GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 112TH CONGRESS

[JPRT 113-2-13]
[From the U.S. Government Publishing Office]

JCS-2-13

[JOINT COMMITTEE PRINT]

GENERAL EXPLANATION OF
TAX LEGISLATION
ENACTED IN THE 112TH CONGRESS

----------

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

FEBRUARY 2013
GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 112TH CONGRESS
JCS-2-13

[JOINT COMMITTEE PRINT]

GENERAL EXPLANATION OF

TAX LEGISLATION

ENACTED IN THE 112TH CONGRESS

__________

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

FEBRUARY 2013
SUMMARY CONTENTS

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Page
Part One: Highway Trust Fund Related Legislation (Public Laws
112-5, 112-30, 112-102, 112-140, and 112-141).................. 3

Part Two: Airport and Airway Trust Fund Short-Term Extensions
(Public Laws 112-7, 112-16, 112-21, 112-27, 112-30, and 112-91) 25

Part Three: Comprehensive 1099 Taxpayer Protection and Repayment
of Exchange Subsidy Overpayments Act of 2011 (Public Law 112-9) 27

Part Four: Revenue Provision of the Department of Defense and
Full-Year Continuing Appropriations Act of 2011 (Public Law
112-10)........................................................ 35

Part Five: Revenue Provisions of the Trade Adjustment Assistance
Extension Act of 2011 (Public Law 112-40)...................... 37

Part Six: Revenue Provisions of the United States-Korea Free
Trade Agreement Implementation Act (Public Law 112-41)......... 40

Part Seven: Repeal of Three Percent Witholding on Certain
Payments Made to Vendors, Work Opportunity Tax Credit for
Veterans, Other Provisions Related To Federal Vendors and
Modification To AGI Calculation for Determining Certain
Healthcare Program Eligibility (Public Law 112-56)............. 44

Part Eight: The Revenue Provision Contained in the Temporary
Payroll Tax Cut Continuation Act of 2011 (Public Law 112-78)... 62

Part Nine: The Airport and Airway Trust Fund Provisions and
Related Taxes in the FAA Modernization and Reform Act of 2012
(Public Law 112-95)............................................ 65

Part Ten: The Revenue Provisions in the Middle Class Tax Relief
and Job Creation Act of 2012 (Public Law 112-96)............... 80

Part Eleven: Revenue Provision of the National Defense
Authorization Act for Fiscal Year 2013 (Public Law 112-239).... 85

Part Twelve: Revenue Provisions Contained in the American
Taxpayer Relief Act of 2012 (Public Law 112-240)............... 86

Part Thirteen: Customs User Fees and Corporate Estimated Taxes... 229

Appendix: Estimated Budget Effects of Tax Legislation Enacted in
the 112th Congress............................................. 233

CONTENTS

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Page
Introduction..................................................... 1

Part One: Highway Trust Fund Related Legislation (Public Laws
112-5, 112-30, 112-102, 112-140, and 112-141).................. 3

A. Short-Term Extensions of Highway Trust Fund
Expenditure and Tax Authority (Public Laws 112-5,
112-30, 112-102, 112-140 and 112-141).............. 3

B. Short-Term Extensions of the Leaking Underground
Storage Tank Trust Fund Financing Rate (Public Laws
112-30, 112-102, and 112-140)...................... 5

C. Revenue Provisions in the Moving Ahead for Progress
in the 21st Century Act or the ``MAP-21'' (Public
Law 112-141)....................................... 6

1. Extension of trust fund expenditure authority
and extension of highway-related taxes (sec.
40101 and 40102 of the Act, and secs. 4041,
4051, 4071, 4081, 4221, 4481, 4483, 6412, 9503,
9504, and 9508 of the Code).................... 6

2. Transfer from Leaking Underground Storage Tank
Trust Fund to Highway Trust Fund (sec. 40201 of
the Act, and sec. 9503 and 9508 of the Code)... 9

3. Pension funding stabilization (sec. 40211 of
the Act, sec. 430 of the Code, and secs. 101(f)
and 303 of ERISA).............................. 10

4. Transfer of excess pension assets (secs. 40241
and 40242 of the Act and sec. 420 of the Code). 18

5. Additional transfers to the Highway Trust Fund
(sec. 40251 of the Act and sec. 9503 of the
Code).......................................... 22

6. Exception from early distribution tax for
annuities under phased retirement program (sec.
100121(c) of the Act and sec. 72(t) of the
Code).......................................... 22

7. Expand the definition of a tobacco manufacturer
to include businesses making available roll-
your-own cigarette machines for consumer use
(sec. 100122 of the Act and sec. 5702(d) of the
Code).......................................... 23

Part Two: Airport and Airway Trust Fund Short-Term Extensions
(Public Laws 112-7, 112-16, 112-21, 112-27, 112-30, and 112-91) 25

Part Three: Comprehensive 1099 Taxpayer Protection and Repayment
of Exchange Subsidy Overpayments Act of 2011 (Public Law 112-9) 27

A. Repeal of Expansion of Information Reporting
Requirements (sec. 2 of the Act and sec. 6041 of
the Code).......................................... 27

B. Repeal of Information Reporting Requirements with
Respect to Real Estate Expenses (sec. 3 of the Act
and sec. 6041 of the Code)......................... 29

C. Increase in Amount of Overpayment of Health Care
Credit Which Is Subject to Recapture (sec. 4 of the
Act and sec. 36B of the Code)...................... 31

Part Four: Revenue Provision of the Department of Defense and
Full-Year Continuing Appropriations Act of 2011 (Public Law
112-10)........................................................ 35

A. Free Choice Vouchers (sec. 1858 of the Act and
secs. 36B, 139D and 4980H of the Code)............. 35

Part Five: Revenue Provisions of the Trade Adjustment Assistance
Extension Act of 2011 (Public Law 112-40)...................... 37

A. Health Coverage Improvements (secs. 241-243 of the
Act and secs. 35, 4980B, 7527 and 9801 of the Code) 37

Part Six: Revenue Provisions of the United States-Korea Free
Trade Agreement Implementation Act (Public Law 112-41)......... 40

A. Increase in Penalty on Paid Preparers Who Fail To
Comply With Earned Income Tax Credit Due Diligence
Requirements (sec. 501 of the Act and sec. 6695(g)
of the Code)....................................... 40

B. Requirement For Prisons Located in the United
States To Provide Information for Tax
Administration (sec. 502 of the Act)............... 40

C. Merchandise Processing Fee (sec. 503 of the Act)... 41

D. Customs User Fees (sec. 504 of the Act)............ 42

E. Time for Payment of Corporate Estimated Taxes (sec.
505 of the Act).................................... 42

Part Seven: Repeal of Three-Percent Withholding on Certain
Payments Made to Vendors, Work Opportunity Tax Credit for
Veterans, Other Provisions Related to Federal Vendors and
Modification to AGI Calculation for Determining Certain
Healthcare Program Eligibility (Public Law 112-56)............. 44

A. Repeal of Imposition of Three-Percent Withholding
on Certain Payments Made to Vendors by Government
Entities (sec. 102 of the Act and sec. 3402(t) of
the Code).......................................... 44

B. Returning Heroes and Wounded Warriors Work
Opportunity Tax Credits (sec. 261 of the Act and
secs. 51 and 52 of the Code)....................... 47

C. One Hundred-Percent Levy for Payments to Federal
Vendors Relating to Property (sec. 301 of the Act
and sec. 6331(h)(3) of the Code)................... 53

D. Study and Report on Reducing the Amount of the Tax
Gap Owed by Federal Contractors (sec. 302 of the
Act)............................................... 55

E. Modification of Calculation of Modified Adjusted
Gross Income for Determining Eligibility for
Certain Healthcare-Related Programs (sec. 401 of
the Act and sec. 36B of the Code).................. 56

Part Eight: The Revenue Provision Contained in the Temporary
Payroll Tax Cut Continuation Act of 2011 (Public Law 112-78)... 62

A. Payroll Tax Cut (sec. 101 of the Act and sec. 601
of the Tax Relief, Unemployment Reauthorization and
Job Creation Act of 2010).......................... 62

Part Nine: The Airport and Airway Trust Fund Provisions and
Related Taxes in the FAA Modernization and Reform Act of 2012
(Public Law 112-95)............................................ 65

A. Extension of Taxes Funding the Airport and Airway
Trust Fund (sec. 1101 of the Act and secs. 4261,
4271, and 4081 of the Code)........................ 65

B. Extension of Airport and Airway Trust Fund
Expenditure Authority (sec. 1102 of the Act, and
sec. 9502 of the Code)............................. 68

C. Treatment of Fractional Ownership Aircraft Program
Flights (sec. 1103 of the Act and new sec. 4043 of
the Code).......................................... 69

D. Transparency in Passenger Tax Disclosures (sec.
1104 of the Act and sec. 7275 of the Code)......... 72

E. Tax-Exempt Private Activity Bond Financing for
Fixed-Wing Emergency Medical Aircraft (sec. 1105 of
the Act and sec. 147(e) of the Code)............... 72

F. Rollover of Amounts Received in Airline Carrier
Bankruptcy (sec. 1106 of the Act and sec. 125 of
the Worker, Retiree, and Employer Recovery Act of
2008).............................................. 73

G. Termination of Exemption For Small Jet Aircraft on
Nonestablished Lines (sec. 1107 of the Act and sec.
4281 of the Code).................................. 77

H. Modification of Control Definition for Purposes of
Section 249 (sec. 1108 of the Act and sec. 249 of
the Code).......................................... 78

Part Ten: The Revenue Provisions in the Middle Class Tax Relief
and Job Creation Act of 2012 (Public Law 112-96)............... 80

A. Extension of Payroll Tax Reduction (sec. 1001 of
the Act and sec. 601 of the Tax Relief,
Unemployment Reauthorization and Job Creation Act
of 2010)........................................... 80

B. Repeal of Certain Shifts in the Timing of Corporate
Estimated Tax Payments (sec. 7001 of the Act)...... 83

Part Eleven: Revenue Provision of the National Defense
Authorization Act for Fiscal Year 2013 (Public Law 112-239).... 85

A. Modification of Definition of Public Safety Officer
(sec. 1086 of the Act and secs. 101(h) and 402(l)
of the Code)....................................... 85

Part Twelve: Revenue Provisions Contained in the American
Taxpayer Relief Act of 2012 (Public Law 112-240)............... 86

TITLE I--GENERAL EXTENSIONS...................................... 86

A. Permanent Extension and Modification of 2001 Tax
Relief (sec. 101 of the Act)....................... 86

1. Individual income tax rate reductions (sec. 1
of the Code)................................... 86

2. Overall limitation on itemized deductions and
the phase-out of personal exemptions (secs. 68
and 151 of the Code)........................... 89

3. Increase the child tax credit (sec. 24 of the
Code).......................................... 90

4. Marriage penalty relief and earned income tax
credit simplification (secs. 1, 32 and 63 of
the Code)...................................... 92

5. Education incentives (secs. 117, 127, 142, 146-
148, 221, and 530 of the Code)................. 93

6. Other incentives for families and children
(includes extension of the adoption tax credit,
employer-provided adoption assistance,
employer-provided child care tax credit, and
dependent care tax credit) (secs. 21, 23, 45D,
and 137 of the Code)........................... 100

7. Alaska native settlement trusts (sec. 646 of
the Code)...................................... 102

8. Estate, gift, and generation-skipping transfer
taxes (secs. 2001 and 2010 of the Code)........ 104

B. Permanent Extension of 2003 Tax Relief; 20-Percent
Capital Gains Rate for Certain High Income
Individuals (sec. 102 of the Act and secs. 1 and 55
of the Code)....................................... 106

C. Extension of 2009 Tax Relief (sec. 103 of the Act). 110

1. Extension of the American opportunity credit
(sec. 25A of the Code)......................... 110

2. Extension of reduced earnings threshold for
additional child tax credit (sec. 24 of the
Code).......................................... 113

3. Extension of modification of the earned income
tax credit (sec. 32 of the Code)............... 114

4. Refunds disregarded in the administration of
federal programs and federally assisted
programs (sec. 6409 of the Code)............... 117

D. Permanent Alternative Minimum Tax Relief for
Individuals (sec. 104 of the Act and secs. 26 and
55 of the Code).................................... 117

TITLE II--INDIVIDUAL TAX EXTENDERS............................... 119

1. Deduction for certain expenses of elementary
and secondary school teachers (sec. 201 of the
Act and sec. 62(a)(2)(D) of the Code).......... 119

2. Exclude discharges of acquisition indebtedness
on principal residences from gross income (sec.
202 of the Act and sec. 108 of the Code)....... 120

3. Parity for mass transit and parking benefits
(sec. 203 of the Act and sec. 132(f) of the
Code).......................................... 122

4. Mortgage insurance premiums (sec. 204 of the
Act and sec. 163 of the Code).................. 123

5. Deduction for State and local sales taxes (sec.
205 of the Act and sec. 164 of the Code)....... 125

6. Contributions of capital gain real property
made for conservation purposes (sec. 206 of the
Act and sec. 170 of the Code).................. 126

7. Deduction for qualified tuition and related
expenses (sec. 207 of the Act and sec. 222 of
the Code)...................................... 130

8. Tax-free distributions from individual
retirement plans for charitable purposes (sec.
208 of the Act and sec. 408 of the Code)....... 131

9. Improve and make permanent the provision
authorizing the Internal Revenue Service to
disclose certain return and return information
to certain prison officials (sec. 209 of the
Act and sec. 6103 of the Code)................. 136

TITLE III--BUSINESS TAX EXTENDERS................................ 137

1. Research credit (sec. 301 of the Act and sec.
41 of the Code)................................ 137

2. Determination of applicable percentage for the
low-income housing tax credit (sec. 302 of the
Act and sec. 42 of the Code)................... 141

3. Treatment of basic housing allowances for
purposes of income eligibility rules (sec. 303
of the Act and secs. 42 and 142 of the Code)... 143

4. Indian employment tax credit (sec. 304 of the
Act and sec. 45A of the Code).................. 144

5. New markets tax credit (sec. 305 of the Act and
sec. 45D of the Code).......................... 145

6. Railroad track maintenance credit (sec. 306 of
the Act and sec. 45G of the Code).............. 148

7. Mine rescue team training credit (sec. 307 of
the Act and sec. 45N of the Code).............. 149

8. Employer wage credit for employees who are
active duty members of the uniformed services
(sec. 308 of the Act and sec. 45P of the Code). 150

9. Work opportunity tax credit (sec. 309 of the
Act and secs. 51 and 52 of the Code)........... 151

10. Qualified zone academy bonds (sec. 310 of the
Act and sec. 54E of the Code).................. 158

11. 15-year straight-line cost recovery for
qualified leasehold improvements, qualified
restaurant buildings and improvements, and
qualified retail improvements (sec. 311 of the
Act and sec. 168 of the Code).................. 160

12. Seven-year recovery period for motorsports
entertainment complexes (sec. 312 of the Act
and sec. 168 of the Code)...................... 163

13. Accelerated depreciation for business property
on an Indian reservation (sec. 313 of the Act
and sec. 168(j) of the Code)................... 164

14. Enhanced charitable deduction for contributions
of food inventory (sec. 314 of the Act and sec.
170 of the Code)............................... 165

15. Increased expensing for small business
depreciable assets (sec. 315 of the Act and
sec. 179 of the Code).......................... 168

16. Election to expense mine safety equipment (sec.
316 of the Act and sec. 179E of the Code)...... 170

17. Special expensing rules for certain film and
television productions (sec. 317 of the Act and
sec. 181 of the Code).......................... 172

18. Deduction allowable with respect to income
attributable to domestic production activities
in Puerto Rico (sec. 318 of the Act and sec.
199 of the Code)............................... 174

19. Modification of tax treatment of certain
payments to controlling exempt organizations
(sec. 319 of the Act and sec. 512 of the Code). 175

20. Treatment of certain dividends of regulated
investment companies (sec. 320 of the Act and
sec. 871(k) of the Code)....................... 177

21. RIC qualified investment entity treatment under
FIRPTA (sec. 321 of the Act and secs. 897 and
1445 of the Code).............................. 178

22. Exceptions for active financing income (sec.
322 of the Act and secs. 953 and 954 of the
Code).......................................... 179

23. Look-thru treatment of payments between related
controlled foreign corporations under foreign
personal holding company rules (sec. 323 of the
Act and sec. 954(c)(6) of the Code)............ 181

24. Exclusion of 100 percent of gain on certain
small business stock (sec. 324 of the Act and
sec. 1202 of the Code)......................... 183

25. Basis adjustment to stock of S corporations
making charitable contributions of property
(sec. 325 of the Act and sec. 1367 of the Code) 185

26. Reduction in recognition period for S
corporation built-in gains tax (sec. 326 of the
Act and sec. 1374 of the Code)................. 186

27. Empowerment zone tax incentives (sec. 327 of
the Act and secs. 1202 and 1391 of the Code)... 189

28. New York Liberty Zone tax-exempt bond financing
(sec. 328 of the Act and sec. 1400L of the
Code).......................................... 194

29. Extension of temporary increase in limit on
cover over of rum excise taxes to Puerto Rico
and the Virgin Islands (sec. 329 of the Act and
sec. 7652(f) of the Code)...................... 194

30. Extension and modification of American Samoa
Economic Development Credit (sec. 330 of the
Act and sec. 119 of Pub. L. No. 109-432)....... 195

31. Bonus depreciation (sec. 331 of the Act and
sec. 168(k) of the Code)....................... 197

TITLE IV--ENERGY TAX EXTENDERS................................... 202

1. Credit for nonbusiness energy property (sec.
401 of the Act and sec. 25C of the Code)....... 202

2. Alternative fuel vehicle refueling property
(sec. 402 of the Act and sec. 30C of the Code). 204

3. Credit for electric motorcycles and three-
wheeled vehicles (sec. 403 of the Act and sec.
30D of the Code)............................... 205

4. Extension and modification of cellulosic
biofuel producer credit (sec. 404 of the Act
and sec. 40 of the Code)....................... 206

5. Incentives for biodiesel and renewable diesel
(sec. 405 of the Act and secs. 40A, 6426, and
6427 of the Code).............................. 208

6. Credit for the production of Indian coal (sec.
406 of the Act and sec. 45 of the Code)........ 210

7. Extension and modification of incentives for
renewable electricity property (sec. 407 of the
Act and secs. 45 and 48 of the Code)........... 211

8. Credit for energy efficient new homes (sec. 408
of the Act and sec. 45L of the Code)........... 213

9. Energy efficient appliance credit (sec. 409 of
the Act and sec. 45M of the Code).............. 214

10. Extension of special depreciation allowance for
cellulosic biofuel plant property (sec. 410 of
the Act and sec. 168(l) of the Code)........... 217

11. Special rule for sales or dispositions to
implement FERC or State electric restructuring
policy for qualified electric utilities (sec.
411 of the Act and sec. 451(i) of the Code).... 218

12. Alternative fuel and alternative fuel mixtures
(sec. 412 of the Act and secs. 6426 and 6427(e)
of the Code)................................... 220

TITLE IX--BUDGET PROVISION....................................... 222

1. Amounts in applicable retirement plans may be
transferred to designated Roth accounts without
distribution (sec. 902 of the Act and sec. 402A
of the Code)................................... 222

Part Thirteen: Customs User Fees and Corporate Estimated Taxes... 229

A. Extension of Custom User Fees............................... 229

B. Time for Payment of Corporate Estimated Taxes............... 230

Appendix: Estimated Budget Effects of Tax Legislation Enacted in
the 112th Congress............................................. 233

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 112th 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 112th
Congress (JCS-2-13), February 2013.
---------------------------------------------------------------------------
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 112th 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, 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, (the ``Code'') unless otherwise
indicated.
Part One 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. 112-5, 112-30, 112-
102, 112-140, and 112-141).
Part Two 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. 112-7, 112-16, 112-21,
112-27, 112-30, and 112-91).
Part Three is an explanation of the provisions of the
Comprehensive 1099 Taxpayer Protection and Repayment of
Exchange Subsidy Overpayments Act of 2011 (Pub. L. No. 112-9).
Part Four is an explanation of the provision repealing
free-choice vouchers in the Department of Defense and Full-Year
Continuing Appropriations Act of 2011 (Pub. L. 112-10).
Part Five is an explanation of the provision relating to
the extension of health coverage tax credit improvements in the
Trade Adjustment Assistance Extension Act of 2011 (Pub. L. No.
112-40).
Part Six is an explanation of the revenue provisions of the
United States-Korea Free Trade Agreement Implementation Act
relating to an increase in the penalty for paid preparers who
fail to comply with earned income tax credit due diligence
requirements, the requirement for certain prisons to provide
information for tax administration, certain fees and the timing
of corporate estimated taxes (Pub. L. No. 112-41).
Part Seven is an explanation of the provisions relating to
the repeal of three-percent withholding on certain payments
made to vendors, extending the work opportunity tax credit to
employers of certain veterans, allowing Treasury to levy up to
100 percent of a payment to a Medicare provider to collect
unpaid taxes, a Treasury study on reducing the amount of the
tax gap owed by federal contractors and a modification of the
calculation of modified adjusted gross income for determining
eligibility for certain healthcare-related programs (Pub. L.
No. 112-56).
Part Eight is an explanation of the provisions relating to
a temporary payroll tax cut (Pub. L. No. 112-78).
Part Nine is an explanation of the provisions relating to
certain airport and airway provisions, and other revenue
provisions in the FAA Modernization and Reform Act of 2012
(Pub. L. No. 112-95).
Part Ten is an explanation of the revenue provisions in the
Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L.
No. 112-96).
Part Eleven is an explanation of the revenue provision of
the National Defense Authorization Act for Fiscal Year 2013
relating to a modification of the definition of public safety
officers.
Part Twelve is an explanation of the revenue provisions of
the American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240)
relating to permanent extension of certain individual income
tax and estate and gift provisions, other temporary individual
tax relief provisions and temporary extension of certain other
expiring provisions.
Part Thirteen is an explanation of the provisions relating
to the extension of custom user fees and the modification of
corporate estimated tax payments. (Pub. L. Nos. 112-42; 112-43,
112-96, and 112-163).
The Appendix provides the estimated budget effects of tax
legislation enacted in the 112th Congress.
The first footnote in each Part gives the legislative
history of each of the Acts of the 112th Congress discussed in
that Part.

PART ONE: HIGHWAY TRUST FUND RELATED LEGISLATION (PUBLIC LAWS 112-5,\2\
112-30,\3\ 112-102,\4\ 112-140,\5\ AND 112-141 \6\)
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\2\ H.R. 662. The House passed H.R. 662 on March 2, 2011. The bill
passed the Senate without amendment on March 3, 2011. The President
signed the bill on March 4, 2011.
\3\ H.R. 2887. The House passed H.R. 2887 on September 13, 2011.
The bill passed the Senate without amendment on September 15, 2011. The
President signed the bill on September 16, 2011.
\4\ H.R. 4281. The House passed H.R. 4281 on March 29, 2012. The
bill passed the Senate without amendment on March 29, 2012. The
President signed the bill on March 30, 2012.
\5\ H.R. 6064. The House passed H.R. 6064 on June 29, 2012. The
bill passed the Senate without amendment on June 29, 2012. The
President signed the bill on June 29, 2012.
\6\ H.R. 4348. The House passed H.R. 4348 on April 18, 2012. The
Senate Committee on Finance reported S. 2132 on February 27, 2012, with
a report (S. Rep. No. 112-152). The Senate passed H.R. 4348 with an
amendment incorporating the text of S. 1813 on April 24, 2012. The
conference report was filed on June 28, 2012 (H.R. Rep. No. 112-557)
and was passed by the House on June 29, 2012, and the Senate on June
29, 2012. The President signed the bill on July 6, 2012.
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A. Short-Term Extensions of Highway Trust Fund Expenditure and Tax
Authority (Public Laws 112-5, 112-30, 112-102, 112-140 and 112-141)

Present Law

Under present law, the Internal Revenue Code (sec. 9503)
authorizes expenditures (subject to appropriations) to be made
from the Highway Trust Fund (and Sport Fish Restoration and
Boating Trust Fund) through March 4, 2011, for purposes
provided in specified authorizing legislation as in effect on
the date of enactment. The taxes dedicated to the Highway Trust
Fund and Leaking Underground Storage Tank Trust Fund are
authorized through September 30, 2011.

Explanation of Provisions

Pub. L. No. 112-5 (the ``Surface Transportation Extension Act of
2011'')
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund through
September 30, 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. It also extends
the expenditure authority for the Sport Fish Restoration and
Boating Trust Fund through September 30, 2011.

Effective Date

The provision is effective March 4, 2011.
Pub. L. No. 112-30 (the ``Surface and Air Transportation Programs
Extension Act of 2011'')
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund through
March 31, 2012. 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 March 31, 2012. The highway-related
taxes are also extended through March 31, 2012.

Effective Date

The provision is effective October 1, 2011.
Pub. L. No. 112-102 (the ``Surface Transportation Extension Act of
2012'')
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund through
June 30, 2012. 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 June 30, 2012. Generally, the
highway-related taxes are also extended through June 30, 2012.
The heavy vehicle use tax is extended through September 30,
2013.

Effective Date

The provision is effective April 1, 2012.
Pub. L. No. 112-140 (the ``Temporary Surface Transportation Extension
Act of 2012'')
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund through
July 6, 2012. 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 July 6, 2012. Generally, the
highway-related taxes are also extended through July 6, 2012.
The Act makes a technical correction to the heavy vehicle use
tax to provide that the taxable period means any year beginning
before July 1, 2013, and ends at the close of September 30,
2013.

Effective Date

In general, the provision is effective on June 29, 2012.
The technical correction to the heavy vehicle use tax takes
effect as if included in section 402 of the Surface
Transportation Extension Act of 2012.

B. Short-Term Extensions of the Leaking Underground Storage Tank Trust
Fund Financing Rate (Public Laws 112-30, 112-102, and 112-140)

Present Law

Explanation of Provision

Pub. L. No. 112-30 (the ``Surface and Air Transportation Programs
Extension Act of 2011'')
This provision extends the LUST Trust Fund financing rate
through March 31, 2012.

Effective Date

The provision is effective October 1, 2011.
Pub. L. No. 112-102 (the ``Surface Transportation Extension Act of
2012'')
This provision extends the LUST Trust Fund financing rate
through June 30, 2012.

Effective Date

The provision is effective April 1, 2012.
Pub. L. No. 112-140 (the ``Temporary Surface Transportation Extension
Act of 2012'')
This provision extends the LUST Trust Fund financing rate
through July 6, 2012.\9\
---------------------------------------------------------------------------
\9\ The LUST Trust Fund financing rate was further extended through
September 30, 2016 by Pub. L. No. 112-141 (Moving Ahead for Progress in
the 21st Century Act'' or the ``MAP-21''), discussed infra.
---------------------------------------------------------------------------

Effective Date

The provision is effective on June 29, 2012.

C. Revenue Provisions in the Moving Ahead for Progress in the 21st
Century Act or the ``MAP-21'' (Public Law 112-141)

1. Extension of trust fund expenditure authority and extension of
highway-related taxes (sec. 40101 and 40102 of the Act, and
secs. 4041, 4051, 4071, 4081, 4221, 4481, 4483, 6412, 9503,
9504, and 9508 of the Code)

Present Law Highway Trust Fund Taxes

In general
Six separate excise taxes are imposed to finance the
Federal Highway Trust Fund program. Three of these taxes are
imposed on highway motor fuels. The remaining three are a
retail sales tax on heavy highway vehicles, a manufacturers'
excise tax on heavy vehicle tires, and an annual use tax on
heavy vehicles. A substantial majority of the revenues produced
by the Highway Trust Fund excise taxes are derived from the
taxes on motor fuels. The annual use tax on heavy vehicles
expires October 1, 2013. Except for 4.3 cents per gallon of the
Highway Trust Fund fuels tax rates, the remaining taxes are
scheduled to expire after June 30, 2012. The 4.3-cents-per-
gallon portion of the fuels tax rates is permanent.\10\ The six
taxes are summarized below.
---------------------------------------------------------------------------
\10\ This portion of the tax rates was enacted as a deficit
reduction measure in 1993. Receipts from it were retained in the
General Fund until 1997 legislation provided for their transfer to the
Highway Trust Fund.
---------------------------------------------------------------------------
Highway motor fuels taxes
The Highway Trust Fund motor fuels tax rates are as
follows: \11\
---------------------------------------------------------------------------
\11\ Secs. 4081(a)(2)(A)(i), 4081(a)(2)(A)(iii), 4041(a)(2),
4041(a)(3), and 4041(m). Some of these fuels also are subject to an
additional 0.1-cent-per-gallon excise tax to fund the LUST Trust Fund
(secs. 4041(d) and 4081(a)(2)(B)).

------------------------------------------------------------------------
Gasoline............................... 18.3 cents per gallon
Diesel fuel and kerosene............... 24.3 cents per gallon
Alternative fuels...................... 18.3 or 24.3 cents per gallon
generally \12\

Non-fuel Highway Trust Fund excise taxes
---------------------------------------------------------------------------
\12\ See secs. 4041(a)(2), 4041(a)(3), and 4041(m).
---------------------------------------------------------------------------
In addition to the highway motor fuels excise tax revenues,
the Highway Trust Fund receives revenues produced by three
excise taxes imposed exclusively on heavy highway vehicles or
tires. These taxes are:
1. A 12-percent excise tax imposed on the first
retail sale of heavy highway vehicles, tractors, and
trailers (generally, trucks having a gross vehicle
weight in excess of 33,000 pounds and trailers having
such a weight in excess of 26,000 pounds); \13\
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\13\ Sec. 4051.
---------------------------------------------------------------------------
2. An excise tax imposed on highway tires with a
rated load capacity exceeding 3,500 pounds, generally
at a rate of 0.945 cents per 10 pounds of excess; \14\
and
---------------------------------------------------------------------------
\14\ Sec. 4071.
---------------------------------------------------------------------------
3. An annual use tax imposed on highway vehicles
having a taxable gross weight of 55,000 pounds or
more.\15\ (The maximum rate for this tax is $550 per
year, imposed on vehicles having a taxable gross weight
over 75,000 pounds.)
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\15\ Sec. 4481.
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The taxable year for the annual use tax is from July 1st
through June 30th of the following year. For the period July 1,
2013, through September 30, 2013, the amount of the annual use
tax is reduced by 75 percent.\16\
---------------------------------------------------------------------------
\16\ Sec. 4482(c)(4) and (d).
---------------------------------------------------------------------------

Present Law Highway Trust Fund Expenditure Provisions

In general
Under present law, revenues from the highway excise taxes,
as imposed through June 30, 2012, generally are dedicated to
the Highway Trust Fund. Dedication of excise tax revenues to
the Highway Trust Fund and expenditures from the Highway Trust
Fund are governed by the Code.\17\ The Code authorizes
expenditures (subject to appropriations) from the Highway Trust
Fund through June 30, 2012, for the purposes provided in
authorizing legislation, as such legislation was in effect on
the date of enactment of the Surface Transportation Extension
Act of 2012.
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\17\ Sec. 9503. The Highway Trust Fund statutory provisions were
placed in the Internal Revenue Code in 1982.
---------------------------------------------------------------------------
Highway Trust Fund expenditure purposes
The Highway Trust Fund has a separate account for mass
transit, the Mass Transit Account.\18\ The Highway Trust Fund
and the Mass Transit Account are funding sources for specific
programs.
---------------------------------------------------------------------------
\18\ Sec. 9503(e)(1).
---------------------------------------------------------------------------
Highway Trust Fund expenditure purposes have been revised
with each authorization Act enacted since establishment of the
Highway Trust Fund in 1956. In general, expenditures authorized
under those Acts (as the Acts were in effect on the date of
enactment of the most recent such authorizing Act) are
specified by the Code as Highway Trust Fund expenditure
purposes.\19\ The Code provides that the authority to make
expenditures from the Highway Trust Fund expires after June 30,
2012. Thus, no Highway Trust Fund expenditures may occur after
June 30, 2012, without an amendment to the Code.
---------------------------------------------------------------------------
\19\ The authorizing Acts that currently are referenced in the
Highway Trust Fund provisions of the Code are: the Highway Revenue Act
of 1956; Titles I and II of the Surface Transportation Assistance Act
of 1982; the Surface Transportation and Uniform Relocation Act of 1987;
the Intermodal Surface Transportation Efficiency Act of 1991; the
Transportation Equity Act for the 21st Century, the Surface
Transportation Extension Act of 2003, the Surface Transportation
Extension Act of 2004; the Surface Transportation Extension Act of
2004, Part II; the Surface Transportation Extension Act of 2004, Part
III; the Surface Transportation Extension Act of 2004, Part IV; the
Surface Transportation Extension Act of 2004, Part V; the Safe,
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy
for Users; the SAFETEA-LU Technical Corrections Act of 2008; the
Surface Transportation Extension Act of 2010; the Surface
Transportation Extension Act of 2010, Part II; the Surface
Transportation Extension Act of 2011; the Surface Transportation
Extension Act of 2011, Part II, and the Surface Transportation
Extension Act of 2012.
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As noted above, section 9503 appropriates to the Highway
Trust Fund amounts equivalent to the taxes received from the
following: the taxes on diesel, gasoline, kerosene and special
motor fuel, the tax on tires, the annual heavy vehicle use tax,
and the tax on the retail sale of heavy trucks and
trailers.\20\ Section 9601 provides that amounts appropriated
to a trust fund pursuant to sections 9501 through 9511, are to
be transferred at least monthly from the General Fund of the
Treasury to such trust fund on the basis of estimates made by
the Secretary of the Treasury of the amounts referred to in the
Code section appropriating the amounts to such trust fund. The
Code requires that proper adjustments be made in amounts
subsequently transferred to the extent prior estimates were in
excess of, or less than, the amounts required to be
transferred.
---------------------------------------------------------------------------
\20\ Sec. 9503(b)(1).
---------------------------------------------------------------------------

Reasons for Change \21\
---------------------------------------------------------------------------

\21\ See S. Rep. 112-152 (February 27, 2012) at 5 (the Committee
report accompanying S. 2132, the ``Highway Investment, Job Creation,
and Economic Growth Act of 2012'' as reported by the Senate Committee
on Finance).
---------------------------------------------------------------------------
Communities and businesses depend on effective
transportation to help them grow. The projects funded by the
Highway Trust Fund ensure safety and mobility, sustain and
create jobs, reduce traffic congestion, improve air quality and
fund infrastructure projects of regional and national
significance across the country. Therefore, Congress believes
it is appropriate to reauthorize Highway Trust Fund
expenditures through September 30, 2014, and to extend current
Federal taxes payable to the Highway Trust Fund.

Explanation of Provision

The Act provides for expenditure authority through
September 30, 2014. The Code provisions governing the purposes
for which monies in the Highway Trust Fund may be spent are
updated to include the reauthorization bill, MAP-21. Cross-
references to the reauthorization bill in the Code provisions
governing the Sport Fish Restoration and Boating Trust Fund are
also updated to include the conference agreement bill. In
general, the provision extends the taxes dedicated to the
Highway Trust Fund at their present law rates through September
30, 2016, and for the heavy vehicle use tax, through September
30, 2017.\22\
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\22\ The LUST Trust Fund financing rate also is extended through
September 30, 2016. The provision also corrects a potential drafting
ambiguity regarding the taxable period as reflected in prior
legislation. The provision is effective as if included in section 142
of the Surface Transportation Extension Act of 2011, Part II.
---------------------------------------------------------------------------

Effective Date

The provision is effective July 1, 2012.
2. Transfer from Leaking Underground Storage Tank Trust Fund to Highway
Trust Fund (sec. 40201 of the Act, and sec. 9503 and 9508 of
the Code)

Present Law

Leaking Underground Storage Tank Trust Fund financing rate
Fuels of a type subject to other trust fund excise taxes
generally are subject to an add-on excise tax of 0.1-cent-per-
gallon to fund the Leaking Underground Storage Tank (``LUST'')
Trust Fund.\23\ For example, the LUST excise tax applies to
gasoline, diesel fuel, kerosene, and most alternative fuels
subject to highway and aviation fuels excise taxes, and to
fuels subject to the inland waterways fuel excise tax. This
excise tax is imposed on both uses and parties subject to the
other taxes, and to situations (other than export) in which the
fuel otherwise is tax-exempt. For example, off-highway business
use of gasoline and off-highway use of diesel fuel and kerosene
generally are exempt from highway motor fuels excise tax.
Similarly, States and local governments and certain other
parties are exempt from such tax. Nonetheless, all such uses
and parties are subject to the 0.1-cent-per-gallon LUST excise
tax.
---------------------------------------------------------------------------
\23\ Secs. 4041, 4042, and 4081.
---------------------------------------------------------------------------
Liquefied natural gas, compressed natural gas, and
liquefied petroleum gas are exempt from the LUST tax.
Additionally, methanol and ethanol fuels produced from coal
(including peat) are taxed at a reduced rate of 0.05 cents per
gallon.
The LUST tax is scheduled to expire after June 30,
2012.\24\
---------------------------------------------------------------------------
\24\ For Federal budget scorekeeping purposes, the LUST Trust Fund
tax, like other excise taxes dedicated to trust funds, is assumed to be
permanent.
---------------------------------------------------------------------------
Overview of Leaking Underground Storage Tank Trust Fund expenditure
provisions
Amounts in the LUST Trust Fund are available, as provided
in appropriations Acts, for purposes of making expenditures to
carry out sections 9003(h)-(j), 9004(f), 9005(c), and 9010-9013
of the Solid Waste Disposal Act as in effect on the date of
enactment of Public Law 109-168. Any claim filed against the
LUST Trust Fund may be paid only out of such fund, and the
liability of the United States for claims is limited to the
amount in the fund.
The monies in the LUST Trust Fund are used to pay expenses
incurred by the Environmental Protection Agency (the ``EPA'')
and the States for preventing, detecting, and cleaning up leaks
from petroleum underground storage tanks, as well as programs
to evaluate the compatibility of fuel storage tanks with
alternative fuels, MTBE additives, and ethanol and biodiesel
blends.
The EPA makes grants to States to implement the program,
and States use cleanup funds primarily to oversee and enforce
corrective actions by responsible parties. States and EPA also
use cleanup funds to conduct corrective actions where no
responsible party has been identified, where a responsible
party fails to comply with a cleanup order, in the event of an
emergency, and to take cost recovery actions against parties.
In 2005, Congress authorized the EPA and States to use trust
fund monies for non-cleanup purposes as well, specifically for
administration and enforcement of the leak prevention
requirements of the UST program.\25\
---------------------------------------------------------------------------
\25\ Pub. L. No. 109-58.
---------------------------------------------------------------------------

Reasons for Change \26\
---------------------------------------------------------------------------

\26\ See S. Rep. 112-152 (February 27, 2012) at 13.
---------------------------------------------------------------------------
Revenues deposited in the LUST Trust Fund have exceeded
outlays and the Fund has a surplus balance. The Highway Trust
Fund primarily relies on motor fuel excise taxes for its
revenues. Congress believes that since the LUST tax is
collected on motor fuels, it is appropriate to fund highway
projects with a portion of such motor fuel tax receipts.

