENTIVES 


A. Extension of Bonus Depreciation; Temporary 100 Percent Expensing for 
  Certain Business Assets (sec. 401 of the Act and sec. 168(k) of the 
                                 Code) 


                              Present Law 


In general 

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
placed in service during 2008, 2009, and 2010 (2009, 2010, and 
2011 for certain longer-lived and transportation 
property).\1583\ The additional first-year depreciation 
deduction is allowed for both regular tax and alternative 
minimum tax purposes, but is not allowed for purposes of 
computing earnings and profits. 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. 
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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    \1583\ Sec. 168(k). The additional first-year depreciation 
deduction is subject to the general rules regarding whether an item 
must be capitalized under section 263 or section 263A.
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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 2009, a taxpayer 
purchased new depreciable property and placed it in 
service.\1584\ 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 is $500. The 
remaining $500 of the cost of the property is depreciable under 
the rules applicable to five-year property. Thus, 20 percent, 
or $100, is also allowed as a depreciation deduction in 2009. 
The total depreciation deduction with respect to the property 
for 2009 is $600. The remaining $400 adjusted basis of the 
property generally is recovered through otherwise applicable 
depreciation rules.
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    \1584\ Assume that the cost of the property is not eligible for 
expensing under section 179.
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    Property qualifying for the additional first-year 
depreciation deduction 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)).\1585\ Second, the 
original use \1586\ of the property must commence with the 
taxpayer after December 31, 2007.\1587\ Third, the taxpayer 
must acquire the property within the applicable time period. 
Finally, the property must be placed in service after December 
31, 2007, and before January 1, 2011. An extension of the 
placed in service date of one year (i.e., to January 1, 2012) 
is provided for certain property with a recovery period of 10 
years or longer and certain transportation property.\1588\ 
Transportation property is defined as tangible personal 
property used in the trade or business of transporting persons 
or property.
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    \1585\ The additional first-year depreciation deduction is not 
available for any property that is required to be depreciated under the 
alternative depreciation system of MACRS. The additional first-year 
depreciation deduction is also not available for qualified New York 
Liberty Zone leasehold improvement property as defined in section 
1400L(c)(2).
    \1586\ 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).
    \1587\ 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, 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.
    \1588\ Property qualifying for the extended placed in service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million.
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    To qualify, property must be acquired (1) after December 
31, 2007, and before January 1, 2011, 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, 2011.\1589\ 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, 2011. 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, 
2011, (``progress expenditures'') is eligible for the 
additional first-year depreciation.\1590\
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    \1589\ 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.
    \1590\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 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 under section 280F on the amount of 
depreciation deductions allowed with respect to certain 
passenger automobiles is increased in the first year by $8,000 
for automobiles that qualify (and for which the taxpayer does 
not elect out of the additional first-year deduction). The 
$8,000 increase is not indexed for inflation.

Election to accelerate certain credits in lieu of claiming bonus 
        depreciation

    A corporation 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, and before 
December 31, 2008.\1591\ 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.\1592\ The increases in the allowable 
credits are treated as refundable. 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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    \1591\ Sec. 168(k)(4). 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 section 168(k) does not 
apply to any eligible qualified property and the straight line method 
is used to calculate depreciation of such property.
    \1592\ Special rules apply to an applicable partnership.
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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 \1593\ 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, 2010, but only if no 
binding written contract for the acquisition is in effect 
before April 1, 2008,\1594\ or (b) pursuant to a binding 
written contract which was entered into after March 31, 2008, 
and before January 1, 2010; \1595\ and (3) the property must be 
placed in service after March 31, 2008, and before January 1, 
2010 (January 1, 2011 for certain longer-lived and 
transportation property).
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    \1593\ 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)(1) 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.
    \1594\ In the case of passenger aircraft, the written binding 
contract limitation does not apply.
    \1595\ 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) are treated as one taxpayer for purposes of 
the limitation, as well as for electing the application of this 
provision.
    A corporation may make a separate election to increase the 
research credit or minimum tax credit limitation by the bonus 
depreciation amount with respect to certain property placed in 
service in 2009 (2010 in the case of certain longer-lived and 
transportation property). The election applies with respect to 
extension property, which is defined as property that is 
eligible qualified property solely because it meets the 
requirements under the extension of the special allowance for 
certain property acquired during 2009.
    A corporation that has made an election to increase the 
research credit or minimum tax credit limitation for eligible 
qualified property for its first taxable year ending after 
March 31, 2008, may choose not to make this election for 
extension property. Further, a corporation that has not made an 
election for eligible qualified property for its first taxable 
year ending after March 31, 2008, is permitted to make the 
election for extension property for its first taxable year 
ending after December 31, 2008, and for each subsequent year. 
In the case of a taxpayer electing to increase the research or 
minimum tax credit for both eligible qualified property and 
extension property, a separate bonus depreciation amount, 
maximum amount, and maximum increase amount is computed and 
applied to each group of property.\1596\
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    \1596\ In computing the maximum amount, the maximum increase amount 
for extension property is reduced by bonus depreciation amounts for 
preceding taxable years only with respect to extension property.
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                        Explanation of Provision

    The provision extends and expands the additional first-year 
depreciation to equal 100 percent of the cost of qualified 
property placed in service after September 8, 2010, and before 
January 1, 2012, (before January 1, 2013, for certain longer-
lived and transportation property),\1597\ and provides for a 50 
percent first-year additional depreciation deduction for 
qualified property placed in service after December 31, 2011, 
and before January 1, 2013, (after December 31, 2012, and 
before January 1, 2014, for certain longer-lived and 
transportation property). Rules similar to those in section 
168(k)(2)(A)(ii) and (iii), which provide that qualified 
property does not include property acquired pursuant to a 
written binding contract that was in effect prior to January 1, 
2008, apply for purposes of determining whether property is 
eligible for the temporary 100 percent additional first-year 
depreciation deduction. Thus under the provision, property 
acquired pursuant to a written binding contract entered into 
after December 31, 2007, is qualified property for purposes of 
the 100 percent additional first-year depreciation deduction 
assuming all other requirements of section 168(k)(2) are met.
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    \1597\ It is intended that, in the case of qualified property that 
is acquired by the taxpayer after September 8, 2010 and placed in 
service by the taxpayer in 2012 and that is eligible for 100 percent 
bonus depreciation by reason of the extended placed in service date 
provided in section 168(k)(5), the 100 percent bonus deprecation 
applies only to the extent of the adjusted basis of the property 
attributable to manufacture, construction, or production before January 
1, 2012. It is also intended that a taxpayer may elect 50 percent 
(rather than 100 percent) bonus depreciation with respect to all 
property in any class of property placed in service during a taxable 
year. Finally, it is intended that section 168(k)(5) does not apply to 
passenger automobiles subject to the limitations on depreciation 
provided in section 280F, but that such property continues to be 
eligible for 50-percent bonus depreciation. Technical corrections may 
be necessary so that the statute reflects this intent.
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    The provision also generally permits a corporation to 
increase the minimum tax credit limitation by the bonus 
depreciation amount with respect to certain property placed in 
service after December 31, 2010, and before January 1, 2013, 
(January 1, 2014 in the case of certain longer-lived and 
transportation property).\1598\ The provision applies with 
respect to round 2 extension property, which is defined as 
property that is eligible qualified property solely because it 
meets the requirements under the extension of the additional 
first-year depreciation deduction for certain property placed 
in service after December 31, 2010.\1599\
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    \1598\ An electing taxpayer does not compute a bonus depreciation 
amount under section 168(k)(4)(C) for any bonus depreciation allowable 
with respect to property placed in service during 2010 except long-
production period property (or certain transportation property) placed 
in service in 2010 that is extension property. For example, assume in 
its taxable year beginning October 1, 2010, and ending September 30, 
2011, a corporation places into service qualified property with a total 
cost of $1,000,000, of which $250,000 was placed in service before 
December 31, 2010. The corporation computes its bonus depreciation 
amount under section 168(k)(4)(C) taking into account only the bonus 
depreciation computed with respect to the $750,000 of property placed 
in service after December 31, 2010.
    \1599\ An election under new section 168(k)(4)(I) with respect to 
round 2 extension property is binding for any property that is eligible 
qualified property solely by reason of the amendments made by section 
401(a) of the Tax Relief, Unemployment Insurance Reauthorization, and 
Job Creation Act of 2010 (and the application of such extension to this 
paragraph pursuant to the amendment made by section 401(c)(1) of such 
Act), Pub. L. No. 111-312, even if such property is placed in service 
in 2012.
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    Under the provision, a taxpayer that has made an election 
to increase the research credit or minimum tax credit 
limitation for eligible qualified property for its first 
taxable year ending after March 31, 2008 or for extension 
property may choose not to make this election for round 2 
extension property. Further, the provision allows a taxpayer 
that has not made an election for eligible qualified property 
for its first taxable year ending after March 31, 2008, or for 
extension property, to make the election for round 2 extension 
property for its first taxable year ending after December 31, 
2010, and for each subsequent year. In the case of a taxpayer 
electing to increase the research or minimum tax credit for 
eligible qualified property and/or extension property and the 
minimum tax credit for round 2 extension property, a separate 
bonus depreciation amount, maximum amount, and maximum increase 
amount is computed and applied to each group of property.\1600\
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    \1600\ In computing the maximum amount, the maximum increase amount 
for extension property or for round 2 extension property is reduced by 
bonus depreciation amounts for preceding taxable years only with 
respect to extension property or round 2 extension property, 
respectively.
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                             Effective Date

    The provision generally applies to property placed in 
service by the taxpayer after December 31, 2010, in taxable 
years ending after such date. The provision expanding the 
additional first-year depreciation deduction to 100 percent of 
the basis of qualified property applies to property placed in 
service by the taxpayer after September 8, 2010, in taxable 
years ending after such date.

B. Temporary Extension of Increased Small Business Expensing (sec. 402 
                  of the Act and sec. 179 of the Code)


                              Present Law

    Subject to certain limitations, a taxpayer that invests in 
certain qualifying property may elect under section 179 to 
deduct (or ``expense'') the cost of qualifying property, rather 
than to recover such costs through depreciation 
deductions.\1601\ For taxable years beginning in 2010 and 2011, 
the maximum amount that a taxpayer may expense is $500,000 of 
the cost of qualifying property placed in service for the 
taxable year.\1602\ The $500,000 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 
$2,000,000.\1603\ Off-the-shelf computer software placed in 
service in taxable years beginning before 2012 is treated as 
qualifying property.
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    \1601\ 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)). In addition, 
section 179(e) provides for an enhanced section 179 deduction for 
qualified disaster assistance property.
    \1602\ The definition of qualifying property was temporarily (for 
2010 and 2011) expanded to include up to $250,000 of qualified 
leasehold improvement property, qualified restaurant property, and 
qualified retail improvement property. See section 179(f)(2).
    \1603\ The temporary $500,000 and $2,000,000 amounts were enacted 
in Section 2021 of the Small Business Jobs Act of 2010, Pub. L. No. 
111-240.
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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 generally may be carried forward to succeeding 
taxable years (subject to similar limitations).\1604\ 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.\1605\
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    \1604\ Special rules apply to limit the carryover of unused section 
179 deductions attributable to qualified leasehold improvement 
property, qualified restaurant property, and qualified retail 
improvement property. See section 179(f)(4).
    \1605\ 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 2012 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).

                        Explanation of Provision

    Under the provision, for taxable years beginning in 2012, 
the maximum amount a taxpayer may expense 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 addition, the provision extends the treatment of off-
the-shelf computer software as qualifying property,\1606\ as 
well as the provision permitting a taxpayer to amend or 
irrevocably revoke an election for a taxable year under section 
179 without the consent of the Commissioner for one year 
(through 2012).
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    \1606\ The temporary extension of the definition of qualifying 
property to include qualified leasehold improvement property, qualified 
restaurant property, and qualified retail improvement property is not 
extended.
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    For taxable years beginning in 2013, and thereafter, the 
maximum amount a taxpayer may expense is $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.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2011.

              TITLE VI--TEMPORARY EMPLOYEE PAYROLL TAX CUT


                A. Payroll Tax Cut (sec. 601 of the Act)


                              Present Law


Federal Insurance Contributions Act (``FICA'') tax

    The FICA tax applies to employers based on the amount of 
covered wages paid to an employee during the year.\1607\ 
Generally, covered wages means all remuneration for employment, 
including the cash value of all remuneration paid in any medium 
other than cash.\1608\ Certain exceptions from covered wages 
are also provided. The tax imposed is composed of two parts: 
(1) the old age, survivors, and disability insurance 
(``OASDI'') tax equal to 6.2 percent of covered wages up to the 
taxable wage base ($106,800 in 2010); and (2) the Medicare 
hospital insurance (``HI'') tax amount equal to 1.45 percent of 
covered wages.
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    \1607\ Sec. 3111.
    \1608\ Sec. 3121.
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    In addition to the tax on employers, each employee is 
subject to FICA taxes equal to the amount of tax imposed on the 
employer (the ``employee portion'').\1609\ The employee portion 
generally must be withheld and remitted to the Federal 
government by the employer.
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    \1609\ Sec. 3101. For taxable years beginning after 2012, an 
additional HI tax applies.
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Self-Employment Contributions Act (``SECA'') tax

    As a parallel to FICA taxes, the SECA tax applies to the 
self-employment income of self-employed individuals.\1610\ The 
rate of the OASDI portion of SECA taxes is 12.4 percent, which 
is equal to the combined employee and employer OASDI FICA tax 
rates, and applies to self-employment income up to the FICA 
taxable wage base. Similarly, the rate of the HI portion is 2.9 
percent, the same as the combined employer and employee HI 
rates under the FICA tax, and there is no cap on the amount of 
self-employment income to which the rate applies. \1611\
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    \1610\ Sec. 1401.
    \1611\ For taxable years beginning after 2012, an additional HI tax 
applies.
---------------------------------------------------------------------------
    An individual may deduct, in determining net earnings from 
self-employment under the SECA tax, the amount of the net 
earnings from self-employment (determined without regard to 
this deduction) for the taxable year multiplied by one half of 
the combined OASDI and HI rates.\1612\
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    \1612\ Sec. 1402(a)(12).
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    Additionally, a deduction, for purposes of computing the 
income tax of an individual, is allowed for one half of the 
amount of the SECA tax imposed on the individual's self-
employment income for the taxable year.\1613\
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    \1613\ Sec. 164(f).
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Railroad retirement tax

    The Railroad Retirement System has two main components. 
Tier I of the system is financed by taxes on employers and 
employees equal to the Social Security payroll tax and provides 
qualified railroad retirees (and their qualified spouses, 
dependents, widows, or widowers) with benefits that are roughly 
equal to Social Security. Covered railroad workers and their 
employers pay the Tier I tax instead of the Social Security 
payroll tax, and most railroad retirees collect Tier I benefits 
instead of Social Security. Tier II of the system replicates a 
private pension plan, with employers and employees contributing 
a certain percentage of pay toward the system to finance 
defined benefits to eligible railroad retirees (and qualified 
spouses, dependents, widows, or widowers) upon retirement; 
however, the Federal Government collects the Tier II payroll 
contribution and pays out the benefits.

                        Explanation of Provision

    The provision reduces the employee OASDI tax rate under the 
FICA tax by two percentage points to 4.2 percent for one year 
(2011). Similarly, the provision reduces the OASDI tax rate 
under the SECA tax by two percentage points to 10.4 percent for 
taxable years of individuals that begin in 2011. A similar 
reduction applies to the railroad retirement tax.
    The provision provides rules for coordination with 
deductions for employment taxes. The rate reduction is not 
taken into account in determining the SECA tax deduction 
allowed for determining the amount of the net earnings from 
self-employment for the taxable year. Thus, the deduction for 
2011 remains at 7.65 percent of self-employment income 
(determined without regard to the deduction).
    The income tax deduction allowed under section 164(f) for 
taxable years beginning in 2011 is computed at the rate of 59.6 
percent of the OASDI tax paid, plus one half of the HI tax 
paid.\1614\
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    \1614\ This percentage replaces the rate of one half (50 percent) 
allowed under present law for this portion of the deduction. The new 
percentage is necessary to continue to allow the self-employed taxpayer 
to deduct the full amount of the employer portion of SECA taxes. The 
employer OASDI tax rate remains at 6.2 percent, while the employee 
portion falls to 4.2 percent. Thus, the employer share of total OASDI 
taxes is 6.2 divided by 10.4, or 59.6 percent of the OASDI portion of 
SECA taxes.
---------------------------------------------------------------------------
    The provision provides that the Treasury Secretary is to 
notify employers of the payroll tax cut.
    The Federal Old-Age and Survivors Trust Fund, the Federal 
Disability Insurance Trust Fund, and the Social Security 
Equivalent Benefit Account established under the Railroad 
Retirement Act of 1974 \1615\ will receive transfers from the 
General Fund of the United States Treasury equal to any 
reduction in payroll taxes attributable to this provision. The 
amounts will be transferred from the General Fund at such times 
and in such a manner as to replicate to the extent possible the 
transfers which would have occurred to the Trust Funds or 
Benefit Account had the provision not been enacted.
---------------------------------------------------------------------------
    \1615\ 45 U.S.C. 231n-1(a).
---------------------------------------------------------------------------
    For purposes of applying any provision of Federal law other 
than the provisions of the Internal Revenue Code of 1986, the 
rate of tax in effect under section 3101(a) is determined 
without regard to the reduction in that rate under this 
provision.

                             Effective Date

    The provision is effective for remuneration received during 
2011 and for self-employment income for taxable years beginning 
in 2011.

     TITLE VII--TEMPORARY EXTENSION OF CERTAIN EXPIRING PROVISIONS


                               A. Energy


1. Incentives for biodiesel and renewable diesel (sec. 701 of the Act 
        and secs. 40A, 6426, and 6427 of the Code)

                              Present Law


Biodiesel

    The Code provides an income tax credit for biodiesel fuels 
(the ``biodiesel fuels credit'').\1616\ 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 includible 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, 2009.
---------------------------------------------------------------------------
    \1616\ 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 EPA under section 
211 of the Clean Air Act (42 U.S.C. sec. 7545) 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, camelina, 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 $1.00 for each gallon of 
biodiesel (including agri-biodiesel) used by the taxpayer in 
the production of a qualified biodiesel mixture. 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) 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.
    Per IRS guidance a mixture need only contain 1/10th of one 
percent of diesel fuel to be a qualified mixture.\1617\ Thus, a 
qualified biodiesel mixture can contain 99.9 percent biodiesel 
and 0.1 percent diesel fuel.
---------------------------------------------------------------------------
    \1617\ Notice 2005-62, I.R.B. 2005-35, 443 (2005). ``A biodiesel 
mixture is a mixture of biodiesel and diesel fuel containing at least 
0.1 percent (by volume) of diesel fuel. Thus, for example, a mixture of 
999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel 
mixture.'' Ibid.
---------------------------------------------------------------------------
            Biodiesel credit (B-100)
    The biodiesel credit is $1.00 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.
            Small agri-biodiesel producer credit
    The Code provides a small agri-biodiesel producer income 
tax credit, in addition to the biodiesel and biodiesel mixture 
credits. The credit is 10 cents per gallon 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) 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.\1618\ The credit is $1.00 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. 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.\1619\
---------------------------------------------------------------------------
    \1618\ Sec. 6426(c).
    \1619\ Sec. 6426(c)(4).
---------------------------------------------------------------------------
    The credit is not available for any sale or use for any 
period after December 31, 2009. 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.\1620\ The 
biodiesel fuel mixture credit must first be taken against tax 
liability for taxable fuels. To the extent the biodiesel fuel 
mixture credit exceeds such tax liability, the excess may be 
received as a payment. Thus, if the person has no section 4081 
liability, the credit is refundable. The Secretary is not 
required to make payments with respect to biodiesel fuel 
mixtures sold or used after December 31, 2009.
---------------------------------------------------------------------------
    \1620\ Sec. 6427(e).
---------------------------------------------------------------------------

Renewable diesel

    ``Renewable diesel'' is liquid fuel that (1) is derived 
from biomass (as defined in section 45K(c)(3)), (2) meets the 
registration requirements for fuels and fuel additives 
established by the EPA under section 211 of the Clean Air Act, 
and (3) meets the requirements of the ASTM D975 or D396, or 
equivalent standard established by the Secretary. 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. Renewable 
diesel also includes fuel derived from biomass that meets the 
requirements of a Department of Defense specification for 
military jet fuel or an ASTM specification for aviation turbine 
fuel.
    For purposes of the Code, renewable diesel is generally 
treated the same as biodiesel. In the case of renewable diesel 
that is aviation fuel, kerosene is treated as though it were 
diesel fuel for purposes of a qualified renewable diesel 
mixture. Like biodiesel, the incentive may be taken as an 
income tax credit, an excise tax credit, or as a payment from 
the Secretary.\1621\ 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, 2009.
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    \1621\ Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the income tax credit, excise tax 
credit and payment provisions for biodiesel and renewable 
diesel for two additional years (through December 31, 2011).
    In light of the retroactive nature of the provision, the 
provision creates a special rule to address claims regarding 
excise credits and claims for payment associated with periods 
occurring during 2010. In particular the provision directs the 
Secretary to issue guidance within 30 days of the date of 
enactment. Such guidance is to provide for a one-time 
submission of claims covering periods occurring during 2010. 
The guidance is to provide for a 180-day period for the 
submission of such claims (in such manner as prescribed by the 
Secretary) to begin no later than 30 days after such guidance 
is issued. Such claims shall be paid by the Secretary of the 
Treasury not later than 60 days after receipt. If the claim is 
not paid within 60 days of the date of the filing, the claim 
shall be paid with interest from such date determined by using 
the overpayment rate and method under section 6621 of such 
Code.

                             Effective Date

    The provision is effective for sales and uses after 
December 31, 2009.

2. Credit for refined coal facilities (sec. 702 of the Act and sec. 45 
        of the Code)

                              Present Law


In general

    A credit is available for refined coal. In general, refined 
coal is a fuel produced from coal that is (1) used to produce 
steam or (2) used to produce steel industry fuel.

Refined coal used to produce steam

    An income tax credit is allowed for the production at 
qualified facilities of certain refined coal sold to an 
unrelated person for use to produce steam. The amount of the 
refined coal credit is $4.375 per ton (adjusted for inflation 
using 1992 as the base year; $6.27 for 2010). A taxpayer may 
generally claim the credit during the 10-year period commencing 
with the date the qualified facility is placed in service.
    A qualifying refined coal facility is a facility producing 
refined coal that is placed in service after October 22, 2004, 
and before January 1, 2010. Refined coal is a qualifying 
liquid, gaseous, or solid synthetic fuel produced from coal 
(including lignite) or high-carbon fly ash, including such fuel 
used as a feedstock. A qualifying fuel is a fuel that, when 
burned, emits 20 percent less nitrogen oxides and either sulfur 
dioxide or mercury than the burning of feedstock coal or 
comparable coal predominantly available in the marketplace as 
of January 1, 2003, but only if the fuel sells at prices at 
least 50 percent greater than the prices of the feedstock coal 
or comparable coal. In addition, to be qualified refined coal, 
the taxpayer must sell the fuel with the reasonable expectation 
that it will be used for the primary purpose of producing 
steam.
    The refined coal credit is reduced over an $8.75 phase-out 
range as the reference price of the fuel used as feedstock for 
the refined coal exceeds an amount equal to 1.7 times the 
reference price for such fuel in 2002 (adjusted for inflation). 
The amount of the 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.
    The credit is a component of the general business 
credit,\1622\ allowing excess credits to be carried back one 
year and forward up to 20 years. The credit is also subject to 
the alternative minimum tax.
---------------------------------------------------------------------------
    \1622\ Sec. 38(b)(8).
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Facilities placed in service after 2008 that make refined coal used to 
        produce steam

    For refined coal facilities placed in service after 2008, 
the requirement that the qualified refined coal fuel sell at a 
price at least 50 percent greater than the price of the 
feedstock coal does not apply. However, to be credit-eligible, 
refined coal produced by such facilities must reduce by 40 
percent (not 20 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.

Refined coal that is steel industry fuel

    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; 
$2.87 for 2010). 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.
    Steel industry fuel is defined 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.

                        Explanation of Provision

    The provision extends for two years (through December 31, 
2011) the placed-in-service period for new refined coal 
facilities other than refined coal facilities that produce 
steel industry fuel.

                             Effective Date

    The modifications to the placed-in-service period are 
effective on the date of enactment.

3. New energy efficient home credit (sec. 703 of the Act and sec. 45L 
        of the Code)

                              Present Law

    The Code provides a credit to an eligible contractor for 
each qualified new energy-efficient home that is constructed by 
the eligible contractor and acquired by a person from such 
eligible contractor for use as a residence during the taxable 
year. To qualify as a new energy-efficient home, the home must 
be: (1) a dwelling located in the United States, (2) 
substantially completed after August 8, 2005, and (3) certified 
in accordance with guidance prescribed by the Secretary to have 
a projected level of annual heating and cooling energy 
consumption that meets the standards for either a 30-percent or 
50-percent reduction in energy usage, compared to a comparable 
dwelling constructed in accordance with the standards of 
chapter 4 of the 2003 International Energy Conservation Code as 
in effect (including supplements) on August 8, 2005, and any 
applicable Federal minimum efficiency standards for equipment. 
With respect to homes that meet the 30-percent standard, one-
third of such 30-percent savings must come from the building 
envelope, and with respect to homes that meet the 50-percent 
standard, one-fifth of such 50-percent savings must come from 
the building envelope.
    Manufactured homes that conform to Federal manufactured 
home construction and safety standards are eligible for the 
credit provided all the criteria for the credit are met. The 
eligible contractor is the person who constructed the home, or 
in the case of a manufactured home, the producer of such home.
    The credit equals $1,000 in the case of a new home that 
meets the 30-percent standard and $2,000 in the case of a new 
home that meets the 50-percent standard. Only manufactured 
homes are eligible for the $1,000 credit.
    In lieu of meeting the standards of chapter 4 of the 2003 
International Energy Conservation Code, manufactured homes 
certified by a method prescribed by the Administrator of the 
Environmental Protection Agency under the Energy Star Labeled 
Homes program are eligible for the $1,000 credit provided 
criteria (1) and (2), above, are met.
    The credit applies to homes that are purchased prior to 
January 1, 2010. The credit is part of the general business 
credit.

                        Explanation of Provision

    The provision extends the credit to homes that are 
purchased prior to January 1, 2012.

                             Effective Date

    The provision applies to homes acquired after December 31, 
2009.

4. Excise tax credits and outlay payments for alternative fuel and 
        alternative fuel mixtures (sec. 704 of the Act and secs. 6426 
        and 6427(e) 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 (``coal-to-liquids''), compressed or liquefied 
gas derived from biomass, or liquid fuel derived from biomass. 
Such term does not include ethanol, methanol, or biodiesel.
    For coal-to-liquids produced after September 30, 2009, 
through December 30, 2009, the fuel must be certified as having 
been derived from coal produced at a gasification facility that 
separates and sequesters 50 percent of such facility's total 
carbon dioxide emissions. The sequestration percentage 
increases to 75 percent for fuel produced after December 30, 
2009.
    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 \1623\ of nonliquid 
alternative fuel sold by the taxpayer for use as a motor fuel 
in a motor vehicle or motorboat, sold for use in aviation or so 
used by the taxpayer.
---------------------------------------------------------------------------
    \1623\ ``Gasoline gallon equivalent'' means, with respect to any 
nonliquid alternative fuel (for example, compressed natural gas), the 
amount of such fuel having a Btu (British thermal unit) 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. 
An ``alternative fuel mixture'' is a mixture of alternative 
fuel and taxable fuel that contains at least \1/10\ of one 
percent taxable fuel. The mixture must be sold by the taxpayer 
producing such mixture to any person for use as a fuel, or used 
by the taxpayer producing the mixture as a fuel. The credits 
generally expired after December 31, 2009 (September 30, 2014 
for liquefied hydrogen).
    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 expired after 
December 31, 2009. With respect to liquefied hydrogen, the 
payment provisions expire after September 30, 2014. The 
alternative fuel credit and alternative fuel mixture credit 
must first be applied to the applicable excise tax liability 
for under section 4041 or 4081, and any excess credit may be 
taken as a payment.

                        Explanation of Provision

    The provision extends the alternative fuel credit, 
alternative fuel mixture credit, and related payment 
provisions, for two additional years (through December 31, 
2011). For purposes of the alternative fuel credit, alternative 
fuel mixture credit and related payment provisions, the 
provision excludes fuel (including lignin, wood residues, or 
spent pulping liquors) derived from the production of paper or 
pulp.
    In light of the retroactive nature of the provision, the 
provision creates a special rule to address claims regarding 
excise credits and claims for payment associated with periods 
occurring during 2010. In particular the provision directs the 
Secretary to issue guidance within 30 days of the date of 
enactment. Such guidance is to provide for a one-time 
submission of claims covering periods occurring during 2010. 
The guidance is to provide for a 180-day period for the 
submission of such claims (in such manner as prescribed by the 
Secretary) to begin no later than 30 days after such guidance 
is issued. Such claims shall be paid by the Secretary of the 
Treasury not later than 60 days after receipt. If the claim is 
not paid within 60 days of the date of the filing, the claim 
shall be paid with interest from such date determined by using 
the overpayment rate and method under section 6621 of such 
Code.

                             Effective Date

    The provision is effective for fuel sold or used after 
December 31, 2009.