Explanation of Provision

The provision transfers $2.4 billion from the LUST Trust
Fund to the Highway Account of the Highway Trust Fund.

Effective Date

The provision is effective on the date of enactment.
3. Pension funding stabilization (sec. 40211 of the Act, sec. 430 of
the Code, and secs. 101(f) and 303 of ERISA)

Present Law

Minimum funding rules
Defined benefit plans are subject to minimum funding rules
that generally require the sponsoring employer to make a
certain level of contribution for each plan year to fund plan
benefits.\27\ Parallel rules apply under the Employee
Retirement Income Security Act of 1974 (``ERISA''), which is
generally in the jurisdiction of the Department of Labor.\28\
The minimum funding rules for single-employer defined benefit
plans were substantially revised by the Pension Protection Act
of 2006 (``PPA'').\29\
---------------------------------------------------------------------------
\27\ Sec. 412. A number of exceptions to the minimum funding rules
apply. For example, governmental plans (within the meaning of section
414(d)) and church plans (within the meaning of section 414(e)) are
generally not subject to the minimum funding rules. Under section 4971,
an excise tax applies to an employer maintaining a single-employer plan
if the minimum funding requirements are not satisfied.
\28\ Sec. 302 of ERISA.
\29\ Pub. L. No. 109-280. The PPA minimum funding rules for single-
employer plans 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, eligible charity plans, and single-
employer plans affected by settlement agreements with the Pension
Benefit Guaranty Corporation. Subsequent changes to the single-employer
plan and multiemployer plan funding rules (including temporary funding
relief) were made by the Worker, Retiree, and Employer Recovery Act of
2008 (``WRERA''), Pub. L. No. 110-458, and the Preservation of Access
to Care for Medicare Beneficiaries and Pension Relief Act of 2010
(``PRA 2010''), Public Law 111-192.
---------------------------------------------------------------------------
Minimum required contributions
In general
The minimum required contribution for a plan year for a
single-employer defined benefit plan generally depends on a
comparison of the value of the plan's assets, reduced by any
prefunding balance or funding standard carryover balance (``net
value of plan assets''),\30\ with the plan's funding target and
target normal cost. 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 generally the present value of benefits expected
to accrue or to be earned during the plan year.
---------------------------------------------------------------------------
\30\ The value of plan assets is generally reduced by any
prefunding balance or funding standard carryover balance in determining
minimum required contributions. A prefunding balance results from
contributions to a plan that exceed the minimum required contributions.
A funding standard carryover balance results from a positive balance in
the funding standard account that applied under the funding
requirements in effect before PPA. Subject to certain conditions, a
prefunding balance or funding standard carryover balance may be
credited against the minimum required contribution for a year, reducing
the amount that must be contributed.
---------------------------------------------------------------------------
If the net value of plan assets is less than the plan's
funding target, so that the plan has a funding shortfall
(discussed further below), the minimum required contribution is
the sum of the plan's target normal cost and the shortfall
amortization charge for the plan year (determined as described
below).\31\ If the net value of plan assets is equal to or
exceeds the plan's funding target, the minimum required
contribution is the plan's target normal cost, reduced by the
amount, if any, by which the net value of plan assets exceeds
the plan's funding target.
---------------------------------------------------------------------------
\31\ If the plan has obtained a waiver of the minimum required
contribution (a funding waiver) within the past five years, the minimum
required contribution also includes the related waiver amortization
charge, that is, the annual installment needed to amortize the waived
amount in level installments over the five years following the year of
the waiver.
---------------------------------------------------------------------------
Shortfall amortization charge
The shortfall amortization charge for a plan year is the
sum of the annual shortfall amortization installments
attributable to the shortfall bases for that plan year and the
six previous plan years. Generally, if a plan has a funding
shortfall for the plan year, a shortfall amortization base must
be established for the plan year.\32\ A plan's funding
shortfall is the amount by which the plan's funding target
exceeds the net value of plan 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 the six
previous plan years. The shortfall amortization base is
amortized in level annual installments (``shortfall
amortization installments'') over a seven-year period beginning
with the current plan year and using the segment interest rates
(discussed below).\33\
---------------------------------------------------------------------------
\32\ If the value of plan assets, reduced only by any prefunding
balance if the employer elects to apply the prefunding balance against
the required contribution for the plan year, is at least equal to the
plan's funding target, no shortfall amortization base is established
for the year.
\33\ Under PRA 2010, employers were permitted to elect to use one
of two alternative extended amortization schedules for up to two
``eligible'' plan years during the period 2008-2011. The use of an
extended amortization schedule has the effect of reducing the amount of
the shortfall amortization installments attributable to the shortfall
amortization base for the eligible plan year. However, the shortfall
amortization installments attributable to an eligible plan year may be
increased by an additional amount, an ``installment acceleration
amount,'' in the case of employee compensation exceeding $1 million,
extraordinary dividends, or stock redemptions within a certain period
of the eligible plan year.
---------------------------------------------------------------------------
The shortfall amortization base for a plan year may be
positive or negative, depending on whether the present value of
remaining installments with respect to amortization bases for
previous years is more or less than the plan's funding
shortfall. If the shortfall amortization base is positive (that
is, the funding shortfall exceeds the present value of the
remaining installments), the related shortfall amortization
installments are positive. If the shortfall amortization base
is negative, the related shortfall amortization installments
are negative. The positive and negative shortfall amortization
installments for a particular plan year are netted when adding
them up 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 net value of plan assets for a plan year is at least
equal to the plan's funding target for the year, so the plan
has no funding shortfall, any shortfall amortization bases and
related shortfall amortization installments are eliminated.\34\
As indicated above, if the net value of plan assets exceeds the
plan's funding target, the excess is applied against target
normal cost in determining the minimum required contribution.
---------------------------------------------------------------------------
\34\ Any amortization base relating to a funding waiver for a
previous year is also eliminated.
---------------------------------------------------------------------------
Interest rate used to determine target normal cost and funding target
The minimum funding rules for single-employer plans specify
the interest rates and other actuarial assumptions that must be
used in determining the present value of benefits for purposes
of 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 at the end of the 15-year period. Each segment rate is
a single interest rate determined monthly by the Secretary of
the Treasury (``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 Internal Revenue Service
(IRS) publishes the segment rates each month.
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 employer, any of the four months preceding the month that
includes the valuation date.
Solely for purposes of determining minimum required
contributions, in lieu of the segment rates described above, an
employer may elect to use interest rates on a yield curve based
on the yields on investment grade corporate bonds for the month
preceding the month in which the plan year begins (i.e.,
without regard to the 24-month averaging described above)
(``monthly yield curve''). If an election to use a monthly
yield curve is made, it cannot be revoked without IRS approval.
Use of segment rates for other purposes
In general
In addition to being used to determine a plan's funding
target and target normal cost, the segment rates are used also
for other purposes, either directly because the segment rates
themselves are specifically cross-referenced or indirectly
because funding target, target normal cost, or some other
concept, such as funding target attainment percentage
(discussed below) in which funding target or target normal cost
is an element, is cross-referenced elsewhere.
Funding target attainment percentage
A plan's funding target attainment percentage for a plan
year is the ratio, expressed as a percentage, that the net
value of plan assets bears to the plan's funding target for the
year. Special rules may apply to a plan if its funding target
attainment percentage is below a certain level. For example,
funding target attainment percentage is used to determine
whether a plan is in ``at-risk'' status, so that special
actuarial assumptions (``at-risk assumptions'') must be used in
determining the plan's funding target and target normal
cost.\35\ A plan is in at risk status for a plan year if, for
the preceding year: (1) the plan's funding target attainment
percentage, determined without regard to the at-risk
assumptions, was less than 80 percent, and (2) the plan's
funding target attainment percentage, determined using the at-
risk assumptions (without regard to whether the plan was in at-
risk status for the preceding year), was less than 70
percent.\36\ In addition, as discussed below, special reporting
to the Pension Benefit Guaranty Corporation (``PBGC'') may be
required if a plan's funding target attainment percentage is
less than 80 percent.
---------------------------------------------------------------------------
\35\ If a plan is in at-risk status, under section 409A(b)(3),
limitations apply on the employer's ability to set aside assets to
provide benefits under a nonqualified deferred compensation plan.
\36\ A similar test applies in order for an employer to be
permitted to apply a prefunding balance against its required
contribution, that is, for the preceding year, the ratio of the value
of plan assets (reduced by any prefunding balance) must be at least 80
percent of the plan's funding target (determined without regard to the
at-risk rules).
---------------------------------------------------------------------------
Restrictions on benefit increases, certain types of
benefits and benefit accruals (collectively referred to as
``benefit restrictions'') may apply to a plan if the plan's
adjusted funding target attainment percentage is below a
certain level.\37\ Adjusted funding target attainment
percentage is determined in the same way as funding target
attainment percentage, except that the net value of plan 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. Although anti-cutback rules generally
prohibit reductions in benefits that have already been earned
under a plan,\38\ reductions required to comply with the
benefit restrictions are permitted.
---------------------------------------------------------------------------
\37\ Code sec. 436 and ERISA sec. 206(g).
\38\ Code sec. 411(d)(6) and ERISA sec. 204(g).
---------------------------------------------------------------------------
Minimum and maximum lump sums, limits on deductible
contributions, retiree health
Defined benefit plans commonly allow a participant to
choose among various forms of benefit offered under the plan,
such as a lump-sum distribution. These optional forms of
benefit generally must be actuarially equivalent to the life
annuity benefit payable to the participant at normal retirement
age. For certain forms of benefit, such as lump sums, the
benefit amount cannot be less than the amount determined using
the segment rates and a specified mortality table.\39\ For this
purpose, however, the segment rates are determined on a monthly
basis, rather than using a 24-month average of corporate bond
rates.
---------------------------------------------------------------------------
\39\ Code sec. 417(e) and ERISA sec. 205(g).
---------------------------------------------------------------------------
The amount of benefits under a defined benefit plan are
subject to certain limits.\40\ The segment rates used in
determining minimum lump sums (and certain other forms of
benefit) are also used in applying the benefit limits to lump
sums, i.e., ``maximum'' lump sums (and the certain other forms
of benefit).
---------------------------------------------------------------------------
\40\ Sec. 415(b).
---------------------------------------------------------------------------
Limits apply to the amount of plan contributions that may
be deducted by an employer.\41\ In the case of a single-
employer defined benefit plan, the plan's funding target and
target normal cost, determined using the segment rates that
apply for funding purposes, are taken into account in
calculating the limit on deductible contributions.
---------------------------------------------------------------------------
\41\ Sec. 404.
---------------------------------------------------------------------------
Subject to various conditions, a qualified transfer of
excess assets of a single-employer defined benefit plan to a
retiree medical account within the plan may be made in order to
fund retiree health benefits.\42\ For this purpose, excess
assets generally means the excess, if any, of the value of the
plan's assets over 125 percent of the sum of the plan's funding
target and target normal cost for the plan year.
---------------------------------------------------------------------------
\42\ Sec. 420. Under present law, a qualified transfer is not
permitted after December 31, 2013.
---------------------------------------------------------------------------
PBGC premiums and 4010 reporting
PBGC premiums apply with respect to defined benefit plans
covered by ERISA.\43\ In the case of a single-employer defined
benefit plan, flat-rate premiums apply at a rate of $35.00 per
participant for 2012.\44\ If a single-employer defined benefit
plan has unfunded vested benefits, variable-rate premiums also
apply at a rate of $9 per $1,000 of unfunded vested benefits
divided by the number of participants. For purposes of
determining variable-rate premiums, unfunded vested benefits
are equal to the excess (if any) of (1) the plan's funding
target for the year determined as under the minimum funding
rules, but taking into account only vested benefits, over (2)
the fair market value of plan assets. In determining the plan's
funding target for this purpose, the interest rates used are
segment rates determined as under the minimum funding rules,
but determined on a monthly basis, rather than using a 24-month
average of corporate bond rates.
---------------------------------------------------------------------------
\43\ ERISA sec. 4006.
\44\ Flat-rate premiums apply also to multiemployer defined benefit
plans at a rate of $9.00 per participant. Single-employer and
multiemployer flat-rate premium rates are indexed for inflation. The
rate of variable-rate premiums is not indexed.
---------------------------------------------------------------------------
In certain circumstances, the contributing sponsor of a
single-employer plan defined benefit pension plan covered by
the PBGC (and members of the contributing sponsor's controlled
group) must provide certain information to the PBGC (referred
to as ``section 4010 reporting'').\45\ This information
includes actuarial information with respect to single-employer
plans maintained by the contributing sponsor (and controlled
group members). Section 4010 reporting is required if: (1) the
funding target attainment percentage at the end of the
preceding plan year of a plan maintained by the contributing
sponsor or any member of its controlled group is less than 80
percent; (2) the conditions for imposition of a lien (i.e.,
required contributions totaling more than $1 million have not
been made) have occurred with respect to a plan maintained by
the contributing sponsor or any member of its controlled group;
or (3) minimum funding waivers in excess of $1 million have
been granted with respect to a plan maintained by the
contributing sponsor or any member of its controlled group and
any portion of the waived amount is still outstanding.
---------------------------------------------------------------------------
\45\ ERISA sec. 4010.
---------------------------------------------------------------------------

Annual funding notice

The plan administrator of a defined benefit plan must
provide an annual funding notice to: (1) each participant and
beneficiary; (2) each labor organization representing such
participants or beneficiaries; and (4) the PBGC.\46\
---------------------------------------------------------------------------
\46\ ERISA sec. 101(f). In the case of a multiemployer plan, the
notice must also be sent to each employer that has an obligation to
contribute under the plan.
---------------------------------------------------------------------------
In addition to the information required to be provided in
all funding notices, certain information must be provided in
the case of a single-employer defined benefit plan, including:
a statement as to whether the plan's funding
target attainment percentage (as defined under the
minimum funding rules) for the plan year to which the
notice relates and the two preceding plan years, is at
least 100 percent (and, if not, the actual
percentages); and
a statement of (a) the total assets
(separately stating any funding standard carryover or
prefunding balance) and the plan's liabilities for the
plan year and the two preceding years, determined in
the same manner as under the funding rules, and (b) the
value of the plan's assets and liabilities as of the
last day of the plan year to which the notice relates,
determined using fair market value and the interest
rate used in determining variable rate premiums.
A funding notice may also include any additional
information that the plan administrator elects to include to
the extent not inconsistent with regulations. The notice must
be written so as to be understood by the average plan
participant. As required under PPA, the Secretary of Labor has
issued a model funding notice that can be used to satisfy the
notice requirement.

Explanation of Provision

The provision revises the rules for determining the segment
rates under the single-employer plan funding rules by adjusting
a segment rate if the rate determined under the regular rules
is outside a specified range of the average of the segment
rates for the preceding 25-year period (``average'' segment
rates). In particular, if a segment rate determined for an
applicable month under the regular rules is less than the
applicable minimum percentage, the segment rate is adjusted
upward to match that percentage. If a segment rate determined
for an applicable month under the regular rules is more than
the applicable maximum percentage, the segment rate is adjusted
downward to match that percentage. For this purpose, the
average segment rate is the average of the segment rates
determined under the regular rules for the 25-year period
ending September 30 of the calendar year preceding the calendar
year in which the plan year begins. The Secretary is to
determine average segment rates on an annual basis and may
prescribe equivalent rates for any years in the 25-year period
for which segment rates determined under the regular rules are
not available. The Secretary is directed to publish the average
segment rates each month.
The applicable minimum percentage and the applicable
maximum percentage depend on the calendar year in which the
plan year begins as shown by the following table:

------------------------------------------------------------------------
The applicable The applicable
If the calendar year is: minimum maximum
percentage is: percentage is:
------------------------------------------------------------------------
2012.................................... 90 percent 110 percent
2013.................................... 85 percent 115 percent
2014.................................... 80 percent 120 percent
2015.................................... 75 percent 125 percent
2016 or later........................... 70 percent 130 percent
------------------------------------------------------------------------

Thus, for example, if the first segment rate determined for
an applicable month under the regular rules for a plan year
beginning in 2012 is less than 90 percent of the average of the
first segment rates determined under the regular rules for the
25-year period ending September 30, 2011, the segment rate is
adjusted to 90 percent of the 25-year average.
Under the provision, if, as of the date of enactment, an
employer election is in effect to use a monthly yield curve in
determining minimum required contributions, rather than segment
rates, the employer may revoke the election (and use segment
rates, as modified by the provision) without obtaining IRS
approval. The revocation must be made at any time before the
date that is one year after the date of enactment, and the
revocation will be effective for the first plan year to which
the amendments made by the provision apply and all subsequent
plan years. The employer is not precluded from making a
subsequent election to use a monthly yield curve in determining
minimum required contributions in accordance with present law.
The change in the method of determining segment rates under
the provision generally applies for the purposes for which
segment rates are used under present law, except for purposes
of minimum and maximum lump-sum benefits,\47\ limits on
deductible contributions to single-employer defined benefit
plans, qualified transfers of excess pension assets to retiree
medical accounts,\48\ PBGC variable-rate premiums,\49\ and 4010
reporting to the PBGC.
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\47\ The provision does not provide a specific exception for
determining maximum lump sum benefits. However, because the interest
rates used in determining minimum lump sums apply also in determining
maximum lump sums, the exception for minimum lump sums applies
indirectly to maximum lump sums.
\48\ Sections 40241 and 40242 of the Act extend to December 31,
2021, the ability to make a qualified transfer and allow qualified
transfers to be made to provide group-term life insurance benefits. See
Part One, Section C.4, below.
\49\ Sections 40221 and 40222 of the Act revise PBGC flat-rate and
variable-rate premiums. See Conference Report to accompany H.R. 4348,
the Moving Ahead for Progress in the 21st Century Act, H.R. Rep. No.
112-557, June 28, 2012, pp. 662-663, for an explanation of the PBGC
premium changes.
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Annual funding notice

The provision requires additional information to be
included in the annual funding notice in the case of an
applicable plan year. For this purpose, an applicable plan year
is any plan year beginning after December 31, 2011, and before
January 1, 2015, for which (1) the plan's funding target,
determined using segment rates as adjusted to reflect average
segment rates (``adjusted'' segment rates), is less than 95
percent of the funding target determined without regard to
adjusted segment rates (that is, segment rates determined
without regard to the provision), (2) the plan has a funding
shortfall, determined without regard to adjusted segment rates,
greater than $500,000 and (3) the plan had 50 or more
participants on any day during the preceding plan year.
The additional information that must be provided is:
a statement that MAP-21 modified the method
for determining the interest rates used to determine
the actuarial value of benefits earned under the plan,
providing for a 25-year average of interest rates to be
taken into account in addition to a 2-year average;
a statement that, as a result of MAP-21, the
plan sponsor may contribute less money to the plan when
interest rates are at historical lows, and
a table showing, for the applicable plan
year and each of the two preceding plan years, the
plan's funding target attainment percentage, funding
shortfall, and the employer's minimum required
contribution, each determined both using adjusted
segment rates and without regard to adjusted segment
rates (that is, as under present law). In the case of a
preceding plan year beginning before January 1, 2012,
only the plan's funding target attainment percentage,
funding shortfall, and the employer's minimum required
contribution provided determined without regard to
adjusted segment rates (that is, determined as under
present law before enactment of the provision) are
required to be provided.
As under present law, a funding notice may also include any
additional information that the plan administrator elects to
include to the extent not inconsistent with regulations. For
example, a funding notice may include a statement of the amount
of the employer's actual or planned contributions to the plan.
The Secretary of Labor is directed to modify the model
funding notice required so that the model includes the
additional information in a prominent manner, for example, on a
separate first page before the remainder of the notice.

Effective Date

The provision is generally effective for plan years
beginning after December 31, 2011. Under a special rule, an
employer may elect, for any plan year beginning before January
1, 2013, not to have the provision apply either (1) for all
purposes for which the provision would otherwise apply, or (2)
solely for purposes of determining the plan's adjusted funding
target attainment percentage (used in applying the benefit
restrictions) for that year. A plan is not treated as failing
to meet the requirements of the anti-cutback rules solely by
reason of an election under the special rule.

4. Transfer of excess pension assets (secs. 40241 and 40242 of the Act
and sec. 420 of the Code)

Present Law

Defined benefit pension plan reversions

Defined benefit plan assets generally may not revert to an
employer prior to termination of the plan and satisfaction of
all plan liabilities.\50\ Upon plan termination, the accrued
benefits of all plan participants are required to be 100-
percent vested. A reversion prior to plan termination may
constitute a prohibited transaction and may result in plan
disqualification. Any assets that revert to the employer upon
plan termination are includible in the gross income of the
employer and subject to an excise tax. The excise tax rate is
20 percent if the employer maintains a replacement plan or
makes certain benefit increases in connection with the
termination; if not, the excise tax rate is 50 percent.
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\50\ In addition, a revision may occur only if the terms of the
plan so provide.
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Retiree medical accounts

A defined benefit plan may provide medical benefits to
retired employees through a separate account that is part of
the plan (``retiree medical accounts'').\51\ Medical benefits
provided through a retiree medical account are generally not
includible in the retired employee's gross income.\52\
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\51\ Sec. 401(h) and Treas. Reg. sec. 1.401-1(b).
\52\ Treas. Reg. sec. 1.72-15(h).
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Transfers of excess pension assets

In general
A qualified transfer of excess assets of a defined benefit
plan, including a multiemployer plan,\53\ to a retiree medical
account within the plan may be made in order to fund retiree
health benefits.\54\ A qualified transfer does not result in
plan disqualification, is not a prohibited transaction, and is
not treated as a reversion. Thus, transferred assets are not
includible in the gross income of the employer and are not
subject to the excise tax on reversions. No more than one
qualified transfer may be made in any taxable year. No
qualified transfer may be made after December 31, 2013.
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\53\ The Pension Protection Act of 2006 (``PPA''), Pub. L. No. 109-
280, extended the application of the rules for qualified transfers to
multiemployer plans with respect to transfers made in taxable years
beginning after December 31, 2006.
\54\ Sec. 420.
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Excess assets generally means the excess, if any, of the
value of the plan's assets \55\ over 125 percent of the sum of
the plan's funding target and target normal cost for the plan
year. In addition, excess assets transferred in a qualified
transfer may not exceed the amount reasonably estimated to be
the amount that the employer will pay out of such account
during the taxable year of the transfer for qualified current
retiree health liabilities. No deduction is allowed to the
employer for (1) a qualified transfer, or (2) the payment of
qualified current retiree health liabilities out of transferred
funds (and any income thereon). In addition, no deduction is
allowed for amounts paid other than from transferred funds for
qualified current retiree health liabilities to the extent such
amounts are not greater than the excess of (1) the amount
transferred (and any income thereon), over (2) qualified
current retiree health liabilities paid out of transferred
assets (and any income thereon). An employer may not contribute
any amount to a health benefits account or welfare benefit fund
with respect to qualified current retiree health liabilities
for which transferred assets are required to be used.
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\55\ The value of plan assets for this purpose is the lesser of
fair market value or actuarial value, reduced by any prefunding balance
or standard carryover balance.
---------------------------------------------------------------------------
Transferred assets (and any income thereon) must be used to
pay qualified current retiree health liabilities for the
taxable year of the transfer. Transferred amounts generally
must benefit pension plan participants, other than key
employees, who are entitled upon retirement to receive retiree
medical benefits through the separate account. Retiree health
benefits of key employees may not be paid out of transferred
assets.
Amounts not used to pay qualified current retiree health
liabilities for the taxable year of the transfer are to be
returned to the general assets of the plan. These amounts are
not includible in the gross income of the employer, but are
treated as an employer reversion and are subject to a 20-
percent excise tax.
In order for the transfer to be qualified, accrued
retirement benefits under the pension plan generally must be
100-percent vested as if the plan terminated immediately before
the transfer (or in the case of a participant who separated in
the one-year period ending on the date of the transfer,
immediately before the separation).
In order for a transfer to be qualified, a maintenance of
effort requirement applies, under which the employer generally
must maintain retiree health benefits at the same cost level
for the taxable year of the transfer and the following four
years.
In addition, the Employee Retirement Income Security Act of
1974 (``ERISA'') \56\ provides that, at least 60 days before
the date of a qualified transfer, the employer must notify the
Secretary of Labor, the Secretary of the Treasury, employee
representatives, and the plan administrator of the transfer,
and the plan administrator must notify each plan participant
and beneficiary of the transfer.\57\
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\56\ Pub. L. No. 93-406.
\57\ ERISA sec. 101(e). ERISA also provides that a qualified
transfer is not a prohibited transaction under ERISA or a prohibited
reversion.
---------------------------------------------------------------------------
Qualified future transfers and collectively bargained
transfers
If certain requirements are satisfied, transfers of excess
pension assets under a single-employer plan to retiree medical
accounts to fund the expected cost of retiree medical benefits
are permitted for the current and future years (a ``qualified
future transfer'') and such transfers are also allowed in the
case of benefits provided under a collective bargaining
agreement (a ``collectively bargained transfer'').\58\
Transfers must be made for at least a two-year period. An
employer can elect to make a qualified future transfer or a
collectively bargained transfer rather than a qualified
transfer. A qualified future transfer or collectively bargained
transfer must meet the requirements applicable to qualified
transfers with modifications related to: (1) the determination
of excess pension assets; (2) the limitation on the amount
transferred; and (3) the maintenance of effort requirement. The
general sunset applicable to qualified transfers applies (i.e.,
no transfers can be made after December 31, 2013).
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\58\ The rules for qualified future transfers and collectively
bargained transfers were added by the PPA and apply to transfers after
the date of enactment (August 17, 2006).
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Employer provided group-term life insurance

Group-term life insurance coverage provided under a policy
carried by an employer is includible in the gross income of an
employee (including a former employee) but only to the extent
that the cost exceeds the sum of the cost of $50,000 of such
insurance plus the amount, if any, paid by the employee toward
the purchase of such insurance.\59\ Special rules apply for
determining the cost of group-term life insurance that is
includible in gross income under a discriminatory group-term
life insurance plan.
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\59\ Sec. 79.
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A pension plan may provide life insurance benefits for
employees (including retirees) but only to the extent that the
benefits are incidental to the retirement benefits provided
under the plan.\60\ The cost of term life insurance provided
through a pension plan is includible in the employee's gross
income.\61\
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\60\ Treas. Reg. sec. 1.401-1(b).
\61\ Secs. 72(m)(3) and 79(b)(3).
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Explanation of Provision

Extension of existing provisions

The Act allows qualified transfers, qualified future
transfers, and collectively bargained transfers to retiree
medical accounts to be made through December 31, 2021. No
transfers are permitted after that date.

Transfers to fund retiree group-term life insurance permitted

The Act allows qualified transfers, qualified future
transfers, and collectively bargained transfers to be made to
fund the purchase of retiree group-term life insurance. The
assets transferred for the purchase of group-term life
insurance must be maintained in a separate account within the
plan (``retiree life insurance account''), which must be
separate both from the assets in the retiree medical account
and from the other assets in the defined benefit plan.
Under the Act, the general rule that the cost of group-term
life insurance coverage provided under a defined benefit plan
is includable in gross income of the participant does not apply
to group-term life insurance provided through a retiree life
insurance account. Instead, the general rule for determining
the amount of employer-provided group-term life insurance that
is includible in gross income applies. However, group-term life
insurance coverage is permitted to be provided through a
retiree life insurance account only to the extent that it is
not includible in gross income. Thus, generally, only group-
term life insurance not in excess of $50,000 may be purchased
with such transferred assets.
Generally, the present law rules for transfers of excess
pension assets to retiree medical accounts to fund retiree
health benefits also apply to transfers to retiree life
insurance accounts to fund retiree group-term life. However,
generally, the rules are applied separately. Thus, for example,
the one-transfer-a-year rule generally applies separately to
transfers to retiree life insurance accounts and transfers to
retiree medical accounts. Further, the maintenance of effort
requirement for qualified transfers applies separately to life
insurance benefits and health benefits. Similarly, for
qualified future transfers and collectively bargained transfers
for retiree group-term life insurance, the maintenance of
effort and other special rules are applied separately to
transfers to retiree life insurance accounts and retiree
medical accounts.
Reflecting the inherent differences between life insurance
coverage and health coverage, certain rules are not applied to
transfers to retiree life insurance accounts, such as the
special rules allowing the employer to elect to the determine
the applicable employer cost for health coverage during the
cost maintenance period separately for retirees eligible for
Medicare and retirees not eligible for Medicare. However, a
separate test is allowed for the cost of retiree group-term
life insurance for retirees under age 65 and those retirees who
have reached age 65.
The Act makes other technical and conforming changes to the
rules for transfers to fund retiree health benefits and removes
certain obsolete (``deadwood'') rules.
The same sunset applicable to qualified transfers,
qualified future transfers, and collectively bargained
transfers to retiree medical accounts applies to transfers to
retiree life insurance accounts (i.e., no transfers can be made
after December 31, 2021).

Effective Date

The provision applies to transfers made after the date of
enactment.

5. Additional transfers to the Highway Trust Fund (sec. 40251 of the
Act and sec. 9503 of the Code)

Present Law

Public Law No. 111-46, an Act to restore funds to the
Highway Trust Fund, provided that out of money in the Treasury
not otherwise appropriated, $7 billion was appropriated to the
Highway Trust Fund effective August 7, 2009. The Hiring
Incentives to Restore Employment Act (the ``HIRE Act'')
provided that out of money in the Treasury not otherwise
appropriated, $14,700,000,000 is appropriated to the Highway
Trust Fund and $4,800,000,000 is appropriated to the Mass
Transit Account in the Highway Trust Fund.

Explanation of Provision

The Act provides that out of money in the Treasury not
otherwise appropriated, the following transfers are to be made
from the General Fund to the Highway Trust Fund:

------------------------------------------------------------------------
FY 2013 FY 2014
------------------------------------------------------------------------
Highway Account......................... $6.2 billion $10.4 billion
Mass Transit Account.................... .............. 2.2 billion
------------------------------------------------------------------------

Effective Date

The provision is effective on the date of enactment.

6. Exception from early distribution tax for annuities under phased
retirement program (sec. 100121(c) of the Act and sec. 72(t) of
the Code)

Present Law

The Code imposes an early distribution tax on distributions
made from qualified retirement plans before an employee attains
age 59\1/2\.\62\ The tax is equal to 10 percent of the amount
of the distribution that is includible in gross income. The 10-
percent tax is in addition to the taxes that would otherwise be
due on distribution. Certain exceptions to the early
distribution tax apply including an exception for distributions
after separation from service with the employer after attaining
age 55, or in the form of substantially equal periodic payments
from the qualified retirement plan commencing after separation
from service at any age. However, there is no exception for
annuity payments that commence before separating from service
with the employer.
---------------------------------------------------------------------------
\62\ Sec. 72(t). The early distribution tax also applies to
distributions from section 403(b) plans and IRAs but does not apply to
distributions from governmental section 457(b) plans.
---------------------------------------------------------------------------

Explanation of Provision

The Act includes a new Federal Phased Retirement Program
under which a Federal agency may allow a full-time retirement
eligible employee to elect to enter phased retirement status in
accordance with regulations issued by the Office of Personnel
Management (OPM).\63\ During that status, generally, the
employee's work schedule is a percentage of a full time work
schedule, and the employee receives a phased retirement
annuity. At full-time retirement, the phased retiree is
entitled to a composite retirement annuity that also includes
the portion of the employee's retirement annuity attributable
to the reduced work schedule. The Act includes an exception to
the early distribution tax for payments under a phased
retirement annuity and a composite retirement annuity received
by an employee participating in this new Federal Phased
Retirement Program.
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\63\ See Conference Report to accompany H.R. 4348, the Moving Ahead
for Progress in the 21st Century Act, H.R. Rep. No. 112-557, June 28,
2012, pp. 666-667, for an explanation of the new Federal Phased
Retirement Program.
---------------------------------------------------------------------------

Effective Date

The provision is effective on the effective date of
implementing regulations issued by OPM implementing the Federal
Phased Retirement Program.

7. Expand the definition of a tobacco manufacturer to include
businesses making available roll-your-own cigarette machines
for consumer use (sec. 100122 of the Act and sec. 5702(d) of
the Code)

Present Law

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: \64\
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\64\ Sec. 5701.
---------------------------------------------------------------------------
Cigars weighing not more than three pounds
per thousand (``small cigars'') are taxed at the rate
of $50.33 per thousand;
Cigars weighing more than three pounds 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 40.26 cents per cigar;
Cigarettes weighing not more than three
pounds per thousand (``small cigarettes'') are taxed at
the rate of $50.33 per thousand ($1.0066 per pack);
Cigarettes weighing more than three pounds
per thousand (``large cigarettes'') are taxed at the
rate of $105.69 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
3.15 cents 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
6.30 cents 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 $1.51 per
pound, and proportionately at that rate on all
fractional parts of a pound;
Chewing tobacco is taxed at the rate of
50.33 cents 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.
In general, the excise tax on tobacco products and
cigarette papers and tubes manufactured in the United States
comes into existence when the products are manufactured and is
determined and payable when the tobacco products or cigarette
papers and tubes are removed from the bonded premises of the
manufacturer. ``Tobacco products'' means cigars, cigarettes,
smokeless tobacco (snuff and chewing tobacco), pipe tobacco,
and roll your own tobacco. Processed tobacco is regulated under
the internal revenue laws but no excise tax is imposed. Tobacco
products and cigarette papers and tubes may be exported from
the United States without payment of tax.
Manufacturers and importers of tobacco products or
processed tobacco are subject to certain permitting, bonding,
reporting, and record keeping requirements. ``Manufacturer of
tobacco products'' means any person who manufactures cigars,
cigarettes, smokeless tobacco, pipe tobacco, or roll-your-own
tobacco. There is an exception for a person who produces these
products for their own personal consumption or use.

Explanation of Provision

The Act amends the definition of manufacturer of tobacco
products to include any person who for commercial purposes
makes available machines capable of making tobacco products for
consumer use. This includes making a machine available for
consumers to produce tobacco products for personal consumption
or use. The addition of this provision is not intended to
change the treatment of such machines under present law. A
person who sells a machine directly to a consumer at retail for
the consumer's personal home use is not a manufacturer of
tobacco products under the provision if the machine is not used
at a retail establishment and is designed to produce only
personal use quantities.
For purposes of imposing the tax liability, the person
making the machine available for consumer use is deemed to be
the person making the removal with respect to any tobacco
products manufactured by the machine.

Effective Date

The provision is effective for articles removed after the
date of enactment (July 6, 2012).

PART TWO: AIRPORT AND AIRWAY TRUST FUND SHORT-TERM EXTENSIONS (PUBLIC
LAWS 112-7,\65\ 112-16,\66\ 112-21,\67\ 112-27,\68\ 112-30,\69\ AND
112-91 \70\)
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\65\ H.R. 662. The House passed H.R. 1079 on March 29, 2011. The
bill passed the Senate without amendment on March 29, 2011. The
President signed the bill on March 31, 2011.
\66\ H.R. 1893. The House passed H.R. 1893 on May 23, 2011. The
bill passed the Senate without amendment on May 24, 2011. The President
signed the bill on May 31, 2011.
\67\ H.R. 2779. The House passed H.R. 2779 on Jun 24, 2011. The
bill passed the Senate without amendment on June 27, 2011. The
President signed the bill on June 29, 2011.
\68\ H.R. 2553. The House passed H.R. 2553 on July 20, 2011. The
bill passed the Senate without amendment on August 5, 2011. The
President signed the bill on August 5, 2011.
\69\ H.R. 2887. The House passed H.R. 2887 on September 13, 2011.
The bill passed the Senate without amendment on September 15, 2011. The
President signed the bill on September 16, 2011.
\70\ H.R. 3800. The House passed H.R. 3800 on January 24, 2012. The
bill passed the Senate without amendment on January 26, 2012. The
President signed the bill on January 31, 2012.
---------------------------------------------------------------------------

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, 2011. Expenditure authority for the
Airport and Airway Trust Fund was scheduled to terminate after
March 31, 2011.

Explanation of Provisions \71\
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\71\ See also Part Nine of this General Explanation for a
description of the trust fund and related tax provisions of the ``FAA
Modernization and Reform Act of 2012'' (Pub. L. No. 112-95) which
includes a provision that extends the Airport and Airway Trust Fund
excise taxes and expenditure authority through September 30, 2015.
---------------------------------------------------------------------------
Pub. L. No. 112-7 (the ``Airport and Airway Extension Act of 2011'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through May 31, 2011.
Pub. L. No. 112-16 (the ``Airport and Airway Extension Act of 2011,
Part II'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through June 30, 2011.
Pub. L. No. 112-21 (the ``Airport and Airway Extension Act of 2011,
Part III'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through July 22, 2011.
Pub. L. No. 112-27 (the ``Airport and Airway Extension Act of 2011,
Part IV'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through September 16,
2011.
Pub. L. No. 112-30 (the ``Surface and Air Transportation Programs
Extension Act of 2011, Title II, the ``Airport and Airway
Extension Act of 2011, Part V,'' secs. 202-203)
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through January 31,
2012.
Pub. L. No. 112-91 (the ``Airport and Airway Extension Act of 2012)
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through February 17,
2012.

PART THREE: COMPREHENSIVE 1099 TAXPAYER PROTECTION AND REPAYMENT OF
EXCHANGE SUBSIDY OVERPAYMENTS ACT OF 2011 (PUBLIC LAW 112-9) \72\
---------------------------------------------------------------------------

\72\ H.R. 4. The House Committee on Ways and Means reported H.R. 4
on February 22, 2011 (H.R. Rep. No. 112-15). The House passed H.R. 4 on
March 3, 2011. The bill passed the Senate without amendment on April 5,
2011. The President signed the bill on April 14, 2011.
---------------------------------------------------------------------------

A. Repeal of Expansion of Information Reporting Requirements (sec. 2 of
the Act and sec. 6041 of the Code)

Present Law

A variety of information reporting requirements apply under
present law.\73\ 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.\74\ 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 by regulation.\75\ Another carveout excepts payments to
corporations from reporting requirements.\76\
---------------------------------------------------------------------------
\73\ Secs. 6031 through 6060.
\74\ Sec. 6041(a). Information returns are generally submitted
electronically on Forms 1096 and Forms 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).
\75\ Sec. 6041(a) requires reporting of payments ``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.
\76\ Treas. Reg. sec. 1.6041-3(p).
---------------------------------------------------------------------------
For payments made after December 31, 2011, the class of
payments subject to reporting was expanded in two ways.\77\
First, the regulatory carveout for payments to corporations was
expressly overridden by the addition of section 6041(i). In
addition, information reporting requirements were expanded to
include gross proceeds paid in consideration for any type of
property. 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.\78\ The regulations
generally except from reporting payments to exempt
organizations, governmental entities, international
organizations, or retirement plans.
---------------------------------------------------------------------------
\77\ The Patient Protection and Affordable Care Act, Pub. L. No.
111-148, sec. 9006 (March 23, 2010).
\78\ 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.
---------------------------------------------------------------------------
Additionally, the requirement that businesses report
certain payments is generally not applicable to payments by
persons engaged in a passive investment activity. However,
beginning in 2011, recipients of rental income from real estate
generally are subject to the same information reporting
requirements as taxpayers engaged in a trade or business.\79\
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.\80\
---------------------------------------------------------------------------
\79\ Sec. 6041(h); Small Business Jobs Act of 2010, Pub. L. No.
111-240, sec. 2101 (Sept. 27, 2010).
\80\ Treasury has not promulgated regulations defining these
``minimal amounts of rental income'' or ``hardship'' cases.
---------------------------------------------------------------------------
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).\81\ 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.\82\ That information is then
used to complete the Form 1099.
---------------------------------------------------------------------------
\81\ Secs. 6042 (dividends), 6045 (broker reporting) and 6049
(interest), as well as the Treasury regulations thereunder.
\82\ See Treas. Reg. sec. 31.3406(h)-3.
---------------------------------------------------------------------------
Failure to comply with the information reporting
requirements results in penalties, which may include a penalty
for failure to file the information return,\83\ a penalty for
failure to furnish payee statements,\84\ or failure to comply
with other various reporting requirements.\85\
---------------------------------------------------------------------------
\83\ Sec. 6721.
\84\ Sec. 6722.
\85\ Sec. 6723.
---------------------------------------------------------------------------

Reasons for Change

Congress understands that there is a significant tax gap,
or difference between the amount of tax owed by taxpayers and
the amount voluntarily paid to the IRS, that must be addressed.
Congress also recognizes that information reporting
requirements generally improve taxpayer compliance. However,
Congress is concerned that the expansion of the information
reporting requirements imposes a substantial tax compliance
burden on small businesses, including costs to acquire new
software or pay for additional accounting services. Congress
believes this burden is disproportionate as compared with any
resulting improvement in tax compliance and therefore believes
that these requirements should be repealed in their entirety.
Congress will continue to explore other potential solutions to
the tax gap problem.

Explanation of Provision

Under the provision, the changes to section 6041 enacted
under section 9006 of the Patient Protection and Affordable
Care Act that provide rules for payments to corporations,
provide additional regulatory authority and impose a reporting
requirement with respect to gross proceeds from property, are
repealed in their entirety.

Effective Date

This provision is effective for payments made after
December 31, 2011.

B. Repeal of Information Reporting Requirements with Respect to Real
Estate Expenses (sec. 3 of the Act and sec. 6041 of the Code)

Present Law

A variety of information reporting requirements apply under
present law.\86\ 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.\87\ 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 by regulation.\88\ Another carveout excepts payments to
corporations from reporting requirements.\89\
---------------------------------------------------------------------------
\86\ Secs. 6031 through 6060.
\87\ Sec. 6041(a). Information returns are generally submitted
electronically on Forms 1096 and Forms 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).
\88\ Sec. 6041(a) requires reporting of payments ``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.
\89\ Treas. Reg. sec. 1.6041-3(p).
---------------------------------------------------------------------------
For payments made after December 31, 2011, the class of
payments subject to reporting was expanded in two ways.\90\
First, the regulatory carveout for payments to corporations was
expressly overridden by the addition of section 6041(i). In
addition, information reporting requirements were expanded to
include gross proceeds paid in consideration for any type of
property. 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.\91\ The regulations
generally except from reporting payments to exempt
organizations, governmental entities, international
organizations, or retirement plans.
---------------------------------------------------------------------------
\90\ The Patient Protection and Affordable Care Act, Pub. L. No.
111-148, sec. 9006 (March 23, 2010).
\91\ 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.
---------------------------------------------------------------------------
Additionally, the requirement that businesses report
certain payments is generally not applicable to payments by
persons engaged in a passive investment activity. However,
beginning in 2011, recipients of rental income from real estate
generally are subject to the same information reporting
requirements as taxpayers engaged in a trade or business.\92\
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.\93\
---------------------------------------------------------------------------
\92\ Sec. 6041(h); Small Business Jobs Act of 2010, Pub. L. No.
111-240, sec. 2101 (Sept. 27, 2010).
\93\ Treasury has not promulgated regulations defining these
``minimal amounts of rental income'' or ``hardship'' cases.
---------------------------------------------------------------------------
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).\94\ 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.\95\ That information is then
used to complete the Form 1099.
---------------------------------------------------------------------------
\94\ Secs. 6042 (dividends), 6045 (broker reporting) and 6049
(interest), as well as the Treasury regulations thereunder.
\95\ See Treas. Reg. sec. 31.3406(h)-3.
---------------------------------------------------------------------------
Failure to comply with the information reporting
requirements results in penalties, which may include a penalty
for failure to file the information return,\96\ and a penalty
for failure to furnish payee statements \97\ or failure to
comply with other various reporting requirements.\98\
---------------------------------------------------------------------------
\96\ Sec. 6721.
\97\ Sec. 6722.
\98\ Sec. 6723.
---------------------------------------------------------------------------

Reasons for Change \99\

---------------------------------------------------------------------------
\99\ See H.R. 705, The ``Comprehensive 1099 Taxpayer Protection and
Repayment of Exchange Subsidy Overpayments Act of 2011,'' which was
reported by the House Ways and Means Committee on February 22, 2011,
pp. 7-8, H.R. Rep. No. 112-16.
---------------------------------------------------------------------------
Congress understands that there is a significant tax gap,
or difference between the amount of tax owed by taxpayers and
the amount voluntarily paid to the IRS, that must be addressed.
Congress also recognizes that information reporting
requirements generally improve taxpayer compliance. However,
Congress is concerned that the expansion of the information
reporting requirements to owners of rental real estate imposes
a significant tax compliance burden on taxpayers who are not
otherwise engaged in business activity. Congress believes this
burden is disproportionate as compared with any resulting
improvement in tax compliance and therefore believes that these
requirements should be repealed in their entirety. Congress
will continue to explore other potential solutions to the tax
gap problem.

Explanation of Provision

Under the provision, recipients of rental income from real
estate who are not otherwise considered to be engaged in a
trade or business of renting property are not subject to the
same information reporting requirements as taxpayers who are
considered to be engaged in a trade or business. As a result,
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 not required to provide
an information return (typically Form 1099-MISC) to the IRS and
to the service provider.

Effective Date

The provision is effective for payments made after December
31, 2010.

C. Increase in Amount of Overpayment of Health Care Credit Which Is
Subject to Recapture (sec. 4 of the Act and sec. 36B of the Code)

Present Law

Premium assistance credit

For taxable years ending after December 31, 2013, a
refundable tax credit (the ``premium assistance credit'') is
provided for eligible individuals and families who purchase
health insurance through an American Health Benefit Exchange.
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 American Health
Benefit Exchange.
The premium assistance credit is 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 who are not eligible for certain other
health insurance.\100\ 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)
any amount 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.\101\ 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.
---------------------------------------------------------------------------
\100\ 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.
\101\ The definition of modified adjusted gross income used in
section 36B is incorporated by reference for purposes of determining
eligibility to participate in certain other healthcare-related
programs, such as reduced cost-sharing (section 1402 of PPACA),
Medicaid for the nonelderly (section 1902(e) of the Social Security Act
(42 U.S.C. 1396a(e)) as modified by section 2002(a) of PPACA) and the
Children's Health Insurance Program (section 2102(b)(1)(B) of the
Social Security Act (42 U.S.C. 1397bb(b)(1)(B)) as modified by section
2101(d) of PPACA).
---------------------------------------------------------------------------
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 subsidize the cost of private health insurance
premiums. The premium assistance credit amount is determined
based on the percentage of income the individual's or family's
share 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. After 2014, the percentages of income are
indexed to the excess of premium growth over income growth for
the preceding calendar year. After 2018, if the aggregate
amount of premium assistance credits and cost-sharing
reductions \102\ 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.
---------------------------------------------------------------------------
\102\ As described in section 1402 of PPACA.

TABLE 1.--THE PREMIUM ASSISTANCE CREDIT PHASE-OUT
------------------------------------------------------------------------
Initial
Household income (expressed as a percent premium Final premium
of FPL) (percentage) (percentage)
------------------------------------------------------------------------
100% up to 133%......................... 2.0 2.0
133% up to 150%......................... 3.0 4.0
150% up to 200%......................... 4.0 6.3
200% up to 250%......................... 6.3 8.05
250% up to 300%......................... 8.05 9.5
300% up to 400%......................... 9.5 9.5
------------------------------------------------------------------------

Minimum essential coverage and employer offer of health insurance
coverage

Generally, if an employee is offered minimum essential
coverage \103\ in the group market, including employer-provided
health insurance coverage, the individual is ineligible for the
premium assistance credit for health insurance purchased
through an American Health Benefit Exchange.
---------------------------------------------------------------------------
\103\ As defined in section 5000A(f).
---------------------------------------------------------------------------
If an employee's share of the premium for self-only
coverage exceeds 9.5 percent of an employee's household income
or the plan's share of total allowed cost of provided benefits
is less than 60 percent of such costs, the employee can be
eligible for the premium assistance credit. Premium assistance
tax credit eligibility requires that an employee decline
enrollment in employer-offered coverage and satisfy the
conditions for receiving a premium assistance tax credit
through an American Health Benefit Exchange.

Reconciliation

If the premium assistance credit received through advance
payment exceeds the amount of premium assistance credit to
which the taxpayer is entitled for the taxable year, the
liability for the overpayment must be reflected on the
taxpayer's income tax return for the taxable year subject to a
limitation on the amount of such liability. For persons with
household income below 500 percent of FPL, the liability for
the overpayment for a taxable year is limited to a specific
dollar amount (the ``applicable dollar amount'') as shown in
Table 2 below (one-half of the applicable dollar amount shown
in Table 2 for unmarried individuals who are not surviving
spouses or filing as heads of households).\104\
---------------------------------------------------------------------------
\104\ Section 36B(f)(2), as amended by section 208 of the Medicare
and Medicaid Extenders Act of 2010, Pub. L. No. 111-309. Prior to the
Medicare and Medicaid Extenders Act of 2010, for persons whose
household income was below 400 percent 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).

TABLE 2.--RECONCILIATION
------------------------------------------------------------------------
Household Income (expressed as a percent
of FPL) Applicable Dollar 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 credit for a taxable year
received through advance payment is less than the amount of the
credit to which the taxpayer is entitled for the year, the
shortfall in the credit is also reflected on the taxpayer's tax
return for the year.

Reasons for Change \105\

---------------------------------------------------------------------------
\105\ See H.R. 705, The ``Comprehensive 1099 Taxpayer Protection
and Repayment of Exchange Subsidy Overpayments Act of 2011,'' which was
reported by the House Ways and Means Committee on February 22, 2011,
pp. 7-8, H.R. Rep. No. 112-16.
---------------------------------------------------------------------------
Congress believes that taxpayers with household income of
at least 200 percent of FPL but less than 400 percent of FPL
should be required to repay a portion of the overpayment of the
premium assistance credit received. Congress believes that it
is equitable to increase the current repayment rates for these
individuals. Furthermore, Congress never intended for a
taxpayer with a household income that is 400 percent of FPL or
above to be eligible for premium assistance credits. Thus, for
any taxpayer with household income that is 400 percent of FPL
or above, Congress believes the taxpayer should be required to
repay the full amount of any overpayment of the advance premium
assistance credit.

Explanation of Provision

Under the provision, the applicable dollar amounts with
respect to overpayments of advance premium assistance credit
for a taxable year are revised as shown in Table 3 below (one
half of the applicable dollar amount shown in Table 3 for
unmarried individuals who are not surviving spouses or filing
as heads of households).\106\
---------------------------------------------------------------------------
\106\ As discussed in Part Seven, Section E, the definition of
modified adjusted gross income applicable for purposes of the credit
was amended by Pub. L. No. 112-56. As amended, modified adjusted gross
income is defined as adjusted gross income increased by: (1) any amount
excluded by section 911 (the exclusion from gross income for citizens
or residents living abroad), (2) any tax-exempt interest received or
accrued during the tax year, and (3) an amount equal to the portion of
the taxpayer's Social Security benefits (as defined in section 86(d))
that is excluded from income under section 86 (that is, the amount of
the taxpayer's Social Security benefits that are excluded from gross
income).

TABLE 3.--RECONCILIATION
------------------------------------------------------------------------
Household Income (expressed as a percent
of FPL) Applicable Dollar Amount
------------------------------------------------------------------------
Less than 200%............................ $600
At least 200% but less than 300%.......... $1,500
At least 300% but less than 400%.......... $2,500
------------------------------------------------------------------------

Persons with household incomes of 400 percent of FPL and
above must repay the full amount of the premium assistance
credit received through an advance payment.

Effective Date

The provision applies to taxable years ending after
December 31, 2013.

PART FOUR: REVENUE PROVISION OF THE DEPARTMENT OF DEFENSE AND FULL-YEAR
CONTINUING APPROPRIATIONS ACT OF 2011 (PUBLIC LAW 112-10) \107\
---------------------------------------------------------------------------

\107\ H.R. 1473. The House passed H.R. 1473 on April 14, 2011. The
bill passed the Senate without amendment on April 14, 2011. The
President signed the bill on April 15, 2011.
---------------------------------------------------------------------------

A. Free Choice Vouchers (sec. 1858 of the Act and secs. 36B, 139D and
4980H of the Code)

Present Law

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
(``free choice voucher'') whose value can be applied to
purchase of a health plan through an American Health Benefit
Exchange.\108\ 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 \109\ 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.
---------------------------------------------------------------------------
\108\ Section 10108 of PPACA.
\109\ In the case of years after 2014, the eight percent and the
9.8 percent are indexed to reflect the excess of premium growth over
income growth.
---------------------------------------------------------------------------
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.\110\ The value of the voucher
is for self-only coverage unless the individual purchases
family coverage in the American Health Benefit Exchange. 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 for determining the
``applicable premium'' for purposes of the continuation
coverage requirements under the Public Health Service Act
(``PHSA''),\111\ except that the amount is adjusted for age and
category of enrollment in accordance with regulations
established by the Secretary.
---------------------------------------------------------------------------
\110\ 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 plan 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.
\111\ Sec. 2204 of the PHSA, 42 U.S.C. 300bb-4.
---------------------------------------------------------------------------
Vouchers can be used in the American Health Benefit
Exchange towards the monthly premium of any qualified health
plan in the American Health Benefit 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.\112\ 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.
---------------------------------------------------------------------------
\112\ Sec. 139D.
---------------------------------------------------------------------------
If an individual receives a voucher, the individual is
disqualified from receiving any premium assistance tax credit
or reduced cost-sharing credit with respect to a plan purchased
through the American Health Benefit Exchange.\113\ Similarly,
if an employee receives a free choice voucher, the employee's
employer is not assessed an employer responsibility payment
with respect to that employee.\114\
---------------------------------------------------------------------------
\113\ Sec. 36B and section 1402 of PPACA.
\114\ Sec. 4980H(b)(3). Under section 6056, employers are required
to provide information relating to costs paid under their health plans.
---------------------------------------------------------------------------

Explanation of Provision

The provision repeals the statutory provisions relating to
free choice vouchers.

Effective Date

The provision is effective as if included in the provisions
of, and the amendments made by, the provisions of PPACA to
which they relate.

PART FIVE: REVENUE PROVISIONS OF THE TRADE ADJUSTMENT ASSISTANCE
EXTENSION ACT OF 2011 (PUBLIC LAW 112-40) \115\
---------------------------------------------------------------------------

\115\ H.R. 2832. The House passed H.R. 2832 on September 7, 2011.
The bill passed the Senate with an amendment on September 22, 2011. The
House agreed to the Senate amendment on October 12, 2011. The President
signed the bill on October 21, 2011.
---------------------------------------------------------------------------

A. Health Coverage Improvements (secs. 241-243 of the Act and secs. 35,
4980B, 7527 and 9801 of the Code)

Present Law

In general
In the case of taxpayers who are eligible individuals,\116\
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 \117\ 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 for the qualified health
insurance. The credit is available on an advance payment basis
once a qualified health insurance costs credit eligibility
certificate is in effect.\118\
---------------------------------------------------------------------------
\116\ 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.
\117\ 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.
\118\ Sec. 7527.
---------------------------------------------------------------------------
The American Recovery and Reinvestment Act of 2009 and Omnibus Trade
Act of 2010
The American Recovery and Reinvestment Act of 2009 \119\
(``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:
---------------------------------------------------------------------------
\119\ Pub. L. No. 111-5.
---------------------------------------------------------------------------
ARRA increased 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 provided 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.\120\ 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.
---------------------------------------------------------------------------
\120\ This ARRA provision generally applies to months beginning
after December 31, 2008 (rather than February 17, 2009) and before
January 1, 2011.
---------------------------------------------------------------------------
ARRA required that the qualified health insurance costs
credit eligibility certificate provided in connection with the
advance payment of the HCTC must include certain additional
information.\121\
---------------------------------------------------------------------------
\121\ This ARRA provision applies for certificates issued after
August 17, 2009 and months beginning before January 1, 2011.
---------------------------------------------------------------------------
ARRA modified 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.\122\
---------------------------------------------------------------------------
\122\ 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 provided 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.\123\
---------------------------------------------------------------------------
\123\ This ARRA provision generally applies to months beginning
after December 31, 2009 (rather than February 17, 2009) and before
January 1, 2011.
---------------------------------------------------------------------------
ARRA expanded the definition of qualified health insurance
by including coverage under an employee benefit plan funded by
a voluntary employees' beneficiary association \124\ (``VEBA'')
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.
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\124\ Sec. 501(c)(9).
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Under ARRA, in determining if there has been a 63-day lapse
in coverage (which determines, in part, if 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.\125\
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\125\ This ARRA provision applies to plan years beginning after
February 17, 2009, and before January 1, 2011.
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ARRA modified the maximum required COBRA continuation
coverage period \126\ 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.\127\
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\126\ The Consolidated Omnibus Reconciliation Act of 1985
(``COBRA'') requires that a group health plan 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. Sec. 4980B. 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. Similar requirements apply under the Employee Retirement Income
Security Act of 1974 and the Public Health Service Act.
\127\ This ARRA provision is effective for periods of coverage that
would, without regard to the provision, end on or after February 17,
1009, provided that the provision does not extend any periods of
coverage beyond December 31, 2010.
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The Omnibus Trade Act of 2010 \128\ extended the temporary
changes to the HCTC and related provisions made by ARRA so that
the ARRA changes generally apply also to months beginning (or,
for certain provisions, plan years beginning or events
occurring) after December 31, 2010 and before February 13,
2011.\129\
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\128\ Pub. L. No. 111-344.
\129\ 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.
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Explanation of Provision

The Act extends the temporary changes to the HCTC and
related provisions so that the changes generally apply also to
months beginning (or, for certain provisions, plan years
beginning or events occurring) after February 12, 2011 and
before January 1, 2014.\130\ For months beginning after
February 12, 2011, and before January 1, 2014, the credit rate
is 72.5 percent. The HCTC is terminated for months beginning
after December 31, 2013.
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\130\ Special transition rules apply with respect to the extension
of certain provisions.
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Effective Date

The provision is generally effective for months beginning,
plan years beginning, or events occurring after February 12,
2011.

PART SIX: REVENUE PROVISIONS OF THE UNITED STATES-KOREA FREE TRADE
AGREEMENT IMPLEMENTATION ACT (PUBLIC LAW 112-41) \131\
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\131\ H.R. 3080. The House Committee on Ways and Means reported
H.R. 3080 on October 6, 2011 (H. Rep. No. 112-239). The House passed
H.R. 3080 on October 12, 2011. The bill passed the Senate without
amendment on October 12, 2011. The President signed the bill on October
21, 2011.
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A. Increase in Penalty on Paid Preparers Who Fail To Comply With Earned
Income Tax Credit Due Diligence Requirements (sec. 501 of the Act and
sec. 6695(g) of the Code)

Present Law

Under Section 6695(g) of the Code, paid preparers who fail
to comply with earned income tax credit due diligence
requirements are fined $100 per return.

Reason for Change

Congress believes it is appropriate to increase the penalty
for paid preparers who fail to comply with earned income tax
credit due diligence requirements to deter non-compliance and
for budgetary offset purposes.

Explanation of Provision

The Act increases the penalty for paid preparers who fail
to comply with earned income tax credit due diligence
requirements from $100 to $500 per return. The increased
penalty applies to returns required to be filed after December
31, 2011.

Effective Date

The provision is effective for returns required to be filed
after December 31, 2011.

B. Requirement For Prisons Located in the United States To Provide
Information for Tax Administration (sec. 502 of the Act )

Present Law

No provision.

Reason for Change

The information provided will assist in detecting and
deterring fraudulent tax return filings from inmates. Congress
believes it is appropriate to identify inmates who are filing
fraudulent tax returns and for budgetary offset purposes.

Explanation of Provision

The Act requires the head of the Federal Bureau of Prisons
and the head of any State agency that administers prisons to
provide certain information regarding inmates incarcerated, in
electronic format, to the Secretary of the Treasury. The
information must be filed no later than September 15, 2012, and
annually thereafter.\132\
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\132\ The information with respect to each inmate is: (1) first,
middle, and last name, (2) date of birth, (3) institution of current
incarceration or, for released inmates, most recent incarceration, (4)
prison assigned inmate number, (5) the date of incarceration, (6) the
date of release or anticipated date of release, (7) the date of work
release, (8) taxpayer identification number and whether the prison has
verified such number, (9) last known address, and (10) any additional
information as the Secretary may request.
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Effective Date

The provision is effective on the date of enactment
(October 21, 2011).

C. Merchandise Processing Fee (sec. 503 of the Act)

Present Law

Section 8101 of the Omnibus Budget Reconciliation Act of
1986 (`OBRA') authorizes the Secretary of the Treasury to
collect a merchandise processing fee for formal and informal
entries in order to offset the salaries and expenses that will
likely be incurred by the Customs Service in the processing of
entries and releases. This authority has been consistently
extended. Provided for under 19 U.S.C. 58c(a)(9)-(10), the
merchandise processing fee is assessed on all goods entered or
released from non-trade agreement partner countries. Presently,
an ad valorem fee of 0.21 percent is mandated for merchandise
that is entered formally. The fee is assessed on the value of
the merchandise being imported, not including duty, freight,
and insurance charges. The current minimum fee is $21, and the
maximum fee is $485. Goods that are entered informally are
charged a fee pursuant to a three-tiered flat rate fee table,
depending on whether the fee is filed manually or
electronically. The fee for informal entries ranges from $2.00
to $9.00 per shipment. The present fee level has been in place
since 1995.

Reason for Change

Congress believes it is appropriate to increase the
merchandise processing fees to address increased costs Customs
and Border Protection has incurred as a result of the increased
volume of trade and additional operational initiatives since
the last legislative change to the merchandise processing fee
in 1995.

Explanation of Provision \133\
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\133\ All public laws enacted in the 112th Congress affecting this
provision are described in Part Thirteen of this document.
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The Act increases the ad valorem fee collected by Customs
and Border Protection that offsets the costs incurred in
processing and inspecting imports from 0.21 percent to 0.3464
percent. This is the first increase in this fee since 1995.

Effective Date

The provision is effective on the date of enactment
(October 21, 2011).

D. Customs User Fees (sec. 504 of the Act)

Present Law

Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (`COBRA') authorizes the Secretary
of the Treasury to collect passenger and conveyance processing
fees and the merchandise processing fees. Section 412 of the
Homeland Security Act of 2002 authorized the Secretary of the
Treasury to delegate such authority to the Secretary of
Homeland Security. COBRA has been amended on several occasions.
The current authorization for the collection of the passenger
and conveyance processing fees is through January 14, 2020. The
current authorization for the collection of the Merchandise
Processing Fee is through January 7, 2020.

Reason for Change

Congress believes it is appropriate to extend the passenger
and conveyance processing fees authorized under COBRA for
budgetary offset purposes.

Explanation of Provision \134\

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\134\ All public laws enacted in the 112th Congress affecting this
provision are described in Part Thirteen of this document.
---------------------------------------------------------------------------
The Act extends the passenger and conveyance processing
fees and the merchandise processing fees authorized under
Section 13031 of the Consolidated Omnibus Budget Reconciliation
Act of 1985 (`COBRA') through December 8, 2020 and August 2,
2021, respectively.

Effective Date

The provision is effective on the date of enactment
(October 21, 2011).

E. Time for Payment of Corporate Estimated Taxes (sec. 505 of the Act )

Present Law

In general, corporations are required to make quarterly
estimated tax payments of their income tax liability. For a
corporation whose taxable year is a calendar year, these
estimated tax payments must be made by April 15, June 15,
September 15, and December 15.

Reason for Change

Congress believes it is appropriate to adjust the corporate
estimated tax payments for budgetary offset purposes.

Explanation of Provision \135\

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\135\ All public laws enacted in the 112th Congress affecting this
provision are described in Part Thirteen of this Explanation.
---------------------------------------------------------------------------
For corporations with assets of at least $1 billion, the
Act increases the amount of the required installment of
estimated tax otherwise due in July, August, or September of
2012 by 0.25 percent of such amount and increases the amount of
the required installment of estimated tax otherwise due in
July, August, or September of 2016 by 2.75 percent of such
amount (determined without regard to any increase in such
amount not contained in the Internal Revenue Code). The next
required installment is reduced to reflect the prior increase.

Effective Date

The provision is effective on the date of enactment
(October 21, 2011).

PART SEVEN: REPEAL OF THREE-PERCENT WITHHOLDING ON CERTAIN PAYMENTS
MADE TO VENDORS, WORK OPPORTUNITY TAX CREDIT FOR VETERANS, OTHER
PROVISIONS RELATED TO FEDERAL VENDORS AND MODIFICATION TO AGI
CALCULATION FOR DETERMINING CERTAIN HEALTHCARE PROGRAM ELIGIBILITY
(PUBLIC LAW 112-56) \136\
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\136\ H.R. 674. The House Committee on Ways and Means reported H.R.
674 (H. Rep. 112-253) on October 18, 2011. The House passed H.R. 674 on
October 27, 2011. The bill passed the Senate with an amendment on
November 10, 2011. The House agreed to the Senate on November 16, 2011.
The President signed the bill on November 21, 2011.
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A. Repeal of Imposition of Three-Percent Withholding on Certain
Payments Made to Vendors by Government Entities (sec. 102 of the Act
and sec. 3402(t) of the Code)

Present Law

In general
Wages paid to employees, including wages and salaries of
employees or elected officials of Federal, State, and local
government units, are subject to withholding of income tax,
which employers are required to collect and remit to the
government. Withholding rates vary depending on the amount of
wages paid, the length of the payroll period, and the number of
withholding allowances claimed by the employee. The withholding
amount is allowed as a credit against the individual taxpayer's
income tax liability. It may be refunded if it is determined,
when a tax return is filed, that the taxpayer's liability is
less than the tax withheld, or additional tax may be due if it
is determined that the taxpayer's liability is more than the
tax withheld.
Certain nonwage payments also may be subject to
withholding. Such payments include pensions,\137\ gambling
proceeds,\138\ Social Security and other specified Federal
payments,\139\ unemployment compensation benefits,\140\ and
reportable payments such as dividends and interest.\141\
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\137\ Payors of pensions are required to withhold from payments
made to payees, unless the payee elects no withholding. Withholding
from periodic payments is at variable rates, parallel to income tax
withholding from wages, whereas withholding from nonperiodic payments
is at a flat 10-percent rate. Sec. 3405(a), (b). Withholding at a rate
of 20 percent is required in the case of an eligible rollover
distribution that is not directly rolled over. Sec. 3405(c).
\138\ Certain gambling proceeds are subject to withholding
obligations which vary depending on the form of wager or game. Sec.
3402(q)(3). Withholding is at a flat rate based on the third lowest
rate of tax applicable to single taxpayers. Sec. 3402(q)(1). If the
winnings are payable to a nonresident alien individual or a foreign
corporation, the withholding regime generally applicable to foreigners
applies instead of the withholding rules for gambling proceeds. Sec.
3402(q)(2).
\139\ Voluntary withholding applies to specified Federal payments
which include Social Security payments, certain payments received as a
result of destruction or damage to crops, certain amounts received as
loans from the Commodity Credit Corporation, and other payments.
\140\ Withholding is voluntary and at a flat 10-percent rate. Sec.
3402(p)(2).
\141\ A variety of payments (such as interest and dividends) are
subject to backup withholding. For example, backup withholding is
required if the payee has not provided a valid taxpayer identification
number (``TIN''). Withholding is at a flat rate based on the fourth
lowest rate of tax applicable to single taxpayers. Sec. 3406.
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Nonbusiness income received by foreign persons from U.S.
sources is generally subject to tax on a gross basis at a rate
of 30 percent (14 percent for certain items of income), which
is collected by withholding at the source of the payment.\142\
The categories of income subject to the 30-percent tax and the
categories for which withholding is required are generally
coextensive, such that determination of the withholding tax
liability determines the substantive liability.
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\142\ Secs. 1441 and 1442.
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Nonwage payments by governmental entities
Other than as described above, tax is not currently
required to be withheld from payments made by government
entities. Effective for payments made after December 31,
2011,\143\ new withholding requirements apply to certain
government payments for goods and services. Specifically,
government entities must withhold three percent of any payments
to persons providing property or services, unless an exception
applies. Exceptions include: 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 this withholding
provision with respect to the employees' services as employees.
Government entities include the government of the United
States, every State, every political subdivision thereof, and
every instrumentality of the foregoing (including multistate
agencies). The withholding requirement applies regardless of
whether the government entity making such payment is the
recipient of the property or services. Political subdivisions
of States (or any instrumentality thereof) with less than $100
million of annual expenditures for property or services that
would otherwise be subject to withholding under this provision
are exempt from the withholding requirement.
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\143\ Sec. 3402(t), which was added by section 511 of TIPRA. Pub.
L. No. 109-222. As originally enacted, its provisions were to be
effective for payments made after December 31, 2010. Section 1511 of
ARRA delayed the effective date until payments made after December 31,
2011. Pub. L. No. 111-5. The regulations, as discussed infra, deferred
the effective date an additional year.
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Payments subject to three-percent withholding 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.
Withholding is not required with respect to government
payments made through Federal, State, or local government
public assistance or public welfare programs for which
eligibility is determined by a needs or income test. For
example, payments under government programs providing food
vouchers or medical assistance to low-income individuals are
not subject to withholding under the provision. However,
payments under government programs to provide health care or
other services that are not based on the needs or income of the
recipients are subject to withholding, including programs where
eligibility is based on the age of the beneficiary.
Three-percent withholding is not required with respect to
payments of wages or 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. In addition, if taxes are actually withheld
from payments under the backup withholding rules, the three-
percent withholding provision is not applicable.
Under final regulations issued by the Secretary of the
Treasury, the withholding (and accompanying reporting)
requirements apply to payments by government entities to any
person providing property or services made after December 31,
2012.\144\ Under these rules, a payment is subject to
withholding if it is $10,000 or more on a payment-by-payment
basis. Multiple payments by a government entity generally will
not be aggregated in applying this $10,000 limit.
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\144\ Treas. Reg. sec. 31.3402(t)-1(d)(1). The final regulations
provide an exception to the section 3402(t) withholding rules for
payments made under a written binding contract (as defined) that was in
effect on December 31, 2012, and is not materially modified. However,
if an existing contract is materially modified (i.e., the contract is
changed such that it materially affects either the payment terms of the
contract or the services or property to be provided under the contract)
after December 31, 2012, payments under the contract become subject to
section 3402(t) withholding. Treas. Reg. sec. 31.3402(t)-1(d)(2).
---------------------------------------------------------------------------

Reasons for Change

Congress understands that poor tax compliance by some
government contractors has been identified as a contributing
factor to the tax gap, or difference between the amount of tax
owed by taxpayers and the amount voluntarily paid to the IRS.
Congress recognizes that withholding and information reporting
requirements can improve taxpayer compliance, but is concerned
that the requirement of three-percent withholding on certain
payments made to vendors by government entities is an overly
broad remedy to this tax gap problem. Congress believes that
this withholding requirement would reduce the cash flow to many
cash-strapped employers that contract with governmental
entities, undermining job creation. Congress further believes
that the looming implementation of this requirement is
contributing to the severe uncertainty facing employers during
this challenging economic time. Moreover, Congress believes
that the withholding requirement imposes substantial costs on
Federal, State, and local governmental agencies required to
withhold payments, including costs to acquire new software or
pay for additional accounting services. In addition to direct
costs of implementation, the possibility that three-percent
withholding will result in increased procurement costs at all
levels of government, as small businesses contracting with
governmental entities adjust their prices to address the
changes in their cash flows, also concerns Congress. Congress
believes these burdens are disproportionate when compared to
the resulting improvement in tax compliance and therefore
believes that the three-percent withholding requirement should
be repealed.

Explanation of Provision

Under the proposal, section 3402(t) enacted under section
511 of TIPRA, is repealed.

Effective Date

The proposal is effective for payments made after December
31, 2011.

B. Returning Heroes and Wounded Warriors Work Opportunity Tax Credits
(sec. 261 of the Act and secs. 51 and 52 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
Two subcategories of veterans qualify for the credit based
on: (1) eligibility for food and nutrition assistance; and (2)
compensation for a service-connected disability.
Food and nutrition assistance
A qualified veteran is a veteran who is certified by the
designated local agency as a member of a family receiving
assistance under a supplemental nutrition assistance program
under the Food and Nutrition Act of 2008 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
supplemental nutrition assistance program under the Food and
Nutrition Act of 2008.
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: (1)
vocational rehabilitation services under an individualized,
written plan for employment under a State plan approved under
the Rehabilitation Act of 1973; (2) under a rehabilitation plan
for veterans carried out under Chapter 31 of Title 38, U.S.
Code; or (3) 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 supplemental nutrition assistance program
benefits recipient
A qualified supplemental nutrition assistance program
benefits 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
and nutrition assistance program under the Food and Nutrition
Act of 2008 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 and nutrition assistance under section 6(o) of the
Food and Nutrition Act of 2008, the six-month requirement is
replaced with a requirement that the family has been receiving
food and nutrition assistance 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 and nutrition assistance program under the Food and
Nutrition Act of 2008.
(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) \145\ 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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\145\ 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 and
nutrition assistance 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 December 31,
2011.

Explanation of Provision

In general

The provision modifies the work opportunity credit with
respect to qualified veterans so that there are now five
subcategories of qualified veterans: (1) in the case of
veterans who were eligible to receive assistance under a
supplemental nutritional assistance program (for at least a
three month period during the year prior to the hiring date)
the employer is entitled to a maximum credit of 40 percent of
$6,000 of qualified first-year wages; (2) in the case of a
qualified veteran who is entitled to compensation for a service
connected disability, who is hired within one year of
discharge, the employer is entitled to a maximum credit of 40
percent of $12,000 of qualified first-year wages; (3) in the
case of a qualified veteran who is entitled to compensation for
a service connected disability, and who has been unemployed for
an aggregate of at least six months during the one year period
ending on the hiring date, the employer is entitled to a
maximum credit of 40 percent of $24,000 of qualified first-year
wages; (4) in the case of a qualified veteran unemployed for at
least four weeks but less than six months (whether or not
consecutive) during the one-year period ending on the date of
hiring, the maximum credit equals 40 percent of $6,000 of
qualified first-year wages; and (5) in the case of a qualified
veteran unemployed for at least six months (whether or not
consecutive) during the one-year period ending on the date of
hiring, the maximum credit equals 40 percent of $14,000 of
qualified first-year wages.

Extension

The Act extends the credit for employers of qualified
veterans through December 31, 2012, but does not extend the
credit for other eligible categories.

Certification rules

Under the Act an otherwise qualified unemployed veteran is
treated as certified by the designated local agency as having
aggregate periods of unemployment (whichever is applicable
under the qualified veterans rules described above) if such
veteran is certified by such agency as being in receipt of
unemployment compensation under a State or Federal law for such
applicable periods.
The Secretary of the Treasury is authorized to provide
alternative methods of certification for unemployed veterans.

Qualified tax-exempt organizations employing qualified veterans

If a qualified tax-exempt organization employs a qualified
veteran (as described above) a tax credit against the FICA
taxes of the organization is allowed on the wages of the
qualified veteran which are paid for the veteran's services in
furtherance of the activities related to the function or
purpose constituting the basis of the organization's exemption
under section 501.
The credit available to such tax-exempt employer for
qualified wages paid to a qualified veteran equals 26 percent
(16.25 percent for employment of 400 hours or less) of
qualified first-year wages. The amount of qualified first-year
wages eligible for the credit is the same as those for non-tax-
exempt employers (i.e., $6,000, $12,000, $14,000 or $24,000,
depending on the category of qualified veteran).
A qualified tax-exempt organization means an employer that
is described in section 501(c) and exempt from tax under
section 501(a).

Transfers to Federal Old-Age and Survivors Insurance Trust Fund

The Social Security Trust Funds are held harmless from the
effects of this provision by a transfer from the Treasury
General Fund.

Treatment of Possessions

The Act provides a reimbursement mechanism for the U.S.
possessions (American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, the Commonwealth of Puerto Rico, and
the United States Virgin Islands). The Treasury Secretary is to
pay to each mirror code possession (Guam, the Commonwealth of
the Northern Mariana Islands, and the United States Virgin
Islands) an amount equal to the loss to that possession as a
result of the Act changes to the qualified veterans rules.
Similarly, the Treasury Secretary is to pay to each non-mirror
Code possession (American Samoa and the Commonwealth of Puerto
Rico) the amount that the Secretary estimates as being equal to
the loss to that possession that would have occurred as a
result of the Act changes if a mirror code tax system had been
in effect in that possession. The Secretary will make this
payment to a non-mirror Code possession only if that possession
establishes to the satisfaction of the Secretary that the
possession has implemented (or, at the discretion of the
Secretary, will implement) an income tax benefit that is
substantially equivalent to the qualified veterans credit
allowed under the Act modifications.
An employer that is allowed a credit against U.S. tax under
the Act with respect to a qualified veteran must reduce the
amount of the credit claimed by the amount of any credit (or,
in the case of a non-mirror Code possession, another tax
benefit) that the employer claims against its possession income
tax.

Effective Date

The provision is effective for individuals who begin work
for the employer after the date of enactment (November 21,
2011).