5. Special rule for sales or dispositions to implement FERC or State 
        electric restructuring policy for qualified electric utilities 
        (sec. 705 of the Act and sec. 451(i) of the Code)

                              Present Law

    A taxpayer selling property generally 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 
\1624\ (the ``reinvestment property'').\1625\ 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.
---------------------------------------------------------------------------
    \1624\ 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.
    \1625\ Sec. 451(i).
---------------------------------------------------------------------------
    A qualifying electric transmission transaction is the sale 
or other disposition of property used by a qualified electric 
utility to an independent transmission company 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) \1626\ with respect to the transmission facilities 
to which the election applies, and (2) an electric utility (as 
defined in the Federal Power Act).\1627\
---------------------------------------------------------------------------
    \1626\ 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.
    \1627\ 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.
---------------------------------------------------------------------------
    In general, an independent transmission company is defined 
as: (1) an independent transmission provider \1628\ 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 no later than four years after the close 
of the taxable year in which the transaction occurs; 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).
---------------------------------------------------------------------------
    \1628\ 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). Exempt 
utility property does not include any property that is located 
outside of the United States.
    If a taxpayer is a member of an affiliated group of 
corporations filing a consolidated return, the reinvestment 
property may be purchased by any member of the affiliated group 
(in lieu of the taxpayer).

                        Explanation of Provision

    The provision extends the treatment under the present-law 
deferral provision to sales or dispositions by a qualified 
electric utility that occur prior to January 1, 2012.

                             Effective Date

    The extension provision applies to dispositions after 
December 31, 2009.

6. Suspension of limitation on percentage depletion for oil and gas 
        from marginal wells (sec. 706 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.\1629\ 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.
---------------------------------------------------------------------------
    \1629\ Secs. 611-613.
---------------------------------------------------------------------------
    The Code generally limits the percentage depletion method 
for oil and gas properties to independent producers and royalty 
owners.\1630\ 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.\1631\ The amount deducted generally may not exceed 100 
percent of the net income from that property in any year (the 
``net-income limitation'').\1632\ The 100-percent net-income 
limitation for marginal production has been suspended for 
taxable years beginning before January 1, 2010.
---------------------------------------------------------------------------
    \1630\ Sec. 613A.
    \1631\ Sec. 613A(c).
    \1632\ Sec. 613(a).
---------------------------------------------------------------------------
    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).\1633\
---------------------------------------------------------------------------
    \1633\ The American Petroleum Institute gravity, or API gravity, is 
a measure of how heavy or light a petroleum liquid is compared to 
water.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the suspension of the 100-percent 
net-income limitation for marginal production for two years (to 
apply to tax years beginning before January 1, 2012).

                             Effective Date

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

7. Extension of grants for specified energy property in lieu of tax 
        credits (sec. 707 of the Act)

                              Present Law


Renewable electricity production credit

    An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities (the ``renewable electricity production 
credit'').\1634\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
solar energy, small irrigation power, municipal solid waste, 
qualified hydropower production, and marine and hydrokinetic 
renewable energy. 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.
---------------------------------------------------------------------------
    \1634\ Sec. 45. In addition to the renewable electricity production 
credit, section 45 also provides income tax credits for the production 
of Indian coal and refined coal at qualified facilities.

    SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
                                RESOURCES
------------------------------------------------------------------------
     Eligible electricity       Credit amount for  2010
  production  activity (sec.   \1\ (cents per  kilowatt-  Expiration \2\
             45)                         hour)
------------------------------------------------------------------------
Wind.........................                      2.2   December 31,
                                                          2012.
Closed-loop biomass..........                      2.2   December 31,
                                                          2013.
Open-loop biomass (including                       1.1   December 31,
 agricultural livestock waste                             2013.
 nutrient facilities).
Geothermal...................                      2.2   December 31,
                                                          2013.
Solar (pre-2006 facilities                         2.2   December 31,
 only).                                                   2005.
Small irrigation power.......                      1.1   December 31,
                                                          2013.
Municipal solid waste                              1.1   December 31,
 (including landfill gas                                  2013.
 facilities and trash
 combustion facilities).
Qualified hydropower.........                      1.1   December 31,
                                                          2013.
Marine and hydrokinetic......                      1.1   December 31,
                                                          2013.
------------------------------------------------------------------------
\1\ In general, the credit is available for electricity produced during
  the first 10 years after a facility has been placed in service.
\2\ Expires for property placed in service after this date.

                             Energy credit

    An income tax credit is also allowed for certain energy 
property placed in service. Qualifying property includes 
certain fuel cell property, solar property, geothermal power 
production property, small wind energy property, combined heat 
and power system property, and geothermal heat pump 
property.\1635\
---------------------------------------------------------------------------
    \1635\ Sec. 48.

                                     SUMMARY OF ENERGY INVESTMENT TAX CREDIT
----------------------------------------------------------------------------------------------------------------
                                                 Credit  rate
                                                   (Percent)           Maximum  credit           Expiration
----------------------------------------------------------------------------------------------------------------
Energy credit       Equipment to produce    10....................  None.................  None.
 (sec. 48)           energy from a
                     geothermal deposit.
                    Equipment to use        10....................  None.................  December 31, 2016.
                     ground or ground
                     water for heating or
                     cooling.
                    Microturbine property   10....................  $200 per Kw of         December 31, 2016.
                     (<2 Mw electrical                               capacity.
                     generation power
                     plants of >26%
                     efficiency).
                    Combined heat and       10....................  None.................  December 31, 2016.
                     power property
                     (simultaneous
                     production of
                     electrical/mechanical
                     power and useful heat
                     > 60% efficiency).
                    Solar electric or       30% (10% after          None.................  None.
                     solar hot water         December 31, 2016).
                     property.
                    Fuel cell property      30....................  $1,500 for each \1/2\  December 31, 2016.
                     (generates                                      Kw of capacity.
                     electricity through
                     electrochemical
                     process).
                    Small (<100 Kw          30....................  None.................  December 31, 2016.
                     capacity) wind
                     electrical generation
                     property.
----------------------------------------------------------------------------------------------------------------

Election to claim energy credit in lieu of renewable electricity 
        production credit

    A taxpayer may make an irrevocable election to have certain 
property which is part of a qualified renewable electricity 
production facility be treated as energy property eligible for 
a 30 percent investment credit under section 48. For this 
purpose, qualified facilities are facilities otherwise eligible 
for the renewable electricity production credit with respect to 
which no credit under section 45 has been allowed. A taxpayer 
electing to treat a facility as energy property may not claim 
the renewable electricity production credit. The eligible basis 
for the investment credit for taxpayers making this election is 
the basis of the depreciable (or amortizable) property that is 
part of a facility capable of generating electricity eligible 
for the renewable electricity production credit.

Grants in lieu of credits

    The Secretary of the Treasury is authorized to provide a 
grant to each person who places in service depreciable property 
that is either (1) part of a qualified renewable electricity 
production facility or (2) qualifying property otherwise 
eligible for the energy credit. In general, the grant amount is 
30 percent of the basis of the qualified property. For 
qualified microturbine, combined heat and power system, and 
geothermal heat pump property, the amount is 10 percent of the 
basis of the property. Otherwise eligible property must be 
placed in service in calendar years 2009 or 2010, or its 
construction must begin during that period and must be 
completed prior to 2013 (in the case of wind facility 
property), 2014 (in the case of other renewable power facility 
property eligible for credit under section 45), or 2017 (in the 
case of any specified energy property described in section 48).
    The grant provision mimics the operation of the energy 
credit. For example, the amount of the grant is not includable 
in gross income. However, the basis of the property is reduced 
by 50 percent of the amount of the grant. In addition, some or 
all of each grant is subject to recapture if the grant-eligible 
property is disposed of by the grant recipient within five 
years of being placed in service.
    Under the provision, if a grant is paid, no renewable 
electricity credit or energy credit may be claimed with respect 
to the grant-eligible property. In general, tax-exempt entities 
are not eligible to receive a grant. No grant may be made 
unless the application for the grant has been received before 
October 1, 2011.

                        Description of Proposal

    The proposal extends the Secretary's authority to provide 
grants in lieu of credits for one year (through 2011). 
Otherwise eligible property must thus be placed in service in 
calendar years 2009, 2010, or 2011, or its construction must 
begin during that period and must be completed prior to 2013 
(in the case of wind facility property), 2014 (in the case of 
other renewable power facility property eligible for credit 
under section 45), or 2017 (in the case of any specified energy 
property described in section 48).

                             Effective Date

    The proposal is effective on the date of enactment.

8. Extension of provisions related to alcohol used as fuel (sec. 708 of 
        the Act and secs. 40, 6426, 6427(e) of the Code)

                              Present Law

    Sections 40, 6426 and 6427(e) provide per-gallon tax 
incentives for the sale, use and production of alcohol fuel and 
alcohol fuel mixtures. The incentives for alcohol generally do 
not apply after December 31, 2010. For cellulosic biofuel 
(discussed infra), the incentive is unavailable after December 
31, 2012.
    ``Alcohol'' includes methanol and ethanol, and the alcohol 
gallon equivalent of ethyl tertiary butyl ether, or other 
ethers produced from such alcohol. It does not include alcohol 
produced from petroleum, natural gas, or coal, or any alcohol 
with a proof of less than 150 (190 proof for purposes of the 
credit taken under 6426 or payment under section 6427). 
Denaturants (additives that make the alcohol unfit for human 
consumption) are disregarded for purposes of determining proof. 
However, denaturants are taken into account in determining the 
volume of alcohol eligible for the per-gallon incentive. In 
calculating alcohol volume, denaturants cannot exceed two 
percent of volume.
    The section 40 alcohol fuels credit is an income tax credit 
comprised of four components: (1) the alcohol mixture credit, 
(2) the alcohol credit, (3) the small ethanol producer credit, 
and (4) the cellulosic biofuel producer credit. Sections 6426 
and 6427(e) pertain to alcohol fuel mixtures only.
            Alcohol mixture credits and payments
    The alcohol fuel mixture credit may be taken as part of the 
section 40 income tax credit, the section 6426 excise tax 
credit, or as a payment under section 6427. For section 40, an 
alcohol fuel mixture is a mixture of alcohol and gasoline or 
alcohol and a special fuel. Since the excise tax credit is 
taken against the liability for taxable fuels (gasoline, 
kerosene, or diesel), for purposes of the excise tax payments 
and credits, an alcohol fuel mixture is a mixture of alcohol 
and a taxable fuel.
    The fuel must be either sold for use as a fuel to another 
person or used as fuel in the mixture producer's trade or 
business. The addition of denaturants does not constitute 
production of a mixture. The credit is allowed only for the 
gallons of alcohol used to produce the mixture. For alcohol 
that is ethanol, the amount of the incentive is 45 cents per 
gallon. For other alcohol, the incentive is generally 60 cents 
per gallon.
    The alcohol mixture credit is most often taken as an excise 
tax credit or payment. Persons who blend alcohol with gasoline, 
diesel fuel, or kerosene to produce an alcohol fuel mixture 
must pay tax on the volume of alcohol in the mixture when the 
mixture is sold or removed. The alcohol fuel mixture credit 
must first be taken to reduce excise tax liability for 
gasoline, diesel fuel or kerosene. Any excess credit may be 
taken as a payment or income tax credit.
            Alcohol credit (straight or ``neat'' alcohol)
    The second component of the section 40 income tax credit is 
the alcohol credit. The credit is available for alcohol (not in 
a mixture) that is either (1) used as a fuel in the taxpayer's 
trade or business, or (2) sold at retail and placed in the fuel 
tank of the retail buyer's vehicle. The credit cannot be 
claimed for alcohol bought at retail and placed in the fuel 
tank of the retail buyer's vehicle, even if the buyer uses it 
as a fuel in a trade or business. This credit is not available 
as an excise tax credit or payment.
            Small ethanol producer credit
    The third component of the section 40 income tax credit is 
the small ethanol producer credit. It is in addition to the 
credits described above and is an extra 10 cents per gallon 
available for up to 15 million gallons of qualified ethanol 
fuel production for any tax year. The 15 million gallon 
limitation is waived for ethanol that is cellulosic ethanol. 
The credit is available to eligible small ethanol producers, 
defined as producers who have an annual productive capacity of 
not more than 60 million gallons of any type of alcohol. 
Qualified ethanol fuel production is ethanol produced and 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. Qualified ethanol fuel production also includes 
production for use or sale 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 small 
ethanol producer credit is not available as an excise tax 
credit or payment.
            Cellulosic biofuel producer credit
    The cellulosic biofuel producer 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 also 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 that is 
alcohol is entitled to the $1.01 without reduction.

Duties on ethanol 

    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) on 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, 
2011. Heading 9901.00.52 of the Harmonized Tariff Schedule of 
the United States imposes a general duty of 5.99 cents per 
liter on 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, 2011.

                       Explanation of Provision 


Extension of income tax credit 

    The provision extends the present-law income tax credit for 
alcohol fuels (other than the cellulosic biofuel producer 
credit) an additional year, through December 31, 2011.

Extension of excise tax credit and outlay payment provisions for 
        alcohol used as a fuel 

    The provision extends the present-law excise tax credit and 
outlay payments for alcohol fuel mixtures for an additional 
year, through December 31, 2011.

Extension of additional duties on ethanol 

    The provision extends the present-law duties on ethanol and 
ethyl tertiary butyl ether for an additional year, through 
December 31, 2011.

                            Effective Date 

    The extension of the income tax credit is effective for 
periods after December 31, 2010. The extension of excise tax 
credit for alcohol fuel mixtures applies to periods after 
December 31, 2010. The extension of the payment provisions for 
alcohol fuel mixtures applies to sales and uses after December 
31, 2010. The extension of additional duties on ethanol takes 
effect on January 1, 2011.

9. Energy efficient appliance credit (sec. 709 of the Act and sec. 45M 
        of the Code) 

                              Present Law 


In general 

    A credit is allowed for the eligible production of certain 
energy-efficient dishwashers, clothes washers, and 
refrigerators. The credit is part of the general business 
credit.
    The credits are as follows:
            Dishwashers
    $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
    $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
    $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
    $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,
    $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
    $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
    $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,
    $75 in the case of a refrigerator that is manufactured in 
calendar year 2008 or 2009 that consumes at least 23 percent 
but not more than 24.9 percent less kilowatt hours per year 
than the 2001 energy conservation standards,
    $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
    $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.
            Definitions
    A dishwasher is any 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 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.

Other rules 

    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 two prior calendar years for 
each category of appliance. 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. 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.

                       Explanation of Provision 

    The provision extends the credit for one year, for 
appliances manufactured in 2011, and changes the aggregate 
credit limitation to permit up to $25 million in credits to be 
claimed per manufacturer for appliances manufactured in 2011. 
Additionally, the provision changes the two percent gross 
receipts limitation on the credit to four percent. The credit 
modifies the standards and credit amounts as follows:
            Dishwashers
    $25 in the case of a dishwasher which is manufactured in 
calendar year 2011 and which 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),
    $50 in the case of a dishwasher which is manufactured in 
calendar year 2011 and which uses no more than 295 kilowatt 
hours per year and 4.25 gallons per cycle (4.75 gallons per 
cycle for dishwashers designed for greater than 12 place 
settings), and
    $75 in the case of a dishwasher which is manufactured in 
calendar year 2011 and which uses no more than 280 kilowatt 
hours per year and 4 gallons per cycle (4.5 gallons per cycle 
for dishwashers designed for greater than 12 place settings).
            Clothes washers
    $175 in the case of a top-loading clothes washer 
manufactured in calendar year 2011 which meets or exceeds a 2.2 
modified energy factor and does not exceed a 4.5 water 
consumption factor, and
    $225 in the case of a clothes washer manufactured in 
calendar year 2011 which (1) is a top-loading clothes washer 
and which meets or exceeds a 2.4 modified energy factor and 
does not exceed a 4.2 water consumption factor, or (2) is a 
front-loading clothes washer and which meets or exceeds a 2.8 
modified energy factor and does not exceed a 3.5 water 
consumption factor.
            Refrigerators
    $150 in the case of a refrigerator manufactured in calendar 
year 2011 which consumes at least 30 percent less energy than 
the 2001 energy conservation standards, and
    $200 in the case of a refrigerator manufactured in calendar 
year 2011 which consumes at least 35 percent less energy than 
the 2001 energy conservation standards.

                            Effective Date 

    The provision applies to appliances produced after December 
31, 2010. The provision related to the gross receipts 
limitation applies to taxable years beginning after December 
31, 2010.

10. Credit for nonbusiness energy property (sec. 710 of the Act and 
        sec. 25C of the Code) 

                              Present Law 


In general 

    Section 25C provides a 30-percent credit for the purchase 
of qualified energy efficiency improvements to the envelope of 
existing homes. Additionally, section 25C provides a 30 percent 
credit for the purchase of (1) qualified natural gas, propane, 
or oil furnace or hot water boilers, (2) qualified energy 
efficient building property, and (3) advanced main air 
circulating fans.
    The credit applies to expenditures made after December 31, 
2008, for property placed in service after December 31, 2008, 
and prior to January 1, 2011.\1636\ The aggregate amount of the 
credit allowed for a taxpayer for taxable years beginning in 
2009 and 2010 is $1,500.
---------------------------------------------------------------------------
    \1636\ With the exception of biomass fuel property, property placed 
in service after December 31, 2008 and prior to February 17, 2009 
qualifies for the new 30 percent credit rate (and $1,500 aggregate cap) 
if it met the efficiency standards of prior law for property placed in 
service during 2009. Biomass fuel property placed in service at any 
point in 2009 is governed by the new efficiency standard.
---------------------------------------------------------------------------

Building envelope improvements 

    A qualified energy efficiency improvement is any energy 
efficient building envelope component (1) that meets or exceeds 
the prescriptive criteria for such a component established by 
the 2000 International Energy Conservation Code \1637\ 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.
---------------------------------------------------------------------------
    \1637\ This reference to the 2000 International Energy Conservation 
Code is superseded by the additional requirements described in the 
paragraph below regarding building envelope components.
---------------------------------------------------------------------------
    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 and which meet the 
prescriptive criteria for such material or system established 
by the 2009 International Energy Conservation Code, as such 
Code (including supplements) is in effect on the date of the 
enactment of the American Recovery and Reinvestment Tax Act of 
2009 (February 17, 2009); (2) exterior windows (including 
skylights) and doors provided such component has a U-factor and 
a seasonal heat gain coefficient (``SHGC'') of 0.3 or less; and 
(3) metal or asphalt roofs with appropriate pigmented coatings 
or cooling granules that are specifically and primarily 
designed to reduce the heat gain for a dwelling.

Other eligible property 

            Qualified natural gas, propane, or oil furnace or hot water 
                    boilers
    A qualified natural gas, propane, or oil hot water boiler 
is a natural gas, propane, or oil hot water boiler with an 
annual fuel utilization efficiency rate of at least 90. A 
qualified natural gas or propane furnace is a natural gas or 
propane furnace with an annual fuel utilization efficiency rate 
of at least 95. A qualified oil furnace is an oil furnace with 
an annual fuel utilization efficiency rate of at least 90.
            Qualified energy-efficient building property
    Qualified energy-efficient building 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 achieves the highest 
efficiency tier established by the Consortium for Energy 
Efficiency, as in effect on January 1, 2009,\1638\ (3) a 
central air conditioner which achieves the highest efficiency 
tier established by the Consortium for Energy Efficiency as in 
effect on Jan. 1, 2009,\1639\ (4) a natural gas, propane, or 
oil water heater which has an energy factor of at least 0.82 or 
thermal efficiency of at least 90 percent, and (5) biomass fuel 
property.
---------------------------------------------------------------------------
    \1638\ These standards are a seasonal energy efficiency ratio 
(``SEER'') greater than or equal to 15, an energy efficiency ratio 
(``EER'') greater than or equal to 12.5, and heating seasonal 
performance factor (``HSPF'') greater than or equal to 8.5 for split 
heat pumps, and SEER greater than or equal to 14, EER greater than or 
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat 
pumps.
    \1639\ These standards are a SEER greater than or equal to 16 and 
EER greater than or equal to 13 for split systems, and SEER greater 
than or equal to 14 and EER greater than or equal to 12 for packaged 
systems.
---------------------------------------------------------------------------
    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 as measured using a lower heating value. 
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.
            Advanced main air circulating fan
    An advanced main air circulating fan is a fan used in a 
natural gas, propane, or oil furnace 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).

Additional rules 

    The taxpayer's basis in the property is reduced by the 
amount of the credit. Special proration rules apply in the case 
of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than 
80 percent of the property is used for nonbusiness purposes, 
only that portion of expenditures that is used for nonbusiness 
purposes is taken into account.

                       Explanation of Provision 

    The provision extends the credits for one year but utilizes 
the credit structure and credit rates that existed prior to the 
enactment of the American Recovery and Reinvestment Act of 
2009. The provision reinstates the rule that expenditures made 
from subsidized energy financing are not qualifying 
expenditures. Additionally, certain efficiency standards that 
were weakened in the American Recovery and Reinvestment Act are 
restored to their prior levels. Lastly, the provision provides 
that windows, skylights and doors that meet the Energy Star 
standards are qualified improvements.
    The following describes the operation of the credit under 
the provision:
    Section 25C provides a 10-percent credit for the purchase 
of 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 2009 International Energy Conservation Code 
as such Code (including supplements) is in effect on the date 
of the enactment of the American Recovery and Reinvestment Tax 
Act of 2009 (February 17, 2009) (or, in the case of windows, 
skylights and doors, and metal roofs with appropriate pigmented 
coatings or asphalt roofs with appropriate cooling granules, 
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 and which meet the 
prescriptive criteria for such material or system established 
by the 2009 International Energy Conservation Code, as such 
Code (including supplements) is in effect on the date of the 
enactment of the American Recovery and Reinvestment Tax Act of 
2009 (February 17, 2009); (2) exterior windows (including 
skylights) and doors; and (3) metal or asphalt roofs with 
appropriate pigmented coatings or cooling granules that are 
specifically and primarily designed to reduce the heat gain for 
a dwelling.
    Additionally, section 25C provides specified credits for 
the purchase of specific energy efficient property originally 
placed in service by the taxpayer during the taxable year. The 
allowable credit for the purchase of certain property is (1) 
$50 for each advanced main air circulating fan, (2) $150 for 
each qualified natural gas, propane, or oil furnace or hot 
water boiler, and (3) $300 for each item of energy efficient 
building property.
    An advanced main air circulating fan is a fan used in a 
natural gas, propane, or oil furnace 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.
    Energy-efficient building 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 achieves the highest efficiency tier 
established by the Consortium for Energy Efficiency, as in 
effect on January 1, 2009,\1640\ (3) a central air conditioner 
which achieves the highest efficiency tier established by the 
Consortium for Energy Efficiency as in effect on Jan. 1, 
2009,\1641\ (4) a natural gas, propane, or oil water heater 
which has an energy factor of at least 0.82 or thermal 
efficiency of at least 90 percent, and (5) biomass fuel 
property.
---------------------------------------------------------------------------
    \1640\ These standards are a seasonal energy efficiency ratio 
(``SEER'') greater than or equal to 15, an energy efficiency ratio 
(``EER'') greater than or equal to 12.5, and heating seasonal 
performance factor (``HSPF'') greater than or equal to 8.5 for split 
heat pumps, and SEER greater than or equal to 14, EER greater than or 
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat 
pumps.
    \1641\ These standards are a SEER greater than or equal to 16 and 
EER greater than or equal to 13 for split systems, and SEER greater 
than or equal to 14 and EER greater than or equal to 12 for packaged 
systems.
---------------------------------------------------------------------------
    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.
    Under section 25C, the maximum credit for a taxpayer 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 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.
    For purposes of determining the amount of expenditures made 
by any individual with respect to any dwelling unit, 
expenditures which are made from subsidized energy financing 
are not taken into account. The term ``subsidized energy 
financing'' means financing provided under a Federal, State, or 
local program a principal purpose of which is to provide 
subsidized financing for projects designed to conserve or 
produce energy.

                            Effective Date 

    The provision applies to property placed in service after 
December 31. 2010.

11. Alternative fuel vehicle refueling property (sec. 711 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.\1642\ 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.
---------------------------------------------------------------------------
    \1642\ Sec. 30C.
---------------------------------------------------------------------------
    For property placed in service in 2009 or 2010, the maximum 
credit available for business property is increased to $200,000 
for qualified hydrogen refueling property and to $50,000 for 
other qualified refueling property. For nonbusiness property, 
the maximum credit is increased to $2,000 for refueling 
property other than hydrogen refueling property. In addition, 
during these years, the credit rate is increased from 30 
percent to 50 percent for refueling property other than 
hydrogen refueling property.
    Qualified refueling property is property (not including a 
building or its structural components) for the storage or 
dispensing of a clean-burning fuel or electricity into the fuel 
tank or battery of a motor vehicle propelled by such fuel or 
electricity, but only if the storage or dispensing of the fuel 
or electricity is at the point of delivery into the fuel tank 
or battery of the motor vehicle. The original 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, 2011. In the case of 
hydrogen refueling property, the property must be placed in 
service before January 1, 2015.

                       Explanation of Provision 

    The provision extends through 2011 the 30-percent credit 
for alternative fuel refueling property (other than hydrogen 
refueling property, the credit for which continues under 
present law through 2014), subject to the pre-2009 maximum 
credit amounts.

                            Effective Date 

    The provision is effective for property placed in service 
after December 31, 2010.

                        B. Individual Tax Relief


 1. Deduction for certain expenses of elementary and secondary school 
         teachers (sec. 721 of the Act and sec. 62 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. With the exception of taxable 
years beginning in 2010, 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 a threshold amount. In addition, miscellaneous itemized 
deductions are not allowable under the alternative minimum tax.
    Certain expenses of eligible educators are allowed as an 
above-the-line deduction. Specifically, for taxable years 
beginning prior to January 1, 2010, 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.\1643\ 
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), 529(c)(1) 
(relating to qualified tuition programs), and section 530(d)(2) 
(relating to Coverdell education savings accounts).
---------------------------------------------------------------------------
    \1643\  Sec. 62(a)(2)(D).
---------------------------------------------------------------------------
    An eligible educator is a kindergarten through grade twelve 
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, 2009.

                        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, 2012.

                             Effective Date

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

2. Deduction of State and local sales taxes (sec. 722 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 2004-2009, 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 that show the allowable deduction. The tables are 
based on average consumption by taxpayers on a State-by-State 
basis taking into account number of dependents, modified 
adjusted gross income and rates of State and local general 
sales taxation. Taxpayers who live in more than one 
jurisdiction during the tax year are required to pro-rate the 
table amounts based on the time they live in each jurisdiction. 
Taxpayers who use the tables created by the Secretary may, in 
addition to the table amounts, deduct eligible general sales 
taxes paid with respect to the purchase of motor vehicles, 
boats and other items specified by the Secretary. Sales taxes 
for items that may be added to the tables are not reflected in 
the tables themselves.
    The term ``general sales tax'' means a tax imposed at one 
rate with respect to the sale at retail of a broad range of 
classes of items. However, in the case of items of food, 
clothing, medical supplies, and motor vehicles, the fact that 
the tax does not apply with respect to some or all of such 
items is not taken into account in determining whether the tax 
applies with respect to a broad range of classes of items, and 
the fact that the rate of tax applicable with respect to some 
or all of such items is lower than the general rate of tax is 
not taken into account in determining whether the tax is 
imposed at one rate. Except in the case of a lower rate of tax 
applicable with respect to food, clothing, medical supplies, or 
motor vehicles, no deduction is allowed for any general sales 
tax imposed with respect to an item at a rate other than the 
general rate of tax. However, in the case of motor vehicles, if 
the rate of tax exceeds the general rate, such excess shall be 
disregarded and the general rate is treated as the rate of tax.
    A compensating use tax with respect to an item is treated 
as a general sales tax, provided such tax is complementary to a 
general sales tax and a deduction for sales taxes is allowable 
with respect to items sold at retail in the taxing jurisdiction 
that are similar to such item.

                        Explanation of Provision

    The 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, 2011).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2009.

3. Contributions of capital gain real property made for conservation 
        purposes (sec. 723 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.\1644\
---------------------------------------------------------------------------
    \1644\  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 by 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.\1645\ 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.
---------------------------------------------------------------------------
    \1645\  Secs. 170(f)(3)(B)(iii) and 170(h).
---------------------------------------------------------------------------
    Qualified conservation contributions of capital gain 
property are subject to the same limitations and carryover 
rules as 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,\1646\ 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.
---------------------------------------------------------------------------
    \1646\ 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.\1647\
---------------------------------------------------------------------------
    \1647\ 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, 2009.\1648\
---------------------------------------------------------------------------
    \1648\ Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
---------------------------------------------------------------------------

                       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 before 
January 1, 2012.

                            Effective Date 

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

4. Above-the-line deduction for qualified tuition and related expenses 
        (sec. 724 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.\1649\ The term 
qualified tuition and related expenses is 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.\1650\ 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.
---------------------------------------------------------------------------
    \1649\ Sec. 222.
    \1650\ 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, 2009.
    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,\1651\ 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.\1652\ 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.
---------------------------------------------------------------------------
    \1651\ Secs. 222(d)(1) and 25A(g)(2).
    \1652\ Sec. 222(c). These reductions are the same as those that 
apply to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

                       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, 2012.

                            Effective Date 

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

5. Tax-free distributions from individual retirement plans for 
        charitable purposes (sec. 725 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 the following entities: (1) a charity described in section 
501(c)(3); (2) certain veterans' organizations, fraternal 
societies, and cemetery companies; \1653\ and (3) a Federal, 
State, or local governmental entity, but only if the 
contribution is made for exclusively public purposes.\1654\ The 
deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
---------------------------------------------------------------------------
    \1653\ Secs. 170(c)(3)-(5).
    \1654\ 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.\1655\
---------------------------------------------------------------------------
    \1655\ 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.\1656\
---------------------------------------------------------------------------
    \1656\ 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 provided) to the taxpayer in 
consideration for the contribution.\1657\ 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.\1658\
---------------------------------------------------------------------------
    \1657\ Sec. 170(f)(8). For any contribution of a cash, check, or 
other monetary gift, no deduction is allowed unless the donor maintains 
as a record of such contribution a bank record or written communication 
from the donee charity showing the name of the donee organization, the 
date of the contribution, and the amount of the contribution. Sec. 
170(f)(17).
    \1658\ 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 generally 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 generally 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 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.\1659\ 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.\1660\ For such interests, a 
charitable deduction is allowed to the extent of the present 
value of the interest designated for a charitable organization.
---------------------------------------------------------------------------
    \1659\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \1660\ 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). Certain individuals also may make 
nondeductible contributions to a Roth IRA (deductible 
contributions cannot be made to Roth IRAs). 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 April 1 of the calendar 
year following the year in which the IRA owner attains age 70-
\1/2\.\1661\
---------------------------------------------------------------------------
    \1661\ 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; \1662\ (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.
---------------------------------------------------------------------------
    \1662\ 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.\1663\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
---------------------------------------------------------------------------
    \1663\ 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.\1664\ 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. A qualified charitable 
distribution is 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.
---------------------------------------------------------------------------
    \1664\ Sec. 408(d)(8). The exclusion does not apply to 
distributions from employer-sponsored retirement plans, including 
SIMPLE IRAs and simplified employee pensions (``SEPs'').
---------------------------------------------------------------------------
    A qualified charitable distribution is any distribution 
from an IRA directly by the IRA trustee to an organization 
described in section 170(b)(1)(A) (other than an organization 
described in section 509(a)(3) or a donor advised fund (as 
defined in section 4966(d)(2)). Distributions are eligible for 
the exclusion only if made on or after the date the IRA owner 
attains age 70-\1/2\ and only to the extent the distribution 
would be includible in gross income (without regard to this 
provision).
    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, 2009.

                       Explanation of Provision 

    The provision extends the exclusion for qualified 
charitable distributions to distributions made in taxable years 
beginning after December 31, 2009 and before January 1, 2012. 
The provision contains a special rule permitting taxpayers to 
elect (in such form and manner as the Secretary may prescribe) 
to have qualified charitable distributions made in January 2011 
treated as having been made on December 31, 2010 for purposes 
of sections 408(a)(6), 408(b)(3), and 408(d)(8). Thus, a 
qualified charitable distribution made in January 2011 is 
permitted to be (1) treated as made in the taxpayer's 2010 
taxable year and thus permitted to count against the 2010 
$100,000 limitation on the exclusion, and (2) treated as made 
in the 2010 calendar year and thus permitted to be used to 
satisfy the taxpayer's minimum distribution requirement for 
2010.

                            Effective Date 

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

6. Look-thru of certain regulated investment company stock in 
        determining gross estate of nonresidents (sec. 726 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.\1665\ 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.\1666\ 
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.\1667\ 
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.\1668\
---------------------------------------------------------------------------
    \1665\ 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.
    \1666\ Sec. 2103.
    \1667\ Secs. 2104(c), 2105(b).
    \1668\ 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'').\1669\ This 
estate tax look-through rule for RIC stock does not apply to 
estates of decedents dying after December 31, 2009.
---------------------------------------------------------------------------
    \1669\ Sec. 2105(d).
---------------------------------------------------------------------------

                       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, 2012.

                            Effective Date 

    The provision is effective for decedents dying after 
December 31, 2009.

7. Parity for exclusion from income for employer-provided mass transit 
        and parking benefits (sec. 727 of the Act and sec. 132 of the 
        Code) 

                              Present Law 


In general 

    Qualified transportation fringe benefits provided by an 
employer are excluded from an employee's gross income for 
income tax purposes and from an employee's wages for payroll 
tax purposes.\1670\ Qualified transportation fringe benefits 
include parking, transit passes, vanpool benefits, and 
qualified bicycle commuting reimbursements. No amount is 
includible in the income of an employee merely because the 
employer offers the employee a choice between cash and 
qualified transportation fringe benefits (other than a 
qualified bicycle commuting reimbursement). Qualified 
transportation fringe benefits also include a cash 
reimbursement by an employer to an employee. In the case of 
transit passes, however, 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.
---------------------------------------------------------------------------
    \1670\ Secs. 132(f), 3121(b)(2), and 3306(b)(16) and 3401(a)(19).
---------------------------------------------------------------------------
    Prior to February 17, 2009, the amount that could be 
excluded as qualified transportation fringe benefits was 
limited to $100 per month in combined vanpooling and transit 
pass benefits and $175 per month in qualified parking benefits. 
All limits were adjusted annually for inflation, using 1998 as 
the base year (in 2009 the limits were $120 and $230, 
respectively). The American Recovery and Reinvestment Act of 
2009, however, temporarily increased the monthly exclusion for 
employer-provided vanpool and transit pass benefits to the same 
level as the exclusion for employer-provided parking ($230 for 
2010). The American Recovery and Reinvestment Act of 2009 
limits are set to expire on December 31, 2010.

                        Explanation of Provision

    The provision extends the parity in qualified 
transportation fringe benefits for one year (through December 
31, 2011).

                             Effective Date

    The provision is effective for months after December, 2010.

8. Refunds disregarded in the administration of Federal programs and 
        Federally assisted programs (sec. 728 of the Act and sec. 6409 
        of the Code)

                              Present Law

    Qualifying individuals may receive refundable credits under 
various provisions in the Code. Some of these credits are not 
taken into account for purposes of determining eligibility for 
benefits or assistance under Federal programs, but the 
treatment of such credits is not uniform. For example, for 
purposes of determining an individual's eligibility under any 
Federal program or federally funded State or local program, the 
child tax credit \1671\ is not considered a resource for the 
month of receipt and the following month,\1672\ but the making 
work pay credit \1673\ is not so considered for the month of 
receipt and the following two months.\1674\ The earned income 
credit has a similar rule to the child tax credit but only with 
respect to certain specifically listed benefit programs.\1675\
---------------------------------------------------------------------------
    \1671\ Sec. 24.
    \1672\ Sec. 203 of the Economic Growth and Tax Relief 
Reconciliation Act of 2001, Pub. L. No. 107-16.
    \1673\ Sec. 36A.
    \1674\ Sec. 1001(c) of the American Recovery and Reinvestment Act 
of 2009, Pub. L. No. 111-5.
    \1675\ Sec. 32(l).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under this provision, any tax refund (or advance payment 
with respect to a refundable credit) received by an individual 
after December 31, 2009 begins a period of 12 months during 
which such refund may not be taken into account as a resource 
for purposes of determining the 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. The provision terminates on 
December 31, 2012.

                             Effective Date

    The provision is effective for amounts received after 
December 31, 2009 and on or before December 31, 2012.

                         C. Business Tax Relief


1. Research credit (sec. 731 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.\1676\ Thus, the research credit is generally available 
with respect to incremental increases in qualified research.
---------------------------------------------------------------------------
    \1676\ 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.\1677\
---------------------------------------------------------------------------
    \1677\ 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, expires for 
amounts paid or incurred after December 31, 2009.\1678\
---------------------------------------------------------------------------
    \1678\ Sec. 41(h).
---------------------------------------------------------------------------

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.\1679\
---------------------------------------------------------------------------
    \1679\ The Small Business Job Protection Act of 1996, Pub. L. No. 
104-188, 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.\1680\ 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.\1681\
---------------------------------------------------------------------------
    \1680\ Sec. 41(f)(1).
    \1681\ Sec. 41(f)(3).
---------------------------------------------------------------------------

Alternative simplified credit

    Taxpayers may elect to claim an alternative simplified 
credit for qualified research expenses. The alternative 
simplified research credit is equal to 14 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. An election to use the alternative simplified 
credit applies to all succeeding taxable years unless revoked 
with the consent of the Secretary.

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).\1682\ 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.
---------------------------------------------------------------------------
    \1682\ 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.\1683\ 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.\1684\ Research does not qualify for 
the credit if it is conducted outside the United States, Puerto 
Rico, or any U.S. possession.
---------------------------------------------------------------------------
    \1683\ Sec. 41(d)(3).
    \1684\ 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.\1685\ 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.\1686\ Taxpayers may alternatively elect to claim a 
reduced research tax credit amount under section 41 in lieu of 
reducing deductions otherwise allowed.\1687\
---------------------------------------------------------------------------
    \1685\ 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).
    \1686\ Sec. 280C(c).
    \1687\ Sec. 280C(c)(3).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the research credit for two years, 
through December 31, 2011.

                             Effective Date

    The provision is effective for amounts paid or incurred 
after December 31, 2009.

2. Indian employment tax credit (sec. 732 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.\1688\ 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.
---------------------------------------------------------------------------
    \1688\ Sec. 45A.
---------------------------------------------------------------------------
    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 \1689\ or section 4(10) of the Indian Child Welfare 
Act of 1978.\1690\ 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).
---------------------------------------------------------------------------
    \1689\ Pub. L. No. 93-262.
    \1690\ Pub. L. No. 95-608.
---------------------------------------------------------------------------
    An employee is not treated as a qualified employee for any 
taxable year of the employer if the total amount of wages paid 
or incurred by the employer with respect to such employee 
during the taxable year exceeds an amount determined at an 
annual rate of $30,000 (which after adjusted for inflation is 
currently $45,000 for 2009). 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 five percent ownership interest in 
the employer. Finally, an employee will not be considered a 
qualified employee to the extent the employee's services relate 
to gaming activities or are performed in a building housing 
such activities.
    The wage credit is available for wages paid or incurred in 
taxable years that begin before January 1, 2010.

                        Explanation of Provision

    The provision extends for two years the present-law 
employment credit provision (through taxable years beginning on 
or before December 31, 2011).

                             Effective Date

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

3. New markets tax credit (sec. 733 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'').\1691\ 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.\1692\ 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 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.\1693\ 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 (1) 
ceases to be a qualified CDE, (2) the proceeds of the 
investment cease to be used as required, or (3) the equity 
investment is redeemed.\1694\
---------------------------------------------------------------------------
    \1691\ Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
    \1692\ Sec. 45D(a)(2).
    \1693\ Sec. 45D(a)(3).
    \1694\ Sec. 45D(g).
---------------------------------------------------------------------------
    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.\1695\ 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.\1696\ 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.\1697\
---------------------------------------------------------------------------
    \1695\ Sec. 45D(c).
    \1696\ Sec. 45D(b).
    \1697\ Sec. 45D(d).
---------------------------------------------------------------------------
    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 (as opposed to 80 percent) of statewide median 
family income.\1698\ 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.
---------------------------------------------------------------------------
    \1698\ Sec. 45D(e).
---------------------------------------------------------------------------
    The Secretary is authorized to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit.\1699\ 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 \1700\ (the ``Act'') to mean individuals, or an 
identifiable group of individuals, including an Indian tribe, 
who are low-income persons or otherwise lack adequate access to 
loans or equity investments. Section 103(17) of the Act 
provides that ``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.\1701\ 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 of the Code, and is contiguous to one or more low-
income communities.
---------------------------------------------------------------------------
    \1699\ Sec. 45D(e)(2).
    \1700\ Pub. L. No. 103-325.
    \1701\ Pub. L. No. 103-325.
---------------------------------------------------------------------------
    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 the business is used in a low-income community; (3) a 
substantial portion of the services performed for the 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 the business is 
attributable to certain financial property or to certain 
collectibles.\1702\
---------------------------------------------------------------------------
    \1702\ Sec. 45D(d)(2).
---------------------------------------------------------------------------
    The maximum annual amount of qualified equity investments 
was $5.0 billion for calendar years 2008 and 2009. The new 
markets tax credit expired on December 31, 2009.

                        Explanation of Provision

    The provision extends the new markets tax credit for two 
years, through 2011, permitting up to $3.5 billion in qualified 
equity investments for each of the 2010 and 2011 calendar 
years. The provision also extends for two years, through 2016, 
the carryover period for unused new markets tax credits.

                             Effective Date

    The provision applies to calendar years beginning after 
December 31, 2009.

4. Railroad track maintenance credit (sec. 734 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 taxable years beginning 
before January 1, 2010.\1703\ 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.\1704\ 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. The credit may also reduce a taxpayer's tax 
liability below its tentative minimum tax.\1705\
---------------------------------------------------------------------------
    \1703\ Sec. 45G(a).
    \1704\ Sec. 45G(b)(1).
    \1705\ Sec. 38(c)(4).
---------------------------------------------------------------------------
    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).\1706\
---------------------------------------------------------------------------
    \1706\ 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.\1707\
---------------------------------------------------------------------------
    \1707\ Sec. 45G(c).
---------------------------------------------------------------------------
    The terms Class II or Class III railroad have the meanings 
given by the Surface Transportation Board.\1708\
---------------------------------------------------------------------------
    \1708\ Sec. 45G(e)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present law credit for two years, 
for qualified railroad track maintenance expenses paid or 
incurred during taxable years beginning after December 31, 2009 
and before January 1, 2012.

                             Effective Date

    The provision is effective for expenses paid or incurred in 
taxable years beginning after December 31, 2009.

5. Mine rescue team training credit (sec. 735 of the Act and sec. 45N 
        of the Code)

                              Present Law

    An eligible employer may claim a general business credit 
against income tax 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 the qualified 
mine rescue team employee (including the wages of the employee 
while attending the program); or (2) $10,000. 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. The 
credit is not allowable for purposes of computing the 
alternative minimum tax.\1709\
---------------------------------------------------------------------------
    \1709\ Sec. 38(c).
---------------------------------------------------------------------------
    An eligible employer is any taxpayer which employs 
individuals as miners in underground mines in the United 
States. The term ``wages'' has the meaning given to such term 
by section 3306(b) \1710\ (determined without regard to any 
dollar limitation contained in that section).
---------------------------------------------------------------------------
    \1710\ Section 3306(b) defines wages for purposes of Federal 
Unemployment Tax.
---------------------------------------------------------------------------
    No deduction is allowed for the portion of the expenses 
otherwise deductible that is equal to the amount of the 
credit.\1711\ The credit does not apply to taxable years 
beginning after December 31, 2009. Additionally, the credit may 
not offset the alternative minimum tax.
---------------------------------------------------------------------------
    \1711\ Sec. 280C(e).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the credit for two years through 
taxable years beginning on or before December 31, 2011.

                             Effective Date

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

6. Employer wage credit for employees who are active duty members of 
        the uniformed services (sec. 736 of the Act and sec. 45P of the 
        Code)

                              Present Law


Differential pay

    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 by the employer is often referred to as 
``differential pay.''

Wage credit for differential pay

    If an employer qualifies as an eligible small business 
employer, the employer is allowed to take a credit against its 
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 employer's qualified employees for the 
taxable year.\1712\
---------------------------------------------------------------------------
    \1712\ Sec. 45P.
---------------------------------------------------------------------------
    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).
    Differential wage payment 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 as does not exceed $20,000. A qualified 
employee is an individual who has been an employee for the 91-
day period immediately preceding the period for which any 
differential wage payment is made.
    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.
    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. Any credit that 
is included in the general business credit, however, cannot be 
carried back to a tax year before the first tax year for which 
that credit is allowable under the effective date of that 
credit. Thus, the differential wage payment credit, if 
disallowed under section 38(c), cannot be carried back to tax 
years ending before June 18, 2008. In addition, unlike many of 
the other credits that are included in the general business 
credit, the differential wage payment credit is not a 
``qualified business credit'' under section 196(c). Thus, a 
taxpayer cannot deduct under section 196(c) any differential 
wage payment credits that remain unused at the end of the 20-
year carryforward period.
    Rules similar to the rules in section 52(c), which bars the 
work opportunity tax credit for tax-exempt organizations other 
than certain farmer's cooperatives, apply to the differential 
wage payment credit. Additionally, rules similar to the rules 
in section 52(e), which limits the work opportunity tax credit 
allowable to regulated investment companies, real estate 
investment trusts, and certain cooperatives, apply to the 
differential wage payment credit.
    The credit is not allowable against a taxpayer's 
alternative minimum tax liability. The amount of credit 
otherwise allowable under the income tax rules for compensation 
paid to any employee must be reduced by the differential wage 
payment credit with respect to that employee.
    There are special rules for trusts and estates and their 
beneficiaries.
    The credit is available with respect to amounts paid after 
June 17, 2008 \1713\ and before January 1, 2010.
---------------------------------------------------------------------------
    \1713\ This date is the date of enactment of the Heroes Earnings 
Assistance and Relief Tax Act of 2008, Pub. L. No. 110-245.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the availability of the credit to 
amounts paid before January 1, 2012.

                             Effective Date

    The provision applies to payments made after December 31, 
2009.

7. 15-year straight-line cost recovery for qualified leasehold 
        improvements, qualified restaurant buildings and improvements, 
        and qualified retail improvements (sec. 737 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.\1714\ 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.
---------------------------------------------------------------------------
    \1714\ 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, qualified restaurant property, and qualified 
retail improvement 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, 2010. Qualified leasehold 
improvement property is recovered using the straight-line 
method and a half-year convention. Leasehold improvements 
placed in service after December 31, 2009 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, 2010. Qualified restaurant property 
is any section 1250 property that is a building (if the 
building is placed in service after December 31, 2008 and 
before January 1, 2010) or an improvement to a building, if 
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.\1715\ Qualified restaurant 
property is recovered using the straight-line method and a 
half-year convention. Additionally, qualified restaurant 
property is not eligible for bonus depreciation.\1716\ 
Restaurant property placed in service after December 31, 2009 
is subject to the general rules described above.
---------------------------------------------------------------------------
    \1715\ Sec. 168(e)(7)(A).
    \1716\ Property that satisfies the definition of both qualified 
leasehold improvement property and qualified restaurant property is 
eligible for bonus depreciation.
---------------------------------------------------------------------------

Qualified retail improvement property

    Section 168(e)(3)(E)(ix) provides a statutory 15-year 
recovery period and for qualified retail improvement property 
placed in service after December 31, 2008 and before January 1, 
2010. Qualified retail improvement property is any improvement 
to an interior portion of a building which is nonresidential 
real property if such portion is open to the general public 
\1717\ 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.
---------------------------------------------------------------------------
    \1717\ 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.
---------------------------------------------------------------------------
    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. 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 while those in other industry classes 
do not qualify.
    Qualified retail improvement property is recovered using 
the straight-line method and a half-year convention. 
Additionally, qualified retail improvement property is not 
eligible for bonus depreciation.\1718\ Qualified retail 
improvement property placed in service on or after January 1, 
2010 is subject to the general rules described above.
---------------------------------------------------------------------------
    \1718\ Property that satisfies the definition of both qualified 
leasehold improvement property and qualified retail property is 
eligible for bonus depreciation.
---------------------------------------------------------------------------

                        Explanation of Provision

    The present law provisions for qualified leasehold 
improvement property, qualified restaurant property, and 
qualified retail improvement property are extended for two 
years to apply to property placed in service on or before 
December 31, 2011.

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2009.

8. 7-year recovery period for motorsports entertainment complexes (sec. 
        738 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.\1719\ 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, 2009 is assigned a recovery period of seven 
years.\1720\ For these purposes, a motorsports entertainment 
complex means a racing track facility which is permanently 
situated on land and which during the 36-month period following 
its placed-in-service date hosts a racing event.\1721\ 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).
---------------------------------------------------------------------------
    \1719\ Sec. 168.
    \1720\ Sec. 168(e)(3)(C)(ii).
    \1721\ Sec. 168(i)(15).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present law seven-year recovery 
period for motorsports entertainment complexes two years to 
apply to property placed in service before January 1, 2012.

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2009.

9. Accelerated depreciation for business property on an Indian 
        reservation (sec. 739 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
20-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;\1722\ and (4) is not property placed in service for 
purposes of conducting gaming activities.\1723\ 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).\1724\
---------------------------------------------------------------------------
    \1722\ For these purposes, related persons is defined in Sec. 
465(b)(3)(C).
    \1723\ Sec. 168(j)(4)(A).
    \1724\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
    An ``Indian reservation'' means a reservation as defined in 
section 3(d) of the Indian Financing Act of 1974\1725\ or 
section 4(10) of the Indian Child Welfare Act of 1978 (25 
U.S.C. 1903(10)).\1726\ 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).
---------------------------------------------------------------------------
    \1725\ Pub. L. No. 93-262.
    \1726\ Pub. L. No. 95-608.
---------------------------------------------------------------------------
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum tax. 
The accelerated depreciation for qualified Indian reservation 
property is available with respect to property placed in 
service on or after January 1, 1994, and before January 1, 
2010.

                        Explanation of Provision

    The provision extends for two years the present-law 
accelerated MACRS recovery periods for qualified Indian 
reservation property to apply to property placed in service 
before January 1, 2012.

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2009.

10. Enhanced charitable deduction for contributions of food inventory 
        (sec. 740 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.\1727\
---------------------------------------------------------------------------
    \1727\ 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.

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.\1728\ In general, a C corporation's charitable 
contribution deductions for a year may not exceed 10 percent of 
the corporation's taxable income.\1729\ 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.\1730\ In the case of contributed property subject 
to the Federal Food, Drug, and Cosmetic Act, as amended, the 
property must satisfy the applicable requirements of such Act 
on the date of transfer and for 180 days prior to the 
transfer.\1731\
---------------------------------------------------------------------------
    \1728\ Sec. 170(e)(3).
    \1729\ Sec. 170(b)(2).
    \1730\ Sec. 170(e)(3)(A)(i)-(iii).
    \1731\ Sec. 170(e)(3)(A)(iv).
---------------------------------------------------------------------------
    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.\1732\ 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.
---------------------------------------------------------------------------
    \1732\ 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.\1733\
---------------------------------------------------------------------------
    \1733\ 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 special temporary provision, any taxpayer, whether 
or not a C corporation, engaged in a trade or business is 
eligible to claim the enhanced deduction for donations of food 
inventory.\1734\ 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.\1735\
---------------------------------------------------------------------------
    \1734\ Sec. 170(e)(3)(C).
    \1735\ 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, 2009.

                        Explanation of Provision

    The provision extends the expansion of, and modifications 
to, the enhanced deduction for charitable contributions of food 
inventory to contributions made before January 1, 2012.

                             Effective Date

    The provision is effective for contributions made after 
December 31, 2009.

11. Enhanced charitable deduction for contributions of book inventories 
        to public schools (sec. 741 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.\1736\
---------------------------------------------------------------------------
    \1736\ 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.

General rules regarding contributions of book 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.
    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.\1737\ In general, a C 
corporation's charitable contribution deductions for a year may 
not exceed 10 percent of the corporation's taxable 
income.\1738\ 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.\1739\ In the case of contributed property subject 
to the Federal Food, Drug, and Cosmetic Act, as amended, the 
property must satisfy the applicable requirements of such Act 
on the date of transfer and for 180 days prior to the 
transfer.\1740\
---------------------------------------------------------------------------
    \1737\ Sec. 170(e)(3).
    \1738\ Sec. 170(b)(2).
    \1739\ Sec. 170(e)(3)(A)(i)-(iii)
    \1740\ Sec. 170(e)(3)(A)(iv).
---------------------------------------------------------------------------
    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.\1741\ 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.
---------------------------------------------------------------------------
    \1741\ 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.

Special rule expanding and modifying the enhanced deduction for 
        contributions of book inventory

    The generally applicable enhanced deduction for C 
corporations is expanded and modified to include certain 
qualified book contributions made after August 28, 2005, and 
before January 1, 2010.\1742\ 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.
---------------------------------------------------------------------------
    \1742\ Sec. 170(e)(3)(D).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the expansion of, and modifications 
to, the enhanced deduction for contributions of book inventory 
to contributions made before January 1, 2012.

                             Effective Date

    The provision is effective for contributions made after 
December 31, 2009.

12. Enhanced charitable deduction for corporate contributions of 
        computer inventory for educational purposes (sec. 742 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.\1743\
---------------------------------------------------------------------------
    \1743\ Sec. 170(e)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    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. Under a 
special, temporary provision, certain corporations may claim a 
deduction in excess of basis for a ``qualified computer 
contribution.'' \1744\ 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, 
2009.\1745\
---------------------------------------------------------------------------
    \1744\ Sec. 170(e)(6).
    \1745\ Sec. 170(e)(6)(G).
---------------------------------------------------------------------------
    A qualified computer contribution means a charitable 
contribution of any computer technology or equipment, which 
meets several requirements. The contribution must meet 
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, the date construction or assembly of the property is 
substantially completed).\1746\ The original use of the 
property must be by the donor or the donee,\1747\ and 
substantially all of the donee's use of the property must be 
within the United States 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.\1748\
---------------------------------------------------------------------------
    \1746\ 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).
    \1747\ This requirement does not apply if the property was 
reacquired by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
    \1748\ Sec. 170(e)(6)(C).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the enhanced deduction for computer 
technology and equipment to contributions made before January 
1, 2012.

                             Effective Date

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

13. Election to expense mine safety equipment (sec. 743 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'').\1749\ 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 three 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.
---------------------------------------------------------------------------
    \1749\ 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 2010 is $500,000 of the cost of the 
qualifying property for the taxable year. In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business.\1750\ The $500,000 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 
$2,000,000.
---------------------------------------------------------------------------
    \1750\ The definition of qualifying property was temporarily (for 
2010 and 2011) expanded to include up to $250,000 of qualified 
leasehold improvement property, qualified restaurant property, and 
qualified retail improvement property. See section 179(c).
---------------------------------------------------------------------------
    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.\1751\ The deduction under section 179E is allowed for 
both regular and alternative minimum tax purposes, including 
adjusted current earnings. In computing earnings and profits, 
the amount deductible under section 179E is allowed as a 
deduction ratably over five taxable years beginning with the 
year the amount is deductible under section 179E.\1752\
---------------------------------------------------------------------------
    \1751\ Sec. 179E(a).
    \1752\ Sec. 312(k)(3). Section 56(g)(4)(C)(i) does not apply to a 
deduction under section 179E (or under sections 179, 179A, 179B, and 
179D), as such deduction is permitted for purposes of computing 
earnings and profits.
---------------------------------------------------------------------------
    ``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 before January 1, 2010.\1753\
---------------------------------------------------------------------------
    \1753\ 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.\1754\
---------------------------------------------------------------------------
    \1754\ 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.\1755\ 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.\1756\
---------------------------------------------------------------------------
    \1755\ Sec. 179E(e).
    \1756\ Sec. 179E(f).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends for two years, to December 31, 2011, 
the present-law placed in service date relating to expensing of 
mine safety equipment.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2009.

14. Special expensing rules for certain film and television productions 
        (sec. 744 of the Act and sec. 181 of the Code)

                              Present Law

    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 \1757\ to deduct the 
cost of any qualifying film and television production, 
commencing prior to January 1, 2010, in the year the 
expenditure is incurred in lieu of capitalizing the cost and 
recovering it through depreciation allowances.\1758\ Taxpayers 
may elect to deduct up to $15 million of the aggregate cost of 
the film or television production under this section.\1759\ 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.\1760\
---------------------------------------------------------------------------
    \1757\ See Temp. Treas. Reg. section 1.181-2T for rules on making 
an election under this section.
    \1758\ For this purpose, a production is treated as commencing on 
the first date of principal photography.
    \1759\ Sec. 181(a)(2)(A).
    \1760\ 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.\1761\ The term 
``compensation'' does not include participations and residuals 
(as defined in section 167(g)(7)(B)).\1762\ 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.\1763\ Qualified 
property does not include sexually explicit productions as 
defined by section 2257 of title 18 of the U.S. Code.\1764\
---------------------------------------------------------------------------
    \1761\ Sec. 181(d)(3)(A).
    \1762\ Sec. 181(d)(3)(B).
    \1763\ Sec. 181(d)(2)(B).
    \1764\ 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.\1765\
---------------------------------------------------------------------------
    \1765\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present law expensing provision 
for two years, to qualified film and television productions 
commencing prior to January 1, 2012.

                             Effective Date

    The provision applies to qualified film and television 
productions commencing after December 31, 2009.

15. Expensing of environmental remediation costs (sec. 745 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.\1766\ 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.\1767\ 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.\1768\ Amounts paid for 
repairs and maintenance do not constitute capital expenditures. 
The determination of whether an expense is deductible or 
capitalizable is based on all relevant facts and circumstances.
---------------------------------------------------------------------------
    \1766\ Sec. 162.
    \1767\ Treas. Reg. sec. 1.162-4.
    \1768\ Treas. Reg. sec. 1.263(a)-1(b).
---------------------------------------------------------------------------
    Taxpayers may elect to treat certain environmental 
remediation expenditures paid or incurred before January 1, 
2010, that would otherwise be chargeable to capital account as 
deductible in the year paid or incurred.\1769\ 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 that would otherwise be allocated 
to the site under the principles set forth in Commissioner v. 
Idaho Power Co.\1770\ and section 263A are treated as qualified 
environmental remediation expenditures.
---------------------------------------------------------------------------
    \1769\ Sec. 198.
    \1770\ 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'') \1771\ 
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.
---------------------------------------------------------------------------
    \1771\ 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 section 198.

                        Explanation of Provision

    The provision extends the present law expensing for two 
years to include expenditures paid or incurred before January 
1, 2012.

                             Effective Date

    The provision is effective for expenditures paid or 
incurred after December 31, 2009.

16. Deduction allowable with respect to income attributable to domestic 
        production activities in Puerto Rico (sec. 746 of the Act and 
        sec. 199 of the Code)

                              Present Law


General

    Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income) that is 
equal to nine percent of the lesser of the taxpayer's qualified 
production activities income or taxable income for the taxable 
year. 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.
    In general, qualified production activities income is equal 
to domestic production gross receipts 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 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 \1772\ 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 \1773\ 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.
---------------------------------------------------------------------------
    \1772\ Qualifying production property generally includes any 
tangible personal property, computer software, and sound recordings.
    \1773\ 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.
---------------------------------------------------------------------------
    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.\1774\ Wages paid 
to bona fide residents of Puerto Rico generally are not 
included in the definition of wages for purposes of computing 
the wage limitation amount.\1775\
---------------------------------------------------------------------------
    \1774\ 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.
    \1775\ Section 3401(a)(8)(C) excludes wages paid to United States 
citizens who are bona fide residents of Puerto Rico from the term wages 
for purposes of income tax withholding.
---------------------------------------------------------------------------

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.\1776\ 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 Puerto Rico-sourced gross receipts are 
taxable under the Federal income tax for individuals or 
corporations.\1777\ In computing the 50-percent wage 
limitation, the taxpayer is permitted to take into account 
wages paid to bona fide residents of Puerto Rico for services 
performed in Puerto Rico.\1778\
---------------------------------------------------------------------------
    \1776\ Sec. 7701(a)(9).
    \1777\ Sec. 199(d)(8)(A).
    \1778\ Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
    The special rules for Puerto Rico apply only with respect 
to the first four taxable years of a taxpayer beginning after 
December 31, 2005 and before January 1, 2010.