C. One Hundred-Percent Levy for Payments to Federal Vendors Relating to
Property (sec. 301 of the Act and sec. 6331(h)(3) of the Code)

Present Law

In general

Levy is the IRS's administrative authority to seize a
taxpayer's property, or rights to property, to pay the
taxpayer's tax liability.\146\ Generally, the IRS is entitled
to seize a taxpayer's property by levy if a Federal tax lien
has attached to such property,\147\ and the IRS has provided
both notice of intention to levy \148\ and notice of the right
to an administrative hearing (referred to as a ``collections
due process notice'' or ``CDP notice'' and the hearing is
referred to as the ``CDP hearing'') \149\ at least 30 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.\150\
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\146\ 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.
\147\ Ibid.
\148\ Sec. 6331(d).
\149\ Sec. 6330. The notice and the hearing are referred to
collectively as the CDP requirements.
\150\ Sec. 6321.
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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 when determining whether assessment
of tax without following the normal deficiency procedures is
permitted.\151\
---------------------------------------------------------------------------
\151\ Secs. 6331(d)(3), 6861.
---------------------------------------------------------------------------
The CDP notice (and pre-levy CDP hearing) is not required
if: (1) the Secretary finds that collection would be
jeopardized by delay; (2) the Secretary has served a levy on a
State to collect a Federal tax liability from a State tax
refund; (3) 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; or (4) the
Secretary has served a Federal contractor levy. In each of
these four cases, however, the taxpayer is provided an
opportunity for a hearing within a reasonable period of time
after the levy.\152\
---------------------------------------------------------------------------
\152\ Sec. 6330(f).
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Federal payment levy program

To help the IRS collect taxes more effectively, the
Taxpayer Relief Act of 1997 \153\ 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 (including vendors) that are delinquent on their
tax obligations. With respect to Federal payments to vendors of
goods or services, the continuous levy may be up to 100 percent
of each payment.\154\ The term ``goods or services'' is not
defined in the statute. The levy (either up to 15 percent or up
to 100 percent) generally continues in effect until the
liability is paid or the IRS releases the levy.
---------------------------------------------------------------------------
\153\ Pub. L. No. 105-34.
\154\ Sec. 6331(h)(3).
---------------------------------------------------------------------------
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
these records match, the delinquent taxpayer is provided both
the notice of intention to levy and the CDP notice. If the
taxpayer does not respond after 30 days, the IRS can instruct
FMS to levy the taxpayer's Federal payments. Subsequent
payments are continuously levied until such time that the tax
debt is paid or IRS releases the levy.

Explanation of Provision

The provision clarifies that Treasury can levy up to 100
percent of any payment due to a Federal vendor for the sale or
lease of property, in addition to the sale or lease of goods or
services.

Effective Date

The provision is effective for levies issued after the date
of enactment (November 21, 2011).

D. Study and Report on Reducing the Amount of the Tax Gap Owed by
Federal Contractors (sec. 302 of the Act)

Present Law

The term ``tax gap'' generally refers to the difference
between the taxes that are rightfully owed to the Federal
Government and the amount that is timely paid. Tax gap has been
used over the years to refer to various aspects of
noncompliance and efforts to measure that noncompliance.
According to the IRS, ``The tax gap is the difference between
true tax liability for a given tax year and the amount that is
paid on time. It is comprised of the nonfiling gap, the
underreporting gap, and the underpayment gap.'' That definition
can be said to be a definition of ``gross tax gap.'' To the
extent that the term is describing the portion of the taxes
attributable to noncompliance and unlikely to be paid
regardless of enforcement activity, the term is referring to
``net tax gap.''

Explanation of Provision

The provision requires the Secretary of the Treasury (or
the Secretary's delegate) in consultation with the Director of
the Office of Management and Budget and the heads of such other
Federal agencies as the Secretary determines appropriate, to
conduct a study of the gross tax gap that is attributable to
Federal contractors. The study shall focus on ways to reduce
the amount of Federal tax owed but not paid by persons
submitting bids and proposals for the procurement of property
or services by the Federal government.
The study shall include:
An estimate of the amount of delinquent
taxes owed by Federal contractors;
The extent to which the requirement that
persons submitting bids or proposals certify whether
such persons have delinquent tax debts has improved tax
compliance and been a factor in Federal agency
decisions not to enter into or renew contracts with
such contractors;
In cases in which the Federal agencies
continue to contract with persons who report having
delinquent tax debt, the factors taken into
consideration in awarding such contracts;
The degree of success of the Federal lien
and levy system in recouping delinquent taxes from
Federal contractors;
The number of persons who have been
suspended or debarred because of a delinquent tax debt
over the past three years;
An estimate of the extent to which the
subcontractors under Federal contracts have delinquent
tax debt;
The Federal agencies which have most
frequently awarded contracts to persons notwithstanding
any certification by such person that the person has
delinquent tax debt;
Recommendations on ways to better identify
Federal contractors with delinquent tax debts.
Not later than 12 months after the date of enactment of
this Act, the Secretary of the Treasury shall submit the study
(along with any legislative recommendations) to the Committee
on Ways and Means of the House of Representatives, the
Committee on Finance of the Senate, the Committee on Oversight
and Government Reform of the House of Representatives, and the
Committee on Homeland Security and Government Affairs of the
Senate.

Effective Date

The provision is effective on the date of its enactment
(November 21, 2011).

E. Modification of Calculation of Modified Adjusted Gross Income for
Determining Eligibility for Certain Healthcare-Related Programs (sec.
401 of the Act and sec. 36B of the Code)

Present Law

Premium assistance credit

For taxable years ending after December 31, 2013, a
refundable tax credit (the ``premium assistance credit'') is
provided for eligible individuals and families who purchase
health insurance through an American Health Benefit Exchange.
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 American Health
Benefit Exchange.
The premium assistance credit is 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 who are not eligible for certain other
health insurance.\155\ 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)
any amount 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.\156\ 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.
---------------------------------------------------------------------------
\155\ 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.
\156\ The definition of modified adjusted gross income used in
section 36B is incorporated by reference for purposes of determining
eligibility to participate in certain other healthcare-related
programs, such as reduced cost-sharing (section 1402 of PPACA),
Medicaid for the nonelderly (section 1902(e) of the Social Security Act
(42 U.S.C. 1396a(e)) as modified by section 2002(a) of PPACA) and the
Children's Health Insurance Program (section 2102(b)(1)(B) of the
Social Security Act (42 U.S.C. 1397bb(b)(1)(B)) as modified by section
2101(d) of PPACA).
---------------------------------------------------------------------------
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 subsidize the cost of private health insurance
premiums. The premium assistance credit amount is determined
based on the percentage of income the individual's or family's
share 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. After 2014, the percentages of income are
indexed to the excess of premium growth over income growth for
the preceding calendar year. After 2018, if the aggregate
amount of premium assistance credits and cost-sharing
reductions \157\ 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.
---------------------------------------------------------------------------
\157\ As described in section 1402 of PPACA.

TABLE 1--THE PREMIUM ASSISTANCE CREDIT PHASE-OUT
------------------------------------------------------------------------
Household income (expressed as a Initial premium Final premium
percent of FPL) (percentage) (percentage)
------------------------------------------------------------------------
100% up to 133%................. 2.0 2.0
133% up to 150%................. 3.0 4.0
150% up to 200%................. 4.0 6.3
200% up to 250%................. 6.3 8.05
250% up to 300%................. 8.05 9.5
300% up to 400%................. 9.5 9.5
------------------------------------------------------------------------

Minimum essential coverage and employer offer of health insurance
coverage

Generally, if an employee is offered minimum essential
coverage \158\ in the group market, including employer-provided
health insurance coverage, the individual is ineligible for the
premium assistance credit for health insurance purchased
through an American Health Benefit Exchange.
---------------------------------------------------------------------------
\158\ As defined in section 5000A(f).
---------------------------------------------------------------------------
If an employee's share of the premium for self-only
coverage exceeds 9.5 percent of an employee's household income
or the plan's share of total allowed cost of provided benefits
is less than 60 percent of such costs, the employee can be
eligible for the premium assistance credit. Premium assistance
tax credit eligibility requires that an employee decline
enrollment in employer-offered coverage and satisfy the
conditions for receiving a premium assistance tax credit
through an American Health Benefit Exchange.

Reconciliation

If the premium assistance credit received through advance
payment exceeds the amount of premium assistance credit to
which the taxpayer is entitled for the taxable year, the
liability for the overpayment must be reflected on the
taxpayer's income tax return for the taxable year subject to a
limitation on the amount of such liability. For persons with
household income below 400 percent of FPL, the liability for
the overpayment for a taxable year is limited to a specific
dollar amount (the ``applicable dollar amount'') as shown in
Table 2 below (one-half of the applicable dollar amount shown
in Table 2 for unmarried individuals who are not surviving
spouses or filing as heads of households).\159\
---------------------------------------------------------------------------
\159\ Section 36B(f)(2)(i), as amended by section 4 of the
Comprehensive 1099 Taxpayer Protection and Repayment of Exchange
Subsidy Overpayments Act of 2011, Pub. L. No. 112-9 (April 14, 2011),
discussed in Part Three, Section C.

TABLE 2--RECONCILIATION
------------------------------------------------------------------------
Household income (expressed as a percent of Applicable dollar
FPL) amount
------------------------------------------------------------------------
Less than 200%................................. $600
At least 200% but less than 300%............... 1,500
At least 300% but less than 400%............... 2,500
------------------------------------------------------------------------

Income taxation of Social Security benefits

Social Security benefits
Section 86 provides rules for determining what amount, if
any, of a taxpayer's Social Security benefits are includible in
gross income. Social Security benefits that are not taxed under
section 86 are excluded from gross income. For purposes of
section 86, Social Security benefits generally include monthly
retirement benefits payable under title II of the Social
Security Act and tier 1 Railroad Retirement benefits. If a
taxpayer's Social Security benefits or Railroad Retirement
benefits are offset by worker's compensation benefits, then the
amount of the taxpayer's Social Security benefits is increased
by the amount of such offset.
Portion of Social Security benefits includible in gross
income
The amount of Social Security benefits includible in gross
income is determined under a two-tier system. Taxpayers
receiving Social Security benefits are not required to include
any portion of such benefits in gross income if their
provisional income does not exceed a first-tier threshold,
which is $25,000, in the case of unmarried individuals, or
$32,000, in the case of married individuals filing
jointly.\160\ For purposes of these computations, a taxpayer's
provisional income is defined as adjusted gross income
increased by certain amounts, including, generally: (1) tax-
exempt interest; (2) excludable interest on educational savings
bonds; (3) adoption assistance payments; (4) certain deductible
student loan interest; (5) certain excludable foreign-source
earned income; (6) certain U.S. possession income; and (7) one-
half of the taxpayer's Social Security benefits. A second-tier
threshold for provisional income is $34,000, in the case of
unmarried individuals, or $44,000, in the case of married
individuals filing joint returns.\161\ These thresholds are not
indexed for inflation.
---------------------------------------------------------------------------
\160\ In the case of a married individual who files a separate
return, the first-tier threshold is generally zero. However, if the
individual lives apart from his or her spouse for the entire year, the
first-tier threshold is $25,000.
\161\ In the case of a married individual who files a separate
return, the second-tier threshold is generally zero. However, if the
individual lives apart from his or her spouse for the entire year, the
second-tier threshold is $34,000.
---------------------------------------------------------------------------
If the taxpayer's provisional income exceeds the first-tier
threshold but does not exceed the second-tier threshold, then
the amount required to be included in gross income is the
lesser of: (1) 50 percent of the taxpayer's Social Security
benefits, or (2) 50 percent of the excess of the taxpayer's
provisional income over the first-tier threshold.
If the amount of provisional income exceeds the second-tier
threshold, then the amount required to be included in gross
income is the lesser of: (1) 85 percent of the taxpayer's
Social Security benefits; or (2) the sum of (a) 85 percent of
the excess of the taxpayer's provisional income over the
second-tier threshold, plus (b) the smaller of (i) the amount
of benefits that would have been included in income if the 50-
percent inclusion rule (described in the previous paragraph)
were applied, or (ii) one-half of the difference between the
taxpayer's second-tier threshold and first-tier threshold.\162\
Tables 3 and 4 below summarize the income taxation of Social
Security benefits.
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\162\ Special rules apply in some cases. In the case of nonresident
individuals who are not U.S. citizens, 85 percent of Social Security
benefits are includible in gross income and subject to the 30-percent
withholding tax (sec. 871(a)(3)). The taxation of Social Security
benefits may also be specified in income tax treaties between the
United States and other countries.

TABLE 3--SUMMARY OF THE TAXATION OF SOCIAL SECURITY BENEFITS FOR UNMARRIED TAXPAYERS
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Provisional income level Amount included in gross income
----------------------------------------------------------------------------------------------------------------
$24,999 and below.................... 0%
----------------------------------------------------------------------------------------------------------------
$25,000 to $33,999................... First-tier inclusion is the lesser of . . .
----------------------------------------------------------------------------------------------------------------
(1) 50% of Social (2) 50% of provisional income exceeding $25,000
Security benefit.
----------------------------------------------------------------------------------------------------------------
Second-tier inclusion is the lesser of . . .
----------------------------------------------------------------------------------------------------------------
$34,000 and above.................... (1) 85% of Social (2) 85% of the amount of provisional income
Security benefit. exceeding $34,000 plus the lesser of . . .
-------------------------------------------------
(2a) $4,500............ (2b) amount of Social
Security benefit that
would have been
included if the 50%
rule applied.
----------------------------------------------------------------------------------------------------------------

TABLE 4--SUMMARY OF THE TAXATION OF SOCIAL SECURITY BENEFITS FOR MARRIED TAXPAYERS
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Provisional income level Amount included in gross income
----------------------------------------------------------------------------------------------------------------
$31,999 and below.................... 0%
----------------------------------------------------------------------------------------------------------------
First-tier inclusion is the lesser of . . .
----------------------------------------------------------------------------------------------------------------
$32,000 to $43,999................... (1) 50% of Social (2) 50% of provisional income exceeding $32,000.
Security benefit.
----------------------------------------------------------------------------------------------------------------
Second-tier inclusion is the lesser of . . .
--------------------------------------------------------------------------
$44,000 and above.................... (1) 85% of Social (2) 85% of the amount of provisional income
Security benefit. exceeding $44,000 plus the lesser of . . .
-------------------------------------------------
(2a) $6,000............ (2b) amount of Social
Security benefit that
would have been
included if the 50%
rule applied.
----------------------------------------------------------------------------------------------------------------

Reasons for Change

Congress believes that the full amount of a taxpayer's
Social Security benefits should be taken into account in
determining eligibility for the premium assistance credit and
other benefits under Federally funded health programs,
regardless of the portion of Social Security benefits
includible in gross income. Taking the full amount of Social
Security benefits into account for these purposes provides
consistency with eligibility for other Federal needs-based
programs and furthers the goal of deficit reduction.

Explanation of Provision

The provision revises the definition of modified adjusted
gross income in section 36B to include the amount of the
taxpayer's Social Security benefits that is excluded from gross
income. Thus, for purposes of the premium assistance credit,
modified adjusted gross income is defined as adjusted gross
income increased by: (1) any amount excluded by section 911
(the exclusion from gross income for citizens or residents
living abroad), (2) any tax-exempt interest received or accrued
during the tax year, plus (3) an amount equal to the portion of
the taxpayer's Social Security benefits excluded from gross
income.\163\
---------------------------------------------------------------------------
\163\ Because the definition of modified adjusted gross income used
in section 36B is incorporated by reference for purposes of determining
eligibility to participate in certain other healthcare-related
programs, such as reduced cost-sharing, Medicaid for the nonelderly,
and the Children's Health Insurance Program, the revised definition
applies also to those programs. In addition, the provision directs the
Secretary of the Treasury (or the Secretary's delegate) to estimate
annually the impact of the revised definition on the Social Security
trust funds and, if a negative impact is estimated, to transfer an
amount from the general fund sufficient to ensure that the Social
Security trust funds are not reduced.
---------------------------------------------------------------------------

Effective Date

The provision is effective on date of enactment. However,
the premium assistance credit is not effective until taxable
years ending after December 31, 2013. Thus, the provision
applies for taxable years ending after December 31, 2013.

PART EIGHT: THE REVENUE PROVISION CONTAINED IN THE TEMPORARY PAYROLL
TAX CUT CONTINUATION ACT OF 2011 (PUBLIC LAW 112-78) \164\
---------------------------------------------------------------------------

\164\ H.R. 3765. The House passed H.R. 3765 on December 23, 2011.
The bill passed the Senate without amendment on December 23, 2011. The
President signed the bill on December 23, 2011.
---------------------------------------------------------------------------

A. Payroll Tax Cut (sec. 101 of the Act and sec. 601 of the Tax Relief,
Unemployment Reauthorization and Job Creation Act of 2010)

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.\165\
Generally, covered wages means all remuneration for employment,
including the cash value of all remuneration paid in any medium
other than cash.\166\ 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 for 2011 and $110,100 for 2012); and (2)
the Medicare hospital insurance (``HI'') tax amount equal to
1.45 percent of covered wages.
---------------------------------------------------------------------------
\165\ Sec. 3111.
\166\ Sec. 3121(a).
---------------------------------------------------------------------------
In addition to the tax on employers, each employee is
generally subject to FICA taxes equal to the amount of tax
imposed on the employer (the ``employee portion'').\167\ The
employee portion of FICA taxes generally must be withheld and
remitted to the Federal government by the employer.
---------------------------------------------------------------------------
\167\ Sec. 3101. For taxable years beginning after 2012, an
additional HI tax applies to certain employees.
---------------------------------------------------------------------------
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.\168\ The
rate of the OASDI portion of SECA taxes is generally 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 of SECA tax 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.\169\
---------------------------------------------------------------------------
\168\ Sec. 1401.
\169\ For taxable years beginning after 2012, an additional HI tax
applies to certain self-employed individuals.
---------------------------------------------------------------------------
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.\170\
---------------------------------------------------------------------------
\170\ Sec. 1402(a)(12).
---------------------------------------------------------------------------
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.\171\
---------------------------------------------------------------------------
\171\ Sec. 164(f).
---------------------------------------------------------------------------

Railroad retirement tax

Instead of FICA taxes, railroad employers and employees are
subject, under the Railroad Retirement Tax Act (``RRTA''), to
taxes equivalent to the OASDI and HI taxes under FICA.\172\ The
employee portion of RRTA taxes generally must be withheld and
remitted to the Federal government by the employer.
---------------------------------------------------------------------------
\172\ Secs. 3201(a) and 3211(a).
---------------------------------------------------------------------------

Reduced OASDI rates for 2011

For 2011, the OASDI rate for the employee portion of the
FICA tax, and the equivalent employee portion of the RRTA tax,
is reduced by two percentage points to 4.2 percent. Similarly,
for taxable years beginning in 2011, the OASDI rate for a self-
employed individual is reduced by two percentage points to 10.4
percent.
Special rules coordinate the SECA tax rate reduction with a
self-employed individual's deduction in determining net
earnings from self-employment under the SECA tax and the income
tax deduction for one-half of the SECA tax. 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. The income tax deduction
allowed for SECA tax 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.\173\
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\173\ 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 allow the self-employed individual 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.
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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 \174\ receive transfers from the General
Fund of the United States Treasury equal to any reduction in
payroll taxes attributable to the rate reduction for 2011. The
amounts are 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.
---------------------------------------------------------------------------
\174\ 45 U.S.C. 231n-1(a).
---------------------------------------------------------------------------
For purposes of applying any provision of Federal law other
than the provisions of the Code, the employee rate of OASDI tax
is determined without regard to the reduced rate for 2011.

Explanation of Provision \175\

---------------------------------------------------------------------------
\175\ See also Part Ten of this General Explanation for a
description of a further extension of the payroll tax reduction.
---------------------------------------------------------------------------
Under the provision, the reduced employee OASDI tax rate of
4.2 percent under the FICA tax, and the equivalent employee
portion of the RRTA tax, is extended to apply to covered wages
paid in the first two months of 2012. The provision also
provides for a recapture of any benefit a taxpayer may have
received from the reduction in the OASDI tax rate, and the
equivalent employee portion of the RRTA tax, for remuneration
received during the first two months of 2012 in excess of
$18,350.\176\ The recapture is accomplished by a tax equal to
two percent of the amount of wages (and railroad compensation)
received during the first two months of 2012 that exceed
$18,350. The provision directs the Secretary of the Treasury
(or the Secretary's delegate) to prescribe regulations or other
guidance that are necessary and appropriate to carry out this
provision.
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\176\ $18,350 is \1/6\ of the 2012 taxable wage base of $110,100.
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In addition, for taxable years beginning in 2012, the OASDI
rate for a self-employed individual is reduced to 10.4 percent,
for self-employment income of up to $18,350 (reduced by wages
subject to the lower OASDI rate for 2012). Related rules for
2011 concerning coordination of a self-employed individual's
deductions in determining net earnings from self-employment and
income tax also apply for 2012, except that the income tax
deduction allowed for the OASDI portion of SECA tax paid for
taxable years beginning in 2012 is computed at the rate of 59.6
percent \177\ of the OASDI tax paid on self-employment income
of up to $18,350. For self-employment income in excess of this
amount, the deduction is equal to half of the OASDI portion of
the SECA tax paid.
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\177\ This percentage used with respect to the first $18,350 of
self-employment income 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 a 4.2 percent rate for the first $18,350
of self-employment income. 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, for the first $18,350 of self-employment income.
---------------------------------------------------------------------------
Rules related to the OASDI rate reduction for 2011
concerning (1) transfers to 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, and (2) determining the
employee rate of OASDI tax in applying provisions of Federal
law other than the Code also apply for 2012.

Effective Date

The provision is effective for remuneration received during
the months of January and February in 2012 and for self-
employment income for taxable years beginning in 2012.

PART NINE: THE AIRPORT AND AIRWAY TRUST FUND PROVISIONS AND RELATED
TAXES IN THE FAA MODERNIZATION AND REFORM ACT OF 2012 (PUBLIC LAW 112-
95) \178\
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\178\ H.R. 658. The House passed H.R. 658 on April 1, 2011. The
bill passed the Senate with an amendment on April 7, 2011. The
conference report was filed on February 1, 2012 (H.R. Rep. No. 112-381)
and was passed by the House on February 3, 2012, and the Senate on
February 6, 2012. The President signed the bill on February 14, 2012.
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A. Extension of Taxes Funding the Airport and Airway Trust Fund (sec.
1101 of the Act and secs. 4261, 4271, and 4081 of the Code)

Present Law

Overview
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial aviation and noncommercial aviation (i.e.,
transportation that is not ``for hire'') to fund the Airport
and Airway Trust Fund. The present aviation excise taxes are as
follows:

------------------------------------------------------------------------
Tax (and Code section) Tax Rates
------------------------------------------------------------------------
Domestic air passengers (sec. 4261).... 7.5 percent of fare, plus $3.80
(2012) per domestic flight
segment generally \179\
International travel facilities tax $16.70 (2012) per arrival or
(sec. 4261). departure \180\
Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air
transportation (sec. 4261).
Air cargo (freight) transportation 6.25 percent of amount charged
(sec. 4271). for domestic transportation;
no tax on international cargo
transportation
Aviation fuels (sec. 4081): \181\
1. Commercial aviation............. 4.3 cents per gallon
2. Non-commercial (general)
aviation:
Aviation gasoline.............. 19.3 cents per gallon
Jet fuel....................... 21.8 cents per gallon
------------------------------------------------------------------------

All Airport and Airway Trust Fund excise taxes, except for
4.3 cents per gallon of the taxes on aviation fuels, are
scheduled to expire after February 17, 2012. The 4.3-cents-per-
gallon fuels tax rate is permanent.
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\179\ The domestic flight segment portion of the tax is adjusted
annually (effective each January 1) for inflation (adjustments based on
the changes in the consumer price index (the ``CPI'')).
\180\ The international travel facilities tax rate is adjusted
annually for inflation (measured by changes in the CPI).
\181\ Like most other taxable motor fuels, aviation fuels are
subject to an additional 0.1-cent-per-gallon excise tax to fund the
Leaking Underground Storage Tank Trust Fund.
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Taxes on transportation of persons by air
Domestic air passenger excise tax
Domestic air passenger transportation generally is subject
to a two-part excise tax. The first component is an ad valorem
tax imposed at the rate of 7.5 percent of the amount paid for
the transportation. The second component is a flight segment
tax. For 2012, the flight segment tax rate is $3.80.\182\ A
flight segment is defined as transportation involving a single
take-off and a single landing. For example, travel from New
York to San Francisco, with an intermediate stop in Chicago,
consists of two flight segments (without regard to whether the
passenger changes aircraft in Chicago).
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\182\ Sec. 4261(b)(1) and 4261(d)(4). The Code provides for a $3
tax indexed annually for inflation, effective each January 1, resulting
in the current rate of $3.80.
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The flight segment component of the tax does not apply to
segments to or from qualified ``rural airports.'' For any
calendar year, a rural airport is defined as an airport that in
the second preceding calendar year had fewer than 100,000
commercial passenger departures, and meets one of the following
three additional requirements: (1) the airport is not located
within 75 miles of another airport that had more than 100,000
such departures in that year; (2) the airport is receiving
payments under the Federal ``essential air service'' program;
or (3) the airport is not connected by paved roads to another
airport.\183\
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\183\ In the case of an airport qualifying as ``rural'' because it
is not connected by paved roads to another airport, only departures for
flight segments of 100 miles or more are considered in calculating
whether the airport has fewer than 100,000 commercial passenger
departures. The Department of Transportation has published a list of
airports that meet the definition of rural airports. See Rev. Proc.
2005-45.
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The domestic air passenger excise tax applies to ``taxable
transportation.'' Taxable transportation means transportation
by air that begins in the United States or in the portion of
Canada or Mexico that is not more than 225 miles from the
nearest point in the continental United States and ends in the
United States or in such 225-mile zone. If the domestic
transportation is paid for outside of the United States, it is
taxable only if it begins and ends in the United States.
For purposes of the domestic air passenger excise tax,
taxable transportation does not include ``uninterrupted
international air transportation.'' Uninterrupted international
air transportation is any transportation that does not both
begin and end in the United States or within the 225-mile zone
and does not have a layover time of more than 12 hours. The tax
on international air passenger transportation is discussed
below.
International travel facilities tax
For 2012, international air passenger transportation is
subject to a tax of $16.70 per arrival or departure in lieu of
the taxes imposed on domestic air passenger transportation if
the transportation begins or ends in the United States.\184\
The definition of international transportation includes certain
purely domestic transportation that is associated with an
international journey. Under these rules, a passenger traveling
on separate domestic segments integral to international travel
is exempt from the domestic passenger taxes on those segments
if the stopover time at any point within the United States does
not exceed 12 hours.
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\184\ Secs. 4261(c) and 4261(d)(4). The international air
facilities tax rate of $12 is indexed annually for inflation, effective
each January 1, resulting in the current rate of $16.70.
---------------------------------------------------------------------------
In the case of a domestic segment beginning or ending in
Alaska or Hawaii, the tax applies to departures only and is
$8.40 for calendar year 2012.
``Free'' travel
Both the domestic air passenger tax and the use of
international air facilities tax apply only to transportation
for which an amount is paid. Thus, free travel, such as that
awarded in ``frequent flyer'' programs and nonrevenue travel by
airline industry employees, is not subject to tax. However,
amounts paid to air carriers (in cash or in kind) for the right
to award free or reduced-fare transportation are treated as
amounts paid for taxable air transportation and are subject to
the 7.5 percent ad valorem tax (but not the flight segment tax
or the use of international air facilities tax). Examples of
such payments are purchases of miles by credit card companies
and affiliates (including airline affiliates) for use as
``rewards'' to cardholders.
Disclosure of air passenger transportation taxes on tickets
and in advertising
Transportation providers are subject to special penalties
relating to the disclosure of the amount of the passenger taxes
on tickets and in advertising. The ticket is required to show
the total amount paid for such transportation and the tax. The
same requirements apply to advertisements. In addition, if the
advertising separately states the amount to be paid for the
transportation or the amount of taxes, the total shall be
stated at least as prominently as the more prominently stated
of the tax or the amount paid for transportation. Failure to
satisfy these disclosure requirements is a misdemeanor, upon
conviction of which the guilty party is fined not more than
$100 per violation.\185\
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\185\ Sec. 7275.
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Tax on transportation of property (cargo) by air

Amounts equivalent to the taxes received from the
transportation of property by air are transferred to the
Airport and Airway Trust Fund. Domestic air cargo
transportation is subject to a 6.25 percent ad valorem excise
tax on the amount paid for the transportation.\186\ The tax
applies only to transportation that both begins and ends in the
United States. There is no disclosure requirement for the air
cargo tax.
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\186\ Sec. 4271.
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Aviation fuel taxes

The Code imposes excise taxes on gasoline used in
commercial aviation (4.3 cents per gallon) and noncommercial
aviation (19.3 cents per gallon), and on jet fuel (kerosene)
and other aviation fuels used in commercial aviation (4.3 cents
per gallon) and noncommercial aviation (21.8 cents per
gallon).\187\ Amounts equivalent to these taxes are transferred
to the Airport and Airway Trust Fund.
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\187\ These fuels are also subject to an additional 0.1 cent per
gallon for the Leaking Underground Storage Tank Trust Fund. If there
was not a taxable sale of the fuel pursuant to section 4081 of the
Code, a backup tax exists under section 4041(c) for such fuel that is
subsequently sold or used in aviation.
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Reasons for Change \188\

---------------------------------------------------------------------------
\188\ See, S. Rep. No. 112-1 (February 14, 2011) at 3 (the
committee report accompanying S. 340, the ``Airport and Airway Trust
Fund Reauthorization Act of 2011,'' as reported by the Senate Committee
on Finance). See also, H. Rep. No. 112-44 (March 29, 2011) at 6 (the
committee report accompanying H.R. 1034, the ``Airport and Airway Trust
Fund Financing Reauthorization Act of 2011'' as reported by the House
Committee on Ways and Means) (``Funding operations and improvements to
the nation's airports and air infrastructure is vitally important to
creating and sustaining economic growth and promoting commerce.'').
---------------------------------------------------------------------------
To ensure an uninterrupted funding source, Congress
believes it is appropriate to extend further the taxes that
finance the Airport and Airway Trust Fund.

Explanation of Provision

The Act extends the present-law Airport and Airway Trust
Fund excise taxes through September 30, 2015.

Effective Date

The provision takes effect on February 18, 2012.

B. Extension of Airport and Airway Trust Fund Expenditure Authority
(sec. 1102 of the Act, and sec. 9502 of the Code)

Present Law

In general

The Airport and Airway Trust Fund was created in 1970 to
finance a major portion of Federal expenditures on national
aviation programs. Operation of the Airport and Airway Trust
Fund is governed by the Code and authorizing statutes. The Code
provisions govern deposit of revenues into the trust fund and
approve the use of trust fund money (as provided by
appropriation acts) for expenditure purposes in authorizing
statutes as in effect on the date of enactment of the latest
authorizing Act. The authorizing acts provide specific trust
fund expenditure programs and purposes.
Authorized expenditures from the Airport and Airway Trust
Fund include the following principal programs:
1. Airport Improvement Program (airport planning,
construction, noise compatibility programs, and safety
projects);
2. Facilities and Equipment program (costs of
acquiring, establishing, and improving the air traffic
control facilities);
3. Research, Engineering, and Development program
(Federal Aviation Administration (``FAA'') research and
development activities);
4. FAA Operations and Maintenance (``O&M'') programs;
and
5. Certain other aviation-related programs specified
in authorizing acts.
Part of the O&M programs is financed from General Fund
monies as well.\189\
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\189\ According to the Government Accountability Office, for FY
2000 through FY 2010 the contribution of general revenues has increased
to cover a larger share of the FAA's operation expenditures. United
States Government Accountability Office, Airport and Airway Trust Fund:
Declining Balance Raises Concerns Over Ability to Meet Future Demands,
Statement of Gerald Dillingham, Director Physical Infrastructure Before
the Committee on Finance, U.S. Senate (GAO-11-358T), February 3, 2011,
p. 5, Fig. 2. Congressional Budget Office, Financing Federal Aviation
Programs: Statement of Robert A. Sunshine before the House Committee on
Ways and Means, May 7, 2009, p. 3.
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Limits on Airport and Airway Trust Fund expenditures

No expenditures are currently permitted to be made from the
Airport and Airway Trust Fund after February 17, 2012. Because
the purposes for which Airport and Airway Trust Fund monies are
permitted to be expended are fixed as of the date of enactment
of the Airport and Airway Extension Act of 2012, the Code must
be amended to authorize new Airport and Airway Trust Fund
expenditure purposes. In addition, the Code contains a specific
enforcement provision to prevent expenditure of Airport and
Airway Trust Fund monies for purposes not authorized under
section 9502. Should such unapproved expenditures occur, no
further aviation excise tax receipts will be transferred to the
Airport and Airway Trust Fund. Rather, the aviation taxes would
continue to be imposed, but the receipts would be retained in
the General Fund.

Reasons for Change \190\

---------------------------------------------------------------------------
\190\ See S. Rep. No. 112-1 (February 14, 2011) at 4.
---------------------------------------------------------------------------
Congress believes that reauthorizing the Airport and Airway
Trust Fund expenditure authority will support jobs throughout
the aviation industry, such as financing airport construction
projects across the country. Reauthorizing the FAA legislation
and making investments to modernize the air traffic control
system is estimated to create 280,000 jobs in airports
throughout the country.

Explanation of Provision

The Act authorizes expenditures from the Airport and Airway
Trust Fund through September 30, 2015. The Act also amends the
list of authorizing statutes to include the ``FAA Modernization
and Reform Act of 2012,'' which sets forth aviation program
expenditure purposes through September 30, 2015.

Effective Date

The provision takes effect on February 18, 2012.

C. Treatment of Fractional Ownership Aircraft Program Flights (sec.
1103 of the Act and new sec. 4043 of the Code)

Present Law

For excise tax purposes, fractional ownership aircraft
flights are treated as commercial aviation. As commercial
aviation, for 2012, such flights are subject to the ad valorem
tax of 7.5 percent of the amount paid for the transportation, a
$3.80 segment tax, and tax of 4.4 cents per gallon on fuel. For
international flights, fractional ownership flights pay the
$16.70 international travel facilities tax.
For purposes of the FAA safety regulations, fractional
ownership aircraft programs are treated as a special category
of general aviation.\191\ Under those FAA regulations, a
``fractional ownership program'' is defined as any system of
aircraft ownership and exchange that consists of all of the
following elements: (i) the provision for fractional ownership
program management services by a single fractional ownership
program manager on behalf of the fractional owners; (ii) two or
more airworthy aircraft; (iii) one or more fractional owners
per program aircraft, with at least one program aircraft having
more than one owner; (iv) possession of at least a minimum
fractional ownership interest in one or more program aircraft
by each fractional owner; (v) a dry-lease aircraft exchange
arrangement among all of the fractional owners; and (vi) multi-
year program agreements covering the fractional ownership,
fractional ownership program management services, and dry-lease
aircraft exchange aspects of the program.
---------------------------------------------------------------------------
\191\ 14 C.F.R. Part 91, subpart k.
---------------------------------------------------------------------------

Reasons for Change \192\

---------------------------------------------------------------------------
\192\ See S. Rep. No. 112-1 (February 14, 2011) at 9.
---------------------------------------------------------------------------
Congress notes that the IRS and FAA classify flights on
aircraft that are part of a fractional ownership program
differently. Under the FAA safety regulations, such flights are
considered general aviation, while the IRS classifies such
flights as commercial aviation for tax purposes. Congress
wishes to make clear that fractional flights should be
considered as noncommercial aviation for tax purposes. In
keeping with Congress' view that the burden of funding a
modernized system should be broadly shared, Congress believes
it is appropriate to subject such flights to the increased fuel
taxes applicable to noncommercial aviation provided by the bill
(35.9 cents per gallon), as well as an additional fuel surtax
of 14.1 cents per gallon.

Explanation of Provision

The Act provides an exemption, through September 30, 2021,
from the commercial aviation taxes (secs. 4261, 4271 and the
4.4 cents-per-gallon tax on fuel) for certain fractional
aircraft program flights. In place of the commercial aviation
taxes, the Act applies a fuel surtax to certain flights made as
part of a fractional ownership program.
Through September 30, 2021, these flights are treated as
noncommercial aviation, subject to the fuel surtax and the base
fuel tax for fuel used in noncommercial aviation.\193\
Specifically, the additional fuel surtax of 14.1 cents per
gallon will apply to fuel used in a fractional program aircraft
(1) for the transportation of a qualified fractional owner with
respect to the fractional aircraft program of which such
aircraft is a part, and (2) with respect to the use of such
aircraft on the account of such a qualified owner. Such use
includes positioning flights (flights in deadhead
service).\194\ Through September 30, 2021, the commercial
aviation taxes do not apply to fractional program aircraft uses
subject to the fuel surtax. Under the Act, flight
demonstration, maintenance, and crew training flights by a
fractional program aircraft are excluded from the fuel surtax
and are subject to the noncommercial aviation fuel tax
only.\195\ The fuel surtax of 14.1 cents per gallon sunsets
September 30, 2021.
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\193\ No inference is intended as to the treatment of these flights
as noncommercial aviation under present law.
\194\ A flight in deadhead service is presumed subject to the fuel
surtax unless the costs for such flight are separately billed to a
person other than a qualified owner. For example, if the costs
associated with a positioning flight of a fractional program aircraft
are separately billed to a person chartering the aircraft, that
positioning flight is treated as commercial aviation.
\195\ It is the understanding of the conferees that a prospective
purchaser does not pay any amount for transportation by demonstration
flights, and that if an amount were paid for the flight, the flight
would be subject to the commercial aviation taxes and not treated as
noncommercial aviation.
---------------------------------------------------------------------------
A ``fractional program aircraft'' means, with respect to
any fractional ownership aircraft program, any aircraft which
is listed as a fractional program aircraft in the management
specifications issued to the manager of such program by the
Federal Aviation Administration under subpart K of part 91 of
title 14, Code of Federal Regulations and is registered in the
United States.
A ``fractional ownership aircraft program'' is a program
under which:
A single fractional ownership program
manager provides fractional ownership program
management services on behalf of the fractional owners;
There are one or more fractional owners per
program aircraft, with at least one program aircraft
having more than one owner;
With respect to at least two fractional
program aircraft, none of the ownership interests in
such aircraft can be less than the minimum fractional
ownership interest, or held by the program manager;
There exists a dry-lease aircraft exchange
arrangement among all of the fractional owners; and
There are multi-year program agreements
covering the fractional ownership, fractional ownership
program management services, and dry-lease aircraft
exchange aspects of the program.
The term ``qualified fractional owner'' means any
fractional owner that has a minimum fractional ownership
interest in at least one fractional program aircraft. A
``minimum fractional ownership interest'' means: (1) A
fractional ownership interest equal to or greater than one-
sixteenth (1/16) of at least one subsonic, fixed wing or
powered lift program aircraft; or (2) a fractional ownership
interest equal to or greater than one-thirty-second (1/32) of
at least one rotorcraft program aircraft. A ``fractional
ownership interest'' is (1) the ownership interest in a program
aircraft; (2) the holding of a multi-year leasehold interest in
a program aircraft; or (3) the holding or a multi-year
leasehold interest that is convertible into an ownership
interest in a program aircraft. A ``fractional owner'' means a
person owning any interest (including the entire interest) in a
fractional program aircraft.
Amounts equivalent to the revenues from the fuel surtax are
dedicated to the Airport and Airway Trust Fund.