                        Explanation of Provision

    The provision extends the special domestic production 
activities rules for Puerto Rico to apply for the first six 
taxable years of a taxpayer beginning after December 31, 2005 
and before January 1, 2012.

                             Effective Date

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

17. Modification of tax treatment of certain payments to controlling 
        exempt organizations (sec. 747 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.\1779\ 
In general, interest, rents, royalties, and annuities are 
excluded from the unrelated business income of tax-exempt 
organizations.\1780\
---------------------------------------------------------------------------
    \1779\ Sec. 511.
    \1780\ 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 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 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).\1781\ 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.
---------------------------------------------------------------------------
    \1781\ 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).
    The special rule does not apply to payments received or 
accrued after December 31, 2009.

                        Explanation of Provision

    The provision extends the special rule to payments received 
or accrued before January 1, 2012. 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, 2009.

18. Treatment of certain dividends of regulated investment companies 
        (sec. 748 of the Act and sec. 871(k) of the Code)

                           Present Law\1782\

---------------------------------------------------------------------------
    \1782\ Secs. 871(k), 881, 1441 and 1442.
---------------------------------------------------------------------------

In general

    A regulated investment company (``RIC'') is an entity that 
meets certain requirements (including a requirement that its 
income generally be derived from passive investments such as 
dividends and interest and a requirement that it distribute at 
least 90 percent of its income) and that elects to be taxed 
under a special tax regime. Unlike an ordinary corporation, an 
entity that is taxed as a RIC can deduct amounts paid to its 
shareholders as dividends. In this manner, tax on RIC income is 
generally not paid by the RIC but rather by its shareholders. 
Income of a RIC distributed to shareholders as dividends is 
generally treated as an ordinary income dividend by those 
shareholders, unless other special rules apply. Dividends 
received by foreign persons from a RIC are generally subject to 
gross-basis tax under sections 871(a) or 881, and the RIC payor 
of such dividends is obligated to withhold such tax under 
sections 1441 and 1442.
    Under present law, a 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 net income, 
designate a dividend it pays as derived from such interest 
income. A foreign person who is a shareholder in the RIC 
generally can treat such a dividend as exempt from gross-basis 
U.S. tax, as if the foreign person had earned the interest 
directly. Also, subject to certain requirements, the RIC is 
exempt from withholding the gross-basis tax on such dividends. 
Similar rules apply with respect to the designation of certain 
short term capital gain dividends. However, these provisions 
relating to certain dividends with respect to interest income 
and short term capital gain of the RIC do not apply to 
dividends with respect to any taxable year of a RIC beginning 
after December 31, 2009.

                        Explanation of Provision

    The provision extends the rules exempting from gross basis 
tax and from withholding tax the interest-related dividends and 
short term capital gain dividends received from a RIC, to 
dividends with respect to taxable years of a RIC beginning 
before January 1, 2012.

                             Effective Date

    The provision applies to dividends paid with respect to any 
taxable year of the RIC beginning after December 31, 2009.

19. RIC qualified investment entity treatment under FIRPTA (sec. 749 of 
        the Act and secs. 897 and 1445 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, although 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 active business requirements are met, a 
foreign person who sells a U.S. real property interest 
(``USRPI'') is subject to tax at the same rates as a U.S. 
person, under the Foreign Investment in Real Property Tax Act 
(``FIRPTA'') provisions codified in section 897 of the Code. 
Withholding tax is also imposed under section 1445.
    A USRPI includes stock or a beneficial interest in any 
domestic corporation unless such corporation has not been a 
U.S. real property holding corporation (as defined) during the 
testing period. A USRPI does not include an interest in a 
domestically controlled ``qualified investment entity.'' A 
distribution from a ``qualified investment entity'' that is 
attributable to the sale of a USRPI is also 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 States and the recipient foreign 
corporation or nonresident alien individual did not hold more 
than 5 percent of that class of stock or beneficial interest 
within the 1-year period ending on the date of 
distribution.\1783\ Special rules apply to situations involving 
tiers of qualified investment entities.
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    \1783\ Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) 
require dividend treatment, rather than capital gain treatment, for 
certain distributions to which FIRPTA does not apply by reason of this 
exception. See also section 881(e)(2).
---------------------------------------------------------------------------
    The term ``qualified investment entity'' includes a real 
estate investment trust (``REIT'') and also includes a 
regulated investment company (``RIC'') that meets certain 
requirements, although the inclusion of a RIC in that 
definition does not apply for certain purposes after December 
31, 2009.\1784\
---------------------------------------------------------------------------
    \1784\ Section 897(h).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the inclusion of a RIC within the 
definition of a ``qualified investment entity'' under section 
897 of the Code through December 31, 2011, for those situations 
in which that inclusion would otherwise have expired at the end 
of 2009.

                             Effective Date

    The provision is generally effective on January 1, 2010.
    The provision does not apply with respect to the 
withholding requirement under section 1445 for any payment made 
before the date of enactment, but a RIC that withheld and 
remitted tax under section 1445 on distributions made after 
December 31, 2009 and before the date of enactment is not 
liable to the distributee with respect to such withheld and 
remitted amounts.

20. Exceptions for active financing income (sec. 750 of the Act and 
        secs. 953 and 954 of the Code)

                              Present Law

    Under the subpart F rules,\1785\ 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).
---------------------------------------------------------------------------
    \1785\ 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 real estate mortgage investment 
conduits (``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.\1786\
---------------------------------------------------------------------------
    \1786\ 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''). 
These provisions were enacted in the Taxpayer Relief Act of 
1997 as one-year temporary exceptions, and in 1998, 1999, 2002, 
2006, and 2008, the provisions were extended, and in some 
cases, modified.\1787\
---------------------------------------------------------------------------
    \1787\ 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. The 
Energy Improvement and Extension Act of 2008, Pub. L. No. 110-343, 
extended the temporary provisions for one year, for taxable years 
beginning after 2008 and before 2010.
---------------------------------------------------------------------------
    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.

                        Explanation of Provision

    The provision extends for two years (for taxable years 
beginning before 2012) 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, 2009, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

21. Look-thru treatment of payments between related controlled foreign 
        corporations under foreign personal holding company rules (sec. 
        751 of the Act and sec. 954(c)(6) of the Code)

                              Present Law


In general

    The rules of subpart F \1788\ 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.
---------------------------------------------------------------------------
    \1788\ Secs. 951-964.
---------------------------------------------------------------------------
    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 that 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-thru rule''

    Under the ``look-thru rule'' (sec. 954(c)(6)), dividends, 
interest (including factoring income that 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 income 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-thru rule, 
including such regulations as are appropriate to prevent the 
abuse of the purposes of such rule.
    The look-thru rule is effective for 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.

                        Explanation of Provision

    The provision extends for two years the application of the 
look-thru rule, to taxable years of foreign corporations 
beginning before January 1, 2012, 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, 2009, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

22. Basis adjustment to stock of S corps making charitable 
        contributions of property (sec. 752 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.\1789\ 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.\1790\
---------------------------------------------------------------------------
    \1789\ Sec. 1366(a)(1)(A).
    \1790\ Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------
    In the case of contributions made in taxable years 
beginning before January 1, 2010, 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, 2009, the amount of the reduction 
is the shareholder's pro rata share of the fair market value of 
the contributed property.

                        Explanation of Provision

    The provision 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, 2012.

                             Effective Date

    The provision applies to contributions made in taxable 
years beginning after December 31, 2009.

23. Empowerment zone tax incentives (sec. 753 of the Act and secs. 1202 
        and 1391 of the Code)

                              Present Law

    The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'') 
\1791\ authorized the designation of nine empowerment zones 
(``Round I empowerment zones'') to provide tax incentives for 
businesses to locate within certain targeted areas \1792\ 
designated by the Secretaries of the Department of Housing and 
Urban Development (``HUD'') and the U.S Department of 
Agriculture (``USDA''). The Taxpayer Relief Act of 1997 \1793\ 
authorized the designation of two additional Round I urban 
empowerment zones, and 20 additional empowerment zones (``Round 
II empowerment zones''). The Community Renewal Tax Relief Act 
of 2000 (``2000 Community Renewal Act'') \1794\ authorized a 
total of ten new empowerment zones (``Round III empowerment 
zones''), bringing the total number of authorized empowerment 
zones to 40.\1795\ In addition, the 2000 Community Renewal Act 
conformed the tax incentives that are available to businesses 
in the Round I, Round II, and Round III empowerment zones, and 
extended the empowerment zone incentives through December 31, 
2009.\1796\
---------------------------------------------------------------------------
    \1791\ Pub. L. No. 103-66.
    \1792\ The targeted areas are those that have pervasive poverty, 
high unemployment, and general economic distress, and that satisfy 
certain eligibility criteria, including specified poverty rates and 
population and geographic size limitations.
    \1793\ Pub. L. No. 105-34.
    \1794\ Pub. L. No. 106-554.
    \1795\ The urban part of the program is administered by the HUD and 
the rural part of the program is administered by the USDA. The eight 
Round I urban empowerment zones are Atlanta, GA; Baltimore, MD, 
Chicago, IL; Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; 
and Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment 
zone designation in Round III. The three Round I rural empowerment 
zones are Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, 
TX. The 15 Round II urban empowerment zones are Boston, MA; Cincinnati, 
OH; Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; 
Gary/Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, 
TN; Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/
Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis, 
IL. The five Round II rural empowerment zones are Desert Communities, 
CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois 
Delta, IL; and Southwest Georgia United, GA. The eight Round III urban 
empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK; 
Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and 
Yonkers, NY. The two Round III rural empowerment zones are Aroostook 
County, ME; and Futuro, TX.
    \1796\ If an empowerment zone designation were terminated prior to 
December 31, 2009, the tax incentives would cease to be available as of 
the termination date.
---------------------------------------------------------------------------
    The tax incentives available within the designated 
empowerment zones include a Federal income tax credit for 
employers who hire qualifying employees, accelerated 
depreciation deductions on qualifying equipment, tax-exempt 
bond financing, deferral of capital gains tax on sale of 
qualified assets sold and replaced, and partial exclusion of 
capital gains tax on certain sales of qualified small business 
stock.
    The following is a description of the tax incentives.

Employment 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 empowerment zone, and 
(2) performs substantially all employment services within the 
empowerment zone in a trade or business of the employer.\1797\
---------------------------------------------------------------------------
    \1797\ Sec. 1396. The $15,000 limit is annual, not cumulative such 
that the limit is the first $15,000 of wages paid in a calendar year 
which ends with or within the taxable year.
---------------------------------------------------------------------------
    The wage credit rate applies to qualifying wages paid 
before January 1, 2010. 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 empowerment zone may claim the 
wage credit, regardless of whether the employer meets the 
definition of an ``enterprise zone business.'' \1798\
---------------------------------------------------------------------------
    \1798\ Secs. 1397C(b) and 1397C(c). However, the wage credit is not 
available for wages paid in connection with certain business activities 
described in section 144(c)(6)(B), including a golf course, country 
club, massage parlor, hot tub facility, suntan facility, racetrack, or 
liquor store, 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.\1799\ Wages are not to be taken into account for purposes 
of the wage credit if taken into account in determining the 
employer's work opportunity tax credit under section 51 or the 
welfare-to-work credit under section 51A.\1800\ In addition, 
the $15,000 cap is reduced by any wages taken into account in 
computing the work opportunity tax credit or the welfare-to-
work credit.\1801\ The wage credit may be used to offset up to 
25 percent of alternative minimum tax liability.\1802\
---------------------------------------------------------------------------
    \1799\ Sec. 280C(a).
    \1800\ Secs. 1396(c)(3)(A) and 51A(d)(2).
    \1801\ Secs. 1396(c)(3)(B) and 51A(d)(2).
    \1802\ Sec. 38(c)(2).
---------------------------------------------------------------------------

Increased section 179 expensing limitation

    An enterprise zone business is allowed an additional 
$35,000 of section 179 expensing (for a total of up to $285,000 
in 2009) \1803\ for qualified zone property placed in service 
before January 1, 2010.\1804\ 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 $500,000.\1805\ The term 
``qualified zone property'' is defined as depreciable tangible 
property (including buildings) provided that (i) the property 
is acquired by the taxpayer (from an unrelated party) after the 
designation took effect, (ii) the original use of the property 
in an empowerment zone commences with the taxpayer, and (iii) 
substantially all of the use of the property is in an 
empowerment zone in the active conduct of a trade or business 
by the taxpayer. Special rules are provided in the case of 
property that is substantially renovated by the taxpayer.
---------------------------------------------------------------------------
    \1803\ For each of 2010 and 2011, the 179 expensing limitation will 
be a total of up to $535,000. The Small Business Jobs Act of 2010, Pub. 
L. No. 111-240, sec. 2021. See discussion in Part Fourteen of this 
document.
    \1804\ Secs. 1397A, 1397D.
    \1805\ Sec. 1397A(a)(2), 179(b)(2), (7). For 2008 and 2009, the 
limit is $800,000.
---------------------------------------------------------------------------
    An enterprise zone business means any qualified business 
entity and any qualified proprietorship. A qualified business 
entity means, any corporation or partnership if for such year: 
(1) every trade or business of such entity is the active 
conduct of a qualified business within an empowerment zone; (2) 
at least 50 percent of the total gross income of such entity is 
derived from the active conduct of such business; (3) a 
substantial portion of the use of the tangible property of such 
entity (whether owned or leased) is within an empowerment zone; 
(4) a substantial portion of the intangible property of such 
entity is used in the active conduct of any such business; (5) 
a substantial portion of the services performed for such entity 
by its employees are performed in an empowerment zone; (6) at 
least 35 percent of its employees are residents of an 
empowerment zone; (7) less than five percent of the average of 
the aggregate unadjusted bases of the property of such entity 
is attributable to collectibles other than collectibles that 
are held primarily for sale to customers in the ordinary course 
of such business; and (8) less than 5 percent of the average of 
the aggregate unadjusted bases of the property of such entity 
is attributable to nonqualified financial property.\1806\
---------------------------------------------------------------------------
    \1806\ Sec. 1397C(b).
---------------------------------------------------------------------------
    A qualified proprietorship is any qualified business 
carried on by an individual as a proprietorship if for such 
year: (1) at least 50 percent of the total gross income of such 
individual from such business is derived from the active 
conduct of such business in an empowerment zone; (2) a 
substantial portion of the use of the tangible property of such 
individual in such business (whether owned or leased) is within 
an empowerment zone; (3) a substantial portion of the 
intangible property of such business is used in the active 
conduct of such business; (4) a substantial portion of the 
services performed for such individual in such business by 
employees of such business are performed in an empowerment 
zone; (5) at least 35 percent of such employees are residents 
of an empowerment zone; (6) less than 5 percent of the average 
of the aggregate unadjusted bases of the property of such 
individual which is used in such business is attributable to 
collectibles other than collectibles that are held primarily 
for sale to customers in the ordinary course of such business; 
and (7) less than 5 percent of the average of the aggregate 
unadjusted bases of the property of such individual which is 
used in such business is attributable to nonqualified financial 
property.\1807\
---------------------------------------------------------------------------
    \1807\ Sec. 1397C(c).
---------------------------------------------------------------------------
    A qualified business is defined as any trade or business 
other than a trade or business that consists predominantly of 
the development or holding of intangibles for sale or license 
or any business prohibited in connection with the employment 
credit.\1808\ In addition, the leasing of real property that is 
located within the empowerment zone is treated as a qualified 
business only if (1) the leased property is not residential 
property, and (2) at least 50 percent of the gross rental 
income from the real property is from enterprise zone 
businesses. The rental of tangible personal property is not a 
qualified business unless at least 50 percent of the rental of 
such property is by enterprise zone businesses or by residents 
of an empowerment zone.
---------------------------------------------------------------------------
    \1808\ Sec. 1397C(d). Excluded businesses include any private or 
commercial golf course, country club, massage parlor, hot tub facility, 
sun tan facility, racetrack, or other facility used for gambling or any 
store the principal business of which is the sale of alcoholic 
beverages for off-premises consumption. Sec. 144(c)(6).
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Expanded tax-exempt financing for certain zone facilities

    States or local governments can issue enterprise zone 
facility bonds to raise funds to provide an enterprise zone 
business with qualified zone property.\1809\ These bonds can be 
used in areas designated enterprise communities as well as 
areas designated empowerment zones. To qualify, 95 percent (or 
more) of the net proceeds from the bond issue must be used to 
finance: (1) qualified zone property whose principal user is an 
enterprise zone business, and (2) certain land functionally 
related and subordinate to such property.
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    \1809\ Sec. 1394.
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    The term enterprise zone business is the same as that used 
for purposes of the increased section 179 deduction limitation 
(discussed above) with certain modifications for start-up 
businesses. First, a business will be treated as an enterprise 
zone business during a start-up period if (1) at the beginning 
of the period, it is reasonable to expect the business to be an 
enterprise zone business by the end of the start-up period, and 
(2) the business makes bona fide efforts to be an enterprise 
zone business. The start-up period is the period that ends with 
the start of the first tax year beginning more than two years 
after the later of (1) the issue date of the bond issue 
financing the qualified zone property, and (2) the date this 
property is first placed in service (or, if earlier, the date 
that is three years after the issue date).\1810\
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    \1810\ Sec. 1394(b)(3).
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    Second, a business that qualifies as at the end of the 
start-up period must continue to qualify during a testing 
period that ends three tax years after the start-up period 
ends. After the three-year testing period, a business will 
continue to be treated as an enterprise zone business as long 
as 35 percent of its employees are residents of an empowerment 
zone or enterprise community.
    The face amount of the bonds may not exceed $60 million for 
an empowerment zone in a rural area, $130 million for an 
empowerment zone in an urban area with zone population of less 
than 100,000, and $230 million for an empowerment zone in an 
urban area with zone population of at least 100,000.

Elective roll over of capital gain from the sale or exchange of any 
        qualified empowerment zone asset purchased after December 21, 
        2000

    Taxpayers can elect to defer recognition of gain on the 
sale of a qualified empowerment zone asset \1811\ held for more 
than one year and replaced within 60 days by another qualified 
empowerment zone asset in the same zone.\1812\ The deferral is 
accomplished by reducing the basis of the replacement asset by 
the amount of the gain recognized on the sale of the asset.
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    \1811\ The term ``qualified empowerment zone asset'' means any 
property which would be a qualified community asset (as defined in 
section 1400F, relating to certain tax benefits for renewal 
communities) if in section 1400F: (i) references to empowerment zones 
were substituted for references to renewal communities, (ii) references 
to enterprise zone businesses (as defined in section 1397C) were 
substituted for references to renewal community businesses, and (iii) 
the date of the enactment of this paragraph were substituted for 
``December 31, 2001'' each place it appears. Sec. 1397B(b)(1)(A).
    A ``qualified community asset'' includes: (1) qualified community 
stock (meaning original-issue stock purchased for cash in an enterprise 
zone business), (2) a qualified community partnership interest (meaning 
a partnership interest acquired for cash in an enterprise zone 
business), and (3) qualified community business property (meaning 
tangible property originally used in a enterprise zone business by the 
taxpayer) that is purchased or substantially improved after the date of 
the enactment of this paragraph.
    For the definition of ``enterprise zone business,'' see text 
accompanying supra note 1806. For the definition of ``qualified 
business,'' see text accompanying supra note 1806.
    \1812\ Sec. 1397B.
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Partial exclusion of capital gains on certain small business stock

    Individuals generally may exclude 50 percent (60 percent 
for certain empowerment zone businesses) of the gain from the 
sale of certain small business stock acquired at original issue 
and held for at least five years.\1813\ The amount of gain 
eligible for the exclusion by an individual with respect to any 
corporation is the greater of (1) ten times the taxpayer's 
basis in the stock or (2) $10 million. To qualify as a small 
business, when the stock is issued, the gross assets of the 
corporation may not exceed $50 million. The corporation also 
must meet certain active trade or business requirements.
---------------------------------------------------------------------------
    \1813\ Sec. 1202.
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    The portion of the gain includible in taxable income is 
taxed at a maximum rate of 28 percent under the regular 
tax.\1814\ A percentage of the excluded gain is an alternative 
minimum tax preference;\1815\ the portion of the gain 
includible in alternative minimum taxable income is taxed at a 
maximum rate of 28 percent under the alternative minimum tax.
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    \1814\ Sec. 1(h).
    \1815\ Sec. 57(a)(7). In the case of qualified small business 
stock, the percentage of gain excluded from gross income which is an 
alternative minimum tax preference is (i) seven percent in the case of 
stock disposed of in a taxable year beginning before 2011; (ii) 42 
percent in the case of stock acquired before January 1, 2001, and 
disposed of in a taxable year beginning after 2010; and (iii) 28 
percent in the case of stock acquired after December 31, 2000, and 
disposed of in a taxable year beginning after 2010.
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    Gain from the sale of qualified small business stock 
generally is taxed at effective rates of 14 percent under the 
regular tax \1816\ and (i) 14.98 percent under the alternative 
minimum tax for dispositions before January 1, 2011; (ii) 19.88 
percent under the alternative minimum tax for dispositions 
after December 31, 2010, in the case of stock acquired before 
January 1, 2001; and (iii) 17.92 percent under the alternative 
minimum tax for dispositions after December 31, 2010, in the 
case of stock acquired after December 31, 2000.\1817\
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    \1816\ The 50 percent of gain included in taxable income is taxed 
at a maximum rate of 28 percent.
    \1817\ The amount of gain included in alternative minimum tax is 
taxed at a maximum rate of 28 percent. The amount so included is the 
sum of (i) 50 percent (the percentage included in taxable income) of 
the total gain and (ii) the applicable preference percentage of the 
one-half gain that is excluded from taxable income.
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Temporary increases in exclusion

    The percentage exclusion for qualified small business stock 
acquired after February 17, 2009, and on or before September 
27, 2010, is increased to 75 percent.
    The percentage exclusion for qualified small business stock 
acquired after September 27, 2010, and before January 1, 2011, 
is increased to 100 percent.\1818\
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    \1818\ Sec. 760 of the Act extends the January 1, 2011, date to 
January 1, 2012.
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    The temporary increases in the exclusion percentage apply 
for all qualified small business stock, including stock of 
empowerment zone businesses.\1819\
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    \1819\ Secs. 1202(a)(3)(B) and 1202(a)(4)(B).
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Other tax incentives

    Other incentives not specific to empowerment zones but 
beneficial to these areas include the work opportunity tax 
credit for employers based on the first year of employment of 
certain targeted groups, including empowerment zone residents 
(up to $2,400 per employee), and qualified zone academy bonds 
for certain public schools located in an empowerment zone, or 
expected (as of the date of bond issuance) to have at least 35 
percent of its students receiving free or reduced lunches.

                        Explanation of Provision

    The provision extends for two years, through December 31, 
2011, the period for which the designation of an empowerment 
zone is in effect, thus extending for two years the empowerment 
zone tax incentives, including the wage credit, accelerated 
depreciation deductions on qualifying equipment, tax-exempt 
bond financing, and deferral of capital gains tax on sale of 
qualified assets sold and replaced. In the case of a 
designation of an empowerment zone the nomination for which 
included a termination date which is December 31, 2009, 
termination shall not apply with respect to such designation if 
the entity which made such nomination amends the nomination to 
provide for a new termination date in such manner as the 
Secretary may provide.
    The provision extends for two years, through December 31, 
2016, the period for which the percentage exclusion for 
qualified small business stock (of a corporation which is a 
qualified business entity) acquired on or before February 17, 
2009 is 60 percent. Gain attributable to periods after December 
31, 2016 for qualified small business stock acquired on or 
before February 17, 2009 or after December 31, 2011 is subject 
to the general rule which provides for a percentage exclusion 
of 50 percent.

                             Effective Date

    The provision relating to the designation of an empowerment 
zone and the provision relating to the exclusion of gain from 
the sale or exchange of qualified small business stock held for 
more than five years applies to periods after December 31, 
2009.

24. Tax incentives for investment in the District of Columbia (sec. 754 
        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,'' or 
``DC Zone,'' within which businesses and individual residents 
are eligible for special tax incentives. The census tracts that 
comprise the District of Columbia Enterprise 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 of Columbia), and (2) all additional census tracts 
within the District of Columbia where the poverty rate is not 
less than 20 percent. The District of Columbia Enterprise Zone 
designation remains in effect for the period from January 1, 
1998, through December 31, 2009.
    The following tax incentives are available for businesses 
located in an empowerment zone and the District of Columbia 
Enterprise Zone is treated as an empowerment zone for this 
purpose: (1) 20-percent wage credit, (2) an additional $35,000 
of section 179 expensing for qualified zone property, and (3) 
expanded tax-exempt financing for certain zone facilities. In 
addition, a zero-percent capital gains rate applies to capital 
gains from the sale of certain qualified DC Zone assets held 
for more than five years.
    Present law also provides for a nonrefundable tax credit 
for first-time homebuyers of a principal residence in the 
District of Columbia.

Employment 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 District of Columbia, 
and (2) performs substantially all employment services within 
an empowerment zone in a trade or business of the employer.
    The wage credit rate applies to qualifying wages paid after 
December 31, 2001, and before January 1, 2010. 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 empowerment 
zone may claim the wage credit, regardless of whether the 
employer meets the definition of an ``enterprise zone 
business,'' as defined below.
    An employer's deduction otherwise allowed for wages paid is 
reduced by the amount of wage credit claimed for that taxable 
year. Wages are not to be taken into account for purposes of 
the wage credit if taken into account in determining the 
employer's work opportunity tax credit under section 51 or the 
welfare-to-work credit under section 51A. In addition, the 
$15,000 cap is reduced by any wages taken into account in 
computing the work opportunity tax credit or the welfare-to-
work credit. The wage credit may be used to offset up to 25 
percent of alternative minimum tax liability.

Increased section 179 expensing limitation

    An enterprise zone business is allowed an additional 
$35,000 of section 179 expensing (for a total of up to $285,000 
in 2009) \1820\ for qualified zone property placed in service 
after December 31, 2001, and before January 1, 2010. 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 $500,000. The term ``qualified zone property'' is 
defined as depreciable tangible property (including buildings) 
provided that (i) the property is acquired by the taxpayer 
(from an unrelated party) after the designation took effect, 
(ii) the original use of the property in an empowerment zone 
commences with the taxpayer, and (iii) substantially all of the 
use of the property is in an empowerment zone in the active 
conduct of a trade or business by the taxpayer. For this 
purpose, special rules are provided in the case of property 
that is substantially renovated by the taxpayer.
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    \1820\ For each of 2010 and 2011, the 179 expensing limitation will 
be a total of up to $535,000. The Small Business Jobs Act of 2010, Pub. 
L. No. 111-240, sec. 2021. See discussion in Part Fourteen of this 
document.
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    An enterprise zone business means any qualified business 
entity and any qualified proprietorship. A qualified business 
entity means, any corporation or partnership if for such year: 
(1) every trade or business of such entity is the active 
conduct of a qualified business within an empowerment zone; (2) 
at least 50 percent of the total gross income of such entity is 
derived from the active conduct of such business; (3) a 
substantial portion of the use of the tangible property of such 
entity (whether owned or leased) is within an empowerment zone; 
(4) a substantial portion of the intangible property of such 
entity is used in the active conduct of any such business; (5) 
a substantial portion of the services performed for such entity 
by its employees are performed in an empowerment zone; (6) at 
least 35 percent of its employees are residents of an 
empowerment zone; (7) less than five percent of the average of 
the aggregate unadjusted bases of the property of such entity 
is attributable to collectibles other than collectibles that 
are held primarily for sale to customers in the ordinary course 
of such business; and (8) less than 5 percent of the average of 
the aggregate unadjusted bases of the property of such entity 
is attributable to nonqualified financial property.
    A qualified proprietorship is any qualified business 
carried on by an individual as a proprietorship if for such 
year: (1) at least 50 percent of the total gross income of such 
individual from such business is derived from the active 
conduct of such business in an empowerment zone; (2) a 
substantial portion of the use of the tangible property of such 
individual in such business (whether owned or leased) is within 
an empowerment zone; (3) a substantial portion of the 
intangible property of such business is used in the active 
conduct of such business; (4) a substantial portion of the 
services performed for such individual in such business by 
employees of such business are performed in an empowerment 
zone; (5) at least 35 percent of such employees are residents 
of an empowerment zone; (6) less than 5 percent of the average 
of the aggregate unadjusted bases of the property of such 
individual which is used in such business is attributable to 
collectibles other than collectibles that are held primarily 
for sale to customers in the ordinary course of such business; 
and (7) less than 5 percent of the average of the aggregate 
unadjusted bases of the property of such individual which is 
used in such business is attributable to nonqualified financial 
property.
    A qualified business is defined as any trade or business 
other than a trade or business that consists predominantly of 
the development or holding of intangibles for sale or license 
or any business prohibited in connection with the employment 
credit. In addition, the leasing of real property that is 
located within the empowerment zone is treated as a qualified 
business only if (1) the leased property is not residential 
property, and (2) at least 50 percent of the gross rental 
income from the real property is from enterprise zone 
businesses. The rental of tangible personal property is not a 
qualified business unless at least 50 percent of the rental of 
such property is by enterprise zone businesses or by residents 
of an empowerment zone.