Effective Date

The provision is effective for taxable transportation
provided after, uses of aircraft after, and fuel used after,
March 31, 2012.

D. Transparency in Passenger Tax Disclosures (sec. 1104 of the Act and
sec. 7275 of the Code)

Present Law

Transportation providers are subject to special penalties
relating to the disclosure of the amount of the passenger taxes
on tickets and in advertising. The ticket is required to show
the total amount paid for such transportation and the tax. The
same requirements apply to advertisements. In addition, if the
advertising separately states the amount to be paid for the
transportation or the amount of taxes, the total shall be
stated at least as prominently as the more prominently stated
of the tax or the amount paid for transportation. Failure to
satisfy these disclosure requirements is a misdemeanor, upon
conviction of which the guilty party is fined not more than
$100 per violation.\196\
---------------------------------------------------------------------------
\196\ Sec. 7275.
---------------------------------------------------------------------------
There is no prohibition against airlines including other
charges in the required passenger taxes disclosure (e.g., fuel
surcharges retained by the commercial airline). In practice,
some but not all airlines include such other charges in the
required passenger taxes disclosure.

Reasons for Change \197\

---------------------------------------------------------------------------
\197\ See S. Rep. No. 112-1 (February 14, 2011) at 11.
---------------------------------------------------------------------------
Congress believes that separating charges payable to a
government entity from those paid to a transportation provider
will reduce confusion on the part of consumers.

Explanation of Provision

The Act prohibits all transportation providers from
including amounts other than the passenger taxes imposed by
section 4261 in the required disclosure of passenger taxes on
tickets and in advertising when the amount of such tax is
separately stated. Disclosure elsewhere on tickets and in
advertising (e.g., as an amount paid for transportation) of
non-tax charges is allowed.

Effective Date

The provision is effective for transportation provided
after March 31, 2012.

E. Tax-Exempt Private Activity Bond Financing for Fixed-Wing Emergency
Medical Aircraft (sec. 1105 of the Act and sec. 147(e) of the Code)

Present Law

Interest on bonds issued by State and local governments
generally is excluded from gross income for Federal income tax
purposes.\198\ 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. In general, 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).\199\ 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 bonds'') and other Code
requirements are met.\200\
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\198\ Sec. 103(a).
\199\ See sec. 141 defining ``private activity bond.''
\200\ See sec. 103(b) and sec. 141(e).
---------------------------------------------------------------------------
Section 147(e) of the Code provides, in part, that a
private activity bond is not a qualified bond if issued as part
of an issue and any portion of the proceeds of such issue is
used for airplanes.\201\ The IRS has ruled that a helicopter is
not an ``airplane'' for purposes of section 147(e).\202\
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\201\ Other prohibited facilities include any sky box, or other
private luxury box, health club facility, facility primarily used for
gambling, or store the principal business of which is the sale of
alcoholic beverages for consumption off premises. Sec. 147(e).
\202\ Rev. Rul. 2003-116, 2003-46 I.R.B. 1083, 2003-2 C.B. 1083,
November 17, 2003 (released: October 29, 2003).
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A fixed-wing aircraft providing air transportation for
emergency medical services and that is equipped for, and
exclusively dedicated on that flight to, acute care emergency
medical services is exempt from the air transportation excise
taxes imposed by sections 4261 and 4271.\203\
---------------------------------------------------------------------------
\203\ Sec. 4261(g)(2).
---------------------------------------------------------------------------

Reasons for Change \204\

---------------------------------------------------------------------------
\204\ See S. Rep. No. 112-1 (Febraury 14, 2011) at 12.
---------------------------------------------------------------------------
Congress believes it is appropriate to correct the
disparity by which tax-exempt bond financing may be used for
helicopters providing emergency medical care but not for
airplanes.

Explanation of Provision

The Act amends section 147(e) so that the prohibition on
the use of proceeds for airplanes does not apply to any fixed-
wing aircraft equipped for, and exclusively dedicated to,
providing acute care emergency medical services (within the
meaning of section 4261(g)(2)).

Effective Date

The provision is effective for obligations issued after the
date of enactment (February 14, 2012).

F. Rollover of Amounts Received in Airline Carrier Bankruptcy (sec.
1106 of the Act and sec. 125 of the Worker, Retiree, and Employer
Recovery Act of 2008)

Present Law

The Code provides for two types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\205\
In general, contributions (other than a rollover contribution)
to a traditional IRA may be deductible from gross income, and
distributions from a traditional IRA are includible in gross
income to the extent not attributable to a return of
nondeductible contributions. In contrast, contributions to a
Roth IRA are not deductible, and qualified distributions from a
Roth IRA are excludable from gross income. Distributions from a
Roth IRA that are not qualified distributions are includible in
gross income to the extent attributable to earnings. In
general, a qualified distribution is a distribution that (1) is
made after the five taxable year period beginning with the
first taxable year for which the individual first made a
contribution to a Roth IRA, and (2) is made on or after the
individual attains age 59\1/2\, death, or disability or which
is a qualified special purpose distribution.
---------------------------------------------------------------------------
\205\ Traditional IRAs are described in section 408, and Roth IRAs
are described in section 408A.
---------------------------------------------------------------------------
The total amount that an individual may contribute to one
or more IRAs for a year is generally limited to the lesser of:
(1) a dollar amount ($5,000 for 2012); or (2) the amount of the
individual's compensation that is includible in gross income
for the year.\206\ In the case of married individuals filing a
joint return, a contribution up to the dollar limit for each
spouse may be made, provided the combined compensation of the
spouses is at least equal to the contributed amount.
---------------------------------------------------------------------------
\206\ The maximum contribution amount is increased for individuals
50 years of age or older.
---------------------------------------------------------------------------
If an individual makes a contribution to an IRA
(traditional or Roth) for a taxable year, the individual is
permitted to recharacterize (in a trustee-to-trustee transfer)
the amount of that contribution as a contribution to the other
type of IRA (traditional or Roth) before the due date for the
individual's income tax return for that year.\207\ In the case
of a recharacterization, the contribution will be treated as
having been made to the transferee plan. The amount transferred
must be accompanied by any net income allocable to the
contribution and no deduction is allowed with respect to the
contribution to the transferor plan. Both regular contributions
and conversion contributions to a Roth IRA can be
recharacterized as having been made to a traditional IRA.
However, Treasury regulations limit the number of times a
contribution for a taxable year may be recharacterized.\208\
---------------------------------------------------------------------------
\207\ Sec. 408A(d)(6).
\208\ Treas. Reg. sec. 1.408A-5.
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Taxpayers generally may convert a traditional IRA into a
Roth IRA.\209\ The amount converted is includible in income as
if a withdrawal had been made, except that the early
distribution tax (discussed below) does not apply. However, the
early distribution tax is applied if the taxpayer withdraws the
amount within five years of the conversion.
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\209\ For taxable years beginning prior to January 1, 2010,
taxpayers with modified AGI in excess of $100,000, and married
taxpayers filing separate returns, were generally not permitted to
convert a traditional IRA into a Roth IRA. Under the Tax Increase
Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, these
limits on conversion are repealed for taxable years beginning after
December 31, 2009.
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If certain requirements are satisfied, a participant in an
employer-sponsored qualified plan (which includes a qualified
retirement plan described in section 401(a), a qualified
retirement annuity described in section 403(a), a tax-sheltered
annuity described in section 403(b), and a governmental
eligible deferred compensation plan described in section
457(b)) or a traditional IRA may roll over distributions from
the plan, annuity or IRA into another plan, annuity or IRA. For
distributions after December 31, 2007, certain taxpayers also
are permitted to make rollover contributions into a Roth IRA
(subject to inclusion in gross income of any amount that would
be includible were it not part of the rollover contribution).
Under the Worker, Retiree, and Employer Recovery Act of
2008 (``WRERA''),\210\ a ``qualified airline employee'' may
contribute any portion of an ``airline payment amount'' to a
Roth IRA within 180 days of receipt of such amount (or, if
later, within 180 days of enactment of the WRERA provision).
Such a contribution is treated as a qualified rollover
contribution to the Roth IRA. Thus, the portion of the airline
payment amount contributed to the Roth IRA is includible in
gross income to the extent that such payment would be
includible were it not part of the rollover contribution.
---------------------------------------------------------------------------
\210\ Pub. L. No. 110-458, section 125.
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A qualified airline employee is an employee or former
employee of a commercial passenger airline carrier who was a
participant in a defined benefit plan maintained by the carrier
which: (1) is qualified under section 401(a); and (2) was
terminated or became subject to the benefit accrual and other
restrictions applicable to plans maintained by commercial
passenger airlines pursuant to section 402(b) of the Pension
Protection Act of 2006 (``PPA'').
An airline payment amount is any payment of any money or
other property payable by a commercial passenger airline to a
qualified airline employee under the approval of an order of a
Federal bankruptcy court in a case filed after September 11,
2001, and before January 1, 2007, and (2) in respect of the
qualified airline employee's interest in a bankruptcy claim
against the airline carrier, any note of the carrier (or amount
paid in lieu of a note being issued), or any other fixed
obligation of the carrier to pay a lump sum amount. An airline
payment amount does not include any amount payable on the basis
of the carrier's future earnings or profits. The amount that
may be contributed to a Roth IRA is the gross amount of the
payment; any reduction in the airline payment amount on account
of withholding of the employee's share of taxes under the
Federal Insurance Contributions Act (``FICA'') \211\ or income
tax \212\ is disregarded.
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\211\ Sec. 3102.
\212\ Sec. 3402.
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Explanation of Provision

The provision expands the choices for recipients of airline
payment amounts by generally allowing qualified airline
employees to contribute airline payment amounts to a
traditional IRA as a rollover contribution within 180 days of
receipt of such amount (or, if later, within 180 days of
enactment of the provision). A qualified airline employee
making such a rollover contribution may exclude the contributed
airline payment amount from gross income in the taxable year in
which the airline payment amount was paid to the qualified
airline employee by the commercial passenger airline carrier.
A qualified airline employee who has made a qualified
rollover contribution of an airline payment amount to a Roth
IRA pursuant to WRERA is generally permitted to recharacterize
all or a portion of the qualified rollover contribution as a
rollover contribution to a traditional IRA by transferring, in
a trustee-to-trustee transfer, the contribution (or a portion
thereof) plus attributable earnings (or losses) from the Roth
IRA. The airline payment amount so transferred (with
attributable earnings) is deemed to have been contributed to
the traditional IRA at the time of the initial rollover
contribution into the Roth IRA if the trustee-to-trustee
transfer to the traditional IRA is made within 180 days of the
enactment of the provision. Airline payment amounts so
transferred may be excluded from gross income in the taxable
year in which the airline payment amount was paid to the
qualified airline employee by the commercial passenger airline
carrier. If an amount contributed to a Roth IRA as a rollover
contribution is recharacterized as a rollover contribution to a
traditional IRA, the amount so recharacterized may not be
contributed to a Roth IRA as a qualified rollover contribution
(i.e., reconverted to a Roth IRA) during the five taxable years
immediately following the taxable year in which the transfer to
the traditional IRA was made.
The ability to contribute airline payment amounts to a
traditional IRA as a rollover contribution and the ability to
recharacterize a previous qualified rollover contribution to a
Roth IRA are subject to limitations. First, a qualified airline
employee is not permitted to contribute (using either a
rollover or recharacterization) an airline payment amount to a
traditional IRA for a taxable year if, at any time during the
taxable year or a preceding taxable year, the employee was a
``covered employee,'' i.e., the principal executive officer (or
an individual acting in such capacity) within the meaning of
the Securities Exchange Act of 1934 or among the three most
highly compensated officers for the taxable year (other than
the principal executive officer), of the commercial passenger
airline carrier making the airline payment amount.\213\ Second,
in the case of a qualified airline employee who was not at any
time a covered employee, the amount that may be rolled over, or
recharacterized, into a traditional IRA for a taxable year
cannot exceed the excess (if any) of (1) 90 percent of the
aggregate airline payment amounts received during the taxable
year and all preceding taxable years, over (2) the aggregate
amount rolled over, or recharacterized, into a traditional IRA
for all preceding taxable years.
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\213\ Covered employee status is defined by reference to section
162(m) (limiting deductions for compensation of covered employees),
which 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),
whose compensation is required to be reported to shareholders under the
Securities Exchange Act of 1934. Treas. Reg. sec. 1.162-27(c)(2)
provides that whether an employee is the chief executive officer or
among the four most highly compensated officers is determined pursuant
to the executive compensation disclosure rules promulgated under the
Securities Exchange Act of 1934. To reflect 2006 changes made to the
disclosure rules by the Securities and Exchange Commission, Notice
2007-49, 2007-25 I.R.B. 1429, provides that ``covered employee'' means
any employee who is (1) the principal executive officer (or an
individual acting in such capacity) within the meaning of the amended
disclosure rules, or (2) among the three most highly compensated
officers for the taxable year (other than the principal executive
officer).
---------------------------------------------------------------------------
Subject to the limitations described above, qualified
airline employees who were eligible to make a qualified
rollover to a Roth IRA under WRERA, but declined to do so, are
permitted under the provision to roll over the airline payment
amount to a traditional IRA within 180 days of the receipt of
the amount (or, if later, within 180 days of enactment of the
provision), and such amount is excluded from income in the
taxable year in which the airline payment amount was paid by
the commercial passenger airline carrier As mentioned above,
any portion of an airline payment amount recharacterized as a
rollover contribution to a traditional IRA pursuant to the
provision is excluded from gross income in the taxable year in
which the airline payment amount was paid by the commercial
passenger airline carrier. A qualified airline employee who
excludes from income an airline payment amount contributed to a
traditional IRA (using either a rollover or recharacterization)
may file a claim for a refund until the later of: (1) the usual
period of limitation \214\ (generally, three years from the
time the return was filed or two years from the time the tax
was paid, whichever period expires later); or (2) April 15,
2013.
---------------------------------------------------------------------------
\214\ Sec. 6511(a).
---------------------------------------------------------------------------
Surviving spouses of qualified airline employees are
granted the same rights with respect to airline payment amounts
as qualified airline employees both under the provision and
under the WRERA provision.
An airline payment amount does not fail to be treated as a
payment of wages for purposes of FICA taxes \215\ and section
209 of the Social Security Act merely because the amount is
excluded from gross income because it is contributed to a
traditional IRA (using either a rollover or recharacterization)
pursuant to the provision.
---------------------------------------------------------------------------
\215\ Chapter 21 of the Code.
---------------------------------------------------------------------------

Effective Date

The provision is effective for all transfers (made after
date of enactment of the provision) of airline payment amounts
received before, on, or after date of enactment.

G. Termination of Exemption For Small Jet Aircraft on Nonestablished
Lines (sec. 1107 of the Act and sec. 4281 of the Code)

Present Law

Under present law, transportation by aircraft with a
certificated maximum takeoff weight of 6,000 pounds or less is
exempt from the excise taxes imposed on the transportation of
persons by air and the transportation of cargo by air when
operating on a nonestablished line. Similarly, when such
aircraft are operating on a flight for the sole purpose of
sightseeing, the taxes imposed on the transportation or persons
or cargo by air do not apply.

Reasons for Change \216\

---------------------------------------------------------------------------
\216\ See S. Rep. No. 112-1 (February 14, 2011) at 11.
---------------------------------------------------------------------------
The present-law tax exemption for small aircraft operating
on nonestablished lines does not reflect the technological
advances allowing for the construction of lightweight jet
aircraft. Congress believes that such aircraft use FAA
resources and utilize facilities receiving assistance from the
Airport and Airway Trust Fund. Consistent with the intent of
the Act that all aircraft making use of FAA resources bear an
appropriate share of the cost, Congress finds that it is proper
to remove jet aircraft from this exemption.

Explanation of Provision

The Act repeals the exemption as it applies to turbine
engine powered aircraft (jet aircraft).

Effective Date

The provision is effective for transportation provided
after March 31, 2012.

H. Modification of Control Definition for Purposes of Section 249 (sec.
1108 of the Act and sec. 249 of the Code)

Present Law

In general, where a corporation repurchases its
indebtedness for a price in excess of the adjusted issue price,
the excess of the repurchase price over the adjusted issue
price (the ``repurchase premium'') is deductible as
interest.\217\ However, in the case of indebtedness that is
convertible into the stock of (1) the issuing corporation, (2)
a corporation in control of the issuing corporation, or (3) a
corporation controlled by the issuing corporation, section 249
provides that any repurchase premium is not deductible to the
extent it exceeds ``a normal call premium on bonds or other
evidences of indebtedness which are not convertible.'' \218\
---------------------------------------------------------------------------
\217\ See Treas. Reg. sec. 1.163-7(c).
\218\ Regulations under section 249 provide that ``[f]or a
convertible obligation repurchased on or after March 2, 1998, a call
premium specified in dollars under the terms of the obligation is
considered to be a normal call premium on a nonconvertible obligation
if the call premium applicable when the obligation is repurchased does
not exceed an amount equal to the interest (including original issue
discount) that otherwise would be deductible for the taxable year of
repurchase (determined as if the obligation were not repurchased).''
Treas. Reg. sec. 1.249-1(d)(2). Where a repurchase premium exceeds a
normal call premium, the repurchase premium is still deductible to the
extent that it is attributable to the cost of borrowing (e.g., a change
in prevailing yields or the issuer's creditworthiness) and not
attributable to the conversion feature. See Treas. Reg. sec. 1.249-
1(e).
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For purposes of section 249, the term ``control'' has the
meaning assigned to such term by section 368(c). Section 368(c)
defines ``control'' as ``ownership of stock possessing at least
80 percent of the total combined voting power of all classes of
stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of stock of the
corporation.'' Thus, section 249 can apply to debt convertible
into the stock of the issuer, the parent of the issuer, or a
first-tier subsidiary of the issuer.

Explanation of Provision

The Act modifies the definition of ``control'' in section
249(b)(2) to incorporate indirect control relationships of the
nature described in section 1563(a)(1). Section 1563(a)(1)
defines a parent-subsidiary controlled group as one or more
chains of corporations connected through stock ownership with a
common parent corporation if (1) stock possessing at least 80
percent of the total combined voting power of all classes of
stock entitled to vote or at least 80 percent of the total
value of shares of all classes of stock of each of the
corporations, except the common parent corporation, is owned
(within the meaning of subsection (d)(1)) by one or more of the
other corporations; and (2) the common parent corporation owns
(within the meaning of subsection (d)(1)) stock possessing at
least 80 percent of the total combined voting power of all
classes of stock entitled to vote or at least 80 percent of the
total value of shares of all classes of stock of at least one
of the other corporations, excluding, in computing such voting
power or value, stock owned directly by such other
corporations.

Effective Date

The provision is effective for repurchases after the date
of enactment (February 14, 2012).

PART TEN: THE REVENUE PROVISIONS IN THE MIDDLE CLASS TAX RELIEF AND JOB
CREATION ACT OF 2012 (PUBLIC LAW 112-96) \219\
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\219\ H.R. 3630. The House passed H.R. 3630 on December 13, 2011.
The bill passed the Senate with an amendment on December 17, 2011. The
conference report was filed on February 16, 2012 (H.R. Rep. No. 112-
399) and was passed by the House on February 17, 2012, and the Senate
on February 17, 2012. The President signed the bill on February 22,
2012.
---------------------------------------------------------------------------

A. Extension of Payroll Tax Reduction (sec. 1001 of the Act and sec.
601 of the Tax Relief, Unemployment Reauthorization and Job Creation
Act of 2010)

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.\220\
Generally, covered wages means all remuneration for employment,
including the cash value of all remuneration paid in any medium
other than cash.\221\ 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 for 2011 and $110,100 for 2012); and (2)
the Medicare hospital insurance (``HI'') tax amount equal to
1.45 percent of covered wages.
---------------------------------------------------------------------------
\220\ Sec. 3111.
\221\ Sec. 3121(a).
---------------------------------------------------------------------------
In addition to the tax on employers, each employee is
generally subject to FICA taxes equal to the amount of tax
imposed on the employer (the ``employee portion'').\222\ The
employee portion of FICA taxes generally must be withheld and
remitted to the Federal government by the employer.
---------------------------------------------------------------------------
\222\ Sec. 3101. For taxable years beginning after 2012, an
additional HI tax applies to certain employees.
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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.\223\ The
rate of the OASDI portion of SECA taxes is generally 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 of SECA tax 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.\224\
---------------------------------------------------------------------------
\223\ Sec. 1401.
\224\ For taxable years beginning after 2012, an additional HI tax
applies to certain self-employed individuals.
---------------------------------------------------------------------------
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.\225\
---------------------------------------------------------------------------
\225\ 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.\226\
---------------------------------------------------------------------------
\226\ Sec. 164(f).
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Railroad retirement tax
Instead of FICA taxes, railroad employers and employees are
subject, under the Railroad Retirement Tax Act (``RRTA''), to
taxes equivalent to the OASDI and HI taxes under FICA.\227\ The
employee portion of RRTA taxes generally must be withheld and
remitted to the Federal government by the employer.
---------------------------------------------------------------------------
\227\ Secs. 3201(a) and 3211(a).
---------------------------------------------------------------------------
Temporary reduced OASDI rates
Under the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010,\228\ for 2011,
the OASDI rate for the employee portion of the FICA tax, and
the equivalent employee portion of the RRTA tax, is reduced by
two percentage points to 4.2 percent. Similarly, for taxable
years beginning in 2011, the OASDI rate for a self-employed
individual is reduced by two percentage points to 10.4 percent.
---------------------------------------------------------------------------
\228\ Pub. L. No. 111-312.
---------------------------------------------------------------------------
Special rules coordinate the SECA tax rate reduction with a
self-employed individual's deduction in determining net
earnings from self-employment under the SECA tax and the income
tax deduction for one-half of the SECA tax. 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. The income tax deduction
allowed for the SECA tax for taxable years beginning in 2011 is
59.6 percent of the OASDI portion of the SECA tax imposed for
the taxable year plus one-half of the HI portion of the SECA
tax imposed for the taxable year.\229\
---------------------------------------------------------------------------
\229\ This percentage replaces the rate of one half (50 percent)
otherwise allowed for this portion of the deduction. The percentage is
necessary to allow the self-employed individual 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 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 \230\ receive transfers from the General
Fund of the United States Treasury equal to any reduction in
payroll taxes attributable to the rate reduction for 2011. The
amounts are 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.
---------------------------------------------------------------------------
\230\ 45 U.S.C. 231n-1(a).
---------------------------------------------------------------------------
For purposes of applying any provision of Federal law other
than the provisions of the Code, the employee rate of OASDI tax
is determined without regard to the reduced rate for 2011.
Under the Temporary Payroll Tax Cut Continuation Act of
2011,\231\ the reduced employee OASDI tax rate of 4.2 percent
under the FICA tax, and the equivalent employee portion of the
RRTA tax, is extended to apply to covered wages paid in the
first two months of 2012. A recapture applies for any benefit a
taxpayer may have received from the reduction in the OASDI tax
rate, and the equivalent employee portion of the RRTA tax, for
remuneration received during the first two months of 2012 in
excess of $18,350.\232\ The recapture is accomplished by a tax
equal to two percent of the amount of wages (and railroad
compensation) received during the first two months of 2012 that
exceed $18,350. The Secretary of the Treasury (or the
Secretary's delegate) is to prescribe regulations or other
guidance that is necessary and appropriate to carry out this
provision.
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\231\ Pub. L. No. 112-78, enacted after passage of H.R. 3630 by the
House of Representatives and the Senate.
\232\ $18,350 is 1/6 of the 2012 taxable wage base of $110,100.
---------------------------------------------------------------------------
In addition, for taxable years beginning in 2012, the OASDI
rate for a self-employed individual is reduced to 10.4 percent,
for self-employment income of up to $18,350 (reduced by wages
subject to the lower OASDI rate for 2012). Related rules for
2011 concerning coordination of a self-employed individual's
deductions in determining net earnings from self-employment and
income tax also apply for 2012, except that the income tax
deduction allowed for the OASDI portion of SECA tax imposed for
taxable years beginning in 2012 is computed at the rate of 59.6
percent \233\ of the OASDI portion of the SECA tax imposed on
self-employment income of up to $18,350. For self-employment
income in excess of this amount, the deduction is equal to half
of the OASDI portion of the SECA tax.
---------------------------------------------------------------------------
\233\ This percentage used with respect to the first $18,350 of
self-employment income 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 a 4.2 percent rate for the first $18,350
of self-employment income. 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, for the first $18,350 of self-employment income.
---------------------------------------------------------------------------
Rules related to the OASDI rate reduction for 2011
concerning (1) transfers to 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, and (2) determining the
employee rate of OASDI tax in applying provisions of Federal
law other than the Code also apply for 2012.

Explanation of Provision

Under the Act, the reduced employee OASDI tax rate of 4.2
percent under the FICA tax, and the equivalent portion of the
RRTA tax, is extended to apply for 2012. Similarly, a reduced
OASDI tax rate of 10.4 percent under the SECA tax, is extended
to apply for taxable years beginning in 2012.
Related rules concerning (1) coordination of a self-
employed individual's deductions in determining net earnings
from self-employment and income tax, (2) transfers to 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, and (3) determining the employee rate
of OASDI tax in applying provisions of Federal law other than
the Code also apply for 2012.
The Act repeals the present-law recapture provision
applicable to a taxpayer who receives the reduced OASDI rate
with respect to more than $18,350 of wages (or railroad
compensation) received during the first two months of 2012, and
removes the $18,350 limitation on self-employment income
subject to the lower rate for taxable years beginning in 2012.

Effective Date

The provision applies to remuneration received, and taxable
years beginning, after December 31, 2011.

B. Repeal of Certain Shifts in the Timing of Corporate Estimated Tax
Payments (sec. 7001 of the Act) \234\

---------------------------------------------------------------------------
\234\ See also part Thirteen B of this document.
---------------------------------------------------------------------------

Present Law

In general, corporations are required to make quarterly
estimated tax payments of their income tax liability.\235\ 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. In the case of a corporation with assets
of at least $1 billion (determined as of the end of the
preceding taxable year):
---------------------------------------------------------------------------
\235\ Sec. 6655.
---------------------------------------------------------------------------
1. payments due in July, August or September, 2012,
are increased to 100.5 percent of the payment otherwise
due; \236\
---------------------------------------------------------------------------
\236\ United States-Korea Free Trade Agreement Implementation Act,
Pub. L. No. 112-41, sec 505, and United States-Panama Trade Promotion
Agreement Implementation Act of 2011, Pub. L. No. 112-43, sec 502.
---------------------------------------------------------------------------
2. payments due in July, August, or September, 2014,
are increased to 174.25 percent of the payment
otherwise due; \237\
---------------------------------------------------------------------------
\237\ 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).
---------------------------------------------------------------------------
3. payments due in July, August or September, 2015,
are increased to 163.75 percent of the payment
otherwise due; \238\
---------------------------------------------------------------------------
\238\ Omnibus Trade Act of 2010, Pub. L. No. 111-344, sec. 10002;
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(2).
---------------------------------------------------------------------------
4. payments due in July, August, or September 2016
are increased to 103.5 percent of the payment otherwise
due; and \239\
---------------------------------------------------------------------------
\239\ United States-Korea Free Trade Agreement Implementation Act,
Pub. L. No. 112-41, sec 505; United States-Colombia Trade Promotion
Agreement Implementation Act, Pub. L. No. 112-42, sec 603; and United
States-Panama Trade Promotion Agreement Implementation Act, Pub. L. No.
112-43, sec 502.
---------------------------------------------------------------------------
5. payments due in July, August or September, 2019,
are increased to 106.50 percent of the payment
otherwise due.\240\
---------------------------------------------------------------------------
\240\ Hiring Incentives to Restore Employment Act, Pub. L. No. 111-
147, sec. 561(3).
---------------------------------------------------------------------------

Explanation of Provision \241\

---------------------------------------------------------------------------
\241\ All public laws enacted in the 112th Congress affecting this
provision are described in Part Thirteen of this document.
---------------------------------------------------------------------------
The Act reduces the applicable percentage for 2012 (100.5
percent), 2014 (174.25 percent), 2015 (163.75 percent), 2016
(103.5 percent), and 2019 (106.5 percent) to 100 percent. Thus
corporations will be required to make estimated tax payments in
2012, 2014, 2015, 2016, and 2019 as if the prior legislation
had never been enacted or amended.

Effective Date

The provision is effective on the date of enactment
(February 22, 2012).

PART ELEVEN: REVENUE PROVISION OF THE NATIONAL DEFENSE AUTHORIZATION
ACT FOR FISCAL YEAR 2013 (PUBLIC LAW 112-239) \242\
---------------------------------------------------------------------------

\242\ H.R. 4310. The House passed H.R. 4310 on May 18, 2012. The
Senate passed the bill with an amendment on December 12, 2012. The
conference report was filed on December 18, 2012 (H.R. Rep. No. 112-
705) and was passed by the House on December 20, 2012, and by the
Senate on December 21, 2012. The President signed the bill on January
2, 2013.
---------------------------------------------------------------------------

A. Modification of Definition of Public Safety Officer (sec. 1086 of
the Act and secs. 101(h) and 402(l) of the Code)

Present Law

Certain survivor annuities payable under a qualified
retirement plan on account of the death of a public safety
officer are excluded from income.\243\ Certain distributions
from a qualified retirement plan to a retired public safety
officer are excluded from gross income (up to a limit of
$3,000) if used to pay health insurance premiums.\244\ For
purposes of these exclusions, public safety officer is defined
by reference to the definition in the Omnibus Crime Control and
Safe Streets Act of 1968.\245\
---------------------------------------------------------------------------
\243\ Sec. 101(h).
\244\ Sec. 402(l).
\245\ 42 U.S.C. 3796b(9)(A).
---------------------------------------------------------------------------

Explanation of Provision

The National Defense Authorization Act for Fiscal Year 2013
(``NDA Act'') amends the definition of public safety officer in
the Omnibus Crime Control and Safe Streets Act of 1968.
However, the NDA Act retains the prior-law definition of public
safety officer for purposes of determining the exclusions from
gross income under the Code.

Effective Date

The provision is effective when the amendment to the
definition of public safety officer in the NDA Act takes
effect.

PART TWELVE: REVENUE PROVISIONS CONTAINED IN THE AMERICAN TAXPAYER
RELIEF ACT OF 2012 (PUBLIC LAW 112-240) \246\
---------------------------------------------------------------------------

\246\ H.R. 8. The bill passed the House on August 1, 2012. The
Senate passed the bill with an amendment on January 1, 2013. The House
agreed to the Senate amendment on January 1, 2013. The President signed
the bill on January 2, 2013. See also S. 3521, reported by the Senate
Finance Committee on August 28, 2012 (S. Rep. No. 112-208), for a bill
extending certain expiring provisions.
---------------------------------------------------------------------------

TITLE I--GENERAL EXTENSIONS

A. Permanent Extension and Modification of 2001 Tax Relief (sec. 101 of
the Act)

1. Individual income tax rate reductions (sec. 1 of the Code)

Present Law

In general
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.
Prior to the enactment of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (``EGTRRA'') \247\ the rate
brackets were 15, 28, 31, 36, and 39.6 percent. 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 tax rates in excess of 15 percent to 25, 28,
33, and 35 percent, respectively.
---------------------------------------------------------------------------
\247\ Pub. L. No. 107-16. Any reference to a provision of EGTRRA is
to the provision as amended by subsequent legislation which is subject
to the EGTRRA sunset.
---------------------------------------------------------------------------
Tax rate schedules
Separate rate schedules apply based on an individual's
filing status. The individual income tax rate schedules for
2012 are as follows:

TABLE 1--INDIVIDUAL INCOME TAX RATE SCHEDULES FOR 2012
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals

Not over $8,700........................ 10% of the taxable income
Over $8,700 but not over $35,350....... $870 plus 15% of the excess
over $8,700
Over $35,350 but not over $85,650...... $4,867.50 plus 25% of the
excess over $35,350
Over $85,650 but not over $178,650..... $17,442.50 plus 28% of the
excess over $85,650
Over $178,650 but not over $388,350.... $43,482.50 plus 33% of the
excess over $178,650
Over $388,350.......................... $112,683.50 plus 35% of the
excess over $388,350

Heads of Households

Not over $12,400....................... 10% of the taxable income
Over $12,400 but not over $47,350...... $1,240 plus 15% of the excess
over $12,400
Over $47,350 but not over $122,300..... $6,482.50 plus 25% of the
excess over $47,350
Over $122,300 but not over $198,050.... $25,220 plus 28% of the excess
over $122,300
Over $198,050 but not over $388,350.... $46,430 plus 33% of the excess
over $198,050
Over $388,350.......................... $109,229 plus 35% of the excess
over $388,350

Married Individuals Filing Joint Returns and Surviving Spouses

Not over $17,400....................... 10% of the taxable income
Over $17,400 but not over $70,700...... $1,740 plus 15% of the excess
over $17,400
Over $70,700 but not over $142,700..... $9,735 plus 25% of the excess
over $70,700
Over $142,700 but not over $217,450.... $27,735 plus 28% of the excess
over $142,700
Over $217,450 but not over $388,350.... $48,665 plus 33% of the excess
over $217,450
Over $388,350.......................... $105,062 plus 35% of the excess
over $388,350

Married Individuals Filing Separate Returns

Not over $8,700........................ 10% of the taxable income
Over $8,700 but not over $35,350....... $870 plus 15% of the excess
over $8,700
Over $35,350 but not over $71,350...... $4,867.50 plus 25% of the
excess over $35,350
Over $71,350 but not over $108,725..... $13,867.50 plus 28% of the
excess over $71,350
Over $108,725 but not over $194,175.... $24,332.50 plus 33% of the
excess over $108,725
Over $194,175.......................... $52,531 plus 35% of the excess
over $194,175
------------------------------------------------------------------------

The following table is the staff of the Joint Committee on
Taxation's calculation of the individual rate schedules for
2013 (assuming the expiration of the EGTRRA sunset).

TABLE 2--INDIVIDUAL INCOME TAX RATE SCHEDULES FOR 2013
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals

Not over $36,250....................... 15% of the taxable income
Over $36,250 but not over $87,850...... $5,437.50 plus 28% of the
excess over $36,250
Over $87,850 but not over $183,250..... $19,886.50 plus 31% of the
excess over $87,850
Over $183,250 but not over $398,350.... $49,460.50 plus 36% of the
excess over $183,250
Over $398,350.......................... $126,896.50 plus 39.6% of the
excess over $398,350

Heads of Households

Not over $48,600....................... 15% of the taxable income
Over $48,600 but not over $125,450..... $7,290 plus 28% of the excess
over $48,600
Over $125,450 but not over $203,150.... $28,808 plus 31% of the excess
over $125,450
Over $203,150 but not over $398,350.... $52,895 plus 36% of the excess
over $203,150
Over $398,350.......................... $123,167 plus 39.6% of the
excess over $398,350

Married Individuals Filing Joint Returns and Surviving Spouses

Not over $60,550....................... 15% of the taxable income
Over $60,550 but not over $146,400..... $9,082.50 plus 28% of the
excess over $60,550
Over $146,400 but not over $223,050.... $33,120.50 plus 31% of the
excess over $146,400
Over $223,050 but not over $398,350.... $56,882 plus 36% of the excess
over $223,050
Over $398,350.......................... $119,990 plus 39.6% of the
excess over $398,350

Married Individuals Filing Separate Returns

Not over $30,275....................... 15% of the taxable income
Over $30,275 but not over $73,200...... $4,541.25 plus 28% of the
excess over $30,275
Over $73,200 but not over $111,525..... $16,560.25 plus 31% of the
excess over $73,200
Over $111,525 but not over $199,175.... $28,441 plus 36% of the excess
over $111,525
Over $199,175.......................... $59,995 plus 39.6% of the
excess over $199,175
------------------------------------------------------------------------

Explanation of Provision

The Act permanently extends the EGTRRA individual income
tax rates for taxable incomes below the threshold amount. For
taxable income above the threshold amount, the 39.6 percent
rate which applied prior to the enactment of EGTRRA applies.
The threshold amounts are (1) $450,000 in the case of a joint
return or surviving spouse, (2) $425,000 in the case of a head
of household, (3) $400,000 in the case of an unmarried person
who is not a surviving spouse or head of household, and (4)
$225,000 in the case of a married individual filing a separate
return.\248\ The threshold amounts are indexed for inflation.
For 2013, the individual income tax rate schedules are as
follows:
---------------------------------------------------------------------------
\248\ For estates and trusts, the 39.6-percent rate applies to all
taxable income in the highest rate bracket.

Table 3--Individual Income Tax Rate Schedules for 2013 \249\
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals

Not over $8,925........................ 10% of the taxable income
Over $8,925 but not over $36,250....... $892.50 plus 15% of the excess
over $8,925
Over $36,250 but not over $87,850...... $4,991.25 plus 25% of the
excess over $36,250
Over $87,850 but not over $183,250..... $17,891.25 plus 28% of the
excess over $87,850
Over $183,250 but not over $398,350.... $44,603.25 plus 33% of the
excess over $183,250
Over $398,350 but not over $400,000.... $115,586.25 plus 35% of the
excess over $398,350
Over $400,000.......................... $116,163.75 plus 39.6% of the
excess over $400,000

Heads of Households
Not over $12,750....................... 10% of the taxable income
Over $12,750 but not over $48,600...... $1,275 plus 15% of the excess
over $12,750
Over $48,600 but not over $125,450..... $6,652.50 plus 25% of the
excess over $48,600
Over $125,450 but not over $203,150.... $25,865 plus 28% of the excess
over $125,450
Over $203,150 but not over $398,350.... $47,621 plus 33% of the excess
over $203,150
Over $398,350 but not over $425,000.... $112,037 plus 35% of the excess
over $398,350
Over $425,000.......................... $121,364.50 plus 39.6% of the
excess over $425,000

Married Individuals Filing Joint Returns and Surviving Spouses

Not over $17,850....................... 10% of the taxable income
Over $17,850 but not over $72,500...... $1,785 plus 15% of the excess
over $17,850
Over $72,500 but not over $146,400..... $9,982.50 plus 25% of the
excess over $72,500
Over $146,400 but not over $223,050.... $28,457.50 plus 28% of the
excess over $146,400
Over $223,050 but not over $398,350.... $49,919.50 plus 33% of the
excess over $223,050
Over $398,350 but not over $450,000.... $107,768.50 plus 35% of the
excess over $398,350
Over $450,000.......................... $125,846 plus 39.6% of the
excess over $450,000

Married Individuals Filing Separate Returns

Not over $8,925........................ 10% of the taxable income
Over $8,925 but not over $36,250....... $892.50 plus 15% of the excess
over $8,925
Over $36,250 but not over $73,200...... $4,991.25 plus 25% of the
excess over $36,250
Over $73,200 but not over $111,525..... $14,228.75 plus 28% of the
excess over $73,200
Over $111,525 but not over $199,175.... $24,959.75 plus 33% of the
excess over $111,525
Over $199,175 but not over $225,000.... $53,884.25 plus 35% of the
excess over $199,175
Over $225,000.......................... $62,923 plus 39.6% of the
excess over $225,000
------------------------------------------------------------------------

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.
---------------------------------------------------------------------------
\249\ A comparison of Table 3, below, with Table 2, above,
illustrates the tax rate changes. Note that Table 3 also incorporates
the provision to retain the marriage penalty relief with respect to the
size of the 15-percent rate bracket, as discussed below.
---------------------------------------------------------------------------

2. Overall limitation on itemized deductions and the phase-out of
personal exemptions (secs. 68 and 151 of the Code)

Present Law

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

An individual may elect to claim his or her itemized
deductions for a taxable year in lieu of the standard
deduction. 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 taxes (or in lieu of income,
sales taxes), property taxes, unreimbursed employee business
expenses, and certain other miscellaneous expenses.
Prior to EGTRRA, 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 (``Pease'' limitation). 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 phased-out and terminated the Pease
limitation.
Pursuant to the EGTRRA sunset, the Pease limitation becomes
fully effective again in 2013. Adjusting for inflation, the
Joint Committee staff calculates the AGI threshold is $178,150
for 2013.