Expanded tax-exempt financing for certain zone facilities

    An enterprise zone business is permitted to borrow proceeds 
from the issuance of tax-exempt enterprise zone facility bonds 
(as defined in section 1394, without regard to the employee 
residency requirement) issued by the District of Columbia. To 
qualify, 95 percent (or more) of the net proceeds must be used 
to finance: (1) qualified zone property whose principal user is 
an enterprise zone business, and (2) certain land functionally 
related and subordinate to such property. Accordingly, most of 
the proceeds have to be used to finance certain facilities 
within the DC Zone. The aggregate face amount of all 
outstanding qualified enterprise zone facility bonds per 
enterprise zone business may not exceed $15 million and may be 
issued only while the DC Zone designation is in effect, from 
January 1, 1998 through December 31, 2009.
    The term enterprise zone business is the same as that used 
for purposes of the increased section 179 deduction limitation 
with certain modifications for start-up businesses. First, a 
business will be treated as an enterprise zone business during 
a start-up period if (1) at the beginning of the period, it is 
reasonable to expect the business to be an enterprise zone 
business by the end of the start-up period, and (2) the 
business makes bona fide efforts to be an enterprise zone 
business. The start-up period is the period that ends with the 
start of the first tax year beginning more than two years after 
the later of (1) the issue date of the bond issue financing the 
qualified zone property, and (2) the date this property is 
first placed in service (or, if earlier, the date that is three 
years after the issue date).
    Second, a business that qualifies as at the end of the 
start-up period must continue to qualify during a testing 
period that ends three tax years after the start-up period 
ends. After the three-year testing period, a business will 
continue to be treated as an enterprise zone business as long 
as 35 percent of its employees are residents of an empowerment 
zone or enterprise community.

Zero-percent capital gains

    A zero-percent capital gains rate applies to capital gains 
from the sale of certain qualified DC Zone assets held for more 
than five years. In general, a ``qualified DC Zone asset'' 
means stock or partnership interests held in, or tangible 
property held by, a DC Zone business. For purposes of the zero-
percent capital gains rate, the DC Zone is defined to include 
all census tracts within the District of Columbia where the 
poverty rate is not less than ten percent.
    In general, gain eligible for the zero-percent tax rate is 
that from the sale or exchange of a qualified DC Zone asset 
that is (1) a capital asset or (2) property used in a trade or 
business, as defined in section 1231(b). 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 
DC Zone business. However, no gain attributable to periods 
before January 1, 1998, and after December 31, 2014, is 
qualified capital gain.

District of Columbia homebuyer tax credit

    First-time homebuyers of a principal residence in the 
District of Columbia qualify for a tax credit of up to $5,000. 
The $5,000 maximum credit amount applies both to individuals 
and married couples. The credit phases out for individual 
taxpayers with adjusted gross income between $70,000 and 
$90,000 ($110,000 and $130,000 for joint filers). The credit is 
available with respect to purchases of existing property as 
well as new construction.
    A ``first-time homebuyer'' means any individual if such 
individual (and, if married, such individual's spouse) did not 
have a present ownership interest in a principal residence in 
the District of Columbia during the one-year period ending on 
the date of the purchase of the principal residence to which 
the credit applies. A taxpayer will be treated as a first-time 
homebuyer with respect to only one residence--i.e., a taxpayer 
may claim the credit only once. A taxpayer's basis in a 
property is reduced by the amount of any homebuyer tax credit 
claimed with respect to such property.
    The first-time homebuyer credit is a nonrefundable personal 
credit and may offset the regular tax and the alternative 
minimum tax. Any credit in excess of tax liability may be 
carried forward indefinitely. The homebuyer credit is generally 
available for property purchased after August 4, 1997, and 
before January 1, 2010. However, the credit does not apply to 
the purchase of a residence after December 31, 2008 to which 
the national first-time homebuyer credit under Section 36 of 
the Code applies.

                        Explanation of Provision

    The provision extends for two years, through December 31, 
2011, the designation of the District of Columbia Enterprise 
Zone. The provision also extends for two years through December 
31, 2011, the special $15 million per-user bond limitation and 
the relief from resident and employee requirements for certain 
tax-exempt bonds issued in the District of Columbia Enterprise 
Zone.
    The provision extends for two years the zero-percent 
capital gains rate applicable to capital gains from the sale or 
exchange of any DC Zone asset held for more than five years 
(and, as amended, acquired or substantially improved before 
January 1, 2012). The provision also extends for two years the 
period to which the term ``qualified capital gain'' refers. As 
amended, the term ``qualified capital gain'' shall not include 
any gain attributable to periods before January 1, 1998, or 
after December 31, 2016.
    The provision extends the first-time D.C. homebuyer credit 
for two years (as amended, to apply to property purchased 
before January 1, 2012).

                             Effective Date

    The provision extending the period of designation of the 
District of Columbia Enterprise Zone and the provision 
extending the period for which the term ``qualified capital 
gain'' refers applies to periods after December 31, 2009. The 
provision extending tax-exempt financing for certain zone 
facilities applies to bonds issued after December 31, 2009. The 
provision amending the definitions of DC Zone business stock, 
DC Zone partnership interest, and DC Zone business property 
applies to property acquired or substantially improved after 
December 31, 2009. The provision extending the first-time 
homebuyer credit applies to homes purchased after December 31, 
2009.

25. Temporary increase in limit on cover over of rum excise taxes to 
        Puerto Rico and the Virgin Islands (sec. 755 of the Act and 
        sec. 7652(f) of the Code)

                              Present Law

    A $13.50 per proof gallon \1821\ excise tax is imposed on 
distilled spirits produced in or imported into the United 
States.\1822\ 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).\1823\
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    \1821\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See secs. 5002(a)(10) and (11).
    \1822\ Sec. 5001(a)(1).
    \1823\ Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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    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.\1824\ The amount of the cover over is 
limited under Code section 7652(f) to $10.50 per proof gallon 
($13.25 per proof gallon before January 1, 2010).
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    \1824\ 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).
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    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.\1825\ 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.\1826\ All of the amounts covered over are subject to 
the limitation.
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    \1825\ Sec. 7652(e)(2).
    \1826\ Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

                        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 limitation of $13.25 per proof gallon 
is extended for rum brought into the United States after 
December 31, 2009 and before January 1, 2012. After December 
31, 2011, the cover over amount reverts to $10.50 per proof 
gallon.

                             Effective Date

    The provision is effective for distilled spirits brought 
into the United States after December 31, 2009.

26. American Samoa economic development credit (sec. 756 of the Act and 
        sec. 119 of Pub. L. No. 109-432)

                              Present Law

    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 corporation's 
economic activity-based limitation with respect to American 
Samoa. The credit is not part of the Code but is computed based 
on the rules of sections 30A and 936. The credit is allowed for 
the first four taxable years of a corporation that begin after 
December 31, 2005, and before January 1, 2010.
    A corporation was an existing credit claimant with respect 
to American Samoa if (1) the corporation was engaged in the 
active conduct of a trade or business within American Samoa on 
October 13, 1995, and (2) the corporation elected the benefits 
of the possession tax credit \1827\ in an election in effect 
for its taxable year that included October 13, 1995.\1828\ 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.
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    \1827\ 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. Secs. 27(b), 936. This 
credit offset the U.S. tax imposed on certain income related to 
operations in the U.S. possessions. Subject to certain limitations, 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. 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.
    Under the economic activity-based limit, the amount of the credit 
could not exceed an amount equal to the sum of (1) 60 percent of the 
taxpayer's qualified possession wages and allocable employee fringe 
benefit expenses, (2) 15 percent of depreciation allowances with 
respect to short-life qualified tangible property, plus 40 percent of 
depreciation allowances with respect to medium-life qualified tangible 
property, plus 65 percent of depreciation allowances with respect to 
long-life qualified tangible property, and (3) in certain cases, a 
portion of the taxpayer's possession income taxes. A taxpayer could 
elect, instead of the economic activity-based limit, a limit equal to 
the applicable percentage of the credit that otherwise would have been 
allowable with respect to possession business income, beginning in 
1998, the applicable percentage was 40 percent.
    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. Sec. 
936(a)(2). The section 936 credit generally expired for taxable years 
beginning after December 31, 2005.
    \1828\ A corporation will qualify as an existing credit claimant if 
it acquired all the assets of a trade or business of a corporation that 
(1) actively conducted that trade or business in a possession on 
October 13, 1995, and (2) had elected the benefits of the possession 
tax credit in an election in effect for the taxable year that included 
October 13, 1995.
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    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 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 applies to the first four taxable years of a 
taxpayer which begin after December 31, 2005, and before 
January 1, 2010.

                        Explanation of Provision

    The provision extends the credit to apply to the first six 
taxable years of a taxpayer beginning after December 31, 2005, 
and before January 1, 2012.

                             Effective Date

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

27. Work opportunity credit (sec. 757 of the Act and sec. 51 of the 
        Code)

                              Present Law


In general

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

Targeted groups eligible for the credit

    Generally, an employer is eligible for the credit only for 
qualified wages paid to members of a targeted group.
            (1) Families receiving TANF
    An eligible recipient is an individual certified by a 
designated local employment agency (e.g., a State employment 
agency) as being a member of a family eligible to receive 
benefits under the Temporary Assistance for Needy Families 
Program (``TANF'') for a period of at least nine months part of 
which is 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
    There are two subcategories of qualified veterans related 
to eligibility for food stamps and compensation for a service-
connected disability.
            Food stamps
    A qualified veteran is a veteran who is certified by the 
designated local agency as 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 three months part of which is 
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.
            Entitled to compensation for a service-connected disability
    A qualified veteran also includes 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.
            Definitions
    For these purposes, being entitled to compensation for a 
service-connected disability is defined with reference to 
section 101 of Title 38, U.S. Code, which means having a 
disability rating of 10 percent or higher for service connected 
injuries.
    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 the date of conviction.
            (4) Designated community residents
    A designated community resident is an individual certified 
as being at least age 18 but not yet age 40 on the hiring date 
and as having a principal place of abode within an empowerment 
zone, enterprise community, renewal community or a rural 
renewal community. For these purposes, a rural renewal county 
is a county outside a metropolitan statistical area (as defined 
by the Office of Management and Budget) which had a net 
population loss during the five-year periods 1990-1994 and 
1995-1999. Qualified wages do not include wages paid or 
incurred for services performed after the individual moves 
outside an empowerment zone, enterprise community, renewal 
community or a rural 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; (b) under a rehabilitation plan 
for veterans carried out under Chapter 31 of Title 38, U.S. 
Code; or (c) an individual work plan developed and implemented 
by an employment network pursuant to subsection (g) of section 
1148 of the Social Security Act. 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 with designated community 
residents, 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 at least 
age 18 but not yet age 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) \1829\ 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.
---------------------------------------------------------------------------
    \1829\ The welfare-to-work tax credit was consolidated into the 
work opportunity tax credit in the Tax Relief and Health Care Act of 
2006, Pub. L. No. 109-432, for qualified individuals who begin to work 
for an employer after December 31, 2006.
---------------------------------------------------------------------------
            (10) Unemployed veterans and disconnected youth hired in 
                    2009 and 2010
    Unemployed veterans and disconnected youth who begin work 
for the employer in 2009 or 2010 are treated as a targeted 
category under section 1221(a) of the American Recovery and 
Reinvestment Act of 2009.\1830\
---------------------------------------------------------------------------
    \1830\ Pub. L. No. 111-5.
---------------------------------------------------------------------------
    An unemployed veteran is defined as an individual certified 
by the designated local agency as someone who: (1) 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; (2) has been discharged or released from active 
duty in the Armed Forces during the five-year period ending on 
the hiring date; and (3) has received unemployment compensation 
under State or Federal law for not less than four weeks during 
the one-year period ending on the hiring date.
    A disconnected youth is defined as an individual certified 
by the designated local agency as someone: (1) at least age 16 
but not yet age 25 on the hiring date; (2) not regularly 
attending any secondary, technical, or post-secondary school 
during the six-month period preceding the hiring date; (3) not 
regularly employed during the six-month period preceding the 
hiring date; and (4) not readily employable by reason of 
lacking a sufficient number of skills.

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).
    In the case of a qualified veteran who is entitled to 
compensation for a service connected disability, the credit 
equals 40 percent of $12,000 of qualified first-year wages. 
This 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.

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.

                        Explanation of Provision

    The provision extends the work opportunity tax credit for 
four months (for individuals who begin work for an employer 
after August 31, 2011 before January 1, 2012).\1831\
---------------------------------------------------------------------------
    \1831\ The rule to allow unemployed veterans and disconnected youth 
who begin work for the employer in 2009 or 2010 to be treated as 
members of a targeted group is not extended.
---------------------------------------------------------------------------

                             Effective Date

    The provisions are effective for individuals who begin work 
for an employer after August 31, 2011.

28. Qualified zone academy bonds (sec. 758 of the Act and 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.\1832\ An issuer must 
file with the Internal Revenue Service certain information 
about the bonds issued in order for that bond issue to be tax-
exempt.\1833\ 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.
---------------------------------------------------------------------------
    \1832\ Sec. 103.
    \1833\ Sec. 149(e).
---------------------------------------------------------------------------
    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\1834\ 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.\1835\ 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.
---------------------------------------------------------------------------
    \1834\ Sec. 103(a) and (b)(2).
    \1835\ 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.'' \1836\ A total of $400 
million of qualified zone academy bonds is authorized to be 
issued annually in calendar years 1998 through 2008. That is 
increased to $1,400 million in 2009 and 2010. Each calendar 
year's bond limitation is allocated 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.
---------------------------------------------------------------------------
    \1836\ See secs. 54E and 1397E.
---------------------------------------------------------------------------
    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.\1837\ 
The Secretary determines credit rates for tax credit bonds 
based on general assumptions about credit quality of the class 
of potential eligible issuers and such other factors as the 
Secretary deems appropriate. The Secretary may determine credit 
rates based on general credit market yield indexes and credit 
ratings. 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.
---------------------------------------------------------------------------
    \1837\ Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
    ``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 arbitrage requirements which generally apply to 
interest-bearing tax-exempt bonds also generally apply to 
qualified zone academy bonds. In addition, an issuer of 
qualified zone academy bonds must reasonably expect to and 
actually spend 100 percent or more of the proceeds of such 
bonds on qualified zone academy property within the three-year 
period that begins on the date of issuance. To the extent less 
than 100 percent of the proceeds are used to finance qualified 
zone academy property during the three-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 three-year period to redeem any nonqualified bonds. The 
three-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.
    Two special arbitrage rules apply to qualified zone academy 
bonds. First, 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). Available project proceeds are 
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. 
Second, 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.
    Issuers of qualified zone academy bonds are required to 
report issuance to the Internal Revenue Service in a manner 
similar to the information returns required for tax-exempt 
bonds.
    For bonds originally issued after March 18, 2010, an issuer 
of qualified zone academy bonds may make an irrevocable 
election on or before the issue date of such bonds to receive a 
payment under section 6431 in lieu of providing a tax credit to 
the holder of the bonds. The payment to the issuer on each 
payment date is equal to the lesser of (1) the amount of 
interest payable on such bond by such issuer with respect to 
such date or (2) the amount of the interest which would have 
been payable under such bond on such date if such interest were 
determined at the applicable tax credit bond rate.

                        Explanation of Provision


In general

    The provision extends the qualified zone academy bond 
program for one year. The provision authorizes issuance of up 
to $400 million of qualified zone academy bonds for 2011.
    The issuer election to receive a payment in lieu of 
providing a tax credit to the holder of the qualified zone 
academy bond is not available for bonds issued with the 2011 
national limitation. The provision has no effect on bonds 
issued with limitation carried forward from 2009 or 2010.

                             Effective Date

    The provision applies to obligations issued after December 
31, 2010.

29. Mortgage insurance premiums (sec. 759 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,\1838\ or the Rural Housing 
Administration, and private mortgage insurance (defined in 
section 2 of the Homeowners Protection Act of 1998 as in effect 
on the date of enactment of the provision).
---------------------------------------------------------------------------
    \1838\ 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 provision does not apply with respect to any mortgage 
insurance contract issued before January 1, 2007. The provision 
terminates for any amount paid or accrued after December 31, 
2010, or properly allocable to any period after that date.
    Reporting rules apply under the provision.

                        Explanation of Provision

    The provision extends the deduction for private mortgage 
insurance premiums for one year (only with respect to contracts 
entered into after December 31, 2006). Thus, the provision 
applies to amounts paid or accrued in 2011 (and not properly 
allocable to any period after 2011).

                             Effective Date

    The provision is effective for amounts paid or accrued 
after December 31, 2010.

30. Temporary exclusion of 100 percent of gain on certain small 
        business stock (sec. 760 of the Act and sec. 1202 of the Code)

                              Present Law


In general

    Individuals generally may exclude 50 percent (60 percent 
for certain empowerment zone businesses) of the gain from the 
sale of certain small business stock acquired at original issue 
and held for at least five years.\1839\ The amount of gain 
eligible for the exclusion by an individual with respect to any 
corporation is the greater of (1) ten times the taxpayer's 
basis in the stock or (2) $10 million. To qualify as a small 
business, when the stock is issued, the gross assets of the 
corporation may not exceed $50 million. The corporation also 
must meet certain active trade or business requirements.
---------------------------------------------------------------------------
    \1839\ Sec. 1202.
---------------------------------------------------------------------------
    The portion of the gain includible in taxable income is 
taxed at a maximum rate of 28 percent under the regular 
tax.\1840\ A percentage of the excluded gain is an alternative 
minimum tax preference; \1841\ the portion of the gain 
includible in alternative minimum taxable income is taxed at a 
maximum rate of 28 percent under the alternative minimum tax.
---------------------------------------------------------------------------
    \1840\ Sec. 1(h).
    \1841\ Sec. 57(a)(7). In the case of qualified small business 
stock, the percentage of gain excluded from gross income which is an 
alternative minimum tax preference is (i) seven percent in the case of 
stock disposed of in a taxable year beginning before 2011; (ii) 42 
percent in the case of stock acquired before January 1, 2001, and 
disposed of in a taxable year beginning after 2010; and (iii) 28 
percent in the case of stock acquired after December 31, 2000, and 
disposed of in a taxable year beginning after 2010. Section 102 of the 
Act extends the 2010 and 2011 dates by two years.
---------------------------------------------------------------------------
    Gain from the sale of qualified small business stock 
generally is taxed at effective rates of 14 percent under the 
regular tax\1842\ and (i) 14.98 percent under the alternative 
minimum tax for dispositions before January 1, 2011; (ii) 19.88 
percent under the alternative minimum tax for dispositions 
after December 31, 2010, in the case of stock acquired before 
January 1, 2001; and (iii) 17.92 percent under the alternative 
minimum tax for dispositions after December 31, 2010, in the 
case of stock acquired after December 31, 2000.\1843\
---------------------------------------------------------------------------
    \1842\ The 50 percent of gain included in taxable income is taxed 
at a maximum rate of 28 percent.
    \1843\ The amount of gain included in alternative minimum tax is 
taxed at a maximum rate of 28 percent. The amount so included is the 
sum of (i) 50 percent (the percentage included in taxable income) of 
the total gain and (ii) the applicable preference percentage of the 
one-half gain that is excluded from taxable income.
---------------------------------------------------------------------------

Temporary increases in exclusion

    The percentage exclusion for qualified small business stock 
acquired after February 17, 2009, and on or before September 
27, 2010, is increased to 75 percent. As a result of the 
increased exclusion, gain from the sale of this qualified small 
business stock held at least five years is taxed at effective 
rates of seven percent under the regular tax \1844\ and 12.88 
percent under the alternative minimum tax.\1845\
---------------------------------------------------------------------------
    \1844\ The 25 percent of gain included in taxable income is taxed 
at a maximum rate of 28 percent.
    \1845\ The 46 percent of gain included in alternative minimum tax 
is taxed at a maximum rate of 28 percent. Forty-six percent is the sum 
of 25 percent (the percentage of total gain included in taxable income) 
plus 21 percent (the percentage of total gain which is an alternative 
minimum tax preference).
---------------------------------------------------------------------------
    The percentage exclusion for qualified small business stock 
acquired after September 27, 2010, and before January 1, 2011, 
is increased to 100 percent and the minimum tax preference does 
not apply.\1846\ The minimum tax preference does not apply.
---------------------------------------------------------------------------
    \1846\ Sec. 1202(a)(4)(A) and (C).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the 100-percent exclusion and the 
exception from minimum tax preference treatment for one year 
(for stock acquired before January 1, 2012).

                             Effective Date

    The provision is effective for stock acquired after 
December 31, 2010.

                D. Temporary Disaster Relief Provisions


1. New York Liberty Zone tax-exempt bond financing (sec. 761 of the Act 
        and sec. 1400L of the Code)

                              Present Law

    An aggregate of $8 billion in tax-exempt private activity 
bonds is authorized for the purpose of financing the 
construction and repair of infrastructure in New York City 
(``Liberty Zone bonds''). The bonds must be issued before 
January 1, 2010.

                        Explanation of Provision

    The provision extends authority to issue Liberty Zone bonds 
for two years (through December 31, 2011).

                             Effective Date

    The provision is effective for bonds issued after December 
31, 2009.

2. Increase in rehabilitation credit in the Gulf Opportunity Zone (sec. 
        762 of the Act 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, 2010. 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 two additional years 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, 2012.

                             Effective Date

    The provision is effective for amounts paid or incurred 
after December 31, 2009.

3. Low-income housing credit rules for buildings in Gulf Opportunity 
        Zones (sec. 763 and sec. 1400N(c)(5) of the Code)

                              Present Law


In general

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

Volume limit

    Generally, 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. Each 
State has a limited amount of low-income housing credit 
available to allocate. This amount is called the aggregate 
housing credit dollar amount (or the ``State housing credit 
ceiling''). For each State, the State housing credit ceiling is 
the sum of four components: (1) the unused housing credit 
ceiling, if any, of such State from the prior calendar year; 
(2) the credit ceiling for the year (either a per capital 
amount or the small State minimum annual cap); (3) any returns 
of credit ceiling to the State during the calendar year from 
previous allocations; and (4) the State's share, if any, of the 
national pool of unused credits from other States that failed 
to use them (only States which allocated their entire credit 
ceiling for the preceding calendar year are eligible for a 
share of the national pool. For calendar year 2010, each 
State's credit ceiling is $2.10 per resident, with a minimum 
annual cap of $2,430,000 for certain small population 
States.\1847\ 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.
---------------------------------------------------------------------------
    \1847\ Rev. Proc. 2009-50.
---------------------------------------------------------------------------
    Under section 1400N(c) of the Code, the otherwise 
applicable State housing credit ceiling is increased for each 
of the States within the Gulf Opportunity Zone. This increase 
applies to calendar years 2006, 2007, and 2008. The additional 
volume 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. This 
additional volume limit expires unless the applicable low-
income buildings are placed in service before January 1, 2011.

                        Explanation of Provision

    The provision extends the placed-in-service deadline (for 
one year) to December 31, 2011.

                             Effective Date

    The provision is effective on the date of enactment.

4. Tax-exempt bond financing for the Gulf Opportunity Zones (sec. 764 
        of the Act and sec. 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 an exempt 
facility bond and a qualified mortgage bond.

Exempt facility bonds

    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)).
    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'').

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'').

Gulf Opportunity Zone Bonds

    The Gulf Opportunity Zone Act of 2005 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.
    Depending on the purpose for which such bonds are issued, 
Gulf Opportunity Zone Bonds are treated as either exempt 
facility bonds or qualified mortgage bonds. Gulf Opportunity 
Zone Bonds are treated as exempt facility bonds if 95 percent 
or more of the net proceeds of such bonds are to be used for 
qualified project costs located in the Gulf Opportunity Zone. 
Qualified project costs include the cost of acquisition, 
construction, reconstruction, and renovation of nonresidential 
real property (including buildings and their structural 
components and fixed improvements associated with such 
property), qualified residential rental projects (as defined in 
section 142(d) with certain modifications), and public utility 
property. Bond proceeds may not be used to finance movable 
fixtures and equipment.
    Rather than applying the 20-50 and 40-60 test from section 
142, a project is a qualified residential rental project under 
the provision if 20 percent or more of the residential units in 
such project are occupied by individuals whose income is 60 
percent or less of area median gross income or if 40 percent or 
more of the residential units in such project are occupied by 
individuals whose income is 70 percent or less of area median 
gross income.
    Gulf Opportunity Zone Bonds 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.
    Also, 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. A qualified GO Zone repair or reconstruction 
loan is 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 
these purposes, 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.
    Gulf Opportunity Zone Bonds must be issued before January 
1, 2011.

                        Explanation of Provision

    The provision extends authority to issue Gulf Opportunity 
Zone Bonds for one year (through December 31, 2011).

                             Effective Date

    The provision is effective on the date of enactment.

5. Bonus depreciation deduction applicable to specified Gulf 
        Opportunity Zone extension property (sec. 765 of the Act and 
        sec. 1400N(d)(6) of the Code)

                              Present Law


In general

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
placed in service during 2008, 2009, and 2010 (2009, 2010, and 
2011 for certain longer-lived and transportation 
property).\1848\ The additional first-year depreciation 
deduction is allowed for both regular tax and alternative 
minimum tax purposes, but is not allowed for purposes of 
computing earnings and profits. 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. 
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.
---------------------------------------------------------------------------
    \1848\ Sec. 168(k). The additional first-year depreciation 
deduction is subject to the general rules regarding whether an item 
must be capitalized under section 263 or section 263A.
---------------------------------------------------------------------------
    Property qualifying for the additional first-year 
depreciation deduction 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)).\1849\ Second, the 
original use \1850\ of the property must commence with the 
taxpayer after December 31, 2007.\1851\ Third, the taxpayer 
must acquire the property within the applicable time period. 
Finally, the property must be placed in service after December 
31, 2007, and before January 1, 2011. An extension of the 
placed in service date of one year (i.e., to January 1, 2012) 
is provided for certain property with a recovery period of 10 
years or longer and certain transportation property.\1852\ 
Transportation property is defined as tangible personal 
property used in the trade or business of transporting persons 
or property.
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    \1849\ The additional first-year depreciation deduction is not 
available for any property that is required to be depreciated under the 
alternative depreciation system of MACRS. The additional first-year 
depreciation deduction is also not available for qualified New York 
Liberty Zone leasehold improvement property as defined in section 
1400L(c)(2).
    \1850\ 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).
    \1851\ 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, 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.
    \1852\ Property qualifying for the extended placed in service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million.
---------------------------------------------------------------------------
    The applicable time period for acquired property is (1) 
after December 31, 2007, and before January 1, 2011, 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, 2011.\1853\ 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, 2011. 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, 
2011 (``progress expenditures'') is eligible for the additional 
first-year depreciation.\1854\
---------------------------------------------------------------------------
    \1853\ 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.
    \1854\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 apply.
---------------------------------------------------------------------------

Gulf Opportunity Zone Additional Depreciation

    Present law provides an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
specified qualified Gulf Opportunity Zone extension property. 
To qualify, property generally must be placed in service on or 
before December 31, 2010. 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),\1855\ 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 is eligible for the 
additional first-year depreciation.
---------------------------------------------------------------------------
    \1855\ Generally, property described in section 168(k)(2)(A)(i) is 
(1) property to which the general rules of the Modified Accelerated 
Cost Recovery System (``MACRS'') apply with an applicable recovery 
period of 20 years or less, (2) computer software other than computer 
software covered by section 197, (3) water utility property (as defined 
in section 168(e)(5)), or (4) certain leasehold improvement property.
---------------------------------------------------------------------------
    The specified portions of the Gulf Opportunity Zone are 
defined as those portions of the Gulf Opportunity Zone which 
are in a county or parish which is identified by the Secretary 
of the Treasury (or his delegate) as being a county or parish 
in which hurricanes occurring in 2005 damaged (in the 
aggregate) more than 60 percent of the housing units in such 
county or parish which were occupied (determined according to 
the 2000 Census).

                        Explanation of Provision

    The provision extends for one year through December 31, 
2011, the date by which specified Gulf Opportunity Zone 
extension property must be placed in service to be eligible for 
the additional first-year depreciation deduction. In the case 
of nonresidential real property or residential rental property, 
the adjusted basis of such property attributable to 
manufacture, construction, or production before January 1, 2012 
is eligible for the additional first-year depreciation.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2009.

PART SEVENTEEN: REGULATED INVESTMENT COMPANY MODERNIZATION ACT OF 2010 
                       (PUBLIC LAW 111-325)\1856\
---------------------------------------------------------------------------

    \1856\ H.R. 4337. The House passed H.R. 4337 on September 28, 2010. 
The Senate passed the bill with an amendment on December 8, 2010. The 
House agreed to the Senate amendment on December 15, 2010. The 
President signed the bill on December 22, 2010. For a technical 
explanation of the bill prepared by the staff of the Joint Committee on 
Taxation, see Technical Explanation of H.R. 4337, ``The Regulated 
Investment Company Modernization Act of 2010,'' For Consideration on 
the Floor of the House of Representatives (JCX-49-10), September 28, 
2010.
---------------------------------------------------------------------------

             I. OVERVIEW OF REGULATED INVESTMENT COMPANIES

    In general, a regulated investment company (``RIC'') is an 
electing domestic corporation that either meets (or is excepted 
from) certain registration requirements under the Investment 
Company Act of 1940,\1857\ that derives at least 90 percent of 
its ordinary income from specified sources considered passive 
investment income,\1858\ that has a portfolio of investments 
that meet certain diversification requirements,\1859\ and meets 
certain other requirements.\1860\
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    \1857\ Secs. 851(a) and (b)(1).
    \1858\ Sec. 851(b)(2).
    \1859\ Sec. 851(b)(3).
    \1860\ Secs. 851 and 852.
---------------------------------------------------------------------------
    Many RICs are ``open-end'' companies (mutual funds), which 
have a continuously changing number of shares that are bought 
from, and redeemed by, the company and are not otherwise 
available for purchase or sale in the secondary market. 
Shareholders of open-end RICs generally have the right to have 
the company redeem shares at ``net asset value.'' Other RICs 
are ``closed-end'' companies, which have a fixed number of 
shares that are normally traded on national securities 
exchanges or in the over-the-counter market and generally are 
not redeemable upon the demand of the shareholder.
    In the case of a RIC that distributes at least 90 percent 
of its net ordinary income and net tax-exempt interest to its 
shareholders, a deduction for dividends paid is allowed to the 
RIC in computing its tax.\1861\ Thus, no corporate income tax 
is imposed on income distributed to its shareholders. Dividends 
of a RIC generally are includible in the income of the 
shareholders; a RIC can pass through the character of (1) its 
long-term capital gain income, by paying ``capital gain 
dividends'' and (2) in certain cases, tax-exempt interest, by 
paying ``exempt-interest dividends.'' A RIC may also pass 
through certain foreign tax credits and credits on tax-credit 
bonds, as well as the character of certain other income 
received by the RIC.
---------------------------------------------------------------------------
    \1861\ Sec. 852(a) and (b).
---------------------------------------------------------------------------

                  II. CAPITAL LOSS CARRYOVERS OF RICS


   A. Capital Loss Carryovers of RICs (sec. 101 of the Act and sec. 
                          1212(a) of the Code)


                              Present Law


Limitation on capital losses

    Losses from the sale or exchange of capital assets are 
allowed only to the extent of the taxpayer's gains from the 
sale or exchange of capital assets plus, in the case of a 
taxpayer other than a corporation, $3,000.\1862\
---------------------------------------------------------------------------
    \1862\ Sec. 1211.
---------------------------------------------------------------------------

Carryover of net capital losses

            RICs
    If a RIC has a net capital loss (i.e., losses from the sale 
or exchanges of capital assets in excess of gains from sales or 
exchanges of capital assets) for any taxable year, the amount 
of the net capital loss is a capital loss carryover to each of 
the eight taxable years following the loss year, and is treated 
as a short-term capital loss in each of those years.\1863\ The 
entire amount of a net capital loss is carried over to the 
first taxable year succeeding the loss year and the portion of 
the loss which may be carried to each of the next seven years 
is the excess of the net capital loss over the net capital gain 
income\1864\ (determined without regard to any net capital loss 
for the loss year or taxable year thereafter) for each of the 
prior taxable year to which the loss may be carried.
---------------------------------------------------------------------------
    \1863\ Sec. 1212(a)(1)(C)(i).
    \1864\ Capital gain net income is the excess of gains from the sale 
or exchange of capital assets over losses from such sales or exchanges. 
Sec. 1222(9).
---------------------------------------------------------------------------
            Corporations other than RICs
    In the case of a corporation other than a RIC, a net 
capital loss generally is treated as a capital loss carryback 
to each of the three taxable years preceding the loss year and 
a capital loss carryover to each of the five taxable years 
following the loss year and is treated as a short-term capital 
loss in each of those years.\1865\ The carryover amount is 
reduced in a manner similar to that described above applicable 
to RICs. A net capital loss may not be carried back to a 
taxable year for which a corporation is a RIC.\1866\
---------------------------------------------------------------------------
    \1865\ Sec. 1212(a)(1)(A).
    \1866\ Sec. 1212(a)(3)(A).
---------------------------------------------------------------------------
            Individual taxpayers
    If a taxpayer other than a corporation has a net capital 
loss for any taxable year, the excess (if any) of the net 
short-term capital loss over the net long-term capital gain is 
treated as a short-term capital loss in the succeeding taxable 
year, and the excess (if any) of the net long-term capital loss 
over the net short-term capital gain is treated as a long-term 
capital loss in the succeeding taxable year.\1867\ There is no 
limitation on the number of taxable years that a net capital 
loss may be carried over.
---------------------------------------------------------------------------
    \1867\ Sec. 1212(b). Adjustments are made to take account of the 
$3,000 amount allowed against ordinary income.
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    The Act provides capital loss carryover treatment for RICs 
similar to the present-law treatment of net capital loss 
carryovers applicable to individuals. Under the Act, if a RIC 
has a net capital loss for a taxable year, the excess (if any) 
of the net short-term capital loss over the net long-term 
capital gain is treated as a short-term capital loss arising on 
the first day of the next taxable year, and the excess (if any) 
of the net long-term capital loss over the net short-term 
capital gain is treated as a long-term capital loss arising on 
the first day of the next taxable year.\1868\ The number of 
taxable years that a net capital loss of a RIC may be carried 
over under the provision is not limited.
---------------------------------------------------------------------------
    \1868\ For earnings and profits treatment of a RIC's net capital 
loss, see section 302 of the Act.
---------------------------------------------------------------------------

Coordination with present-law carryovers

    The Act provides for the treatment of net capital loss 
carryovers under the present law rules to taxable years of a 
RIC beginning after the date of enactment (December 22, 2010). 
These rules apply to (1) capital loss carryovers from taxable 
years beginning on or before the date of enactment (December 
22, 2010) and (2) capital loss carryovers from other taxable 
years prior to the taxable year the corporation became a RIC.
    Amounts treated as a long-term or short-term capital loss 
arising on the first day of the next taxable year under the 
provision are determined without regard to amounts treated as a 
short-term capital loss under the present-law carryover rule. 
In determining the amount by which a present-law carryover is 
reduced by capital gain net income for a prior taxable year, 
any capital loss treated as arising on the first day of the 
prior taxable year under the provision is taken into account in 
determining capital gain net income for the prior year.
    The following example illustrates these rules:
    Assume a calendar year RIC has no net capital loss for any 
taxable year beginning before 2010, a net capital loss of $2 
million for 2010; a net capital loss of $1 million for 2011, 
all of which is a long-term capital loss; and $600,000 gain 
from the sale of a capital asset held less than one year on 
July 15, 2012.
    For 2012, the RIC has (1) $600,000 short-term capital gain 
from the July 15 sale, (2) $2 million carryover from 2010 which 
is treated as a short-term capital loss,\1869\ and (3) $1 
million long-term capital loss from 2011 treated as arising on 
January 1, 2012. The capital loss allowed in 2012 is limited to 
$600,000, the amount of capital gain for the taxable year.
---------------------------------------------------------------------------
    \1869\ The present-law treatment of net capital losses arising in 
taxable years beginning before the date of enactment (December 22, 
2010) continues to apply.
---------------------------------------------------------------------------
    For purposes of determining the amount of the $2 million 
net capital loss that may be carried over from 2010 to 2013, 
there is no capital gain net income for 2012 because the 
$600,000 gain does not exceed the $1 million long-term loss 
treated as arising on January 1, 2012; therefore the entire 
2010 net capital loss is carried over to 2013 and treated as a 
short-term capital loss in 2013. $400,000 (the excess of the $1 
million long-term capital loss treated as arising on January 1, 
2012, over the $600,000 short-term capital gain for 2012) is 
treated as a long-term capital loss on January 1, 2013. The 
2010 net capital loss may continue to be carried over through 
2018, subject to reduction by capital gain net income; no 
limitation applies on the number of taxable years that the 2011 
net capital loss may be carried over.

                             Effective Date

    The provision generally applies to net capital losses for 
taxable years beginning after the date of enactment (December 
22, 2010). The provision relating to the treatment of present-
law carryovers applies to taxable years beginning after the 
date of enactment (December 22, 2010).

       III. MODIFICATION OF GROSS INCOME AND ASSET TESTS OF RICS


A. Savings Provisions for Failures of RICs to Satisfy Gross Income and 
 Asset Tests (sec. 201 of the Act and sec. 851(d) and (i) of the Code)


                              Present Law


Asset tests

    In general, at the close of each quarter of the taxable 
year, at least 50 percent of the value of a RIC's total assets 
must be represented by (i) cash and cash items (including 
receivables), Government securities and securities of other 
RICs, and (ii) other securities, generally limited in respect 
of any one issuer to an amount not greater in value than five 
percent of the value of the total assets of the RIC and to not 
more than 10 percent of the outstanding voting securities of 
such issuer.\1870\
---------------------------------------------------------------------------
    \1870\ Sec. 851(b)(3)(A).
---------------------------------------------------------------------------
    In addition, at the close of each quarter of the taxable 
year, not more than 25 percent of the value of a RIC's total 
assets may be invested in (i) the securities (other than 
Government securities or the securities of other RICs) of any 
one issuer, (ii) the securities (other than the securities of 
other RICs) of two or more issuers which the taxpayer controls 
and which are determined, under regulations prescribed by the 
Secretary, to be engaged in the same or similar trades or 
businesses or related trades or businesses, or (iii) the 
securities of one or more qualified publicly traded 
partnerships (as defined in section 851(h)).\1871\
---------------------------------------------------------------------------
    \1871\ Sec. 851(b)(3)(B).
---------------------------------------------------------------------------
    A RIC meeting both asset tests at the close of any quarter 
will not lose its status as a RIC because of a discrepancy 
during a subsequent quarter between the value of its various 
investments and the asset test 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.\1872\ This rule protects a RIC against 
inadvertent failures of the asset tests that may be caused by 
fluctuations in the relative values of its assets. A second 
rule (the ``30-day rule'') gives a RIC 30 days following the 
end of a quarter in which it fails an asset test to cure the 
failure, if the failure is by reason of a discrepancy, between 
the value of its various investments and the asset test 
requirements, that exists immediately after the acquisition of 
any security or other property which is wholly or partly the 
result of such acquisition during such quarter.\1873\ Failure 
of any asset test (except where the failure is cured pursuant 
to the 30-day rule) will prevent a corporation from qualifying 
as a RIC.
---------------------------------------------------------------------------
    \1872\ Sec. 851(d).
    \1873\ Ibid.
---------------------------------------------------------------------------

Gross income test

    A RIC must derive 90 percent of its gross income for a 
taxable year from certain types of income.\1874\ These types of 
income (``qualifying income'') are (1) dividends, interest, 
payments with respect to securities loans (as defined in 
section 512(a)(5)), and gains from the sale or other 
disposition of stock or securities (as defined in section 
2(a)(36) of the Investment Company Act of 1940, as amended) 
\1875\ or foreign currencies, or other income (including but 
not limited to gains from options, futures or forward 
contracts) derived with respect to the business of investing in 
such stock, securities, or currencies, and (2) net income 
derived from an interest in a qualified publicly traded 
partnership.\1876\
---------------------------------------------------------------------------
    \1874\ Sec. 851(b)(2).
    \1875\ Section 2(a)(36) of the Investment Company Act of 1940 
defines a ``security'' as ``any note, stock, treasury stock, security 
future, bond, debenture, evidence of indebtedness, certificate of 
interest or participation in any profit-sharing agreement, collateral-
trust certificate, preorganization certificate or subscription, 
transferable share, investment contract, voting-trust certificate, 
certificate of deposit for a security, fractional undivided interest in 
oil, gas, or other mineral rights, any put, call, straddle, option, or 
privilege on any security (including a certificate of deposit) or on 
any group or index of securities (including any interest therein or 
based on the value thereof), or any put, call, straddle, option, or 
privilege entered into on a national securities exchange relating to 
foreign currency, or, in general, any interest or instrument commonly 
known as a ``security,'' or any certificate of interest or 
participation in, temporary or interim certificate for, receipt for, 
guarantee of, or warrant or right to subscribe to or purchase, any of 
the foregoing.''
    \1876\ A ``qualified publicly traded partnership'' means a publicly 
traded partnership (within the meaning of section 7704(b)), other than 
a publicly traded partnership whose gross income is qualifying income 
(other than income of another publicly traded partnership). Sec. 
851(h).
---------------------------------------------------------------------------
    Thus, a RIC meets the gross income test provided its gross 
income that is not qualifying income does not exceed one-ninth 
of the portion of its gross income that is qualifying income. 
For example, a RIC with $90x of gross income from qualifying 
income can have up to $10x of gross income from other sources 
without failing the test. Failure to meet the gross income test 
for a taxable year prevents a corporation from qualifying as a 
RIC for that year.

                        Explanation of Provision


Saving provision for asset test failures

    The Act provides a special rule for de minimis asset test 
failures and a mechanism by which a RIC can cure other asset 
test failures and pay a penalty tax. The rule for de minimis 
asset test failures applies if a RIC fails to meet one of the 
asset tests in section 851(b)(3) due to the ownership of assets 
the total value of which does not exceed the lesser of (i) one 
percent of the total value of the RIC's assets at the end of 
the quarter for which the assets are valued, and (ii) $10 
million. Where the de minimis rule applies, the RIC shall 
nevertheless be considered to have satisfied the asset tests 
if, within six months of the last day of the quarter in which 
the RIC identifies that it failed the asset test (or such other 
time period provided by the Secretary) the RIC: (i) disposes of 
assets in order to meet the requirements of the asset tests, or 
(ii) the RIC otherwise meets the requirements of the asset 
tests.
    In the case of other asset test failures, a RIC shall 
nevertheless be considered to have met the asset tests if: (i) 
the RIC sets forth in a schedule filed in the manner provided 
by the Secretary a description of each asset that causes the 
RIC to fail to satisfy the asset test; (ii) the failure to meet 
the asset tests is due to reasonable cause and not due to 
willful neglect; and (iii) within six months of the last day of 
the quarter in which the RIC identifies that it failed the 
asset test (or such other time period provided by the 
Secretary) the RIC (I) disposes of the assets which caused the 
asset test failure, or (II) otherwise meets the requirements of 
the asset tests. In cases of asset test failures other than de 
minimis failures, the provision imposes a tax in an amount 
equal to the greater of (i) $50,000 or (ii) the amount 
determined (pursuant to regulations promulgated by the 
Secretary) by multiplying the highest rate of tax specified in 
section 11 (currently 35 percent) by the net income generated 
during the period of asset test failure by the assets that 
caused the RIC to fail the asset test. For purposes of subtitle 
F, the tax imposed for an asset test failure is treated as 
excise tax with respect to which the deficiency procedures 
apply.
    These provisions added by the Act do not apply to any 
quarter in which a corporation's status as a RIC is preserved 
under the provision of present law.

Saving provision for gross income test failures

    The Act provides that a corporation that fails to meet the 
gross income test shall nevertheless be considered to have 
satisfied the test if, following the corporation's failure to 
meet the test for the taxable year, the corporation (i) sets 
forth in a schedule, filed in the manner provided by the 
Secretary, a description of each item of its gross income and 
(ii) the failure to meet the gross income test is due to 
reasonable cause and is not due to willful neglect.
    In addition, under the Act, a tax is imposed on any RIC 
that fails to meet the gross income test equal to the amount by 
which the RIC's gross income from sources which are not 
qualifying income exceeds one-ninth of its gross income from 
sources which are qualifying income. For example, if a RIC has 
$90x of gross income of sources which are qualifying income and 
$15x of gross income from other sources, a tax of $5x is 
imposed. The tax is the amount by which the $15x gross income 
from sources which are not qualifying income exceeds the $10x 
permitted under present law.

Calculation of investment company taxable income

    Taxes imposed for failure of the asset or income tests are 
deductible for purposes of calculating investment company 
taxable income.

                             Effective Date

    The provision applies to taxable years with respect to 
which the due date (determined with regard to extensions) of 
the return of tax is after the date of enactment (December 22, 
2010).

 IV. MODIFICATION OF RULES RELATED TO DIVIDENDS AND OTHER DISTRIBUTIONS


  A. Modification of Dividend Designation Requirements and Allocation 
    Rules for RICs (sec. 301 of the Act and sec. 852(b) of the Code)


                              Present Law


Capital gain dividends

            In general
    In general, a capital gain dividend paid by a RIC is 
treated by the RIC's shareholders as long-term capital 
gain.\1877\ In addition, a RIC is allowed a dividend paid 
deduction for its capital gain dividends in computing the tax 
imposed on its net capital gain.\1878\
---------------------------------------------------------------------------
    \1877\ Sec. 852(b)(3)(B). This provision applies only with respect 
to RICs which meet the requirements of section 852(a) for the taxable 
year.
    \1878\ Sec. 852(b)(3)(A).
---------------------------------------------------------------------------
    A capital gain dividend is any dividend, or part thereof, 
which is designated by the RIC as a capital gain dividend in a 
written notice mailed to the RIC's shareholders not later than 
60 days after the close of the RIC's taxable year, \1879\ 
except that in the event a RIC designates an aggregate amount 
of capital gain dividends for a taxable year that exceeds the 
RIC's net capital gain, the portion of each distribution that 
is a capital gain dividend is only that proportion of the 
designated amount that the RIC's net capital gain bears to the 
total amount so designated by the RIC. For example, assume a 
RIC makes quarterly distributions of $30, designated entirely 
as capital gain dividends. If the RIC has only $100 of net 
capital gain for its taxable year, only $25 of each quarterly 
distribution is a capital gain dividend (i.e., $30  
($100/$120) = $25).
---------------------------------------------------------------------------
    \1879\ Sec. 852(b)(3)(C). If there is an increase in the amount by 
which a RIC's net capital gain exceeds the deduction for dividends paid 
(determined with reference to capital gain dividends only) as a result 
of a ``determination,'' the RIC has 120 days after the date of the 
determination to make a designation with respect to such increase. A 
determination is defined in section 860(e) as: (1) a decision by the 
Tax Court, or a judgment, decree, or other order by any court of 
competent jurisdiction, which has become final; (2) a closing agreement 
made under section 7121; (3) under regulations prescribed by the 
Secretary, an agreement signed by the Secretary and by, or on behalf 
of, the qualified investment entity relating to the liability of such 
entity for tax; or (4) a statement by the taxpayer attached to its 
amendment or supplement to a return of tax for the relevant tax year. 
See Rev. Proc. 2009-28, 2009-20 I.R.B. 1011.
---------------------------------------------------------------------------

Other designated items

            Exempt-interest dividends
    A RIC may designate any portion of a dividend (other than a 
capital gain dividend) as an ``exempt-interest dividend,'' if 
at least half of the RICs assets consist of tax-exempt State 
and local bonds. The shareholder treats an exempt-interest 
dividend as an item of tax-exempt interest.\1880\
---------------------------------------------------------------------------
    \1880\ Sec. 852(b)(5)(B).
---------------------------------------------------------------------------
    Exempt-interest dividends are defined as any dividend, or 
part thereof, which is designated by the RIC as an exempt 
interest dividend in a written notice mailed to the RIC's 
shareholders not later than 60 days after the close of the 
RIC's taxable year,\1881\ except that in the event a RIC 
designates an aggregate amount of exempt-interest dividends for 
a taxable year that exceeds the RIC's tax exempt interest (net 
of related deductions disallowed under sections 265 and 
171(a)(2) by reason of the interest being tax exempt), the 
portion of each distribution that will be an exempt interest 
dividend is only that proportion of the designated amount that 
net exempt interest bears to the amount so designated.
---------------------------------------------------------------------------
    \1881\ Sec. 852(b)(5)(A).
---------------------------------------------------------------------------
            Foreign tax credits; credits for tax-credit bonds; 
                    dividends received by RIC
    RICs may pass through to shareholders certain foreign tax 
credits, credits for tax-credit bonds, and dividends received 
by the RIC that qualify, in the case of corporate shareholders, 
for the dividends received deduction, or, in the case of 
individual shareholders, the capital gain rates in effect for 
dividends received in taxable years beginning before January 1, 
2013. In each case the qualifying amount must be designated in 
a written notice mailed to its shareholders not later than 60 
days after the close of the RIC's taxable year.
            Dividends paid to certain foreign persons.
    Certain dividends paid to nonresident alien individuals and 
foreign corporations in taxable years of the RIC beginning 
before January 1, 2012, are treated as interest or short term-
capital gain.\1882\ These dividends must be designated in a 
written notice mailed to its shareholders not later than 60 
days after the close of the RIC's taxable year. Rules similar 
to the rules described above relating to capital gain dividends 
and exempt-interest dividends apply to designated amounts in 
excess of the maximum amounts permitted to be so designated.
---------------------------------------------------------------------------
    \1882\ Secs. 871(k) and 881(e).
---------------------------------------------------------------------------

                        Explanation of Provision


Capital gain dividends

            Reporting requirements
    The provision replaces the present-law designation 
requirement for a capital gain dividend with a requirement that 
a capital gain dividend be reported by the RIC in written 
statements furnished to its shareholders. A written statement 
furnishing this information to a shareholder may be a Form 
1099.
            Allocation by fiscal year RICs
    The provision provides a special rule allocating the excess 
reported amount \1883\ for taxable year RICs in order to reduce 
the need for RICs to amend Form 1099s and shareholders to file 
amended income tax returns. This special allocation rule 
applies to a taxable year of a RIC which includes more than one 
calendar year if the RIC's post-December reported amount \1884\ 
exceeds the excess reported amount for the taxable year.
---------------------------------------------------------------------------
    \1883\ The ``excess reported amount'' is the excess of the 
aggregate amount reported as capital gain dividends for the taxable 
year over the RIC's net capital gain for the taxable year.
    \1884\ The ``post-December reported amount'' is the aggregate 
amount reported with respect to items arising after December 31 of the 
RIC's taxable year.
---------------------------------------------------------------------------
    For example, assume a RIC for its taxable year ending June 
30, 2012, makes quarterly distributions of $30,000 on September 
30, 2011, December 31, 2011, March 31, 2012, and June 30, 2012, 
and reports the amounts as capital gain dividends. If the RIC 
has only $100,000 net capital gain for its taxable year, the 
excess reported amount is $20,000. Because the post-December 
reported amount ($60,000) exceeds the excess reported amount 
($20,000), the excess reported amount is allocated among the 
post-December reported capital gain dividends in proportion to 
the amount of each such distribution reported as a capital gain 
dividend. Thus, one-half of the excess reported amount (i.e., 
1/2 of $20,000 = $10,000) is allocated to each post-December 
distribution, reducing the amount of each post-December 
distribution treated as a capital gain dividend from $30,000 to 
$20,000. Because no excess reported amount is allocated to 
either of the quarterly distributions made on or before 
December 31, 2011, the entire $30,000 of each of the 
distributions retains its character as a capital gain dividend.
    If, in the above example, the RIC has only $40,000 net 
capital gain for its taxable year, the excess reported amount 
is $80,000. Because the post-December reported amount ($60,000) 
does not exceed the excess reported amount ($80,000), the 
excess reported amount is allocated among all the reported 
capital gain dividends for the taxable year in proportion to 
the amount of each distribution reported as a capital gain 
dividend. Thus, one-fourth of the excess reported amount (i.e., 
1/4 of $80,000 = $20,000) is allocated to each distribution, 
reducing the amount of each distribution treated as a capital 
gain dividend from $30,000 to $10,000.

Other designated items

    The provision replaces the other designation requirements 
described under present law with a requirement that amounts be 
reported by the RIC in written statements furnished to its 
shareholders.\1885\
---------------------------------------------------------------------------
    \1885\ The Act does not change the method of designation of 
undistributed capital gain taken into account by shareholders under 
section 852(b)(3)(D)(i).
---------------------------------------------------------------------------
    The provision also provides allocation rules for excess 
reported amounts of exempt-interest dividends and certain 
dividends paid to nonresident alien individuals and foreign 
corporations by fiscal year RICs similar to the rule described 
above applicable capital gain dividends.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (December 22, 2010).\1886\
---------------------------------------------------------------------------
    \1886\ Each amendment to a provision relating to qualified 
dividends of individual shareholders will sunset when the provision to 
which the amendment was made sunsets pursuant to section 303 of the 
Jobs and Growth Tax Relief Reconciliation Act. Under present law, these 
provisions sunset in taxable years beginning after December 31, 2012.
---------------------------------------------------------------------------

B. Earnings and Profits of RICs (sec. 302 of the Act and sec. 852(c)(1) 
                              of the Code)


                              Present Law

    The current earnings and profits of a RIC are not reduced 
by any amount that is not allowable as a deduction in computing 
taxable income for the taxable year.\1887\
---------------------------------------------------------------------------
    \1887\ Sec. 852(c)(1). The provision applies to a RIC without 
regard to whether it meets the requirements of section 852(a) for the 
taxable year.
---------------------------------------------------------------------------
            Application to net capital loss
    Thus, under the general rule, the current earnings and 
profits of a RIC are not reduced by a net capital loss either 
in the taxable year the loss arose or any taxable year to which 
the loss is carried.\1888\ The accumulated earnings and profits 
are reduced in the taxable year the net capital loss arose.
---------------------------------------------------------------------------
    \1888\ See explanation of section 101 of the Act for the treatment 
of carryovers of a net capital loss under present law and as amended by 
the Act.
---------------------------------------------------------------------------
            Application to exempt-interest expenses
    Because the general rule denies deductions in computing 
current earnings and profits for amounts disallowed for 
expenses, interest, and amortizable bond premium relating to 
tax-exempt interest,\1889\ the current earnings and profits of 
a RIC with tax-exempt interest may exceed the amount which the 
RIC can distribute as exempt-interest dividends.\1890\ Thus, 
distributions by a RIC with only tax-exempt interest income may 
result in taxable dividends to its shareholders. For example, 
assume a RIC has $1 million gross tax-exempt interest and 
$10,000 expenses disallowed under section 265 (and no 
accumulated earnings and profits and no other item of current 
earnings and profits). If the RIC were to distribute $1 million 
to its shareholders during its taxable year (which is $10,000 
more than its economic income for the year), $990,000 may be 
designated as exempt-interest dividends, and the remaining 
$10,000 is taxable as ordinary dividends.
---------------------------------------------------------------------------
    \1889\ Secs. 171(a)(2) and 265.
    \1890\ For a description of exempt-interest dividends, see 
explanation of section 301 of the Act.
---------------------------------------------------------------------------

                        Explanation of Provision


Net capital loss

    The rules applicable to the taxable income treatment of a 
net capital loss of a RIC apply for purposes of determining 
earnings and profits (both current earnings and profits and 
accumulated earnings and profits). Thus, a net capital loss for 
a taxable year is not taken into account in determining 
earnings and profits, but any capital loss treated as arising 
on the first day of the next taxable year is taken into account 
in determining earnings and profits for the next taxable year 
(subject to the application of the net capital loss rule for 
that year).

Exempt-interest expenses

    The deductions disallowed in computing investment company 
taxable income relating to tax-exempt interest are allowed in 
computing current earnings and profits of a RIC.
    In the example under present law, the provision reduces the 
RIC's current earnings and profits from $1 million to $990,000 
and if the RIC were to distribute $1 million to its 
shareholders during the taxable year, $990,000 may be reported 
as exempt-interest dividends and the remaining $10,000 is 
treated as a return of capital (or gain to the shareholder).

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (December 22, 2010).

 C. Pass-thru of Exempt-interest Dividends and Foreign Tax Credits in 
 Fund of Funds Structures (sec. 303 of the Act and sec. 852(g) of the 
                                 Code)


                              Present Law

    In a so-called ``fund of funds'' structure, one RIC 
(``upper-tier fund'') holds stock in one or more other RICs 
(``lower-tier funds''). Generally, the character of certain 
types of income and gain, such as capital gain and qualified 
dividends, of a lower-tier fund pass through from the lower-
tier RIC to the upper-tier RIC and then pass through to the 
shareholders of the upper-tier RIC.
    Exempt-interest dividends may be paid by a RIC, and foreign 
tax credits may be passed through a RIC, only if at least 50 
percent of the value of the total assets of a RIC consist of 
tax-exempt obligations (in the case of exempt-interest 
dividends) or more than 50 percent of the value of the total 
assets consist of stock or securities in foreign corporations 
(in the case of the foreign tax credits). Because an upper-tier 
RIC holds stock in other RICs, it does not meet the 50-percent 
asset requirements. As a result, it may not pass through these 
items to its shareholders, even if the items were passed 
through to it by a lower tier RIC meeting these requirements.

                        Explanation of Provision

    Under the provision, in the case of a qualified fund of 
funds, the RIC may (1) pay exempt-interest dividends without 
regard to the requirement that at least 50 percent of the value 
of its total assets consist of tax-exempt State and local bonds 
and (2) elect to allow its shareholders the foreign tax credit 
without regard to the requirement that more than 50 percent of 
the value of its total assets consist of stock or securities in 
foreign corporations.
    For this purpose, a qualified fund of funds means a RIC at 
least 50 percent of the value of the total assets of which (at 
the close of each quarter of the taxable year) is represented 
by interests in other RICs.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (December 22, 2010).

 D. Modification of Rules for Spillover Dividends of RICs (sec. 304 of 
                   the Act and sec. 855 of the Code)


                              Present Law

    A RIC may elect to have certain dividends paid after the 
close of a taxable year considered as having been paid during 
that year for purposes of the RIC distribution requirements and 
determining the taxable income of the RIC.\1891\ These 
dividends are referred to as ``spillover dividends.'' In order 
to qualify as a spillover dividend, the dividend must be 
declared prior to the time prescribed for filing the tax return 
for the taxable year (determined with regard to extensions) and 
the distribution must be made in the 12-month period following 
the close of the taxable year and not later than the date of 
the first dividend payment made after the declaration.
---------------------------------------------------------------------------
    \1891\ Sec. 855.
---------------------------------------------------------------------------

                        Explanation of Provision

    The time for declaring a spillover dividend is the later of 
the 15th day of the 9th month following the close of the 
taxable year or the extended due date for filing the return. 
Also, the requirement that the distribution be made not later 
than the date of the first dividend payment after the 
declaration is changed. The provision provides that the 
distribution must be made not later than the date of the first 
dividend payment of the same type of dividend (for example, an 
ordinary income dividend or a capital gain dividend) made after 
the declaration. For this purpose, a dividend attributable to 
short-term capital gain with respect to which a notice is 
required under the Investment Company Act of 1940 shall be 
treated as the same type of dividend as a capital gain 
dividend.\1892\
---------------------------------------------------------------------------
    \1892\ See section 19 of the Investment Company Act of 1940, as 
amended, for rules requiring notice to shareholders identifying source 
of distribution.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to distributions in taxable years 
beginning after the date of enactment (December 22, 2010).

  E. Return of Capital Distributions of RICs (sec. 305 of the Act and 
                         sec. 316 of the Code)


                              Present Law

    A dividend is a distribution of property by a corporation 
(1) out of its earnings and profits accumulated after February 
28, 1913 (``accumulated earnings and profits''), and (2) out of 
its earnings and profits of the taxable year (``current 
earnings and profits'').\1893\ The current earnings and profits 
are prorated among current year distributions.\1894\ 
Distributions of property which are not a dividend reduce the 
adjusted basis of a shareholder's stock and are treated as gain 
to the extent in excess of the stock's adjusted basis.\1895\
---------------------------------------------------------------------------
    \1893\ Sec. 316.
    \1894\ Treas. Reg. sec. 1.316-2(b).
    \1895\ Sec. 301(c).
---------------------------------------------------------------------------
    For example, assume a RIC, with a taxable year ending June 
30 and with no accumulated earnings and profits, has current 
earnings and profits of $4 million and distributes $3 million 
to its shareholders on September 15 and $3 million on March 15. 
Under present law, $2 million of each distribution is out of 
current earnings and profits and is treated as dividend income 
to its shareholders. The remaining amounts are applied against 
the adjusted basis of each shareholder's stock or taken into 
account as gain by the shareholders.