Personal exemption phase-out for certain taxpayers (``PEP'')

Personal exemptions generally are allowed for the taxpayer,
his or her spouse, and any dependents. For 2013, the amount
deductible for each personal exemption is $3,900. This amount
is indexed annually for inflation.
Prior to EGTRRA, 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 a taxpayer
could claim 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, a taxpayer's available personal exemptions were phased-
out over a $122,500 range (which was not indexed for
inflation), beginning at the applicable threshold. EGTRRA
phased-out and terminated PEP.
Pursuant to the EGTRRA sunset, the personal exemption
phase-out becomes fully effective again in 2013. The Joint
Committee staff calculates the PEP thresholds for 2013 are: (1)
$178,150 for single individuals; (2) $267,200 for married
couples filing joint returns; and (3) $222,700 for heads of
households.

Explanation of Provision

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

Under the Act, the ``Pease'' thresholds amounts are
modified. The AGI thresholds for taxable years beginning in
2013 are (1) $250,000 for single individuals; (2) $300,000 for
married couples filing joint returns and surviving spouses; (3)
$275,000 for heads of households, and (4) $150,000 for a
married individual filing a separate return. These amounts are
indexed for inflation for taxable years beginning after 2013.

Personal exemption phase-out for certain taxpayers (``PEP'')

Under the Act, the PEP threshold amounts are modified, and
are the same as the AGI thresholds for the ``Pease''
limitation.

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

3. Increase the child tax credit (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 2012 and $500 thereafter.\250\ A child who is
not a citizen, national, or resident of the United States
cannot be a qualifying child.\251\
---------------------------------------------------------------------------
\250\ Sec. 24(a).
\251\ Sec. 24(c).
---------------------------------------------------------------------------
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 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.\252\
---------------------------------------------------------------------------
\252\ Sec. 24(b).
---------------------------------------------------------------------------
The credit is allowable against the regular tax and, for
taxable years beginning before January 1, 2013, is allowed
against the alternative minimum tax (``AMT''). For taxable
years beginning after December 31, 2012, the credit is not
allowed against the AMT. To the extent the child credit exceeds
the taxpayer's income tax liability, the taxpayer is eligible
for a refundable credit \253\ (the additional child tax credit)
equal to 15 percent of earned income in excess of a threshold
dollar amount (the ``earned income'' formula).\254\ The
threshold dollar amount enacted by EGTRRA was $10,000 indexed
for inflation. The American Recovery and Reinvestment Act of
2009 (``ARRA'') reduced the threshold dollar amount to $3,000
(unindexed) for 2009 and 2010. The Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010
extended the $3,000 threshold for both 2011 and 2012. After
2012, the ability to determine the refundable child credit
based on earned income in excess of the threshold dollar amount
expires.
---------------------------------------------------------------------------
\253\ The refundable credit may not exceed the maximum credit per
child of $1,000 through 2012 and $500 thereafter.
\254\ Sec. 24(d).
---------------------------------------------------------------------------
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 (``EITC''). After 2012, 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. At the taxpayer's election, combat pay may
be treated as earned income for these purposes. 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.
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.

Explanation of Provision

The Act makes permanent the $1,000 child tax credit. The
Act also permanently extends the repeal of a prior-law
provision that reduced the refundable child credit by the
amount of the AMT. Under the Act, the staff of the Joint
Committee on Taxation calculates that in 2013, the earned
income threshold for computing the refundable child credit is
$13,400.\255\ Finally, the Act permanently 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.\256\
---------------------------------------------------------------------------
\255\ This amount is $10,000 indexed for inflation from 2001. See
Title I, section C. 2. for additional discussion of the child credit.
\256\ See Title I. section C. 4, below.
---------------------------------------------------------------------------

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

4. Marriage penalty relief and earned income tax credit simplification
(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.
Under the sunset provisions of the EGTRRA, the provision will
no longer apply for taxable years beginning after December 31,
2012.

15-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. Under the sunset
provisions of the EGTRRA, the provision will no longer apply
for taxable years beginning after December 31, 2012.

Earned income tax credit

The earned income tax credit (``EITC'') is a refundable tax
credit available to certain lower-income individuals.
Generally, the amount of an individual's allowable earned
income credit is dependent on the individual's earned income,
adjusted gross income, and the number of qualifying children.
Under the sunset provisions of the EGTRRA, the provision will
no longer apply for taxable years beginning after December 31,
2012.

Explanation of Provision

Basic standard deduction

The Act permanently 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 permanently.

15-percent rate bracket

The Act permanently 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
permanently.

Earned income tax credit

The Act makes permanent the EITC provisions enacted by
EGTRRA.
These include: (1) a simplified definition of earned
income; (2) a simplified relationship test; (3) a simplified
tie-breaking rule; (4) additional math error authority for the
Internal Revenue Service; (5) a repeal of the prior-law
provision that reduced an individual's EITC by the amount of
his alternative minimum tax liability; and (6) a $3,000
increase in the beginning and ending points of the credit
phase-out for married taxpayers.\257\
---------------------------------------------------------------------------
\257\ The amount is indexed for inflation. See Title I, section C.
3. for additional discussion of the earned income tax credit.
---------------------------------------------------------------------------

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

5. Education incentives (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

Gross income does not include 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.\258\ This
exclusion does not extend to scholarship amounts covering
regular living expenses, such as room and board. In addition to
the exclusion for qualified scholarships, the Code 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 as amounts received as a qualified
scholarship are also excludable from wages for payroll tax
purposes.\259\
---------------------------------------------------------------------------
\258\ Sec. 117.
\259\ 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 the 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, 2012.

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.\260\ Under
EGTRRA, this exclusion applies to both graduate and
undergraduate courses. 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.
---------------------------------------------------------------------------
\260\ Secs. 127, 3121(a)(18).
---------------------------------------------------------------------------
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, employer-provided educational
assistance is excludable from gross income and wages only if
the education expenses qualify as a working condition fringe
benefit.\261\ 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 purposes of a working
condition fringe benefit, the two-percent floor on
miscellaneous itemized deductions is disregarded.
---------------------------------------------------------------------------
\261\ Sec. 132(d).
---------------------------------------------------------------------------
The specific exclusion will not be available for taxable
years beginning after December 31, 2012. 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.\262\
---------------------------------------------------------------------------
\262\ 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.\263\ 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.
---------------------------------------------------------------------------
\263\ 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
2012, the deduction is phased out ratably for single taxpayers
with AGI between $60,000 and $75,000 and between $125,000 and
$155,000 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,
2012, 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 the EGTRRA changes, 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. Thus,
the staff of the Joint Committee on Taxation estimates that the
phaseout ranges will be $50,000 to $65,000 ($75,000 to $90,000
in the case of a married couple filing jointly) for 2013.

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.\264\
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.
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\264\ Sec. 530.
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Earnings on contributions to a Coverdell education savings
account generally are subject to tax when withdrawn.\265\
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.\266\
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\265\ In addition, Coverdell education savings accounts are subject
to the unrelated business income tax imposed by section 511.
\266\ 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.
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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.\267\
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.\268\
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\267\ Qualified higher education expenses are defined in the same
manner as for qualified tuition programs.
\268\ Sec. 530(b)(2)(B).
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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, as well as any other tax-
free educational benefits, such as employer-provided
educational assistance, that are excludable from gross income.
Effective for taxable years beginning after December 31,
2012, the changes made by EGTRRA to Coverdell education savings
accounts expire. 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 to $220,000 from $150,000 to
$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.\269\ 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.\270\ 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.\271\ 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.\272\ 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.
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\269\ 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).
\270\ Ninety-five percent or more of the net proceeds of a
governmental bond issue are to be used for local governmental
activities of the issuer. Sec. 148(f)(4)(D).
\271\ Under Treasury regulations, an issuer may apply a fact-based
rather than an expectations-based test. Treas. Reg. sec. 1.148-8(c)(1).
\272\ 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.'' \273\ The term ``private
person'' includes the Federal government and all other
individuals and entities other than State or local governments.
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\273\ 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.
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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.\274\ 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.
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\274\ Sec. 142(a)(13), (k).
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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 Act makes permanent the EGTRRA changes 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, the Coverdell education savings accounts, the
expansion of the small government unit exception to arbitrage
rebate and the allowance of the issuance of tax-exempt private
activity bonds for public school facilities. Thus, all of these
tax benefits for education continue to be available after 2012.

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

6. Other incentives for families and children (includes extension of
the adoption tax credit, employer-provided adoption assistance,
employer-provided child care tax credit, and dependent care tax
credit) (secs. 21, 23, 45D, and 137 of the Code)

Present Law

Adoption credit and exclusion from income for employer-provided
adoption assistance

Present law for 2012 provides: (1) a nonrefundable adoption
credit with a maximum of $12,650 per eligible child (both
special needs and non-special needs adoptions); and (2) a
maximum exclusion for employer-provided adoption assistance of
$12,650 per eligible child (both special needs and non-special
needs adoptions).\275\ 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
2012, the phase-out range is between $189,710 and $229,710. The
phaseout threshold is adjusted for inflation annually, but the
phaseout range remains a $40,000 range. Under present law, for
purposes of the credit and exclusion, a special needs adoption
finalized during the taxable year is deemed to include $12,650
of eligible expenses associated with that adoption, regardless
of whether expenses rose to that level. Present law allows
taxpayers to claim the adoption credit against their
alternative minimum tax liability.
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\275\ Secs. 23 and 137. EGTRRA increased the maximum credit and
exclusion to $10,000 (indexed for inflation after 2002) for both non-
special needs and special needs adoptions, and increased the phase-out
starting point to $150,000 (indexed for inflation after 2002). 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 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). The 2010 Act extended
for one year (2012) the EGTRRA expansion of the adoption credit and the
exclusion from income for employer-provided adoption assistance. 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, were not extended by the 2010 Act provision or otherwise.
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For taxable years beginning after December 31, 2012, the
amount of the adoption credit is reduced to $6,000, and only
applies in the case of special needs adoptions. The employer-
provided adoption assistance exclusion terminates. 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. The provision
providing for special rules regarding the expenses relating to
special needs adoptions do not apply, and the credit may not
offset alternative minimum tax liability.

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)); 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.
The tax credit expires for taxable years beginning after
December 31, 2012.

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.\276\ 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 above (``AGI'')
$15,000. Therefore, the credit percentage is reduced to 20
percent for taxpayers with AGI over $43,000. Generally,
eligible expenses include expenses for household services and
expenses for the care of a qualifying individual but only if
such expenses are incurred to enable the taxpayer to be
gainfully employed.
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\276\ Sec. 21.
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The level of this credit is reduced for taxable years
beginning after December 31, 2012, under EGTRRA.

Explanation of Provision

Adoption credit and exclusion from income for employer-provided
adoption assistance

The Act makes permanent the EGTRRA expansion of these two
provisions. Therefore, for 2013, 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 $193,930 and $233,930 (indexed
for inflation) for 2013.\277\ The 2012 rules relating to
expenses for special needs adoptions are retained, and
taxpayers remain able to offset their alternative minimum tax
liability with the credit.
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\277\ 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, are not extended by the provision.
---------------------------------------------------------------------------

Employer-provided child care tax credit

The Act makes permanent the EGTRRA expansion of the
employer-provided child tax credit.

Expansion of dependent care tax credit

The Act makes permanent the EGTRRA expansion of the
dependent care tax credit.

Effective Date

The provisions apply to taxable years beginning after
December 31, 2012.

7. Alaska native settlement trusts (sec. 646 of the Code)

Present Law

The Alaska Native Claims Settlement Act (``ANCSA'') \278\
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, which provides restrictions regarding the transfer of
Settlement Common Stock, unless an Alaska Native Corporation
specifically allows other shareholders under specified
procedures.
---------------------------------------------------------------------------
\278\ 43 U.S.C. 1601 et. seq.
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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.\279\
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\279\ 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 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.\280\ There is also simplified reporting
to beneficiaries.\281\
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\280\ Sec. 646.
\281\ Sec. 6039H.
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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 to the beneficiaries are thereafter made
by the electing Trust that are taxed to the beneficiaries as
dividends from the Alaska Native Corporation.
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.
The special rules do not apply to taxable years beginning
after December 31, 2012.

Explanation of Provision

The Act makes permanent the EGTRRA amendments relating to
electing Settlement Trusts.

Effective Date

The provision applies to taxable years of electing
Settlement Trusts, their beneficiaries, and sponsoring Alaska
Native Corporations beginning after December 31, 2012.

8. Estate, gift, and generation-skipping transfer taxes (secs. 2001 and
2010 of the Code)

Present 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, made either directly or in trust or using
a 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.
A unified credit is available with respect to taxable
transfers by gift and at death.\282\ The unified credit offsets
tax computed at the lowest estate and gift tax rates on a
specified amount of transfers, referred to as the applicable
exclusion amount. The applicable exclusion amount for estate
and gift tax is $5 million (indexed for inflation for years
after 2011). For 2012, the inflation-indexed estate and gift
tax applicable exclusion amount is $5.12 million. The
generation skipping transfer tax exclusion is equal to the
applicable exclusion amount for estate tax purposes. The top
estate and gift tax rate is 35 percent.
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\282\ Sec. 2010.
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A deduction is allowed for certain death taxes paid to any
State or the District of Columbia.
The Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act of 2010 (``2010 Extension Act'') \283\
extended certain special temporary rules originally enacted as
part of EGTRRA relating to: (1) allocation of generation
skipping transfer tax exemption; (2) estate tax conservation
easements; and (3) installment payments of estate taxes.\284\
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\283\ Pub. L. No. 111-312. Title III of the 2010 Extension Act
generally extended and modified the estate and gift tax provisions of
EGTRRA.
\284\ See Subtitles F, G and H of Title V of EGTRRA.
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Portability of unused exclusion between spouses

Under a temporary provision enacted as part of the 2010
Extension Act, 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.\285\
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\285\ Sec. 2010(c). 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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Sunset of EGTRRA and 2010 Extension Act estate and gift tax provisions

The estate, gift, and generation skipping transfer tax
provisions of EGTRRA, as extended and modified by the 2010
Extension Act, apply for decedents dying, generation skipping
transfers made, and gifts made before 2013. For transfers after
December 31, 2012, the law scheduled to be in effect prior to
the enactment of EGTRRA will apply. In general, this includes:
(1) an estate and gift tax applicable exclusion amount of $1
million; (2) a top estate and gift tax rate of 55 percent; (3)
no portability of unused exclusion between spouses; (4) a
credit (rather than a deduction) for certain death taxes paid
to any State or the District of Columbia; and (5) expiration of
the special rules enacted under EGTRRA relating to allocation
of generation skipping transfer tax exemption, estate tax
conservation easements, and installment payments of estate
taxes.

Explanation of Provision

The Act makes permanent the estate and gift tax provisions
of EGTRRA, as extended and modified by the 2010 Extension Act,
with the modifications described below. For 2013, the
inflation-indexed estate and gift tax applicable exclusion
amount is $5.25 million.
The Act increases the top estate and gift tax rate to 40
percent and makes a technical correction to the portability
provision.\286\
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\286\ Section 2010(c)(4)(B)(i) is amended replacing ``basic
exclusion amount'' with ``applicable exclusion amount'' to reflect the
original intent of the statute. See, Joint Committee on Taxation,
General Explanation of Tax Legislation Enacted in the 111th Congress
(JCS-2-11), March 2011; and Joint Committee on Taxation, ERRATA--
General Explanation of Tax Legislation Enacted in the 111th Congress
(JCX-20-11), March 2011.
---------------------------------------------------------------------------

Effective Date

The provision generally is effective for decedents dying,
generation skipping transfers made, and gifts made after
December 31, 2012.
The technical correction to the portability provision is
effective as if included in the 2010 Extension Act (i.e.,
effective for decedents dying after December 31, 2010).

B. Permanent Extension of 2003 Tax Relief; 20-Percent Capital Gains
Rate for Certain High Income Individuals (sec. 102 of the Act and secs.
1 and 55 of the Code)

Present Law

Capital gains

In general
In general, gain or loss reflected in the value of an asset
is not recognized for income tax purposes until a taxpayer
disposes of the asset. On the sale or exchange of a capital
asset, any gain generally is included in income. Any net
capital gain of an individual 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 2013
Under present law, for taxable years beginning before
January 1, 2013, 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 2012
For taxable years beginning after December 31, 2012, 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
2013.
For taxable years beginning after December 31, 2012, a tax
is imposed on net investment income (which includes net gain
included in gross income from the disposition of property other
than certain property held in a trade or business) in the case
of an individual, estate, or trust. 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.

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 2013
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 2013, 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.\287\
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\287\ In addition, for taxable years beginning before 2013, 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 2012
For taxable years beginning after 2012, all dividends
received by an individual are taxed at ordinary income tax
rates.
For taxable years beginning after December 31, 2012, a tax
is imposed on net investment income in the case of an
individual, estate, or trust. In the case of an individual, the
tax is 3.8 percent of the lesser of net investment income,
which includes dividends, 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.

Explanation of Provision

Under the Act, the tax rates in effect before 2013 for
adjusted net capital gain and qualified dividend income are
made permanent, except that the 15-percent rate applies only to
adjusted net capital gain and qualified dividend income which
otherwise would be taxed at a rate below 39.6 percent under the
regular tax. A 20-percent rate applies to amounts which would
otherwise be taxed at a 39.6-percent rate.\288\ These rates
apply for purposes of both the regular tax and the alternative
minimum tax. Thus, tax rates of 0, 15, and 20 percent apply to
this income. The Act does not change the tax on net investment
income.
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\288\ The provisions set forth in the preceding footnote relating
to sections 306 and 341 are made permanent, and the tax rate for the
accumulated earnings tax and the personal holding company tax is 20
percent.
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Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

C. Extension of 2009 Tax Relief (sec. 103 of the Act)

1. Extension of the American opportunity credit (sec. 25A of the Code)

Present Law

Hope Scholarship credit

For taxable years beginning before 2009 and after 2012,
individual taxpayers are allowed to claim a nonrefundable
credit, the Hope Scholarship 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.\289\
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.
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\289\ 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, 2012.
---------------------------------------------------------------------------
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.

American opportunity tax credit

The American opportunity tax credit refers to modifications
to the Hope credit that apply for taxable years beginning in
2009, 2010, 2011 and 2012. 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 five years (through 2017) the
temporary modifications to the Hope credit 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, 2012.

2. Extension of reduced earnings threshold for additional child tax
credit (sec. 24 of the Code)

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 2012 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, 2013, 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, as extended by the Tax
Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (``2010 Extension Act'') \290\ set the
threshold at $3,000 for taxable years 2009 to 2012. After 2012,
the ability to determine the refundable child credit based on
earned income in excess of the threshold dollar amount expires.
---------------------------------------------------------------------------
\290\ Pub. L. No. 111-312.
---------------------------------------------------------------------------
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 2012, 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 five years the earned income
threshold of $3,000.

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

3. Extension of modification of the earned income tax credit (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 $3,200 (for 2012). 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.\291\
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\291\ 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 $6,210, resulting in a maximum credit
of $475 for 2011. The maximum is available for those with
incomes between $6,210 and $7,770 ($12,980 if married filing
jointly). The credit begins to phase out at a rate of 7.65
percent of earnings above $7,770 ($12,980 if married filing
jointly) resulting in a $0 credit at $13,980 of earnings
($19,190 if married filing jointly).
Taxpayers with one qualifying child may claim a credit in
2012 of 34 percent of their earnings up to $9,320, resulting in
a maximum credit of $3,169. The maximum credit is available for
those with earnings between $9,320 and $17,090 ($22,300 if
married filing jointly). The credit begins to phase out at a
rate of 15.98 percent of earnings above $17,090 ($22,300 if
married filing jointly). The credit is completely phased out at
$36,920 of earnings ($42,130 if married filing jointly).
Taxpayers with two qualifying children may claim a credit
in 2012 of 40 percent of earnings up to $13,090, resulting in a
maximum credit of $5,236. The maximum credit is available for
those with earnings between $13,090 and $17,090 ($22,300 if
married filing jointly). The credit begins to phase out at a
rate of 21.06 percent of earnings above $17,090 ($22,300 if
married filing jointly). The credit is completely phased out at
$41,952 of earnings ($47,162 if married filing jointly).
A temporary provision enacted by the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of
2010 (``2010 Extension Act'') \292\ allows taxpayers with three
or more qualifying children to claim a credit of 45 percent for
2011 and 2012. For example, in 2012 taxpayers with three or
more qualifying children may claim a credit of 45 percent of
earnings up to $13,090, resulting in a maximum credit of
$5,891. The maximum credit is available for those with earnings
between $13,090 and $17,090 ($22,300 if married filing
jointly). The credit begins to phase out at a rate of 21.06
percent of earnings above $17,090 ($22,300 if married filing
jointly). The credit is completely phased out at $45,060 of
earnings ($50,270 if married filing jointly).
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\292\ Pub. L. No. 111-312.
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Under a provision of the 2010 Extension Act, the phase-out
thresholds for married couples were raised to an amount $5,000
(indexed for inflation from 2009) above that for other
filers.\293\ The increase is $5,210 for 2012.
---------------------------------------------------------------------------
\293\ A technical correction may be needed to reflect the inflation
adjusted amounts for taxable years after 2010.
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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 five years (through
2017).
The provision extends the higher phase-out thresholds for
married couples filing joint returns for five years (through
2017).

Effective Date

The provision applies to taxable years beginning after
December 31, 2012.

4. Refunds disregarded in the administration of federal programs and
federally assisted programs (sec. 6409 of the Code)

Present Law

Any tax refund (or advance payment with respect to a
refundable credit) made to any individual in calendar year
2010, 2011, or 2012 is not taken into account as a resource for
a period of 12 months from receipt 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.

Reasons for Change \294\

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\294\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
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Congress believes that it continues to be important to
provide an explicit uniform rule regarding the treatment of tax
refunds for purposes of determining eligibility for benefits
under Federal programs (or State or local programs financed
with Federal funds).

Explanation of Provision

The Act makes permanent the present law provision for any
tax refund (or advance payment with respect to a refundable
credit) made to any individual.

Effective Date

The provision is effective for amounts received after
December 31, 2012.

D. Permanent Alternative Minimum Tax Relief for Individuals (sec. 104
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) $74,450 ($45,000 in taxable
years beginning after 2011) in the case of married individuals
filing a joint return and surviving spouses; (2) $48,450
($33,750 in taxable years beginning after 2011) in the case of
other unmarried individuals; (3) $37,225 ($22,500 in taxable
years beginning after 2011) in the case of married individuals
filing separate returns; and (4) $22,500 in the case of an
estate or trust. The exemption amounts are phased out by an
amount equal to 25 percent of the amount by which the
individual's AMTI exceeds (1) $150,000 in the case of married
individuals filing a joint return and surviving spouses, (2)
$112,500 in the case of 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. These credits include 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 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 2012, 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 2011, the nonrefundable
personal credits (other than the adoption credit (for taxable
years beginning after 2012), the child credit (for taxable
years beginning after 2012), the Hope Scholarship credit (for
taxable years beginning after 2012), the credit for savers, the
credit for residential energy efficient property, the credit
for certain plug-in electric vehicles, the credit for
alternative motor vehicles, and the 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
adoption credit (for taxable years beginning before 2013), the
child credit (for taxable years beginning before 2013), the
Hope Scholarship credit (for taxable years beginning before
2013), the credit for savers, the credit for residential energy
efficient property, the credit certain plug-in electric
vehicles, the credit for alternative motor vehicles, and the
credit for new qualified plug-in electric drive motor vehicles
are allowed to the full extent of the individual's regular tax
and alternative minimum tax.

Reasons for Change \295\

---------------------------------------------------------------------------
\295\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress is concerned about the projected increase in the
number of individuals who will be affected by the individual
alternative minimum tax and the projected increase in tax
liability for those who are affected by the tax. The provision
will reduce the number of individuals who would otherwise be
affected by the alternative minimum tax and will reduce the tax
liability of the families that continue to be affected by the
alternative minimum tax.

Explanation of Provision

The basic AMT exemption amounts for taxable years beginning
in 2012 are increased to (1) $78,750 in the case of married
individuals filing a joint return and surviving spouses; (2)
$50,600 in the case of other unmarried individuals; and (3)
$39,375 in the case of married individuals filing separate
returns. For taxable years beginning after 2012, the Act
indexes the following dollar amounts for inflation:
(1) The dollar amounts dividing the 26- and 28-
percent rates.
(2) The dollar amounts of the basic AMT exemption.
(3) The dollar amounts at which the phase-out of the
basic AMT exemption amount begins.
The Act makes permanent the provision allowing the personal
credits against the AMT.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

TITLE II--INDIVIDUAL TAX EXTENDERS

1. Deduction for certain expenses of elementary and secondary school
teachers (sec. 201 of the Act and sec. 62(a)(2)(D) of the Code)

Present Law

In general, ordinary and necessary business expenses are
deductible. However, unreimbursed employee business expenses
generally are deductible only as an itemized deduction and only
to the extent that the individual's total miscellaneous
deductions (including employee business expenses) exceed two
percent of adjusted gross income. For taxable years beginning
after 2012, 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, 2012, 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.\296\
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).
---------------------------------------------------------------------------
\296\ 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 (kindergarten through grade 12), as determined under
State law.
The above-the-line deduction for eligible educators is not
allowed for taxable years beginning after December 31, 2011.

Reasons for Change \297\

---------------------------------------------------------------------------
\297\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress recognizes that many elementary and secondary
school teachers provide substantial classroom resources at
their own expense, and believe that it is appropriate to extend
the present law deduction for such expenses in order to
continue to partially offset the substantial costs such
educators incur for the benefit of their students.

Explanation of Provision

The provision extends the deduction for eligible educator
expenses for two years, through December 31, 2013.

Effective Date

The provision applies to taxable years beginning after
December 31, 2011.

2. Exclude discharges of acquisition indebtedness on principal
residences from gross income (sec. 202 of the Act and sec. 108
of the Code)

Present Law

In general

Gross income includes income that is realized by a debtor
from the discharge of indebtedness, subject to certain
exceptions for debtors in Title 11 bankruptcy cases, insolvent
debtors, certain student loans, certain farm indebtedness, and
certain real property business indebtedness (secs. 61(a)(12)
and 108).\298\ In cases involving discharges of indebtedness
that are excluded from gross income under the exceptions to the
general rule, taxpayers generally reduce certain tax
attributes, including basis in property, by the amount of the
discharge of indebtedness.
---------------------------------------------------------------------------
\298\ A debt cancellation which constitutes a gift or bequest is
not treated as income to the donee debtor (sec. 102).
---------------------------------------------------------------------------
The amount of discharge of indebtedness excluded from
income by an insolvent debtor not in a Title 11 bankruptcy case
cannot exceed the amount by which the debtor is insolvent. In
the case of a discharge in bankruptcy or where the debtor is
insolvent, any reduction in basis may not exceed the excess of
the aggregate bases of properties held by the taxpayer
immediately after the discharge over the aggregate of the
liabilities of the taxpayer immediately after the discharge
(sec. 1017).
For all taxpayers, the amount of discharge of indebtedness
generally is equal to the difference between the adjusted issue
price of the debt being cancelled and the amount used to
satisfy the debt. These rules generally apply to the exchange
of an old obligation for a new obligation, including a
modification of indebtedness that is treated as an exchange (a
debt-for-debt exchange).

Qualified principal residence indebtedness

An exclusion from gross income is provided for any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness.Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B), except that the dollar limitation is $2 million)
with respect to the taxpayer's principal residence. Acquisition
indebtedness with respect to a principal residence generally
means indebtedness which is incurred in the acquisition,
construction, or substantial improvement of the principal
residence of the individual and is secured by the residence. It
also includes refinancing of such indebtedness to the extent
the amount of the indebtedness resulting from such refinancing
does not exceed the amount of the refinanced indebtedness. For
these purposes, the term ``principal residence'' has the same
meaning as under section 121 of the Code.
If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $800,000 is qualified principal residence
indebtedness. If the residence is sold for $700,000 and
$300,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under the
qualified principal residence indebtedness exclusion.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the provision.
The qualified principal residence indebtedness exclusion
does not apply to a taxpayer in a Title 11 case; instead the
general exclusion rules apply. In the case of an insolvent
taxpayer not in a Title 11 case, the qualified principal
residence indebtedness exclusion applies unless the taxpayer
elects to have the general exclusion rules apply instead.
The exclusion does not apply to the discharge of a loan if
the discharge is on account of services performed for the
lender or any other factor not directly related to a decline in
the value of the residence or to the financial condition of the
taxpayer.
The exclusion for qualified principal residence
indebtedness is effective for discharges of indebtedness before
January 1, 2013.

Reasons for Change \299\

---------------------------------------------------------------------------
\299\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that where a lender discharges
acquisition debt on a principal residence such as is the case
of a short sale or when a taxpayer loses their principal
residence through a foreclosure, it is inappropriate to treat
discharges of indebtedness as income.

Explanation of Provision

The provision extends for one additional year (through
December 31, 2013) the exclusion from gross income for
discharges of qualified principal residence indebtedness.

Effective Date

The provision applies to discharges of indebtedness on or
after January 1, 2013.

3. Parity for mass transit and parking benefits (sec. 203 of the Act
and sec. 132(f) of the Code)

Present Law

Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income for
income tax purposes and from an employee's wages for employment
tax purposes.\300\ 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 (under a bona fide reimbursement arrangement) by
an employer to an employee for parking, transit passes, or
vanpooling. In the case of transit passes, however, a cash
reimbursement is considered a qualified transportation fringe
benefit only if a voucher or similar item that may be exchanged
only for a transit pass is not readily available for direct
distribution by the employer to the employee.
---------------------------------------------------------------------------
\300\ Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16)
and 3401(a)(19).
---------------------------------------------------------------------------
Before February 17, 2009, the amount that could be excluded
as qualified transportation fringe benefits was limited to $100
per month in combined transit pass and vanpool benefits and
$175 per month in qualified parking benefits. These limits are
adjusted annually for inflation, using 1998 as the base year;
for 2012 the limits are $125 and $240, respectively. The
American Recovery and Reinvestment Act of 2009 \301\ provided
parity in qualified transportation fringe benefits by
temporarily increasing the monthly exclusion for combined
employer-provided transit pass and vanpool benefits to the same
level as the exclusion for employer-provided parking, effective
for months beginning on or after the date of enactment
(February 17, 2009) and before January 1, 2011. The Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of
2010 \302\ extended parity in qualified transportation fringe
benefits through December 31, 2011.
---------------------------------------------------------------------------
\301\ Pub. L. No. 111-5.
\302\ Pub. L. No. 111-312.
---------------------------------------------------------------------------
Effective January 1, 2012, the amount that can be excluded
as qualified transportation fringe benefits is limited to $125
per month in combined transit pass and vanpool benefits and
$240 per month in qualified parking benefits.

Reasons for Change \303\

---------------------------------------------------------------------------
\303\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Maintaining parity in transportation benefits provides
employees with an incentive to use public transportation and
vanpools for their commute rather than driving to work in their
personal vehicles, thus potentially easing traffic congestion
and pollution.

Explanation of Provision

The provision extends parity in qualified transportation
fringe benefits through December 31, 2013. Thus, for 2012, the
monthly limit on the exclusion for combined transit pass and
vanpool benefits is $240.
In order for the extension to be effective retroactive to
January 1, 2012, expenses incurred during 2012 by an employee
for employer-provided vanpool and transit benefits may be
reimbursed (under a bona fide reimbursement arrangement) by
employers on a tax-free basis to the extent they exceed $125
per month and are less than $240 per month. Congress intends
that the rule that an employer reimbursement is excludible only
if vouchers are not available to provide the benefit shall
continue to apply, except in the case of reimbursements for
vanpool or transit benefits between $125 and $240 for months
during 2012. Further, Congress intends that reimbursements for
expenses incurred for months during 2012 may be made in
addition to the provision of benefits or reimbursements of up
to $245 per month for expenses incurred during 2013.

Effective Date

The provision applies to months after December 31, 2011.

4. Mortgage insurance premiums (sec. 204 of the Act and sec. 163 of the
Code)

Present Law

In general

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

Acquisition indebtedness and home equity indebtedness

Qualified residence interest is interest on acquisition
indebtedness and home equity indebtedness with respect to a
principal and a second residence of the taxpayer. The maximum
amount of home equity indebtedness is $100,000. The maximum
amount of acquisition indebtedness is $1 million. Acquisition
indebtedness means debt that is incurred in acquiring,
constructing, or substantially improving a qualified residence
of the taxpayer, and that is secured by the residence. Home
equity indebtedness is debt (other than acquisition
indebtedness) that is secured by the taxpayer's principal or
second residence, to the extent the aggregate amount of such
debt does not exceed the difference between the total
acquisition indebtedness with respect to the residence, and the
fair market value of the residence.

Private mortgage insurance

Certain premiums paid or accrued for qualified mortgage
insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness on a qualified residence of the
taxpayer are treated as interest that is qualified residence
interest and thus deductible. The amount allowable as a
deduction is phased out ratably by 10 percent for each $1,000
by which the taxpayer's adjusted gross income exceeds $100,000
($500 and $50,000, respectively, in the case of a married
individual filing a separate return). Thus, the deduction is
not allowed if the taxpayer's adjusted gross income exceeds
$110,000 ($55,000 in the case of married individual filing a
separate return).
For this purpose, qualified mortgage insurance means
mortgage insurance provided by the Veterans Administration, the
Federal Housing Administration, or the Rural Housing
Administration,\304\ and private mortgage insurance (defined in
section two of the Homeowners Protection Act of 1998 as in
effect on the date of enactment of the provision).
---------------------------------------------------------------------------
\304\ 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,
2011, or properly allocable to any period after that date.
Reporting rules apply under the provision.

Reasons for Change \305\

---------------------------------------------------------------------------
\305\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes it is appropriate to extend the present-
law temporary provision. Congress understands that the purpose
of the provisions permitting deduction of home mortgage
interest is to encourage home ownership while limiting
significant disincentives to saving. Congress believes that it
would be consistent with the purpose of the provisions
permitting deduction of home mortgage interest to permit the
deduction of mortgage insurance premiums. While these premiums
are not in the nature of interest, Congress notes that purchase
of such insurance is often demanded by lenders in order for
home buyers to obtain financing (depending on the size of the
buyer's down payment). Congress believes that permitting
deductibility of premiums for this type of insurance connected
with home purchases will foster home ownership. In the case of
higher income taxpayers who may not purchase mortgage
insurance, however, Congress believes the incentive of
deductibility becomes unnecessary, and a phase-out is
appropriate. It is not intended that prepayments be currently
deductible, but rather, that they be deductible only in the
period to which they relate. Reporting of payments is generally
necessary to administer the provision.

Explanation of Provision

The provision extends the deduction for private mortgage
insurance premiums for two years (with respect to contracts
entered into after December 31, 2006). Thus, the provision
applies to amounts paid or accrued in 2012 and 2013 (and not
properly allocable to any period after 2013).\306\
---------------------------------------------------------------------------
\306\ The provision corrects the names of the Department of
Veterans Affairs and the Rural Housing Service.
---------------------------------------------------------------------------

Effective Date

The provision applies to amounts paid or accrued after
December 31, 2011.

5. Deduction for State and local sales taxes (sec. 205 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
before 2012, 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.
A general sales tax is a tax imposed at one rate with
respect to the sale at retail of a broad range of classes of
items.\307\ 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 food, clothing,
medical supplies, and motor vehicles, the above rules are
relaxed in two ways. First, if the tax does not apply with
respect to some or all of such items, a tax that applies to
other such items can still be considered a general sales tax.
Second, the rate of tax applicable with respect to some or all
of these items may be lower than the general rate. However, in
the case of motor vehicles, if the rate of tax exceeds the
general rate, such excess is disregarded and the general rate
is treated as the rate of tax.
---------------------------------------------------------------------------
\307\ Sec. 164(b)(5)(B).
---------------------------------------------------------------------------
A compensating use tax with respect to an item is treated
as a general sales tax, provided such tax is complementary to a
general sales tax and a deduction for sales taxes is allowable
with respect to items sold at retail in the taxing jurisdiction
that are similar to such item.

Reasons for Change \308\

---------------------------------------------------------------------------
\308\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes an extension of the option to deduct
State and local sales taxes in lieu of deducting State and
local income taxes is appropriate to continue to provide
similar Federal tax treatment to residents of States that rely
on sales taxes, rather than income taxes, to fund State and
local governmental functions.

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 2013.

Effective Date

The provision applies to taxable years beginning after
December 31, 2011.

6. Contributions of capital gain real property made for conservation
purposes (sec. 206 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.\309\
---------------------------------------------------------------------------
\309\ 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. 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 most private
nonoperating 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 in excess of the applicable percentage 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.

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.

Qualified conservation contributions

Qualified conservation contributions are one exception to
the ``partial interest'' rule, which generally bars deductions
for charitable contributions of partial interests in
property.\310\ 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.
---------------------------------------------------------------------------
\310\ 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.

Temporary rules regarding contributions of capital gain real property
for conservation purposes

In general
Under a temporary provision \311\ 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 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.
---------------------------------------------------------------------------
\311\ 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.\312\
---------------------------------------------------------------------------
\312\ 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.)
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 temporary rules regarding contributions of capital gain
real property for conservation purposes do not apply to
contributions made in taxable years beginning after December
31, 2011.\313\
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\313\ Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
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Reasons for Change \314\

---------------------------------------------------------------------------
\314\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the special rule that provides an
increased incentive to make charitable contributions of partial
interests in real property for conservation purposes is an
important way of encouraging conservation and preservation, and
should be extended for two additional years.

Explanation of Provision

The provision extends the temporary rules regarding
contributions of capital gain real property for conservation
purposes for two years for contributions made in taxable years
beginning before January 1, 2014.