                        Explanation of Provision

    In the case of a non-calendar year RIC which makes 
distributions of property with respect to the taxable year in 
an amount in excess of the current and accumulated earnings and 
profits, the current earnings and profits are allocated first 
to distributions made on or before December 31 of the taxable 
year.
    Thus, under the provision, in the above example, all $3 
million of the distribution made on September 15 is out of 
current earnings and profits and thus treated as dividend 
income. Only $1 million of the distribution made on March 15 is 
out of current earnings and profits and treated as dividend 
income. The remaining $2 million of the March 15 distribution 
is applied against the adjusted basis of each shareholder's 
stock or taken into account as gain by the shareholders.
    In the case of a RIC with more than one class of stock, the 
provision applies separately to each class of stock.\1896\
---------------------------------------------------------------------------
    \1896\ See Rev. Rul. 69-440.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to distributions made in taxable 
years beginning after the date of enactment (December 22, 
2010).

 F. Distributions in Redemption of Stock of RICs (sec. 306 of the Act 
                   and secs. 267 and 302 of the Code)


                              Present Law


Exchange treatment

    The redemption of stock by a corporation is treated as an 
exchange of stock if the redemption fits into one of four 
categories of transactions.\1897\ If the redemption does not 
fit into one of these categories, the redemption is treated as 
a distribution of property. One of the four categories of 
transactions is that the redemption ``is not essentially 
equivalent to a dividend.'' \1898\ A redemption ``is not 
essentially equivalent to a dividend'' if the redemption 
results in a ``meaningful reduction in the shareholder's 
proportionate ownership in the corporation.'' \1899\ Other 
categories include a substantially disproportionate redemption, 
a redemption that terminates the shareholder's interest in the 
corporation, and a partial liquidation (if the redeemed 
shareholder is not a corporation).\1900\
---------------------------------------------------------------------------
    \1897\ Sec. 302.
    \1898\ Sec. 302(b)(1).
    \1899\ United States v. Davis, 397 U.S. 301 (1970).
    \1900\ Sec. 302(b)(2)-(4).
---------------------------------------------------------------------------
    The Code provides no specific rule regarding the 
application of the ``not essentially equivalent to a dividend'' 
test in the case of an open-end RIC whose shareholders ``sell'' 
their shares by having them redeemed by the issuing RIC and 
where multiple redemptions by different shareholders may occur 
daily.

Loss deferral

    Any deduction in respect of a loss from the sale or 
exchange of property between members of a controlled group of 
corporations is deferred until the transfer of the property 
outside the group.\1901\ In the case of a fund of funds, a 
lower-tier fund may be required to redeem shares in an upper-
tier fund when the upper-tier fund shareholders demand 
redemption of their shares. Because the upper-tier fund and 
lower-tier fund may be members of the same controlled group of 
corporations, any loss by the upper-tier fund on the 
disposition of the lower-tier fund shares may be deferred.
---------------------------------------------------------------------------
    \1901\ Sec. 267(f).
---------------------------------------------------------------------------

                        Explanation of Provision


Exchange treatment

    The Act provides that, except to the extent provided in 
regulations, the redemption of stock of a publicly offered RIC 
is treated as an exchange if the redemption is upon the demand 
of the shareholder and the company issues only stock which is 
redeemable upon the demand of the shareholder. A publicly 
offered RIC is a RIC the shares of which are (1) continuously 
offered pursuant to a public offering, (2) regularly traded on 
an established securities market, or (3) held by no fewer than 
500 persons at all times during the taxable year.

Loss disallowance

    The Act provides that, except to the extent provided in 
regulations, the loss deferral rule does not apply to any 
redemption of stock of a RIC if the RIC issues only stock which 
is redeemable upon the demand of the shareholder and the 
redemption is upon the demand of a shareholder which is another 
RIC.

                             Effective Date

    The provision applies to distributions after the date of 
enactment (December 22, 2010).

G. Repeal of Preferential Dividend Rule for Publicly Offered RICs (sec. 
                307 of the Act and sec. 562 of the Code)


                              Present Law

    RICs are allowed a deduction for dividends paid to their 
shareholders. In order to qualify for the deduction, a dividend 
must not be a ``preferential dividend.'' \1902\ For this 
purpose, a dividend is preferential unless it is distributed 
pro rata to shareholders, with no preference to any share of 
stock compared with other shares of the same class, and with no 
preference to one class as compared with another except to the 
extent the class is entitled to a preference. A distribution by 
a RIC to a shareholder whose initial investment was $10 million 
or more is not treated as preferential if the distribution is 
increased to reflect reduced administrative cost of the RIC 
with respect to the shareholder.
---------------------------------------------------------------------------
    \1902\ Sec. 562(c).
---------------------------------------------------------------------------
    Securities law, administered by the Securities Exchange 
Commission, provides strict limits on the ability of RICs to 
issue shares with preferences.\1903\
---------------------------------------------------------------------------
    \1903\ See, for example, section 18 of the Investment Company Act 
of 1940.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision repeals the preferential dividend rule for 
publicly offered RICs. For this purpose, a RIC is publicly 
offered if its shares are (1) continuously offered pursuant to 
a public offering, (2) regularly traded on an established 
securities market, or (3) held by no fewer than 500 persons at 
all times during the taxable year.

                             Effective Date

    The provision applies to distributions in taxable years 
beginning after the date of enactment (December 22, 2010).

 H. Elective Deferral of Certain Late-Year Losses of RICs (sec. 308 of 
                the Act and sec. 852(b)(8) of the Code)


                              Present Law


Capital gains and losses

            In general
    In general, a RIC may pay a capital gain dividend to its 
shareholders to the extent of the RIC's net capital gain for 
the taxable year. The shareholders treat capital gain dividends 
as long-term capital gain.\1904\
---------------------------------------------------------------------------
    \1904\ See explanation of section 301 of the Act.
---------------------------------------------------------------------------
    Under present law, an excise tax is imposed on a RIC for a 
calendar year equal to four percent of the excess (if any) of 
the required distribution over the distributed amount. The 
required distribution is the sum of 98 percent of the RIC's 
ordinary income for the calendar year and 98 percent of the 
capital gain net income for the one-year period ending October 
31 of such calendar year. The distributed amount is the sum of 
the deduction for dividends paid during the calendar year and 
the amount on which a corporate income tax is imposed on the 
RIC for taxable years ending during the calendar year.\1905\
---------------------------------------------------------------------------
    \1905\ Sec. 4982.
---------------------------------------------------------------------------
            Deferral of net capital losses and long-term capital losses
    Under present law, for purposes of determining the amount 
of a net capital gain dividend, the amount of net capital gain 
for a taxable year is determined without regard to any net 
capital loss or net long-term capital loss attributable to 
transactions after October 31 of the taxable year, and the 
post-October net capital loss or net long term capital loss is 
treated as arising on the first day of the RIC's next taxable 
year.\1906\
---------------------------------------------------------------------------
    \1906\ Section 852(b)(3)(C). Certain RICs with taxable years ending 
with the month of November or December are not subject to this rule.
---------------------------------------------------------------------------
    Present law provides that to the extent provided in 
regulations, the above rules relating to post-October net 
capital losses also apply for purposes of computing taxable 
income of a RIC.\1907\ Regulations have been issued allowing 
RICs to elect to defer all or part of any net capital loss (or 
if there is no such net capital loss, any net long-term capital 
loss) attributable to the portion of the taxable year after 
October 31 to the first day of the succeeding taxable 
year.\1908\
---------------------------------------------------------------------------
    \1907\ The last sentence of Sec. 852(b)(3)(C).
    \1908\ Treas. Reg. 1.852-11.
---------------------------------------------------------------------------
    The following example illustrates the application of the 
post-October capital loss rules.
    Assume a RIC with a taxable year ending June 30, 2011, 
recognizes a long-term capital gain of $1,000,000 on September 
15, 2010. In order to avoid the excise tax, the RIC distributes 
$980,000 on December 15, 2010, which it designates as a capital 
gain dividend. On January 15, 2011, the RIC recognizes a 
$600,000 long-term capital loss. The RIC has no other income or 
loss during 2010 and 2011, and has no accumulated earnings and 
profits.
    Absent the post-October loss rule, the RIC would have a net 
capital gain (and current earnings and profits) of only 
$400,000 for the taxable year ending June 30, 2011. Only 
$400,000 of the December 15, 2010, distribution would be a 
capital gain dividend; the remaining $580,000 of the $980,000 
distributed on December 15 would be a return of capital. 
Because the ``distributed amount'' for excise tax purposes 
takes into account only those distributions for which a 
deduction for dividends paid is allowed, the RIC's distributed 
amount for calendar year 2010 would be $400,000, which is less 
than the distributed amount required to avoid the excise tax. 
In addition, the shareholders may have improperly reported the 
distribution as a capital gain dividend on the 2010 income tax 
returns.
    By ``pushing'' the post-October long-term capital loss to 
July 1, 2011, in the above example the entire $980,000 paid on 
December 15, 2010, is a capital gain dividend. The distribution 
is fully deductible in computing the excise tax. No excise tax 
is imposed for 2010 because the RIC has no undistributed 
income.
            Short-term capital losses not deferred
    No special rule applies to short-term capital losses 
arising after October 31 of the taxable year for purposes of 
defining a capital gain dividend.
    The following example illustrates the present-law treatment 
of a RIC with a post-October 31 short-term capital loss:
    Assume a RIC with a taxable year ending June 30, 2011, 
recognizes a short-term capital gain of $1 million on September 
15, 2010. In order to avoid the excise tax, the RIC distributes 
$980,000 on December 15, 2010. On May 15, 2011, the RIC 
recognizes a $1 million long-term capital gain and $1 million 
short-term capital loss. The RIC has no other income or loss 
during 2010, 2011, or 2012 (and has no accumulated earnings and 
profits).
    Under present law, the shareholders receive Forms 1099 for 
2010 reporting the dividends as other than capital gain 
dividends and they report the dividends accordingly on their 
2010 income tax returns. Because the RIC has only $1 million of 
current earnings and profits for its taxable year, the RIC may 
not pay an additional distribution designated as a capital gain 
dividend for its taxable year in order to be allowed a dividend 
paid deduction in computing the RIC's tax on net capital gain. 
Instead, the RIC could designate the December 15 distribution 
as a capital gain dividend, but that would require shareholders 
to file amended income tax returns for 2010.
            Deferral partly elective
    Under present law, for purposes of determining capital gain 
dividends, the ``push'' forward of post-October capital losses 
is automatic, rather than elective; in contrast the push 
forward of these losses is elective for RIC taxable income 
purposes. Assume for example that a RIC has no net capital gain 
for the portion of its taxable year on or before October 31, 
and makes no distributions before January 1 of the taxable 
year. For the remainder of its taxable year, the RIC has a $1 
million short-term capital gain and a $1 million long-term 
capital loss. Under present law, for purposes of determining 
the amount of capital gain dividends, the $1 million long-term 
capital loss is automatically pushed forward to the next 
taxable year. But for purposes of determining its taxable 
income, the capital loss is pushed forward only if the RIC 
elects. If no election is made and the RIC has a $1 million 
long-term capital gain in the next taxable year and pays a $1 
million dividend, the dividend may not be designated a capital 
gain dividend, although the RIC had $1 million long-term 
capital gain that year. If an election is made, the RIC must 
distribute the $1 million of short-term capital gain as an 
ordinary dividend in the current taxable year although the 
gains were economically offset by the long-term capital loss.

Ordinary gains and losses

            Net foreign currency losses and losses on stock in a 
                    passive foreign investment company
    In applying the excise tax described above, net foreign 
currency losses and gains and ordinary loss or gain from the 
disposition of stock in a passive foreign investment company 
(``PFIC'') properly taken into account after October 31 are 
``pushed'' to the following calendar year for purposes of the 
tax.\1909\
---------------------------------------------------------------------------
    \1909\ Sec. 4982(e)(5) and (6).
---------------------------------------------------------------------------
    Under present law, to the extent provided in regulations, a 
RIC may elect to push the post-October net foreign currency 
losses and the net reduction in the value of stock in a PFIC 
with respect to which an election is in effect under section 
1296(k) forward to the next taxable year.\1910\ Regulations 
have been issued allowing RICs to elect to defer all or part of 
any post-October net foreign currency losses for the portion of 
the taxable year after October 31 to the first day of the 
succeeding taxable year.\1911\
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    \1910\ Sec. 852(b)(8) and (10).
    \1911\ Treas. Reg. sec. 1.852-11.
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            Other ordinary losses
    Other ordinary losses of a RIC may not be ``pushed'' 
forward. As a result, in the event that a RIC has net ordinary 
losses for the portion of the taxable year after December 31 
(other than a net foreign currency loss or loss on stock of a 
PFIC), the RIC may have insufficient earnings and profits to 
pay a dividend during the calendar year ending in the taxable 
year in order to reduce or eliminate the excise tax.
    For example, assume a RIC for its taxable year ending June 
30, 2012, has ordinary income of $1 million for the portion of 
its taxable year ending on December 31, 2011. In order to avoid 
the excise tax, the RIC distributes $980,000 on December 15, 
2011. The RIC has no accumulated earnings and profits. For the 
period beginning January 1, 2012, and ending on June 30, 2012, 
the RIC has a net ordinary loss of $1 million. Because the RIC 
has no earnings and profits, the distribution in 2011 is not a 
dividend; the distributed amount for calendar year 2011 is 
zero; and an excise tax is imposed.

                        Explanation of Provision


Post-October capital losses

    Under the provision, except to the extent provided in 
regulations, a RIC may elect to ``push'' to the first day of 
the next taxable year part or all of any post-October capital 
loss. The post-October capital loss means the greatest of the 
RIC's net capital loss, net long-term capital loss, or the net 
short-term capital loss (attributable to the portion of the 
taxable year after October 31).\1912\
---------------------------------------------------------------------------
    \1912\ Special rules apply to certain RICs with taxable years 
ending with the month of November or December.
---------------------------------------------------------------------------
    The election \1913\ applies for all purposes of the Code, 
including determining taxable income, net capital gain, net 
short-term capital gain, and earnings and profits.
---------------------------------------------------------------------------
    \1913\ The principles of Treasury Regulation section 1.852-11 are 
to apply to a qualified late-year loss for which an election is made 
under this provision, subject to any subsequent change in the 
regulations.
---------------------------------------------------------------------------
    The application of the provision to short-term capital 
losses may be illustrated by the following example:
    Assume a RIC for its taxable year ending June 30, 2012, 
recognizes a short-term capital gain of $1 million on September 
15, 2011. In order to avoid the excise tax, the RIC distributes 
$980,000 on December 15, 2011. On May 15, 2012, the RIC 
recognizes a $1 million long-term capital gain and $1 million 
short-term capital loss. The RIC has no other income or loss 
during 2011, 2012, or 2013 (and has no accumulated earnings and 
profits).
    The RIC may elect to treat the short-term capital loss as 
arising on July 1, 2012. If the RIC so elects and makes an 
additional $1 million distribution before July 1, 2012, it may 
report the distribution as a capital gain dividend and be 
allowed a dividends paid deduction in computing the tax on its 
net capital gain for the 2011-2012 taxable year. No amended 
Forms 1099 and no amended tax returns by the shareholders are 
required.

Late-year ordinary losses

    Under the provision, except to the extent provided in 
regulations, a RIC may elect to ``push'' to the first day of 
the next taxable year part or all of any qualified late-year 
ordinary loss. The qualified late year ordinary loss is the 
excess of (1) the sum of the specified losses attributable to 
the portion of the taxable year after October 31 and other 
ordinary losses attributable to the portion of the taxable year 
after December 31, over (2) the sum of the specified gains 
attributable to the portion of the taxable year after October 
31 and other ordinary income attributable to the portion of the 
taxable year after December 31. Specified losses and gains have 
the same meaning as used for purposes of the excise tax under 
section 4982.\1914\
---------------------------------------------------------------------------
    \1914\ See explanation of section 402 of the Act.
---------------------------------------------------------------------------
    The election applies for all purposes of the Code.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (December 22, 2010).

    I. Exception to Holding Period Requirement for Exempt-Interest 
    Dividends Declared on Daily Basis (sec. 309 of the Act and sec. 
                         852(b)(4) of the Code)


                              Present Law

    If a shareholder receives an exempt-interest dividend with 
respect to a share of RIC stock held for 6 months or less, any 
loss on the sale or exchange of the stock, to the extent of the 
amount of the exempt-interest dividend, is disallowed. To the 
extent provided by regulations, the loss disallowance rule does 
not apply to losses on shares which are sold or exchanged 
pursuant to a plan which involves the periodic liquidation of 
the shares. In the case of a RIC which regularly distributes at 
least 90 percent of its net tax-exempt interest, the Secretary 
may by regulations prescribe a shorter holding period not 
shorter than the greater of 31 days or the period between the 
regular distributions.

                        Explanation of Provision

    The provision makes the loss disallowance rule 
inapplicable, except as otherwise provided by regulations, with 
respect to a regular dividend paid by a RIC that declares 
exempt-interest dividends on a daily basis in an amount equal 
to at least 90 percent of its net tax-exempt interest and 
distributes the dividends on a monthly or more frequent basis.

                             Effective Date

    The provision applies to stock for which the taxpayer's 
holding period begins after the date of enactment (December 22, 
2010).

       V. MODIFICATIONS RELATED TO EXCISE TAX APPLICABLE TO RICS


 A. Excise Tax Exemption for Certain RICs Owned by Tax Exempt Entities 
           (sec. 401 of the Act and sec. 4982(f) of the Code)


                              Present Law

    An excise tax is imposed on a RIC for a calendar year equal 
to four percent of the excess (if any) of the required 
distribution over the distributed amount. The required 
distribution is the sum of 98 percent of the RIC's ordinary 
income for the calendar year and 98 percent of the capital gain 
net income for the one-year period ending October 31 of such 
calendar year. The distributed amount is the sum of the 
deduction for dividends paid during the calendar year and the 
amount on which a corporate income tax is imposed on the RIC 
for taxable years ending during the calendar year.\1915\
---------------------------------------------------------------------------
    \1915\ Sec. 4982.
---------------------------------------------------------------------------
    The excise tax does not apply to a RIC for any calendar 
year if at all times during the calendar year each shareholder 
in the RIC is either a qualified pension plan exempt from tax 
or a segregated asset account of a life insurance company held 
in connection with variable contracts.

                        Explanation of Provision

    The provision adds tax-exempt entities whose ownership of 
beneficial interests in the RIC would not preclude the 
application of section 817(h)(4) (regarding segregated asset 
accounts of a variable annuity or life insurance contract) to 
the list of persons who may hold stock in a RIC that is exempt 
from the excise tax. These persons include qualified annuity 
plans described in section 403, IRAs, including Roth IRAs, 
certain government plans described in section 414(d) or 457, 
and a pension plan described in section 501(c)(18).\1916\ Also, 
another RIC to which section 4982 does not apply may hold stock 
in a RIC exempt from the excise tax.
---------------------------------------------------------------------------
    \1916\ See Rev. Rul. 94-62, 1994-2 C.B. 164, as supplemented by 
Rev. Rul. 2007-58, I.R.B. 2007-37 (Sept. 10, 2007).
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to calendar years beginning after the 
date of enactment (December 22, 2010).

B. Deferral of Certain Gains and Losses of RICs for Excise Tax Purposes 
           (sec. 402 of the Act and sec. 4982(e) of the Code)


                              Present Law

    Special rules apply to certain items of income and loss in 
computing the excise tax under section 4982.\1917\ Any foreign 
currency gains and losses attributable to a section 988 
transaction properly taken into account after October 31 of any 
calendar year generally are ``pushed'' to the following 
calendar year.\1918\ Any post-October positive or negative 
adjustments, and income or loss, on contingent payment debt 
instruments is treated in the same manner as foreign currency 
gain or loss from a section 988 transaction.\1919\ Any gain 
recognized under section 1296 (relating to mark-to-market for 
marketable stock in a passive foreign investment company 
(``PFIC'')) generally is determined as if the RIC's taxable 
year ends October 31, and any gain or loss from an actual 
disposition of stock in an electing PFIC after October 31 
generally is ``pushed'' to the following calendar year.\1920\
---------------------------------------------------------------------------
    \1917\ See present-law explanation of section 401 for a description 
of the tax.
    \1918\ Sec. 4982(e)(5).
    \1919\ See Treas. Reg. sec. 1.1275-4(b)(9)(v).
    \1920\ Sec. 4982(e)(6).
---------------------------------------------------------------------------
    To the extent provided in regulations, any net foreign 
currency loss of a RIC and any net reduction in the value of 
the stock of a PFIC held by a RIC attributable to transactions 
after October 31 of the taxable year may be ``pushed'' to the 
first day of the following taxable year for purposes of 
computing taxable income.\1921\ Similar rules apply for 
purposes of computing earnings and profits in order to allow a 
RIC a distribution deduction for purposes of the excise 
tax.\1922\
---------------------------------------------------------------------------
    \1921\ Sec. 852(b)(8) and (10). See Treas. Reg. sec. 1.852-11 for 
rules relating to the treatment of losses attributable to periods after 
October 31 of a taxable year.
    \1922\ Sec. 852(c)(2).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the present-law excise tax ``push'' 
rules applicable to foreign currency gains and losses are 
expanded to include all ``specified gains and losses,'' i.e., 
ordinary gains and losses from the sale, exchange, or other 
disposition of (or termination of a position with respect to) 
property, including foreign currency gain and loss, and amounts 
marked-to-market under section 1296. Thus, these post-October 
31 gains and losses are ``pushed'' to the next calendar 
year.\1923\
---------------------------------------------------------------------------
    \1923\ For treatment of these losses for income tax purposes, see 
section 852(b)(8) of the Code, as amended by section 308 of the Act.
---------------------------------------------------------------------------
    The provision also provides that, for purposes of 
determining a RIC's ordinary income, the present-law rule 
treating PFIC stock as disposed of on October 31 is made 
applicable to all property held by a RIC which under any 
provision of the Code (including regulations thereunder) is 
treated as disposed of on the last day of the taxable year.
    Finally, for purposes of the excise tax, the provision 
allows a RIC with a taxable year other than the calendar year, 
except as provided in regulations, to elect to ``push'' any net 
ordinary loss (determined without regard to ordinary gains and 
losses which are automatically ``pushed'' to the next calendar 
year) attributable to the portion of the calendar year after 
the beginning of the taxable year which begins in the calendar 
year to the first day of the next calendar year.
    For example, assume a RIC for its taxable year ending June 
30, 2012, has ordinary loss of $1 million for the portion of 
its taxable year ending on December 31, 2011, and $1 million 
ordinary income for the remainder of the taxable year. The RIC 
has no other items of income or loss in 2011, 2012, or 2013. 
The RIC must distribute $980,000 in 2012 to avoid the excise 
tax, notwithstanding that it has no taxable income (or earnings 
and profits) for a taxable year which includes any portion of 
2012. Under the provision, if the RIC makes an election, the $1 
million ordinary loss will be treated as arising on January 1, 
2012, for purposes of the excise tax and the RIC will not be 
required to make a distribution in 2012 to avoid the excise 
tax.

                             Effective Date

    The provision applies to calendar years beginning after the 
date of enactment (December 22, 2010).

 C. Distributed Amount for Excise Tax Purposes Determined on Basis of 
Taxes Paid by RIC (sec. 403 of the Act and sec. 4982(c)(4) of the Code)


                              Present Law

    In computing the excise tax under section 4982,\1924\ a RIC 
is treated as having distributed amounts on which a tax is 
imposed on the RIC during the calendar year in which the 
taxable year of the RIC ends, regardless of the calendar year 
in which estimated tax payments are made.\1925\
---------------------------------------------------------------------------
    \1924\ See present-law explanation of section 401 for a description 
of the tax.
    \1925\ Sec. 4982(c)(1)(B).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a RIC making estimated tax payments of 
the taxes imposed on investment company taxable income and 
undistributed net capital gain for a taxable year beginning 
(but not ending) during any calendar year may elect to increase 
the distributed amount for that calendar year by the amount on 
which the estimated tax payments of these taxes are made during 
that calendar year. The distributed amount for the following 
calendar year is reduced by the amount of the prior year's 
increase.

                             Effective Date

    The provision applies to calendar years beginning after the 
date of enactment (December 22, 2010).

 D. Increase in Required Distribution of Capital Gain Net Income (sec. 
            404 of the Act and sec. 4982(b)(1) of the Code)


                              Present Law

    An excise tax is imposed on a RIC for a calendar year equal 
to four percent of the excess (if any) of the required 
distribution over the distributed amount. The required 
distribution is the sum of 98 percent of the RIC's ordinary 
income for the calendar year and 98 percent of the capital gain 
net income for the one-year period ending October 31 of such 
calendar year. The distributed amount is the sum of the 
deduction for dividends paid during the calendar year and the 
amount on which a corporate income tax is imposed on the RIC 
for taxable years ending during the calendar year.\1926\
---------------------------------------------------------------------------
    \1926\ Sec. 4982.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision increases the required distribution 
percentage of the capital gain net income from 98 percent to 
98.2 percent.

                             Effective Date

    The provision applies to calendar years beginning after the 
date of enactment (December 22, 2010).

                          VI. OTHER PROVISIONS


 A. Repeal of Assessable Penalty with Respect to Liability for Tax of 
          RICs (sec. 501 of the Act and sec. 6697 of the Code)


                              Present Law

    If there is a determination that a RIC has a tax deficiency 
with respect to a prior taxable year, the RIC can distribute a 
``deficiency dividend.'' \1927\ A deficiency dividend is 
treated by the RIC as a dividend paid with respect to the prior 
taxable year. As a result, the deficiency dividend increases 
the RIC's deduction for dividends paid for that year and 
eliminates the deficiency. A RIC making a deficiency dividend 
is subject to an interest charge as if the entire amount of the 
deficiency dividend were the amount of the tax deficiency. An 
additional penalty is also imposed equal to the lesser of (1) 
the amount of the interest charge, or (2) one-half of the 
amount of the deficiency dividend.\1928\
---------------------------------------------------------------------------
    \1927\ Sec. 860.
    \1928\ Sec. 6697.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision repeals the additional penalty with respect 
to deficiency dividends.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (December 22, 2010).

B. Modification of Sale Load Basis Deferral Rule for RICs (sec. 502 of 
                the Act and sec. 852(f)(1) of the Code)


                              Present Law

    If (1) a taxpayer incurs a load charge in acquiring stock 
in a RIC and by reason of incurring the charge or making the 
acquisition, acquires a reinvestment right, (2) the stock is 
disposed of within 90 days of the acquisition, and (3) the 
taxpayer subsequently acquires stock in a RIC and the otherwise 
applicable load charge is reduced by reason of the reinvestment 
right, the load charge (to the extent it does not exceed the 
reduction) is not taken into account in determining gain or 
loss of the original stock but is treated as incurred in 
acquiring the subsequently acquired stock.\1929\
---------------------------------------------------------------------------
    \1929\ Sec. 852(f).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision limits the applicability of the provision 
described under present law to cases where the taxpayer 
subsequently acquires stock before January 31 of the calendar 
year following the calendar year the original stock is disposed 
of.

                             Effective Date

    The provision applies to charges incurred in taxable years 
beginning after the date of enactment (December 22, 2010).