Effective Date

The provision applies to contributions made in taxable
years beginning after December 31, 2011.

7. Deduction for qualified tuition and related expenses (sec. 207 of
the Act and sec. 222 of the Code)

Present Law

An individual is allowed a deduction for qualified tuition
and related expenses for higher education paid by the
individual during the taxable year.\315\ The deduction is
allowed in computing adjusted gross income. 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.\316\ 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.
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\315\ Sec. 222.
\316\ The deduction generally is not available for expenses with
respect to a course or education involving sports, games, or hobbies,
and is not available for student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an individual's
academic course of instruction.
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The maximum deduction is $4,000 for an individual whose
adjusted gross income for the taxable year does not exceed
$65,000 ($130,000 in the case of a joint return), or $2,000 for
other individuals whose adjusted gross income does not exceed
$80,000 ($160,000 in the case of a joint return). No deduction
is allowed for an individual whose adjusted gross income
exceeds the relevant adjusted gross income limitations, for a
married individual who does not file a joint return, or for an
individual with respect to whom a personal exemption deduction
may be claimed by another taxpayer for the taxable year. The
deduction is not available for taxable years beginning after
December 31, 2011.
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,\317\ 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.\318\ 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.
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\317\ Secs. 222(d)(1) and 25A(g)(2).
\318\ Sec. 222(c). These reductions are the same as those that
apply to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

Reasons for Change \319\

---------------------------------------------------------------------------
\319\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress observes that the cost of a college education
continues to rise, and thus believes that the extension of the
qualified tuition deduction is appropriate to mitigate the
impact of rising tuition costs on students and their families.
Congress further believes that the tuition deduction provides
an important financial incentive for individuals to pursue
higher education.

Explanation of Provision

The provision extends the qualified tuition deduction for
two years, through 2013.

Effective Date

The provision applies to taxable years beginning after
December 31, 2011.

8. Tax-free distributions from individual retirement plans for
charitable purposes (sec. 208 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
170(c)(2); (2) certain veterans' organizations, fraternal
societies, and cemetery companies; \320\ and (3) a Federal,
State, or local governmental entity, but only if the
contribution is made for exclusively public purposes.\321\ The
deduction also is allowed for purposes of calculating
alternative minimum taxable income.
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\320\ Secs. 170(c)(3)-(5).
\321\ Sec. 170(c)(1).
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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.\322\
---------------------------------------------------------------------------
\322\ Secs. 170(b) and (e).
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A taxpayer who takes the standard deduction (i.e., who does
not itemize deductions) may not take a separate deduction for
charitable contributions.\323\
---------------------------------------------------------------------------
\323\ Sec. 170(a).
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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.\324\ 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.\325\
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\324\ 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).
\325\ Sec. 6115.
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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 most private nonoperating 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.\326\ 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.\327\ For such interests, a
charitable deduction is allowed to the extent of the present
value of the interest designated for a charitable organization.
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\326\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
\327\ 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\.\328\
---------------------------------------------------------------------------
\328\ 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; \329\ (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.
---------------------------------------------------------------------------
\329\ 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.\330\ Elections not to have
withholding apply are to be made in the time and manner
prescribed by the Secretary.
---------------------------------------------------------------------------
\330\ Sec. 3405.
---------------------------------------------------------------------------

Qualified charitable distributions

Under a temporary provision applicable for taxable years
beginning before January 1, 2012, otherwise taxable IRA
distributions from a traditional or Roth IRA are excluded from
gross income to the extent they are qualified charitable
distributions.\331\ 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.
---------------------------------------------------------------------------
\331\ 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.
Under present law, the exclusion does not apply to
distributions made in taxable years beginning after December
31, 2011.

Reasons for Change \332\

---------------------------------------------------------------------------
\332\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that facilitating charitable
contributions from IRAs will increase giving to charitable
organizations. Therefore, Congress believes that the exclusion
for qualified charitable distributions should be extended for
two years.

Explanation of Provision

The provision extends the exclusion for qualified
charitable distributions for two years, to distributions made
in taxable years beginning before January 1, 2014.

Effective Date

The provision is effective for distributions made in
taxable years beginning after December 31, 2011.
The provision contains two special rules. First, the
provision permits taxpayers to elect (in such form and manner
as the Secretary may prescribe) to have qualified charitable
distributions made in January 2013 treated as having been made
on December 31, 2012 for purposes of sections 408(a)(6),
408(b)(3), and 408(d)(8). Thus, a qualified charitable
distribution made in January 2013 is permitted to be (1)
treated as made in the taxpayer's 2012 taxable year and thus
permitted to count against the 2012 $100,000 limitation on the
exclusion, and (2) treated as made in the 2012 calendar year
and thus permitted to be used to satisfy the taxpayer's minimum
distribution requirement for 2012.
Second, the provision permits taxpayers to elect (in such
form and manner as the Secretary may prescribe) to treat any
portion of a distribution from an IRA that occurred after
November 30, 2012 and before January 1, 2013 as a qualified
charitable distribution to the extent that the following
requirements are met: (1) the portion is transferred in cash,
after the distribution and before February 1, 2013, to a
charitable organization described in section 408(d)(8)(B)(i);
and (2) the portion is part of a distribution that would have
met the requirements of a qualified charitable distribution but
for the fact that the distribution was not transferred directly
to the charitable organization.

9. Improve and make permanent the provision authorizing the Internal
Revenue Service to disclose certain return and return
information to certain prison officials (sec. 209 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.\333\
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.\334\ ``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.
---------------------------------------------------------------------------
\333\ Sec. 6103(a).
\334\ 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.\335\
---------------------------------------------------------------------------
\335\ 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.\336\ For example, one exception permits
disclosure to the head of the Federal Bureau of Prisons and to
the head of a State agency charged with administration of a
State prison 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. Such information
may be redisclosed to officers and employees of such Bureau or
agency. The Secretary may disclose only such information as is
necessary to permit effective tax administration with respect
to prisoners. The disclosure authority expired December 31,
2011.
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\336\ 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 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.
---------------------------------------------------------------------------

Reasons for Change \337\

---------------------------------------------------------------------------
\337\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that sharing information with prison
officials will allow the prison officials to take appropriate
disciplinary and administrative action to deter prisoners from
filing false Federal tax returns. As many State prisons are run
on a contract basis, and the IRS has identified a number of
these prisons as sources of false returns, Congress believes
that equal disclosure authority should be afforded to such
prison officials to address the matter. Permitting the
disclosure of information directly to the officers and
employees responsible for disciplining prisoners could improve
efficiency. In addition, providing prison officials with a full
copy of the false return, showing the prisoner's signature, is
more likely to satisfy the burden of proof that a prisoner
filed the false return.

Explanation of Provision

The provision makes permanent the authority of the IRS to
disclose tax information relating to prisioner misconduct to
the Federal Bureau of Prisons and State prison officials. In
addition, the provision (1) authorizes the disclosure of actual
returns (not just return information), (2) allows the
disclosure to be made directly to officers and employees of the
prison agency rather than through the head of such agency, (3)
allows redisclosure of return information to contractors that
operate prisons, and (4) clarifies the authority for the
disclosure to, and use by, legal representatives in
proceedings.

Effective Date

The provision applies to disclosures made on or after the
date of enactment.

TITLE III--BUSINESS TAX EXTENDERS

1. Research credit (sec. 301 of the Act and sec. 41 of the Code)

Present Law

General rule

For general research expenditures, 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.\338\ Thus, the research
credit generally is available with respect to incremental
increases in qualified research. An alternative simplified
research credit (with a 14 percent rate and a different base
amount) may be claimed in lieu of this credit.
---------------------------------------------------------------------------
\338\ Sec. 41.
---------------------------------------------------------------------------
A 20-percent research 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.\339\
---------------------------------------------------------------------------
\339\ 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, is not
available for amounts paid or incurred after December 31,
2011.\340\
---------------------------------------------------------------------------
\340\ Sec. 41(h).
---------------------------------------------------------------------------

Computation of allowable credit

Except for energy research payments and certain university
basic research payments made by corporations, the research
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). Special rules apply to all other
taxpayers (so called start-up firms).\341\ In computing the
credit, a taxpayer's base amount cannot be less than 50 percent
of its current-year qualified research expenses.
---------------------------------------------------------------------------
\341\ The Small Business Job Protection Act of 1996 expanded the
definition of start-up firms under section 41(c)(3)(B)(i) to include
any firm if the first taxable year in which such firm had both gross
receipts and qualified research expenses began after 1983. A special
rule (enacted in 1993) is designed to gradually recompute a start-up
firm's fixed-base percentage based on its actual research experience.
Under this special rule, a start-up firm is assigned a fixed-base
percentage of three percent for each of its first five taxable years
after 1993 in which it incurs qualified research expenses. A start-up
firm's fixed-base percentage for its sixth through tenth taxable years
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all
subsequent taxable years, the taxpayer's fixed-base percentage is its
actual ratio of qualified research expenses to gross receipts for any
five years selected by the taxpayer from its fifth through tenth
taxable years after 1993. Sec. 41(c)(3)(B).
---------------------------------------------------------------------------
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 or all
members of a group of businesses under common control are
treated as a single taxpayer.\342\ The credit allowable to each
member is its proportionate share of the qualified research
expenses, basic research payments, and energy research payments
giving rise to the credit.
---------------------------------------------------------------------------
\342\ Sec. 41(f)(1).
---------------------------------------------------------------------------
Under regulations prescribed by the Secretary, special
rules apply for computing the research credit when a major
portion of a trade or business (or unit thereof) changes hands.
Under these rules, qualified research expenses and gross
receipts arising in taxable years prior to the change of
ownership of a trade or business are treated as transferred to
the acquiring taxpayer with the trade or business that gave
rise to those expenses and receipts for purposes of recomputing
the acquiring taxpayer's fixed-base percentage.\343\ Qualified
research expenses incurred during the taxable year including or
ending with a change of ownership are treated as transferred to
the acquiring taxpayer with the trade or business for purposes
of determining the credit for the acquiring taxpayer's first
taxable year including the acquisition.
---------------------------------------------------------------------------
\343\ Sec. 41(f)(3).
---------------------------------------------------------------------------

Alternative simplified credit

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).\344\ 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.
---------------------------------------------------------------------------
\344\ 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.\345\ In addition,
research does not qualify for the credit if: (1) conducted
after the beginning of commercial production of the business
component; (2) related to the adaptation of an existing
business component to a particular customer's requirements; (3)
related to the duplication of an existing business component
from a physical examination of the component itself or certain
other information; (4) related to certain efficiency surveys,
management function or technique, market research, market
testing, or market development, routine data collection or
routine quality control; (5) related to software developed
primarily for internal use by the taxpayer; (6) related to
social sciences, arts, or humanities; or (7) funded by any
grant, contract, or otherwise by another person (or
governmental entity).\346\ Research does not qualify for the
credit if it is conducted outside the United States, Puerto
Rico, or any U.S. possession.
---------------------------------------------------------------------------
\345\ Sec. 41(d)(3).
\346\ 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.\347\ 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.\348\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\349\
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\347\ 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).
\348\ Sec. 280C(c).
\349\ Sec. 280C(c)(3).
---------------------------------------------------------------------------

Reasons for Change \350\

---------------------------------------------------------------------------
\350\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress acknowledges that research is important to the
economy. Research is the basis of new products, new services,
new industries, and new jobs for the domestic economy. There
can be cases where an individual business may not find it
profitable to invest in research as much as it otherwise might
because it is difficult to capture the full benefits from the
research and prevent such benefits from being used by
competitors. At the same time, the research may create great
benefits that spill over to society at large. To encourage
activities that will result in these spillover benefits to
society at large, the government does act to promote research.
Therefore Congress believes it is appropriate to extend the
present-law research credit.
Congress further believes that technical changes are
necessary (1) to ensure that when a business changes hands, the
disposing business entity receives the research credit for
expenses incurred prior to the date of a change in ownership,
and (2) to simplify the allocation of research expenses among
commonly controlled groups of businesses.

Explanation of Provision

The provision extends the research credit for two years
(through 2013). Under the provision, the special rules for
taxpayers under common control and the special rules for
computing the credit when a major portion of a trade or
business (or unit thereof) changes hands are modified.
Qualified research expenses paid or incurred by the disposing
taxpayer in a taxable year that includes or ends with a change
in ownership are treated as current year qualified research
expenses of the disposing taxpayer and such expenses are not
treated as current year qualified research expenses of the
acquiring taxpayer. Further, the disposing taxpayer's and
acquiring taxpayer's base period amounts are adjusted by a pro-
rated amount. In addition, the credit allowable to each member
of a controlled group of corporations or each member of a group
of businesses under common control is determined on a
proportionate basis to its share of the current year aggregate
qualified research expenses (i.e., the gross qualified research
expense allocation method).\351\
---------------------------------------------------------------------------
\351\ The provision overturns the stand-alone entity credit
approach contained in Treas. Reg. sec. 1.41-6(c).
---------------------------------------------------------------------------

Effective Date

The extension of the credit is effective for amounts paid
or incurred after December 31, 2011. The modifications to the
special rules are effective for taxable years beginning after
December 31, 2011.

2. Determination of applicable percentage for the low-income housing
tax credit (sec. 302 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
credit period after each low-income building is placed-in-
service. The amount of the credit for any taxable year in the
credit period is the applicable percentage of the qualified
basis of each qualified low-income building.

Present value credit

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

Calculation of the applicable percentage

In general
The credit percentage for a low-income building is set for
the earlier of: (1) the month the building is placed in
service; or (2) at the election of the taxpayer, (a) the month
the taxpayer and the housing credit agency enter into a binding
agreement with respect to such building for a credit
allocation, or (b) in the case of a tax-exempt bond-financed
project for which no credit allocation is required, the month
in which the tax-exempt bonds are issued.
These credit percentages (used for the 70-percent credit
and 30-percent credit) are adjusted monthly by the IRS on a
discounted after-tax basis (assuming a 28-percent tax rate)
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is
placed in service. The discounting formula assumes that each
credit is received on the last day of each year and that the
present value is computed on the last day of the first year. In
a project consisting of two or more buildings placed in service
in different months, a separate credit percentage may apply to
each building.
Special rule
Under this rule the applicable percentage is set at a
minimum of 9 percent for newly constructed non-Federally
subsidized buildings placed in service after July 30, 2008, and
before December 31, 2013.

Reasons for Change \352\

---------------------------------------------------------------------------
\352\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Historically low Federal interest rates result in lower
credit amounts for low-income housing tax credit properties. To
reduce uncertainty and financial risk in the adjustable rate,
Congress believes that an extension of the temporary minimum
applicable percentage for newly constructed non-Federally
subsidized building is warranted.

Explanation of Provision

The provision extends the temporary minimum applicable
percentage of 9 percent for newly constructed non-Federally
subsidized buildings with respect to which credit allocations
are made before January 1, 2014.

Effective Date

The provision is effective on the date of enactment.

3. Treatment of basic housing allowances for purposes of income
eligibility rules (sec. 303 of the Act and secs. 42 and 142 of
the Code)

Present Law

In general

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

Rule for income determinations before July 30, 2008 and on or after
January 1, 2012

The recipients of the military basic housing allowance must
include these amounts for purposes of low-income credit
eligibility income test, as described above.

Special rule for income determination before January 1, 2012

Under the provision the basic housing allowance (i.e.,
payments under 37 U.S.C. sec. 403) is not included in income
for the low-income credit income eligibility rules. The
provision is limited in application to qualified buildings. A
qualified building is defined as any building located:
1. any county which contains a qualified military
installation to which the number of members of the
Armed Forces assigned to units based out of such
qualified military installation has increased by 20
percent or more as of June 1, 2008, over the personnel
level on December 31, 2005; and
2. any counties adjacent to a county described in
(1), above.
For these purposes, a qualified military installation is
any military installation or facility with at least 1000
members of the Armed Forces assigned to it.
The provision applies to income determinations: (1) made
after July 30, 2008, and before January 1, 2012, in the case of
qualified buildings which received credit allocations on or
before July 30, 2008, or qualified buildings placed in service
on or before July 30, 2008, to the extent a credit allocation
was not required with respect to such building by reason of
42(h)(4) (i.e. such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
before July 30, 2008; and (2) made after July 30, 2008, in the
case of qualified buildings which received credit allocations
after July 30, 2008 and before January 1, 2012, or qualified
buildings placed in service after July 30, 2008, and before
January 1, 2012, to the extent a credit allocation was not
required with respect to such qualified building by reason of
42(h)(4) (i.e. such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
after July 30, 2008, and before January 1, 2012.

Reasons for Change \353\

---------------------------------------------------------------------------
\353\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that more time is necessary for market
forces to create adequate housing in communities affected by
the base closing legislation. In the meantime, Congress
believes that encouraging owners of low-income housing credit
properties to rent such subsidized units to military families
is appropriate.

Explanation of Provision

The provision extends the special rule for two additional
years (through December 31, 2013).

Effective Date

The provision is effective for income determinations on or
after January 1, 2012.

4. Indian employment tax credit (sec. 304 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.\354\ 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.
---------------------------------------------------------------------------
\354\ 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 \355\ or section 4(10) of the Indian Child Welfare
Act of 1978.\356\ 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).
---------------------------------------------------------------------------
\355\ Pub. L. No. 93-262.
\356\ 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
$45,000 for 2011). 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, 2012.

Reasons for Change \357\

---------------------------------------------------------------------------
\357\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
To further encourage employment on Indian reservations,
Congress believes it is appropriate to extend the Indian
employment credit an additional two years.

Explanation of Provision

The provision extends for two years the present-law
employment credit provision (through taxable years beginning on
or before December 31, 2013).

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

5. New markets tax credit (sec. 305 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'').\358\ 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.\359\ 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.\360\ 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.\361\
---------------------------------------------------------------------------
\358\ Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\359\ Sec. 45D(a)(2).
\360\ Sec. 45D(a)(3).
\361\ 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.\362\ A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired at its original issue directly (or through an
underwriter) 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.\350\
Substantially all of the investment proceeds must be used by
the CDE to make qualified low-income community investments and
the investment must be designated as a qualified equity
investment by the CDE. 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.\363\
---------------------------------------------------------------------------
\362\ Sec. 45D(c).
\363\ 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.\364\ 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.
---------------------------------------------------------------------------
\364\ Sec. 45D(e).
---------------------------------------------------------------------------
The Secretary is authorized to designate ``targeted
populations'' as low-income communities for purposes of the new
markets tax credit.\365\ 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 \366\ (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.\367\ 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.
---------------------------------------------------------------------------
\365\ Sec. 45D(e)(2).
\366\ Pub. L. No. 103-325.
\367\ 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.\368\
---------------------------------------------------------------------------
\368\ Sec. 45D(d)(2).
---------------------------------------------------------------------------
The maximum annual amount of qualified equity investments
was $3.5 billion for calendar years 2010 and 2011. The new
markets tax credit expired on December 31, 2011.

Reasons for Change \369\

---------------------------------------------------------------------------
\369\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the new markets tax credit has
proved to be an effective means of providing equity and other
investments to benefit businesses in low income communities,
and that it is appropriate to provide for the allocation of
additional tax credit authority for another two calendar years.

Explanation of Provision

The provision extends the new markets tax credit for two
years, through 2013, permitting up to $3.5 billion in qualified
equity investments for each of the 2012 and 2013 calendar
years. The provision also extends for two years, through 2018,
the carryover period for unused new markets tax credits.

Effective Date

The provision applies to calendar years beginning after
December 31, 2011.

6. Railroad track maintenance credit (sec. 306 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, 2012.\370\ 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.\371\ 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 also may reduce a taxpayer's tax
liability below its tentative minimum tax.\372\
---------------------------------------------------------------------------
\370\ Secs. 45G(a) and (f).
\371\ Sec. 45G(b)(1).
\372\ 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).\373\
---------------------------------------------------------------------------
\373\ 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.\374\
---------------------------------------------------------------------------
\374\ Sec. 45G(c).
---------------------------------------------------------------------------
The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board.\375\
---------------------------------------------------------------------------
\375\ Sec. 45G(e)(1).
---------------------------------------------------------------------------

Reasons for Change \376\

---------------------------------------------------------------------------
\376\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that Class II and Class III railroads are
an important part of the nation's railway system. Therefore,
Congress believes that this incentive for railroad track
maintenance expenditures should be extended.

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,
2011, and before January 1, 2014.

Effective Date

The provision is effective for expenses paid or incurred in
taxable years beginning after December 31, 2011.

7. Mine rescue team training credit (sec. 307 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.\377\
---------------------------------------------------------------------------
\377\ 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) \378\ (determined without regard to any
dollar limitation contained in that section).
---------------------------------------------------------------------------
\378\ 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.\379\ The credit does not apply to taxable years
beginning after December 31, 2011. Additionally, the credit may
not offset the alternative minimum tax.
---------------------------------------------------------------------------
\379\ Sec. 280C(e).
---------------------------------------------------------------------------

Reasons for Change \380\

---------------------------------------------------------------------------
\380\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that training mine rescue team employees
will help ensure a positive outcome for individuals operating
in and around a mine in the event of an accident. Therefore,
Congress believes that this incentive for costs incurred to
train mine rescue teams should be extended.

Explanation of Provision

The provision extends the credit for two years through
taxable years beginning on or before December 31, 2013.

Effective Date

The provision generally is effective for taxable years
beginning after December 31, 2011.

8. Employer wage credit for employees who are active duty members of
the uniformed services (sec. 308 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.\381\
---------------------------------------------------------------------------
\381\ 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 against the income tax otherwise allowable 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. Further, the
credit is not allowable against a taxpayer's alternative
minimum tax liability.
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 available with respect to amounts paid after
June 17, 2008,\382\ and before January 1, 2012.
---------------------------------------------------------------------------
\382\ This date is the date of enactment of the Heroes Earnings
Assistance and Relief Tax Act of 2008, Pub. L. No. 110-245.
---------------------------------------------------------------------------

Reasons for Change \383\

---------------------------------------------------------------------------
\383\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that it is still appropriate to encourage
small employers to make differential wage payments to employees
during any period that the employee is called to duty for a
period of more than 30 days in the uniform services.

Explanation of Provision

The provision extends the availability of the credit for
two years to amounts paid before January 1, 2014.

Effective Date

The provision applies to payments made after December 31,
2011.

9. Work opportunity tax credit (sec. 309 of the Act and secs. 51 and 52
of the Code)

Present Law

In general

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
Prior to enactment of the ``VOW to Hire Heroes Act of
2011'' (the ``VOW Act''),\384\ there were two subcategories of
qualified veterans to whom wages paid by an employer were
eligible for the credit. Employers who hired veterans who were
eligible to receive assistance under a supplemental nutritional
assistance program were entitled to a maximum credit of 40
percent of $6,000 of qualified first-year wages paid to such
individual.\385\ Employers who hired veterans who were entitled
to compensation for a service-connected disability were
entitled to a maximum wage credit of 40 percent of $12,000 of
qualified first-year wages paid to such individual.\386\
---------------------------------------------------------------------------
\384\ Pub. L. No. 112-56 (Nov. 21, 2011).
\385\ For these purposes, a qualified veteran must be certified by
the designated local agency as a member of a family receiving
assistance under a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008 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 supplemental nutrition assistance program under the
Food and Nutrition Act of 2008.
\386\ The qualified veteran must be certified as entitled to
compensation for a service-connected disability and (1) have 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) have been unemployed for six months or more (whether or not
consecutive) during the one-year period ending on the date of hiring.
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.
---------------------------------------------------------------------------
The VOW Act modified the work opportunity credit with
respect to qualified veterans, by adding additional
subcategories. There are now five subcategories of qualified
veterans: (1) in the case of veterans who were eligible to
receive assistance under a supplemental nutritional assistance
program (for at least a three month period during the year
prior to the hiring date) the employer is entitled to a maximum
credit of 40 percent of $6,000 of qualified first-year wages;
(2) in the case of a qualified veteran who is entitled to
compensation for a service connected disability, who is hired
within one year of discharge, the employer is entitled to a
maximum credit of 40 percent of $12,000 of qualified first-year
wages; (3) in the case of a qualified veteran who is entitled
to compensation for a service connected disability, and who has
been unemployed for an aggregate of at least six months during
the one year period ending on the hiring date, the employer is
entitled to a maximum credit of 40 percent of $24,000 of
qualified first-year wages; (4) in the case of a qualified
veteran unemployed for at least four weeks but less than six
months (whether or not consecutive) during the one-year period
ending on the date of hiring, the maximum credit equals 40
percent of $6,000 of qualified first-year wages; and (5) in the
case of a qualified veteran unemployed for at least six months
(whether or not consecutive) during the one-year period ending
on the date of hiring, the maximum credit equals 40 percent of
$14,000 of qualified first-year wages.
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 resident
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 supplemental nutrition assistance program
benefits recipient
A qualified supplemental nutrition assistance program
benefits 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
and nutrition program under the Food and Nutrition Act of 2008
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 and
nutrition assistance under section 6(o) of the Food and
Nutrition Act of 2008, the six-month requirement is replaced
with a requirement that the family has been receiving food and
nutrition assistance 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 and
nutrition assistance program under the Food and Nutrition Act
of 2008.
(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 recipient
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) \387\ 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.
---------------------------------------------------------------------------
\387\ 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.
---------------------------------------------------------------------------

Qualified wages

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).
For calculation of the credit with respect to qualified
veterans, see the description of ``qualified veteran'' above.

Certification rules

Generally, 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.
An otherwise qualified unemployed veteran is treated as
certified by the designated local agency as having aggregate
periods of unemployment (whichever is applicable under the
qualified veterans rules described above) if such veteran is
certified by such agency as being in receipt of unemployment
compensation under a State or Federal law for such applicable
periods. The Secretary of the Treasury is authorized to provide
alternative methods of certification for unemployed veterans.

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.

Qualified tax-exempt organizations employing qualified veterans

The credit is not available to qualified tax-exempt
organizations other than those employing qualified veterans.
The special rules, described below, were enacted in the VOW
Act.
If a qualified tax-exempt organization employs a qualified
veteran (as described above) a tax credit against the FICA
taxes of the organization is allowed on the wages of the
qualified veteran which are paid for the veteran's services in
furtherance of the activities related to the function or
purpose constituting the basis of the organization's exemption
under section 501.
The credit available to such tax-exempt employer for
qualified wages paid to a qualified veteran equals 26 percent
(16.25 percent for employment of 400 hours or less) of
qualified first-year wages. The amount of qualified first-year
wages eligible for the credit is the same as those for non-tax-
exempt employers (i.e., $6,000, $12,000, $14,000 or $24,000,
depending on the category of qualified veteran).
A qualified tax-exempt organization means an employer that
is described in section 501(c) and exempt from tax under
section 501(a).
The Social Security Trust Funds are held harmless from the
effects of this provision by a transfer from the Treasury
General Fund.

Treatment of possessions

The VOW Act provided a reimbursement mechanism for the U.S.
possessions (American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, the Commonwealth of Puerto Rico, and
the United States Virgin Islands). The Treasury Secretary is to
pay to each mirror code possession (Guam, the Commonwealth of
the Northern Mariana Islands, and the United States Virgin
Islands) an amount equal to the loss to that possession as a
result of the VOW Act changes to the qualified veterans rules.
Similarly, the Treasury Secretary is to pay to each non-mirror
Code possession (American Samoa and the Commonwealth of Puerto
Rico) the amount that the Secretary estimates as being equal to
the loss to that possession that would have occurred as a
result of the VOW Act changes if a mirror code tax system had
been in effect in that possession. The Secretary will make this
payment to a non-mirror Code possession only if that possession
establishes to the satisfaction of the Secretary that the
possession has implemented (or, at the discretion of the
Secretary, will implement) an income tax benefit that is
substantially equivalent to the qualified veterans credit
allowed under the VOW Act modifications.
An employer that is allowed a credit against U.S. tax under
the VOW Act with respect to a qualified veteran must reduce the
amount of the credit claimed by the amount of any credit (or,
in the case of a non-mirror Code possession, another tax
benefit) that the employer claims against its possession income
tax.

Other rules

Expiration

Generally, the work opportunity tax credit is not available
for individuals who begin work for an employer after December
31, 2011. The work opportunity tax credit for employers of
qualified veterans is not available for such individuals who
begin work for an employer after December 31, 2012.

Reasons for Change \388\

---------------------------------------------------------------------------
\388\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Given the level of unemployment and general economic
conditions, Congress believes that the credit should be
extended.

Explanation of Provision

The credit is extended for all eligible categories through
December 31, 2013.

Effective Date

The provision is effective for individuals who begin work
for the employer after December 31, 2011 (in the case of
certain qualified veterans after December 31, 2012).

10. Qualified zone academy bonds (sec. 310 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.\389\ 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.\390\ 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.
---------------------------------------------------------------------------
\389\ Sec. 103.
\390\ Sec. 149(e).
---------------------------------------------------------------------------
The tax exemption for State and local bonds does not apply
to any arbitrage bond.\391\ 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.\392\ 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.
---------------------------------------------------------------------------
\391\ Sec. 103(a) and (b)(2).
\392\ 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.'' \393\ A total of $400 million
of qualified zone academy bonds is authorized to be issued
annually in calendar years 1998 through 2008, $1,400 million in
2009 and 2010, and $400 million in 2011. Each calendar years
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.
---------------------------------------------------------------------------
\393\ 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.
Qualified zone academy bonds are a type of qualified tax
credit bond and subject to the general rules applicable to
qualified tax credit bonds.\394\ 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.\395\ 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.
---------------------------------------------------------------------------
\394\ Sec. 54A.
\395\ 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 100 percent of the available project 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.
Under section 6431 of the Code, an issuer of specified tax
credit bonds, may elect to receive a payment in lieu of a
credit being allowed to the holder of the bond. This provision
is not available for qualified zone academy bond allocations
from the 2011 national limitation or any carry forward of the
2011 allocation.\396\
---------------------------------------------------------------------------
\396\ Sec. 6431(f)(3)(A)(iii).
---------------------------------------------------------------------------

Reasons for Change \397\

---------------------------------------------------------------------------
\397\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the past experience with the program
warrants its extension.

Explanation of Provision

The provision extends the qualified zone academy bond
program for two years. The proposal authorizes issuance of up
to $400 million of qualified zone academy bonds per year for
2012 and 2013.
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 2012 or
2013 national limitations.\398\ The proposal has no effect on
bonds issued with limitation carried forward from 2009 or 2010.
---------------------------------------------------------------------------
\398\ A technical correction to section 6431(f) of the Code may be
needed so that the statute reflects this intent.
---------------------------------------------------------------------------

Effective Date

The provision applies to obligations issued after December
31, 2011.

11. 15-year straight-line cost recovery for qualified leasehold
improvements, qualified restaurant buildings and improvements,
and qualified retail improvements (sec. 311 of the Act and sec.
168 of the Code)

Present Law

In general

Depreciation of leasehold improvements

Generally, depreciation allowances for improvements made on
leased property are determined under MACRS, even if the MACRS
recovery period assigned to the property is longer than the
term of the lease. This rule applies regardless of whether the
lessor or the lessee places the leasehold improvements in
service. If a leasehold improvement constitutes an addition or
improvement to nonresidential real property already placed in
service, the improvement generally is depreciated using the
straight-line method over a 39-year recovery period, beginning
in the month the addition or improvement was placed in service.
However, exceptions exist for certain qualified leasehold
improvements, 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, 2012. Qualified leasehold
improvement property is any improvement to an interior portion
of a building that is nonresidential real property, provided
certain requirements are met.\400\ 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.
---------------------------------------------------------------------------
\400\ Sec. 168(e)(6).
---------------------------------------------------------------------------
Qualified leasehold improvement property is recovered using
the straight-line method and a half-year convention. Qualified
leasehold improvement property placed in service after December
31, 2011 is subject to the general rules described above.

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, 2012. Qualified restaurant property
is any section 1250 property that is a building 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.\401\
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.\402\ Qualified restaurant property placed in
service after December 31, 2011 is subject to the general rules
described above.
---------------------------------------------------------------------------
\401\ Sec. 168(e)(7).
\402\ 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 for qualified retail improvement property
placed in service before January 1, 2012. 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 \403\ 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.\404\ 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, any structural component benefiting
a common area, 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.
---------------------------------------------------------------------------
\403\ 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.
\404\ Sec. 168(e)(8).
---------------------------------------------------------------------------
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. Generally, it is 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.\405\ Qualified retail
improvement property placed in service after December 31, 2011
is subject to the general rules described above.
---------------------------------------------------------------------------
\405\ Property that satisfies the definition of both qualified
leasehold improvement property and qualified retail property is
eligible for bonus depreciation.
---------------------------------------------------------------------------

Reasons for Change \406\

---------------------------------------------------------------------------
\406\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that taxpayers should not be required to
recover the costs of certain leasehold improvements beyond the
useful life of the investment. The 39-year recovery period for
leasehold improvements for property placed in service after
December 31, 2007, extends beyond the useful life of many such
investments. Although lease terms differ, Congress believes
that lease terms for commercial real estate also are typically
shorter than the 39-year recovery period. In the interests of
simplicity and administrability, a uniform period for recovery
of leasehold improvements is desirable. Therefore, the
provision extends the 15-year recovery period for leasehold
improvements.
Congress also believes that unlike other commercial
buildings, restaurant buildings generally are more specialized
structures. Restaurants also experience considerably more
traffic and remain open longer than most commercial properties.
This daily use causes rapid deterioration of restaurant
properties and forces restaurateurs to constantly repair and
upgrade their facilities. As such, restaurant facilities
generally have a shorter life span than other commercial
establishments. The provision extends the 15-year recovery
period for improvements made to restaurant buildings and
continues to apply the 15-year recovery period to new
restaurants, to more accurately reflect the true economic life
of such properties.
Congress believes that taxpayers should not be required to
recover the costs of certain improvements beyond the useful
life of the investment. The 39-year recovery period for
improvements to owner occupied (i.e., not leased) retail
property extends beyond the useful life of many such
investments. Additionally, Congress believes that retailers
should not be treated differently based on whether the building
in which they operate is owned or leased. As many small
business retailers own the building in which they operate their
business, Congress believes this provision will provide relief
to small businesses. Therefore, the provision extends the 15-
year recovery period for qualified retail improvements.

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, 2013.

Effective Date

The provision is effective for property placed in service
after December 31, 2011.

12. Seven-year recovery period for motorsports entertainment complexes
(sec. 312 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.\407\ 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 on or
before December 31, 2011 is assigned a recovery period of seven
years.\408\ 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.\409\ 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).
---------------------------------------------------------------------------
\407\ Sec. 168.
\408\ Sec. 168(e)(3)(C)(ii).
\409\ Sec. 168(i)(15).
---------------------------------------------------------------------------

Reasons for Change \410\

---------------------------------------------------------------------------
\410\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the depreciation incentive
will encourage economic development. Thus, the provision
extends the seven-year recovery period for motorsports
entertainment complex property.

Explanation of Provision

The provision extends the present-law seven-year recovery
period for motorsports entertainment complexes for two years to
apply to property placed in service before January 1, 2014.

Effective Date

The provision is effective for property placed in service
after December 31, 2011.

13. Accelerated depreciation for business property on an Indian
reservation (sec. 313 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;
\411\ and (4) is not property placed in service for purposes of
conducting gaming activities.\412\ 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).\413\
---------------------------------------------------------------------------
\411\ For these purposes, related persons is defined in Sec.
465(b)(3)(C).
\412\ Sec. 168(j)(4)(A).
\413\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
An ``Indian reservation'' means a reservation as defined in
section 3(d) of the Indian Financing Act of 1974 \414\ or
section 4(10) of the Indian Child Welfare Act of 1978 (25
U.S.C. 1903(10)).\415\ 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).
---------------------------------------------------------------------------
\414\ Pub. L. No. 93-262.
\415\ Pub. L. No. 95-608.
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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 before January 1, 2012.

Reasons for Change \416\

---------------------------------------------------------------------------
\416\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the depreciation incentive
will encourage economic development within Indian reservations
and expand employment opportunities on such reservations.

Explanation of Provision

The provision extends for two years the present-law
accelerated MACRS recovery periods for qualified Indian
reservation property to apply to property placed in service
before January 1, 2014.

Effective Date

The provision is effective for property placed in service
after December 31, 2011.

14. Enhanced charitable deduction for contributions of food inventory
(sec. 314 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.\417\
---------------------------------------------------------------------------
\417\ Sec. 170.
---------------------------------------------------------------------------
Charitable contributions of cash are deductible in the
amount contributed. In general, contributions of capital gain
property 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 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.\418\ In general, a C corporation's charitable
contribution deductions for a year may not exceed 10 percent of
the corporation's taxable income.\419\ To be eligible for the
enhanced deduction, the contributed property generally must be
inventory of the taxpayer and must be 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.\420\ 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.\421\
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\418\ Sec. 170(e)(3).
\419\ Sec. 170(b)(2).
\420\ Sec. 170(e)(3)(A)(i)-(iii).
\421\ 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.\422\
---------------------------------------------------------------------------
\422\ 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.\423\
---------------------------------------------------------------------------
\423\ 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 engaged
in a trade or business, whether or not a C corporation, is
eligible to claim the enhanced deduction for donations of food
inventory.\424\ 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 corporations)
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.\425\
---------------------------------------------------------------------------
\424\ Sec. 170(e)(3)(C).
\425\ 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, 2011.

Reasons for Change \426\

---------------------------------------------------------------------------
\426\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that charitable organizations benefit
from charitable contributions of food inventory by non-C
corporations and that the enhanced deduction is a useful
incentive for the making of such contributions. Accordingly,
Congress believes it is appropriate to extend the special rule
for charitable contributions of food inventory for two years.

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, 2014.

Effective Date

The provision is effective for contributions made after
December 31, 2011.