  PART EIGHTEEN: REVENUE PROVISIONS OF THE OMNIBUS TRADE ACT OF 2010 
                      (PUBLIC LAW 111-344) \1930\
---------------------------------------------------------------------------

    \1930\ H.R. 6517. The House passed H.R. 6517 on December 15, 2010. 
The Senate passed the bill with an amendment on December 22, 2010. The 
House agreed to the Senate amendment on December 22, 2010. The 
President signed the bill on December 29, 2010.
---------------------------------------------------------------------------

A. Extension of Health Coverage Tax Credit Improvements (secs. 111-118 
             of the Act and secs. 35 and 7527 of the Code)

                              Present Law

In general
    Under the Trade Act of 2002,\1931\ in the case of taxpayers 
who are eligible individuals,\1932\ a refundable tax credit is 
provided for 65 percent of the taxpayer's premiums for 
qualified health insurance of the taxpayer and qualifying 
family members \1933\ for each eligible coverage month 
beginning in the taxable year.\1934\ The credit is commonly 
referred to as the health coverage tax credit (``HCTC''). The 
credit is available only with respect to amounts paid by the 
taxpayer. The credit is available on an advance payment 
basis.\1935\
---------------------------------------------------------------------------
    \1931\ Pub. L. No. 107-210.
    \1932\ An eligible individual is an individual who is (1) an 
eligible Trade Adjustment Assistance (``TAA'') recipient, (2) an 
eligible alternative TAA recipient, or (3) an eligible Pension Benefit 
Guaranty Corporation (``PBGC'') pension recipient.
    \1933\ Qualifying family members are the taxpayer's spouse and any 
dependent of the taxpayer with respect to whom the taxpayer is entitled 
to claim a dependency exemption. Any individual who has other specified 
coverage is not a qualifying family member.
    \1934\ Please see Part Two, Section III.B, above for a discussion 
of eligible coverage months and a more lengthy discussion of persons 
eligible for the health coverage tax credit and the definition of 
qualified health insurance under the Trade Act of 2002.
    \1935\ Under section 7527, an individual is eligible for the 
advance payment of the credit once a qualified health insurance costs 
credit eligibility certificate is in effect.
---------------------------------------------------------------------------
The American Recovery and Reinvestment Act of 2009
    Sections 1899 to 1899L of the American Recovery and 
Reinvestment Act of 2009 (``ARRA'') made a number of temporary 
changes to the HCTC and related provisions that are generally 
effective for months beginning after February 17, 2009 and 
before January 1, 2011, or with respect to certain events 
occurring between those dates:
    ARRA increases the amount of the HCTC to 80 percent of the 
taxpayer's premiums for qualified health insurance of the 
taxpayer and qualifying family members.
    ARRA provides that the Secretary of the Treasury shall make 
one or more retroactive payments on behalf of certified 
individuals for qualified health insurance coverage of the 
taxpayer and qualifying family members.\1936\ For this purpose, 
a retroactive advance payment is an advance payment for 
eligible coverage months occurring prior to the first month for 
which an advance payment is otherwise made on behalf of such 
individual.
---------------------------------------------------------------------------
    \1936\ This ARRA provision generally applies to months beginning 
after December 31, 2009 (rather than February 17, 2009) and before 
January 1, 2011.
---------------------------------------------------------------------------
    ARRA requires that the qualified health insurance costs 
credit eligibility certificate provided in connection with the 
advance payment of the HCTC must include certain additional 
information.\1937\
---------------------------------------------------------------------------
    \1937\ The provision applies for certificates issued after August 
17, 2009 and months beginning before January 1, 2011.
---------------------------------------------------------------------------
    ARRA modifies the definition of eligible individual by 
modifying the definition of an eligible Trade Adjustment 
Assistance (``TAA'') recipient. Specifically, the ARRA 
eliminates the requirement that an individual be enrolled in 
training in the case of an individual receiving unemployment 
compensation.\1938\
---------------------------------------------------------------------------
    \1938\ ARRA also clarifies that the definition of an eligible TAA 
recipient includes an individual who would be eligible to receive a 
trade readjustment allowance except that the individual is in a break 
in training that exceeds the period specified in section 233(e) of the 
Trade Act of 1974, but is within the period for receiving the 
allowance.
---------------------------------------------------------------------------
    ARRA provides continued eligibility for the credit for 
family members after the following events: (1) the eligible 
individual becoming entitled to Medicare, (2) divorce, and (3) 
death.\1939\
---------------------------------------------------------------------------
    \1939\ This ARRA provision generally applies to months beginning 
after December 31, 2008 (rather than February 17, 2009) and before 
January 2011.
---------------------------------------------------------------------------
    ARRA expands the definition of qualified health insurance 
by including coverage under an employee benefit plan funded by 
a voluntary employees' beneficiary association (``VEBA,'' as 
defined in section 501(c)(9)) established pursuant to an order 
of a bankruptcy court, or by agreement with an authorized 
representative, as provided in section 1114 of title 11, United 
States Code.
    Under ARRA, in determining if there has been a 63-day lapse 
in coverage (which determines, in part, if the State-based 
consumer protections apply), in the case of a TAA-eligible 
individual, the period beginning on the date the individual has 
a TAA-related loss of coverage and ending on the date which is 
seven days after the date of issuance by the Secretary (or by 
any person or entity designated by the Secretary) of a 
qualified health insurance costs credit eligibility certificate 
(under section 7527) for such individual is not taken into 
account.
    ARRA modifies the maximum required COBRA continuation 
coverage period \1940\ with respect to certain individuals 
whose qualifying event is a termination of employment or a 
reduction in hours to coordinate with eligibility for HCTC as 
an eligible individual or a qualifying family member.\1941\
---------------------------------------------------------------------------
    \1940\ The Consolidated Omnibus Reconciliation Act of 1985 
(``COBRA'') requires that a group health plan must offer continuation 
coverage to qualified beneficiaries in the case of a qualifying event. 
An excise tax under the Code applies on the failure of a group health 
plan to meet the requirement. Qualifying events include the death of 
the covered employee, termination of the covered employee's employment, 
divorce or legal separation of the covered employee, and certain 
bankruptcy proceedings of the employer. In the case of termination from 
employment, the coverage must be extended for a period of not less than 
18 months. In certain other cases, coverage must be extended for a 
period of not less than 36 months. Under such period of continuation 
coverage, the plan may require payment of a premium by the beneficiary 
of up to 102 percent of the applicable premium for the period.
    \1941\ This ARRA provision is effective for periods of coverage 
that would, without regard to the provision, end on or after February 
17, 2010, provided that the provision does not extend any periods of 
coverage beyond December 31, 2010.
---------------------------------------------------------------------------

                        Explanation of Provision

    Sections 111 through 118 of the Omnibus Trade Act of 2010 
extends the temporary changes to the HCTC and related 
provisions made by ARRA so that the ARRA changes also apply to 
generally months beginning (or, for certain provisions, plan 
years beginning or events occurring) after December 31, 2010 
and before February 13, 2011.\1942\
---------------------------------------------------------------------------
    \1942\ The expansion of the definition of qualified health 
insurance to include coverage under an employee benefit plan funded by 
certain VEBAs is extended to apply to months beginning before February 
13, 2012.
---------------------------------------------------------------------------

                             Effective Date

    The provision is generally effective for months beginning 
(or, for certain provisions, plan years beginning or events 
occurring) after December 31, 2010.

B. Time for Payment of Corporate Estimated Taxes (sec. 10002 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.\1943\ 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. In the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding taxable year):
---------------------------------------------------------------------------
    \1943\ Sec. 6655.
---------------------------------------------------------------------------
          (i) payments due in July, August, or September, 2014, 
        are increased to 174.25 percent of the payment 
        otherwise due; \1944\
---------------------------------------------------------------------------
    \1944\ Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, 
sec. 12(a); Health Care and Education Reconciliation Act of 2010, Pub. 
L. No. 111-152, sec. 1410; Hiring Incentives to Restore Employment Act, 
Pub. L. No. 111-147, sec. 561, par. (1); Act to extend the Generalized 
System of Preferences and the Andean Trade Preference Act, and for 
other purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and 
Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint 
resolution approving the renewal of import restrictions contained in 
the Burmese Freedom and Democracy Act of 2003, and for other purposes, 
Pub. L. No. 111-42, sec. 202(b)(1).
---------------------------------------------------------------------------
          (ii) payments due in July, August or September, 2015, 
        are increased to 159.25 percent of the payment 
        otherwise due; \1945\ and
---------------------------------------------------------------------------
    \1945\ Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 
2131; Firearms Excise Tax Improvements Act of 2010, Pub. L. No. 111-
237, sec. 4(a); United States Manufacturing Enhancement Act of 2010, 
Pub. L. No. 111-227, sec. 4002; Joint resolution approving the renewal 
of import restrictions contained in the Burmese Freedom and Democracy 
Act of 2003, and for other purposes, No. 111-210, sec. 3; Haiti 
Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(b); Hiring 
Incentives To Restore Employment Act, Pub. L. No. 111-147, sec. 561, 
par. (2).
---------------------------------------------------------------------------
          (iii) payments due in July, August or September, 
        2019, are increased to 106.50 percent of the payment 
        otherwise due.\1946\
---------------------------------------------------------------------------
    \1946\ Hiring Incentives to Restore Employment Act, Pub. L. No. 
111-147, sec. 561, par. (3).
---------------------------------------------------------------------------
    For each of the periods impacted, the next required payment 
is reduced accordingly.

                    Explanation of Provision \1947\
---------------------------------------------------------------------------

    \1947\ All the public laws enacted in the 111th Congress affecting 
this provision are described in Part Twenty-One of this document.
---------------------------------------------------------------------------
    The provision increases the required payment of estimated 
tax otherwise due in July, August, or September, 2015, by 4.50 
percentage points.

                             Effective Date

    The provision is effective on the date of enactment 
(December 29, 2010).
 PART NINETEEN: JAMES ZADROGA 9/11 HEALTH AND COMPENSATION ACT OF 2010 
                       (PUBIC LAW 111-347) \1948\

---------------------------------------------------------------------------
    \1948\ H.R. 847. The House passed H.R. 847 on September 29, 2010. 
The Senate passed the bill with an amendment on December 22, 2010. The 
House agreed to the Senate amendment on December 22, 2010. The 
President signed the bill on January 2, 2011.
---------------------------------------------------------------------------

A. Excise Tax on Foreign Procurement (sec. 301 of the Act and new sec. 
                           5000C of the Code)


                              Present Law

    The United States taxes U.S. citizens and residents 
(including domestic corporations) on their worldwide income, 
whether derived in the United States or abroad. The United 
States generally taxes nonresident alien individuals and 
foreign corporations engaged in a trade or business in the 
United States on income that is effectively connected with the 
conduct of such trade or business (sometimes referred to as 
``effectively connected income''). The United States also taxes 
nonresident alien individuals and foreign corporations on 
certain U.S.-source income that is not effectively connected 
with the conduct of a U.S. trade or business.
    Income of a nonresident alien individual or foreign 
corporation that is effectively connected with the conduct of a 
trade or business in the United States generally is subject to 
U.S. tax in the same manner and at the same rates as income of 
a U.S. person. Deductions are allowed to the extent that they 
are connected with effectively connected income.\1949\ A 
foreign corporation also is subject to a flat 30-percent branch 
profits tax on its ``dividend equivalent amount,'' which is a 
measure of the effectively connected earnings and profits of 
the corporation that are removed in any year from the conduct 
of its U.S. trade or business.\1950\ In addition, a foreign 
corporation is subject to a flat 30-percent branch-level excess 
interest tax on the excess of the amount of interest that is 
deducted by the foreign corporation in computing its 
effectively connected income over the amount of interest that 
is paid by its U.S. trade or business.\1951\
---------------------------------------------------------------------------
    \1949\ Secs. 864(c), 871(b), 873, 882(a), 882(c).
    \1950\ Sec. 884.
    \1951\ Sec. 884(f).
---------------------------------------------------------------------------
    Subject to a number of exceptions, U.S.-source fixed or 
determinable, annual or periodical income (``FDAP'') of a 
nonresident alien individual or foreign corporation that is not 
effectively connected with the conduct of a U.S. trade or 
business is subject to U.S. tax at a rate of 30 percent of the 
gross amount paid.\1952\ Items of income within the scope of 
FDAP include, for example, interest, dividends, rents, 
royalties, salaries, and annuities. The tax generally is 
collected by means of withholding.\1953\
---------------------------------------------------------------------------
    \1952\ Secs. 871(a), 881(a).
    \1953\ Secs. 1441 and 1442 provide for withholding from payments to 
nonresident aliens and foreign corporations, respectively.
---------------------------------------------------------------------------
    Treaties generally provide that neither country may subject 
nationals of the other country (or permanent establishments of 
enterprises of the other country) to taxation more burdensome 
than the tax it imposes on its own nationals (or on its own 
enterprises). Similarly, in general, neither treaty country may 
discriminate against enterprises owned by residents of the 
other country. The scope of the nondiscrimination provisions 
vary: Many older treaties provide protection only with respect 
to those taxes that are identified as covered taxes under the 
treaty. More recently, and consistent with the U.S. negotiating 
position since 1996,\1954\ some nondiscrimination articles 
apply broadly to any tax imposed by one of the contracting 
states.
---------------------------------------------------------------------------
    \1954\ U.S. Department of the Treasury, U.S. Model Income Tax 
Convention of November 15, 2006, available at http://www.treasury.gov/
offices/tax-policy/library/model006.pdf, updated an earlier model 
treaty published September 20, 1996. The Technical Explanation of the 
1996 draft included a brief history of its provenance, explaining that 
it was drawn from a number of sources, including the U.S. Treasury 
Department's draft Model Income Tax Convention published on June 16, 
1981, and withdrawn as an official U.S. Model on July 17, 1992, the 
Model Double Taxation Convention on Income and Capital, and its 
Commentaries, published by the OECD, as updated in 1995 (the ``OECD 
Model''), existing U.S. income tax treaties, recent U.S. negotiating 
experience, current U.S. tax laws and policies and comments received 
from tax practitioners and other interested parties. U.S. Department of 
the Treasury, U.S. Model Income Tax Convention: Technical Explanation 
(September 20, 1996), available at 96 Tax Notes Today 186-7.
---------------------------------------------------------------------------
    In addition to complying with tax laws, parties engaged in 
cross-border transactions are required to comply with relevant 
trade agreements of the jurisdictions in which they operate. To 
the extent that the purchaser is a governmental entity, such 
transactions are generally described in a subset of trade 
regulations known as government procurement agreements. The 
United States includes government procurement obligations in 
its free trade agreements (``FTA'') with the aim of ensuring 
that U.S. goods, services and suppliers are afforded non-
discriminatory opportunities to compete in the government 
procurement of U.S. trading partners.
    The first major government procurement agreement was the 
1979 Government Procurement Agreement (``GPA''), which entered 
into force in 1981. Since the formation of the World Trade 
Agreement in 1996, the United States has been a party to the 
``plurilateral'' GPA that is an annex to the WTO agreement. 
This agreement is open only to members of WTO who either signed 
upon formation of the WTO in 1996, or subsequently acceded both 
to WTO and the GPA. At present, there are 41 members of the 
GPA, including all members of the European Union, the United 
States, Canada, Hong Kong, China, Iceland, Israel, Japan, the 
Republic of Korea, Liechtenstein, the Netherlands with respect 
to Aruba, Norway, Singapore, Switzerland, and Taiwan (Chinese 
Taipei).

                        Explanation of Provision

    Under this provision, foreign persons are subject to an 
excise tax of two percent on any specified procurement payment. 
A specified procurement payment is a payment made by the United 
States government or its agents, pursuant to a contract under 
which the United States purchases goods or services from a 
source in a country that is not party to an international 
procurement agreement with the United States. Goods are from 
such a source if produced or manufactured in such country. 
Payments for services are subject to the tax if the services 
are provided in a country that is not a party to such an 
agreement with the United States. If the origin of the goods or 
services is in a country that is not a member of the GPA, 
payments made to a foreign parent located in a country that is 
a member of the GPA are subject to the excise tax.
    The excise tax is imposed on the gross amount of the 
payment. For purposes of subtitle F of the Internal Revenue 
Code, it is treated as an income tax, permitting assessment and 
collection of the amounts in a manner similar to the 
withholding taxes under chapter 3.
    Executive agencies are required to ensure that funds 
disbursed to foreign contractors are not used to reimburse the 
tax imposed by this section. Contracting activities are to be 
monitored and reviewed annually to comply with this provision. 
Finally, the statute requires that the provision be 
administered in a manner consistent with U.S. obligations under 
international agreements.\1955\
---------------------------------------------------------------------------
    \1955\ Sec. 301(c) of the Act.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to payments received under contracts 
entered into on or after the date of enactment (January 2, 
2011).
 PART TWENTY: AUTHORITY OF TAX COURT TO APPOINT EMPLOYEES (PUBLIC LAW 
                            111-366) \1956\

---------------------------------------------------------------------------
    \1956\ H.R. 5901. The House passed H.R. 5901 on July 30, 2010. The 
Senate passed the bill with an amendment on December 17, 2010. The 
House agreed to the Senate amendment on December 22, 2010. The 
President signed the bill on January 4, 2011.
---------------------------------------------------------------------------

 A. Authority of Tax Court to Appoint Employees (sec. 1 of the Act and 
                         sec. 7471 of the Code)


                              Present Law

    The United States Tax Court is an independent court of 
record established by Congress under Article I of the 
Constitution.\1957\ Generally, the Tax Court is authorized to 
retain and compensate employees under the rules applicable to 
executive branch competitive service appointments.\1958\
---------------------------------------------------------------------------
    \1957\ Sec. 7441.
    \1958\ Sec. 7471.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision authorizes the Tax Court to establish an 
independent personnel management system that generally is not 
subject to the rules applicable to executive branch competitive 
service appointments. To the extent feasible, the Tax Court is 
directed to compensate employees at rates consistent with those 
for employees holding comparable positions in courts 
established under Article III of the Constitution.
    The provision requires that the Tax Court preserve certain 
rights available to executive branch competitive service 
employees and prohibits employment discrimination on the basis 
of race, color, religion, age, gender, national origin, 
political affiliation, marital status, or handicapping 
condition. In addition, Tax Court employees employed prior to 
the effective date of the provision retain their appeal rights 
to the Merit Systems Protection Board and the Equal Employment 
Opportunity Commission so long as they are continuously 
employed by the court.

                             Effective Date

    The provision is effective on the date the United States 
Tax Court adopts a personnel management system after the date 
of enactment (January 4, 2011).

  PART TWENTY-ONE: CUSTOMS USER FEES, CORPORATE ESTIMATED TAXES, AND 
               ASSISTANCE FOR COBRA CONTINUATION COVERAGE

                   A. Extension of Customs User Fees

                              Present Law

    Section 13031 of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (``COBRA'') \1959\ authorized the 
Secretary of the Treasury to collect certain service fees. 
Section 412 of the Homeland Security Act of 2002 \1960\ 
authorized the Secretary of the Treasury to delegate such 
authority to the Secretary of Homeland Security. 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.\1961\ COBRA was 
amended on several occasions but most recently prior to the 
start of the 111th Congress by the Andean Tax Preference Act of 
2008,\1962\ which extended authorization for the collection of 
the passenger and conveyance fees through January 31, 2018 and 
the merchandise processing fees through February 14, 2018.
---------------------------------------------------------------------------
    \1959\ Pub. L. No. 99-272.
    \1960\ Pub. L. No. 107-296.
    \1961\ 19 U.S.C. sec. 58c.
    \1962\ Pub. L. No. 110-436.
---------------------------------------------------------------------------

                        Explanation of Provision

    The renewal of the Burmese Freedom and Democracy Act of 
2003 extends the passenger and conveyance processing fees 
authorized under COBRA through February 7, 2018.\1963\
---------------------------------------------------------------------------
    \1963\ Pub. L. No. 111-42.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on July 26, 2009.

                        Explanation of Provision

    The extension of the Andean Trade Preference Act extends: 
(1) the passenger and conveyance processing fees authorized 
under COBRA through June 7, 2008; and (2) the merchandise 
processing fees authorized under COBRA through May 14, 
2008.\1964\
---------------------------------------------------------------------------
    \1964\ Pub. L. No. 111-124.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on date of enactment (December 
28, 2009).

                        Explanation of Provision

    The Haiti Economic Lift Program Act of 2010 extends: (1) 
the passenger and conveyance processing fees authorized under 
COBRA through August 17, 2018; and (2) the merchandise 
processing fees authorized under COBRA though November 10, 
2018.\1965\
---------------------------------------------------------------------------
    \1965\ Pub. L. No. 111-171.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on date of enactment (May 24, 
2010).

                        Explanation of Provision

    The renewal of the Burmese Freedom and Democracy Act of 
2003 extends the passenger and conveyance processing fees 
authorized under COBRA through August 24, 2018.\1966\
---------------------------------------------------------------------------
    \1966\ Pub. L. No. 111-210.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on date of enactment (July 27, 
2010).

                        Explanation of Provision

    The United States Manufacturing Enhancement Act of 2010 
extends: (1) the passenger and conveyance processing fees 
authorized under COBRA through November 30, 2018; and (2) the 
merchandise processing fees authorized under COBRA through 
December 10, 2018.\1967\
---------------------------------------------------------------------------
    \1967\ Pub. L. No. 111-227.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on date of enactment (August 11, 
2010).

   B. Modifications to Corporate Estimated Tax Payments Due in July, 
     August, and September, 2010, 2011, 2013, 2014, 2015, and 2019


                         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 Section 401 of the Tax Increase Prevention Act of 
2005 (``TIPRA'') (including amendments that are contained in 
other provisions of law),\1968\ in the case of a corporation 
with assets of at least $1 billion:
---------------------------------------------------------------------------
    \1968\ For additional detail, see Joint Committee on Taxation, 
General Explanation of Tax Legislation Enacted in the 109th Congress 
(JCS-1-00), January 17, 2007; see also Joint Committee on Taxation, 
General Explanation of Tax Legislation Enacted in the 110th Congress 
(JCS-1-09), March 2009.
---------------------------------------------------------------------------
          (i) payments due in July, August, or September, 2010, 
        are increased to 120.50 percent of the payment 
        otherwise due;
          (ii) payments due in July, August or September, 2011, 
        are increased to 127.50 percent of the payment 
        otherwise due; and
          (iii) payments due in July, August or September, 
        2013, are increased to 120.00 percent of the payment 
        otherwise due.
    For each of the periods impacted, the next required payment 
is reduced accordingly.

                        Explanation of Provision

    The Children's Health Insurance Program Reauthorization Act 
of 2009 \1969\ increases the applicable percentage in 2013 
(120.00 percent) by 0.50 percentage points.
---------------------------------------------------------------------------
    \1969\ Pub. L. No. 111-3.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (March 
4, 2009).

                        Explanation of Provision

    The Corporate Estimated Tax Shift Act of 2009 \1970\ 
reduces the applicable percentage for 2010 (120.50 percent), 
2011 (127.50 percent), and 2013 (120.50 percent) to 100 
percent. Thus corporations will make estimated tax payments in 
2010, 2011, and 2013 as if the TIPRA legislation had never been 
enacted or amended. The bill also increases the payments 
otherwise due in July, August, or September, 2014 (100 percent) 
by 0.25 percentage points. The next required payment is reduced 
accordingly.
---------------------------------------------------------------------------
    \1970\ Pub. L. No. 111-42.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (July 
28, 2009).

                        Explanation of Provision

    The Worker, Homeownership, and Business Assistance Act of 
2009 \1971\ increases the applicable percentage in 2014 (100.25 
percent) by 33.00 percentage points.
---------------------------------------------------------------------------
    \1971\ Pub. L. No. 111-92.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment 
(November 6, 2009).

                        Explanation of Provision

    The extension of the General System of Preferences and the 
Andean Trade Preference Act \1972\ increases the applicable 
percentage in 2014 (133.25 percent) by 1.50 percentage points.
---------------------------------------------------------------------------
    \1972\ Pub. L. No. 111-124.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment 
(December 28, 2009).

                        Explanation of Provision

    The Hiring Incentives to Restore Employment Act \1973\ 
increases the applicable percentage in 2014 (134.75 percent) by 
23.00 percentage points, the applicable percentage in 2015 (100 
percent) by 21.50 percentage points, and the applicable 
percentage in 2019 (100 percent) by 6.50 percentage points. For 
each of the periods impacted, the next required payment is 
reduced accordingly.
---------------------------------------------------------------------------
    \1973\ Pub. L. No. 111-147.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (March 
18, 2010).

                        Explanation of Provision

    The Health Care and Education Reconciliation Act of 2010 
\1974\ increases the applicable percentage in 2014 (157.75 
percent) by 15.75 percentage points.
---------------------------------------------------------------------------
    \1974\ Pub. L. No. 111-152.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (March 
30, 2010).

                        Explanation of Provision

    The Haiti Economic Lift Program Act of 2010 \1975\ 
increases the applicable percentage in 2014 (173.50 percent) by 
0.75 percentage points and the applicable percentage in 2015 
(121.50 percent) by 0.75 percentage points.
---------------------------------------------------------------------------
    \1975\ Pub. L. No. 111-171.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (May 
24, 2010).

                        Explanation of Provision

    The renewal of the Burmese Freedom and Democracy Act of 
2003 \1976\ increases the applicable percentage in 2015 (122.25 
percent) by 0.25 percentage points.
---------------------------------------------------------------------------
    \1976\ Pub. L. No. 111-210.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (July 
27, 2010).

                        Explanation of Provision

    The United States Manufacturing Enhancement Act of 2010 
\1977\ increases the applicable percentage in 2015 (122.50 
percent) by 0.50 percentage points.
---------------------------------------------------------------------------
    \1977\ Pub. L. No. 111-227.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (August 
11, 2010).

                        Explanation of Provision

    The Firearms Excise Tax Improvement Act of 2010 \1978\ 
increases the applicable percentage in 2015 (123.00 percent) by 
0.25 percentage points.
---------------------------------------------------------------------------
    \1978\ Pub. L. No. 111-237.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (August 
16, 2010).

                        Explanation of Provision

    The Small Business Jobs and Credit Act of 2010 \1979\ 
increases the applicable percentage in 2015 (123.25 percent) by 
36.00 percentage points.
---------------------------------------------------------------------------
    \1979\ Pub. L. No. 111-240.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment 
(September 27, 2010).

                        Explanation of Provision

    The Omnibus Trade Act of 2010 \1980\ increases the 
applicable percentage in 2015 (159.25 percent) by 4.50 
percentage points.
---------------------------------------------------------------------------
    \1980\ Pub. L. No. 111-344.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment 
(December 29, 2010).

       C. Extension of Assistance for COBRA Continuation Coverage


                              Present Law

    The American Recovery and Reinvestment Act of 2009 provides 
that, for a period not exceeding nine months, an assistance 
eligible individual is treated as having paid any premium 
required for COBRA continuation coverage under a group health 
plan if the individual pays 35 percent of the premium.\1981\ 
Thus, if the assistance eligible individual pays 35 percent of 
the premium, the group health plan must treat the individual as 
having paid the full premium required for COBRA continuation 
coverage, and the individual is entitled to a subsidy for 65 
percent of the premium. An assistance eligible individual is 
any qualified beneficiary who elects COBRA continuation 
coverage and satisfies three additional requirements. First, 
the qualifying event with respect to the covered employee for 
that qualified beneficiary must be a loss of group health plan 
coverage on account of an involuntary termination of the 
covered employee's employment (other than for gross 
misconduct). Second, the qualifying event must occur during the 
period beginning September 1, 2008 and ending with December 31, 
2009, and the qualified beneficiary must be eligible for COBRA 
continuation coverage during that period and elect such 
coverage. Third, the assistance eligible individual must meet 
certain income threshold requirements.
---------------------------------------------------------------------------
    \1981\ For this purpose, payment by an assistance eligible 
individual includes payment by another individual paying on behalf of 
the individual, such as a parent or guardian, or an entity paying on 
behalf of the individual, such as a State agency or charity. Further, 
the amount of the premium used to calculate the reduced premium is the 
premium amount that the employee would be required to pay for COBRA 
continuation coverage absent this premium reduction (e.g. 102 percent 
of the ``applicable premium'' for such period).
---------------------------------------------------------------------------

                        Explanation of Provision

    The Department of Defense Appropriations Act, 2010 \1982\ 
extends the maximum period an individual is eligible for the 
COBRA premium subsidy from nine months to 15 months. Specific 
transitions rules are provided for individuals who are eligible 
for the premium subsidy because of the extension of the period 
from nine to 15 months.
---------------------------------------------------------------------------
    \1982\ Pub. L. No. 111-118.
---------------------------------------------------------------------------
    The provision also extends the time period during which the 
COBRA qualifying event must occur by two months so that it ends 
on February 28, 2010 (rather than December 31, 2009). Thus, in 
order to be an assistance-eligible individual for purposes of 
the premium subsidy, involuntary termination from employment 
must have occurred during the period beginning September 1, 
2008, and ending February 28, 2010.
    The provision contains notice requirements regarding the 
extensions to assistance eligible individuals who experience a 
qualifying event on or after October 31, 2009.

                             Effective Date

    The provision is effective as if included in the American 
Recovery and Reinvestment Act of 2009 (February 17, 2009).

                        Explanation of Provision

    The Temporary Extension Act of 2010 \1983\ extends the time 
period during which the COBRA qualifying event must occur from 
February 28, 2010, to March 31, 2010.
---------------------------------------------------------------------------
    \1983\ Pub. L. No. 111-144.
---------------------------------------------------------------------------
    The provision also clarifies that an assistance eligible 
individual can have experienced a qualifying event consisting 
of a reduction in hours of employment followed by an 
involuntary termination of employment (other than for gross 
misconduct) and still be eligible for the COBRA subsidy. If 
such individual did not elect continuation coverage after 
experiencing the reduction in hours, he or she must be given 
the chance to do so following termination of employment. In 
such circumstances, however, the individual's period of 
continuation coverage is determined as if it began immediately 
following the reduction in hours. The provision also clarifies 
the preexisting condition rules relating to such individuals. 
The provision contains notice requirements regarding the 
clarifications.
    The provision permits the Secretary of Labor or the 
Secretary of Health and Human Services, whichever appropriate, 
or an affected individual, to bring a civil action to enforce a 
determination that the individual is an eligible individual for 
purposes of the subsidy and for appropriate relief. In 
addition, the appropriate Secretary may asses a penalty against 
a plan sponsor or health insurance issuer of not more than $100 
per day for each failure to comply with a determination of 
eligibility (but only beginning 10 days after the sponsor's or 
issuer's receipt of the determination).
    The provision deems an event to be an involuntary 
termination in all cases in which an employer reasonably 
determines it to be such and maintains supporting documentation 
of the determination (including an attestation by the 
employer).
    The provision also makes certain technical clarifications 
to the period of assistance as defined in the American Recovery 
and Reinvestment Act of 2009, and to the Department of Defense 
Appropriations Act, 2010.

                             Effective Date

    The provision is generally effective as if included in the 
American Recovery and Reinvestment Act of 2009 (February 17, 
2009).
    The clarification regarding COBRA continuation coverage 
resulting from a reduction in hours is effective for periods of 
coverage after date of enactment (March 2, 2010).
    The technical clarifications to the Department of Defense 
Appropriations Act, 2010 are effective as if included in the 
Department of Defense Appropriations Act, 2010 (February 17, 
2009, because the Department of Defense Appropriations Act is 
effective as if included in the American Recovery and 
Reinvestment Act of 2009).
    The provisions relating to enforcement and the 
clarification of period of assistance are effective on date of 
enactment (March 2, 2010).

                        Explanation of Provision

    The Continuing Extension Act of 2010 \1984\ extends the 
time period during which the COBRA qualifying event must occur 
to May 31, 2010. In addition, specific transitions rules are 
provided for individuals who are eligible for the premium 
subsidy in April and May of 2010 because of the extension of 
the period.
---------------------------------------------------------------------------
    \1984\ Pub. L. No. 111-157.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective as if included in the American 
Recovery and Reinvestment Act of 2009 (February 17, 2009).




 APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE 
                             111TH CONGRESS