15. Increased expensing for small business depreciable assets (sec. 315
of the Act and sec. 179 of the Code)

Present Law

A taxpayer may elect under section 179 to deduct (or
``expense'') the cost of qualifying property, rather than to
recover such costs through depreciation deductions, subject to
limitation.\427\ 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.\428\ The
$125,000 and $500,000 amounts are indexed for inflation
occurring since 2006.\429\ The indexed amounts for 2012 are
$139,000 and $560,000. 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 2013 also is treated as qualifying
property.
---------------------------------------------------------------------------
\427\ Additional section 179 incentives have been 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.
\428\ Sec. 179(b)(2).
\429\ Sec. 179(b)(6).
---------------------------------------------------------------------------
For taxable years beginning in 2010 and 2011, the maximum
amount a taxpayer may expense 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 $2,000,000. For taxable years
beginning in 2010 and 2011, qualifying property also includes
certain real property (i.e., qualified leasehold improvement
property, qualified restaurant property, and qualified retail
improvement property).\430\ Of the $500,000 expense amount
available under section 179 for 2010 and 2011, the maximum
amount available with respect to qualified real property is
$250,000 for each taxable year.
---------------------------------------------------------------------------
\430\ Sec. 179(f).
---------------------------------------------------------------------------
For taxable years beginning in 2013 and thereafter, a
taxpayer may elect to deduct up to $25,000 of the cost of
qualifying property placed in service for the taxable year,
subject to limitation. 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 (not including off-the-
shelf computer software) that is purchased for use in the
active conduct of a trade or business.
The amount eligible to be expensed for a taxable year may
not exceed the taxable income for such 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 limitations). However, amounts 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.\431\ Thus, 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. Any
such carryover amounts that are not used in 2011 are treated as
property placed in service in 2011 for purposes of computing
depreciation. That is, the unused carryover amount from 2010 is
considered placed in service on the first day of the 2011
taxable year.\432\
---------------------------------------------------------------------------
\431\ Section 179(f)(4) details the special rules that apply to
disallowed amounts.
\432\ 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.
Assume further that in 2011, the company had no asset purchases and
had taxable income of $-0-. The $100,000 carryover from 2010
attributable to qualified leasehold improvements is treated as placed
in service as of the first day of the company's 2011 taxable year. The
$50,000 carryover allocated to equipment is carried over to 2012 under
section 179(b)(3)(B).
---------------------------------------------------------------------------
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.\433\ In general, any election or
specification made with respect to any property may not be
revoked except with the consent of the Commissioner. However,
an election or specification under section 179 may be revoked
by the taxpayer without consent of the Commissioner for taxable
years beginning after 2002 and before 2013.\434\
---------------------------------------------------------------------------
\433\ Sec. 179(c)(1).
\434\ Sec. 179(c)(2).
---------------------------------------------------------------------------

Reasons for Change \435\

---------------------------------------------------------------------------
\435\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that section 179 expensing provides two
important benefits for small businesses. First, it lowers the
cost of capital for tangible property used in a trade or
business. With a lower cost of capital, Congress believes small
businesses will invest in more equipment and employ more
workers. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In order to
increase the value of these benefits and to increase the number
of taxpayers eligible, the provision increases the amount
allowed to be expensed under section 179 and increases the
amount of the phase-out threshold.
Congress also believes that qualified real property (i.e.,
leasehold improvement property, restaurant property, and retail
improvement property) should continue to be included in the
section 179 expensing provision to encourage small businesses
to invest in these types of real property. Further, Congress
believes that purchased computer software should continue to be
included in the section 179 expensing provision so that it is
not disadvantaged relative to developed software. In addition,
Congress believes that the process of making and revoking
section 179 elections should continue to be simpler and more
efficient for taxpayers by eliminating the requirement of the
consent of the Commissioner.

Explanation of Provision

The provision provides that the maximum amount a taxpayer
may expense, for taxable years beginning in 2012 and 2013, 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
$2,000,000.
In addition, the provision extends, for taxable years
beginning in 2013, the treatment of off-the-shelf computer
software as qualifying property. The provision also extends the
treatment of qualified real property as eligible section 179
property for taxable years beginning in 2012 and 2013,
including the limitation on carryovers and the maximum amount
of $250,000 for each taxable year. The provision makes a
technical drafting correction by clarifying that for the last
taxable year beginning in 2013, the taxable income limitation
\436\ is computed without regard to any additional depreciation
expense resulting from the application of the carryover
limitation of section 179(f)(4). For taxable years beginning in
2013, the provision continues to permit a taxpayer to amend or
irrevocably revoke an election for a taxable year under section
179 without the consent of the Commissioner.
---------------------------------------------------------------------------
\436\ Sec. 179(b)(3).
---------------------------------------------------------------------------

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

16. Election to expense mine safety equipment (sec. 316 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'').\437\ 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.
---------------------------------------------------------------------------
\437\ 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 2012 is $125,000 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.\438\ 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.
---------------------------------------------------------------------------
\438\ 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.\439\ 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.\440\
---------------------------------------------------------------------------
\439\ Sec. 179E(a).
\440\ Sec. 312(k)(3).
---------------------------------------------------------------------------
``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, 2012.\441\
---------------------------------------------------------------------------
\441\ 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.\442\
---------------------------------------------------------------------------
\442\ 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.\443\ 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.\444\
---------------------------------------------------------------------------
\443\ Sec. 179E(e).
\444\ Sec. 179E(f).
---------------------------------------------------------------------------

Reasons for Change \445\

---------------------------------------------------------------------------
\445\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that mine safety equipment is vital to
ensuring a safe workplace for the nation's underground mine
workforce. Therefore, Congress believes that this incentive for
mine safety equipment property should be extended.

Explanation of Provision

The provision extends for two years (through December 31,
2013) 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, 2011.

17. Special expensing rules for certain film and television productions
(sec. 317 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, which allows amortization for certain
intangible property, does not apply to some 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 \446\ to deduct the
cost of any qualifying film and television production,
commencing prior to January 1, 2012, in the year the
expenditure is incurred in lieu of capitalizing the cost and
recovering it through depreciation allowances.\447\ Taxpayers
may elect to deduct up to $15 million of the aggregate cost of
the film or television production under this section.\448\ 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.\449\
---------------------------------------------------------------------------
\446\ See Temp. Treas. Reg. section 1.181-2T for rules on making an
election under this section.
\447\ For this purpose, a production is treated as commencing on
the first date of principal photography.
\448\ Sec. 181(a)(2)(A).
\449\ 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.\450\ The term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\451\ 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.\452\ Qualified
property does not include sexually explicit productions as
defined by section 2257 of title 18 of the U.S. Code.\453\
---------------------------------------------------------------------------
\450\ Sec. 181(d)(3)(A).
\451\ Sec. 181(d)(3)(B).
\452\ Sec. 181(d)(2)(B).
\453\ 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.\454\
---------------------------------------------------------------------------
\454\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------

Reasons for Change \455\

---------------------------------------------------------------------------
\455\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that section 181 encourages domestic film
production and that the provision should be extended. The issue
of runaway production affects all productions, regardless of
cost, and therefore Congress believes that it is appropriate to
treat as an expense the first $15 million ($20 million in
certain cases) of production costs of otherwise qualified
films.

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, 2014.

Effective Date

The provision applies to qualified film and television
productions commencing after December 31, 2011.

18. Deduction allowable with respect to income attributable to domestic
production activities in Puerto Rico (sec. 318 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 slightly less than 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 \456\ 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 \457\ 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.
---------------------------------------------------------------------------
\456\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
\457\ 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.\458\ 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.\459\
---------------------------------------------------------------------------
\458\ 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.
\459\ 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.\460\ 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.\461\ 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.\462\
---------------------------------------------------------------------------
\460\ Sec. 7701(a)(9).
\461\ Sec. 199(d)(8)(A).
\462\ Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
The special rules for Puerto Rico apply only with respect
to the first six taxable years of a taxpayer beginning after
December 31, 2005 and before January 1, 2012.

Reasons for Change \463\

---------------------------------------------------------------------------
\463\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that, notwithstanding expiration of the
Puerto Rico and possession tax credit and the Puerto Rico
economic activity credit for taxable years beginning after
2005, the Code should promote economic activity in Puerto Rico.
Consequently, Congress believes that it is appropriate to treat
Puerto Rico as part of the United States for purposes of the
domestic production activities deduction.

Explanation of Provision

The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first eight
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2014.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

19. Modification of tax treatment of certain payments to controlling
exempt organizations (sec. 319 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.\464\ In
general, interest, rents, royalties, and annuities are excluded
from the unrelated business income of tax-exempt
organizations.\465\
---------------------------------------------------------------------------
\464\ Sec. 511.
\465\ 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
taxable 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).\466\ 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.
---------------------------------------------------------------------------
\466\ 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, 2011.

Reasons for Change \467\

---------------------------------------------------------------------------
\467\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes it is desirable to extend the special
rule for an additional two years.

Explanation of Provision

The provision extends the special rule for two years to
payments received or accrued before January 1, 2014.
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, 2011.

20. Treatment of certain dividends of regulated investment companies
(sec. 320 of the Act and sec. 871(k) of the Code)

Present Law

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 a temporary provision of prior law, a RIC that earned
certain interest income that generally would not be subject to
U.S. tax if earned by a foreign person directly could, to the
extent of such net interest income, designate a dividend it
paid as derived from such interest income for purposes of the
treatment of a foreign RIC shareholder. A foreign person who is
a shareholder in the RIC generally could treat such a dividend
as exempt from gross-basis U.S. tax. Also, subject to certain
requirements, the RIC was exempt from withholding the gross-
basis tax on such dividends. Similar rules applied with respect
to the designation of certain short-term capital gain
dividends. However, these provisions relating to dividends with
respect to interest income and short-term capital gain of the
RIC have expired, and therefore do not apply to dividends with
respect to any taxable year of a RIC beginning after December
31, 2011.\468\
---------------------------------------------------------------------------
\468\ Secs. 871(k), 881(e), 1441(c)(12), and 1441(a).
---------------------------------------------------------------------------

Reasons for Change \469\

---------------------------------------------------------------------------
\469\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes it is desirable to extend the provision
for an additional two years.

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, 2014.

Effective Date

The provision applies to dividends paid with respect to any
taxable year of the RIC beginning after December 31, 2011.

21. RIC qualified investment entity treatment under FIRPTA (sec. 321 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 five percent of that class of stock or beneficial interest
within the one-year period ending on the date of
distribution.\470\ Special rules apply to situations involving
tiers of qualified investment entities.
---------------------------------------------------------------------------
\470\ 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, 2011.\471\
---------------------------------------------------------------------------
\471\ Section 897(h).
---------------------------------------------------------------------------

Reasons for Change \472\

---------------------------------------------------------------------------
\472\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes it is desirable to extend the provision
for an additional two years.

Explanation of Provision

The provision extends the inclusion of a RIC within the
definition of a ``qualified investment entity'' under section
897 through December 31, 2013, for those situations in which
that inclusion would otherwise have expired after December 31,
2011.

Effective Date

The provision is generally effective on January 1, 2012.
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, 2011 and before the date of enactment is not
liable to the distributee with respect to such withheld and
remitted amounts.

22. Exceptions for active financing income (sec. 322 of the Act and
secs. 953 and 954 of the Code)

Present Law

Under the subpart F rules,\473\ 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).
---------------------------------------------------------------------------
\473\ 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.\474\
---------------------------------------------------------------------------
\474\ 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'').
With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to
qualify for the active financing exceptions. In addition,
certain nexus requirements apply, which provide that income
derived by a CFC or a qualified business unit (``QBU'') of a
CFC from transactions with customers is eligible for the
exceptions if, among other things, substantially all of the
activities in connection with such transactions are conducted
directly by the CFC or QBU in its home country, and such income
is treated as earned by the CFC or QBU in its home country for
purposes of such country's tax laws. Moreover, the exceptions
apply to income derived from certain cross border transactions,
provided that certain requirements are met. Additional
exceptions from foreign personal holding company income apply
for certain income derived by a securities dealer within the
meaning of section 475 and for gain from the sale of active
financing assets.
In the case of a securities dealer, the temporary exception
from foreign personal holding company income applies to certain
income. The income covered by the exception is any interest or
dividend (or certain equivalent amounts) from any transaction,
including a hedging transaction or a transaction consisting of
a deposit of collateral or margin, entered into in the ordinary
course of the dealer's trade or business as a dealer in
securities within the meaning of section 475. In the case of a
QBU of the dealer, the income is required to be attributable to
activities of the QBU in the country of incorporation, or to a
QBU in the country in which the QBU both maintains its
principal office and conducts substantial business activity. A
coordination rule provides that this exception generally takes
precedence over the exception for income of a banking,
financing or similar business, in the case of a securities
dealer.
In the case of insurance, a temporary exception from
foreign personal holding company income applies for certain
income of a qualifying insurance company with respect to risks
located within the CFC's country of creation or organization.
In the case of insurance, temporary exceptions from insurance
income and from foreign personal holding company income also
apply for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met. In the case of a life insurance or
annuity contract, reserves for such contracts are determined
under rules specific to the temporary exceptions. Present law
also permits a taxpayer in certain circumstances, subject to
approval by the IRS through the ruling process or in published
guidance, to establish that the reserve of a life insurance
company for life insurance and annuity contracts is the amount
taken into account in determining the foreign statement reserve
for the contract (reduced by catastrophe, equalization, or
deficiency reserve or any similar reserve). IRS approval is to
be based on whether the method, the interest rate, the
mortality and morbidity assumptions, and any other factors
taken into account in determining foreign statement reserves
(taken together or separately) provide an appropriate means of
measuring income for Federal income tax purposes.

Reasons for Change \475\

---------------------------------------------------------------------------
\475\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that it is appropriate to extend the
temporary provisions for an additional two years to provide
certainty and to allow for business planning.

Explanation of Provision

The provision extends for two years (for taxable years
beginning before January 1, 2014) 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, 2011, and for taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.

23. Look-thru treatment of payments between related controlled foreign
corporations under foreign personal holding company rules (sec.
323 of the Act and sec. 954(c)(6) of the Code)

Present Law

In general

The rules of subpart F \476\ 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.
---------------------------------------------------------------------------
\476\ 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 or accrued 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 necessary or 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, 2012, and for
taxable years of U.S. shareholders with or within which such
taxable years of foreign corporations end.

Reasons for Change \477\

---------------------------------------------------------------------------
\477\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that it is appropriate to extend the
look-through provision for an additional two years \478\ in
order to assist the competitiveness of U.S. companies with
overseas operations.
---------------------------------------------------------------------------
\478\ The provision was originally enacted in the Tax Increase
Prevention and Reconciliation Act of 2005 (Pub. L. No. 109-222), for
taxable years beginning before January 1, 2009, and extended for one
year in the Tax Extenders and Alternative Minimum Tax Relief Act of
2008 (Div. C of Pub. L. No. 110-343). It was most recently extended by
the Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (Pub. L. No. 111-312) through December 31, 2011.
---------------------------------------------------------------------------

Explanation of Provision

The provision extends for two years the application of the
look-thru rule, to taxable years of foreign corporations ending
before January 1, 2014, and for taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.

Effective Date

24. Exclusion of 100 percent of gain on certain small business stock
(sec. 324 of the Act and sec. 1202 of the Code)

Present Law

In general

A taxpayer other than a corporation 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.\479\ The
amount of gain eligible for the exclusion by an eligible
taxpayer with respect to the stock of any qualifying domestic C
corporation is the greater of (1) ten times the taxpayer's
basis in the stock or (2) $10 million (reduced by the amount of
gain eligible for exclusion in prior years). To qualify as a
qualified small business, when the stock is issued, the
aggregate gross assets (i.e., cash plus aggregate adjusted
basis of other property) held by the domestic C corporation may
not exceed $50 million. The corporation also must meet certain
active trade or business requirements.
---------------------------------------------------------------------------
\479\ Sec. 1202.
---------------------------------------------------------------------------
The portion of the gain includible in taxable income is
taxed at a maximum rate of 28 percent under the regular
tax.\480\ A percentage of the excluded gain is an alternative
minimum tax preference; \481\ 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.
---------------------------------------------------------------------------
\480\ Sec. 1(h).
\481\ 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 2013; (ii) 42
percent in the case of stock acquired before January 1, 2001, and
disposed of in a taxable year beginning after 2012; and (iii) 28
percent in the case of stock acquired after December 31, 2000, and
disposed of in a taxable year beginning after 2012.
---------------------------------------------------------------------------
Gain from the sale of qualified small business stock
generally is taxed at effective rates of 14 percent under the
regular tax \482\ and (i) 14.98 percent under the alternative
minimum tax for dispositions in a taxable year beginning before
January 1, 2013; (ii) 19.88 percent under the alternative
minimum tax for dispositions in a taxable year beginning after
December 31, 2012, in the case of stock acquired before January
1, 2001; and (iii) 17.92 percent under the alternative minimum
tax for dispositions in a taxable year beginning after December
31, 2012, in the case of stock acquired after December 31,
2000.\483\
---------------------------------------------------------------------------
\482\ The 50 percent of gain included in taxable income is taxed at
a maximum rate of 28 percent.
\483\ 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.
---------------------------------------------------------------------------

Special rules for certain qualified small business stock acquired in
2009, 2010, and 2011

For qualified small business stock acquired after February
17, 2009, and before September 28, 2010, the percentage
exclusion is increased 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 maximum effective rates of seven percent
under the regular tax \484\ and 12.88 percent under the
AMT.\485\
---------------------------------------------------------------------------
\484\ The 25 percent of gain included in taxable income is taxed at
a maximum rate of 28 percent.
\485\ The 46 percent of gain included in AMTI 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).
---------------------------------------------------------------------------
For qualified small business stock acquired after September
27, 2010, and before January 1, 2012, the percentage exclusion
is increased to 100 percent and the minimum tax preference does
not apply.

Rollover of gain

A taxpayer other than a corporation may elect to rollover
gain from the sale of qualified small business stock held more
than six months where other qualified small business stock is
purchased during the 60-day period beginning on the date of
sale.\486\ The holding period for the replacement stock
includes the period the original stock was held.\487\
---------------------------------------------------------------------------
\486\ Sec. 1045.
\487\ Sec. 1223(13). Under present law, it is unclear whether the
tacked-holding-period applies for purposes of determining when the
replacement stock was acquired for purposes of determining the
exclusion percentage. One commentator has suggested ``it appears that
1223(13)'s tacked-holding-period should apply for this latter purpose
[i.e., determining the date the replacement stock was acquired] as
well.'' Ginsburg, Levin, and Rocap, Mergers, Acquisitions, and Buyouts,
p. 2-399 (Feb. 2012).
---------------------------------------------------------------------------

Reasons for Change \488\

---------------------------------------------------------------------------
\488\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the increased exclusion
and the elimination of the minimum tax preference for small
business stock gain will encourage and reward investment in
qualified small business stock.

Explanation of Provision

The provision extends the 100-percent exclusion and the
exception from minimum tax preference treatment for two years
(for stock acquired before January 1, 2014).\489\
---------------------------------------------------------------------------
\489\ Section 102 of the Act makes permanent the seven-percent
minimum tax preference amount for qualified small business stock
acquired before September 28, 2010.
---------------------------------------------------------------------------
The provision clarifies that in the case of any qualified
small business stock acquired (determined without regard to the
tacked-holding period) after February 17, 2009, and before
January 1, 2014, the date of acquisition for purposes of
determining the exclusion percentage is the date the holding
period for the stock begins.\490\ Thus, for example, if an
individual (i) acquires qualified small business stock at its
original issue for $1 million on July 1, 2006, (ii) sells the
stock on March 1, 2012, for $2 million in a transaction in
which gain is not recognized by reason of section 1045, (iii)
acquires qualified replacement stock at its original issue on
March 15, 2012, for $2 million, and (iv) sells the replacement
stock for $3 million, 50 percent (and not 100 percent) of the
$2 million gain on the sale of the replacement stock is
excluded from gross income.\491\
---------------------------------------------------------------------------
\490\ The provision is not intended to change the acquisition date
determined under section 1202(i)(1)(A) for certain stock exchanged for
property.
\491\ This example assumes all the requirements of section 1202 are
met with respect to the original stock and the replacement stock.
---------------------------------------------------------------------------

Effective Date

The provision is generally effective for stock acquired
after December 31, 2011.
The clarification applies to stock acquired after February
17, 2009.

25. Basis adjustment to stock of S corporations making charitable
contributions of property (sec. 325 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.\492\ 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.\493\
---------------------------------------------------------------------------
\492\ Sec. 1366(a)(1)(A).
\493\ Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------
In the case of charitable contributions made in taxable
years beginning before January 1, 2012, 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, 2011, the amount of
the reduction is the shareholder's pro rata share of the fair
market value of the contributed property.

Reasons for Change \494\

---------------------------------------------------------------------------
\494\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the treatment of charitable
contributions of property by S corporations that applied to
charitable contributions made in certain taxable years
beginning before January 1, 2012, is appropriate and should be
extended.

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, 2014.

Effective Date

The provision applies to charitable contributions made in
taxable years beginning after December 31, 2011.

26. Reduction in recognition period for S corporation built-in gains
tax (sec. 326 of the Act and sec. 1374 of the Code)

Present Law

In general

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 own income
tax return.\495\
---------------------------------------------------------------------------
\495\ Sec. 1366.
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Under section 1374, a corporate level built-in gains tax,
at the highest marginal rate applicable to corporations
(currently 35 percent), is imposed on an S corporation's net
recognized built-in gain \496\ 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.\497\
If the taxable income of the S corporation is less than the
amount of net recognized built-in gain in the year such built-
in gain is recognized (for example, because of post-conversion
losses), no tax under section 1374 is imposed on the excess of
such built-in gain over taxable income for that year. However
the untaxed excess of net recognized built-in gain over taxable
income for that year is treated as recognized built-in gain in
the succeeding taxable year.\498\ Treasury regulations provide
that if a corporation sells an asset before or during the
recognition period and reports the income from the sale using
the installment method under section 453 during or after the
recognition period, that income is subject to tax under section
1374.\499\
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\496\ Certain built-in income items are treated as recognized
built-in gain for this purpose. Sec. 1374(d)(5).
\497\ 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. Treas. Reg. sec. 1.1374-1(d). A
regulated investment company (RIC) or a real estate investment trust
(REIT) that was formerly a C corporation (or that acquired assets from
a C corporation) generally is subject to the rules of section 1374 as
if the RIC or REIT were an S corporation, unless the relevant C
corporation elects ``deemed sale'' treatment. Treas. Reg. secs.
1.337(d)-7(b)(1) and (c)(1).
\498\ Sec. 1374(d)(2).
\499\ Treas. Reg. sec. 1.1374-4(h).
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The built-in gain tax also applies to net recognized built-
in gain attributable to any asset received by an S corporation
from a C corporation in a transaction in which the S
corporation's basis in the asset is determined (in whole or in
part) by reference to the basis of such asset (or other
property) in the hands of the C corporation.\500\ In the case
of such a transaction, the recognition period for any asset
transferred by the C corporation starts on the date the 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.\501\
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\500\ Sec. 1374(d)(8).
\501\ Sec. 1374(d)(8)(B).
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The amount of the built-in gain tax under section 1374 is
treated as a loss by each of the S corporation shareholders in
computing its own income tax.\502\
---------------------------------------------------------------------------
\502\ Sec. 1366(f)(2). Shareholders continue to take into account
all items of gain and loss under section 1366.
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Special rules for 2009, 2010, and 2011

For any taxable year beginning in 2009 and 2010, no tax was
imposed on the net recognized built-in gain of an S corporation
under section 1374 if the seventh taxable year in the
corporation's recognition period preceded such taxable
year.\503\ Thus, with respect to gain that arose prior to the
conversion of a C corporation to an S corporation, no tax was
imposed under section 1374 if the seventh taxable year that the
S corporation election was in effect preceded the taxable year
beginning in 2009 or 2010.
---------------------------------------------------------------------------
\503\ Sec. 1374(d)(7)(B).
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For any taxable year beginning in 2011, no tax was imposed
on the net recognized built-in gain of an S corporation under
section 1374 if the fifth year in the corporation's recognition
period preceded such taxable year.\504\ Thus, with respect to
gain that arose prior to the conversion of a C corporation to
an S corporation, no tax was imposed under section 1374 if the
S corporation election was in effect for five years preceding
the taxable year beginning in 2011.
---------------------------------------------------------------------------
\504\ Sec. 1374(d)(7)(C).
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Reasons for Change \505\

---------------------------------------------------------------------------
\505\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes it is desirable to continue to provide a
shortened period for purposes of the built-in gain tax, for an
additional two years. The Act also makes technical changes to
insure the provision operates as intended.

Explanation of Provision

For taxable years beginning in 2012 and 2013, the provision
applies the term ``recognition period'' in section 1374, for
purposes of determining the net recognized built-in gain, by
substituting a five-year period \506\ for the otherwise
applicable 10-year period. Thus, for such taxable years, the
recognition period is the five-year period beginning with the
first day of the first taxable year for which the corporation
was an S corporation (or beginning with the date of acquisition
of assets if the rules applicable to assets acquired from a C
corporation apply). If an S corporation with assets subject to
section 1374 disposes of such assets in a taxable year
beginning in 2012 or 2013 and the disposition occurs more than
five years after the first day of the relevant recognition
period, gain or loss on the disposition will not be taken into
account in determining the net recognized built-in gain.
---------------------------------------------------------------------------
\506\ 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.
---------------------------------------------------------------------------
A technical amendment provides that the rule requiring the
excess of net recognized built-in gain over taxable income for
a taxable year to be carried over and treated as recognized
built-in gain in the succeeding taxable year applies only to
gain recognized within the recognition period. Thus, for
example, built-in gain recognized in a taxable year beginning
in 2013, from a disposition in that year that occurs beyond the
end of the temporary 5-year recognition period, will not be
carried forward under the income limitation rule and treated as
recognized built-in gain in the taxable year beginning in 2014
(after the temporary provision has expired and the recognition
period is again 10 years).
If an S corporation subject to section 1374 sells a built-
in gain asset and reports the income from the sale using the
installment method under section 453, the treatment of all
payments received will be governed by the provisions of section
1374(d)(7) applicable to the taxable year in which the sale was
made. Thus, for example, if an S corporation sold a built-in
gain asset in 2008 in a sale occurring on or before the
recognition period in effect at that time, and reported the
gain using the installment method under section 453, gain
recognized under that method in 2012 or 2013 (including, for
example, any gain under section 453B from a disposition of the
installment obligation in those years) \507\ is subject to tax
under section 1374. On the other hand, if a corporation sold an
asset in a taxable year beginning in 2012 or 2013, and the sale
occurred beyond the end of the then-effective 5-year
recognition period (but not beyond the end of the otherwise
applicable 10-year recognition period), then gain reported
using the installment method under section 453 in a taxable
year beginning in 2014 (after the temporary provision expires)
is not subject to tax under section 1374, because the sale was
made after the end of the recognition period applicable to that
sale. As a third example, if an S corporation sold an asset in
a taxable year beginning in 2011, and no tax would have been
imposed on the net recognized built-in gain from the sale under
section 1374(d)(7)(B)(ii) because the fifth taxable year in the
recognition period preceded such taxable year, then gain from
such sale reported using the installment method under section
453 in a taxable year beginning in 2014 is not subject to tax
under section 1374.
---------------------------------------------------------------------------
\507\ Section 453B requires gain or loss to be recognized on
disposition of an installment obligation and treated as gain or loss
resulting from the sale or exchange of the property in respect of which
the installment obligation was received.
---------------------------------------------------------------------------

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

27. Empowerment zone tax incentives (sec. 327 of the Act and secs. 1202
and 1391 of the Code)

Present Law

The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'')
\508\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas \509\
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 \510\
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'') \511\ authorized a
total of ten new empowerment zones (``Round III empowerment
zones''), bringing the total number of authorized empowerment
zones to 40.\512\ 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.\513\ The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 extended the
empowerment zone incentives through December 31, 2011.\514\
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\508\ Pub. L. No. 103-66.
\509\ 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.
\510\ Pub. L. No. 105-34.
\511\ Pub. L. No. 106-554.
\512\ 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.
\513\ 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.
\514\ Pub. L. No. 111-312.
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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.

Wage credit

A 20-percent wage credit is available to employers for the
first $15,000 of qualified wages paid to each employee (i.e., a
maximum credit of $3,000 with respect to each qualified
employee) who (1) is a resident of the empowerment zone, and
(2) performs substantially all employment services within the
empowerment zone in a trade or business of the employer.\515\
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\515\ 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, 2012. 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.'' \516\
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\516\ 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.\517\ 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.\518\ 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.\519\ The wage credit may be used to offset up to
25 percent of alternative minimum tax liability.\520\
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\517\ Sec. 280C(a).
\518\ Secs. 1396(c)(3)(A) and 51A(d)(2).
\519\ Secs. 1396(c)(3)(B) and 51A(d)(2).
\520\ Sec. 38(c)(2).
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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 $535,000
in 2010 and 2011) \521\ for qualified zone property placed in
service before January 1, 2012.\522\ 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
$2,000,000.\523\ 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.
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\521\ The Small Business Jobs Act of 2010, Pub. L. No. 111-240,
sec. 2021.
\522\ Secs. 1397A, 1397D.
\523\ Sec. 1397A(a)(2), 179(b)(2). For 2012 the limit is $500,000.
For taxable years beginning after 2012, the limit is $200,000.
---------------------------------------------------------------------------
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 five percent of the average
of the aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial property.\524\
---------------------------------------------------------------------------
\524\ 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 five 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 five 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.\525\
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\525\ Sec. 1397C(c).
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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.\526\ 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.
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\526\ 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).
---------------------------------------------------------------------------

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.\527\ 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.
---------------------------------------------------------------------------
\527\ Sec. 1394.
---------------------------------------------------------------------------
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).\528\
---------------------------------------------------------------------------
\528\ Sec. 1394(b)(3).
---------------------------------------------------------------------------
Second, a business that qualifies as an enterprise zone
business 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

Taxpayers can elect to defer recognition of gain on the
sale of a qualified empowerment zone asset \529\ held for more
than one year and replaced within 60 days by another qualified
empowerment zone asset in the same zone.\530\ 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.
---------------------------------------------------------------------------
\529\ 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 an 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 490. For the definition of ``qualified
business,'' see text accompanying supra note 492.
\530\ Sec. 1397B.
---------------------------------------------------------------------------

Partial exclusion of capital gains on certain small business stock

Generally, individuals may exclude a percentage of gain
from the sale of certain small business stock acquired at
original issue and held at least five years.\531\ For stock
acquired prior to February 18, 2009, or after December 31,
2011, the percentage is generally 50 percent, except that for
empowerment zone stock the percentage is 60 percent. For stock
acquired after February 17, 2009, and before January 1, 2012, a
higher percentage applies to all small business stock with no
additional percentage for empowerment zone stock.\532\
---------------------------------------------------------------------------
\531\ Sec. 1202.
\532\ Section 324 of the Act extends the higher percentage for two
years (for stock acquired before January 1, 2014). For a more detailed
description of the present law exclusion, see the explanation in this
report to that section of the Act.
---------------------------------------------------------------------------

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.

Reasons for Change \533\

---------------------------------------------------------------------------
\533\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that it continues to be important to
provide tax incentives to individuals and businesses in
empowerment zones and that it is appropriate to extend such
incentives for an additional two years.

Explanation of Provision

The provision extends for two years, through December 31,
2013, 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, increased
section 179 expensing for qualifying equipment, tax-exempt bond
financing, and deferral of capital gains tax on sale of
qualified assets replaced with other qualified assets.\534\ In
the case of a designation of an empowerment zone the nomination
for which included a termination date which is December 31,
2011, 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.
---------------------------------------------------------------------------
\534\ A technical correction may be necessary to clarify that the
elective rollover provision applies to qualified empowerment zone
assets acquired after December 21, 2000 and before January 1, 2014.
---------------------------------------------------------------------------
The provision extends for two years, through December 31,
2018, 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, 2018 for qualified small business stock acquired on or
before February 17, 2009 or after December 31, 2013 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,
2011.

28. New York Liberty Zone tax-exempt bond financing (sec. 328 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, 2012.

Reasons for Change \535\

---------------------------------------------------------------------------
\535\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that one additional extension will enable
these bonds to be issued.

Explanation of Provision

The provision extends authority to issue Liberty Zone bonds
for two years (through December 31, 2013).

Effective Date

The provision is effective for bonds issued after December
31, 2011.

29. Extension of temporary increase in limit on cover over of rum
excise taxes to Puerto Rico and the Virgin Islands (sec. 329 of
the Act and sec. 7652(f) of the Code)

Present Law

A $13.50 per proof gallon \536\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\537\ 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).\538\
---------------------------------------------------------------------------
\536\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\537\ Sec. 5001(a)(1).
\538\ Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
---------------------------------------------------------------------------
The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\539\ 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, 2012).
---------------------------------------------------------------------------
\539\ Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the
amount of excise tax collected from imports into the United States of
articles produced in the Virgin Islands is retained by the United
States under section 7652(b)(3).
---------------------------------------------------------------------------
Tax amounts attributable to shipments to the United States
of rum produced in Puerto Rico are covered over to Puerto Rico.
Tax amounts attributable to shipments to the United States of
rum produced in the Virgin Islands are covered over to the
Virgin Islands. Tax amounts attributable to shipments to the
United States of rum produced in neither Puerto Rico nor the
Virgin Islands are divided and covered over to the two
possessions under a formula.\540\ 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.\541\ All of the amounts covered over are subject to
the limitation.
---------------------------------------------------------------------------
\540\ Sec. 7652(e)(2).
\541\ Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

Reasons for Change \542\

---------------------------------------------------------------------------
\542\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the needs of Puerto Rico and the
Virgin Islands justify the extension of the cover over amount
of $13.25 per gallon through December 31, 2013.

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, 2011 and before January 1, 2014. After December
31, 2013, the cover over amount reverts to $10.50 per proof
gallon.

Effective Date

The provision is effective for articles brought into the
United States after December 31, 2011.

30. Extension and Modification of American Samoa Economic Development
Credit (sec. 330 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 six taxable years of a corporation that begin after
December 31, 2005, and before January 1, 2012.
A corporation was an existing credit claimant with respect
to a 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 \543\ in an election in effect for
its taxable year that included October 13, 1995.\544\ 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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\543\ 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.
\544\ 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 six taxable years of a
taxpayer which begin after December 31, 2005, and before
January 1, 2012.

Reasons for Change \545\

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\545\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that, notwithstanding expiration of the
Puerto Rico and possession tax credit for taxable years
beginning after 2005, the U.S. Federal tax law should encourage
economic activity in American Samoa. Congress believes that a
tax incentive for economic activity in American Samoa should be
available to some domestic corporations that did not claim the
possession tax credit but that a domestic corporation, whether
or not an existing credit claimant, should be eligible for the
incentive only if it has manufacturing income in American
Samoa. Consequently, Congress believes it is appropriate to
extend and modify (in the manner described below) the American
Samoa economic development credit.

Explanation of Provision

The provision extends the credit to apply to the first
eight taxable years of a taxpayer beginning after December 31,
2005, and before January 1, 2014. For taxable years of a
taxpayer beginning after December 31, 2011, the provision
modifies the credit in two ways. First, the provision allows
domestic corporations with operations in American Samoa to
claim the credit even if those corporations are not existing
credit claimants. Second, the credit is available to a domestic
corporation (either an existing credit claimant or a new credit
claimant) only if, in addition to satisfying all the present
law requirements for claiming the credit, the corporation also
has qualified production activities income (as defined in
section 199(c) by substituting ``American Samoa'' for ``the
United States'' in each place that latter term appears).

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

31. Bonus depreciation (sec. 331 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 between January 1, 2008 and September 8, 2010
or between January 1, 2012 and January 1, 2013 (January 1, 2014
for certain longer-lived and transportation property).\546\ An
additional first-year depreciation deduction is allowed equal
to 100 percent of the adjusted basis of qualified property if
it meets the requirements for the additional first-year
depreciation and also meets the following requirements. First,
the taxpayer must acquire the property after September 8, 2010
and before January 1, 2012 (January 1, 2013 for certain longer-
lived and transportation property).\547\ Second, the taxpayer
must place the property in service after September 8, 2010 and
before January 1, 2012 (January 1, 2013 in the case of certain
longer-lived and transportation property). Third, the original
use of the property must commence with the taxpayer after
September 8, 2010.
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\546\ 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.
\547\ For a definition of ``acquire'' for this purpose, see section
3.02(1)(a) of Rev. Proc. 2011-26, 2011-16 I.R.B. 664.
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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.
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.\548\ 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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\548\ 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)).\549\ Second, the
original use \550\ of the property must commence with the
taxpayer after December 31, 2007.\551\ Third, the taxpayer must
acquire the property within the applicable time period (as
described below). Finally, the property must be placed in
service before January 1, 2013. An extension of the placed-in-
service date of one year (i.e., January 1, 2014) is provided
for certain property with a recovery period of 10 years or
longer and certain transportation property.\552\
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\549\ 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).
\550\ 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).
\551\ 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.
\552\ Property qualifying for the extended placed-in-service date
must have an estimated production period exceeding one year and a cost
exceeding $1 million. Transportation property generally is defined as
tangible personal property used in the trade or business of
transporting persons or property. Certain aircraft which is not
transportation property, other than for agricultural or firefighting
uses, also qualifies for the extended placed-in-service-date, if at the
time of the contract for purchase, the purchaser made a nonrefundable
deposit of the lesser of 10 percent of the cost or $100,000, and which
has an estimated production period exceeding four months and a cost
exceeding $200,000.
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To qualify, property must be acquired (1) after December
31, 2007, and before January 1, 2013, 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, 2013.\553\ 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, 2013. 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,
2013 (``progress expenditures'') is eligible for the additional
first-year depreciation deduction.\554\
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\553\ 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.
\554\ 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).\555\ The
$8,000 increase is not indexed for inflation.
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\555\ Sec. 168(k)(2)(F).
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Special rule for long-term contracts

In general, in the case of a long-term contract, the
taxable income from the contract is determined under the
percentage-of-completion method. Solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of 7 years or less is taken into account as a
cost allocated to the contract as if bonus depreciation had not
been enacted for property placed in service after December 31,
2009 and before January 1, 2011 (January 1, 2012 in the case of
certain longer-lived and transportation property). Bonus
depreciation is taken into account in determining taxable
income under the percentage-of-completion method for property
placed in service after December 31, 2010.

Election to accelerate minimum tax credit in lieu of claiming bonus
depreciation

A corporation otherwise eligible for additional first year
depreciation under section 168(k) may elect to claim additional
minimum tax credits in lieu of claiming deprecation under
section 168(k) for ``eligible qualified 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).\556\ A corporation making the
election increases the limitation under section 53(c) on the
use of minimum tax credits in lieu of taking bonus depreciation
deductions. The increases in the allowable credits under this
provision are treated as refundable. The depreciation for
eligible qualified property is calculated for both regular tax
and alternative minimum tax purposes using the straight-line
method in place of the method that would otherwise be used
absent the election under this provision.
---------------------------------------------------------------------------
\556\ Sec. 168(k)(4). Eligible qualified property means qualified
property eligible for bonus depreciation with minor effective date
differences.
---------------------------------------------------------------------------
The minimum tax credit limitation is increased by the bonus
depreciation amount, which is equal to 20 percent of bonus
depreciation \557\ for certain eligible qualified property that
could be claimed as a deduction absent an election under this
provision.
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\557\ 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 the 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.
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The bonus depreciation amount is limited to the lesser of
(1) $30 million or (2) six-percent of the 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.
In the case of a corporation making an election which is a
partner in a partnership, for purposes of determining the
electing partner's distributive share of partnership items,
section 168(k)(1) does not apply to any eligible qualified
property and the straight-line method is used with respect to
such property.
Generally an election under this provision for a taxable
year applies to subsequent taxable years.\558\
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\558\ Special election rules apply as the result of prior
extensions of this provision.
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Normalization accounting

Under present law, in order for public utility property to
qualify for certain accelerated depreciation allowances for
Federal income tax purposes, the benefits of accelerated
depreciation must be normalized.\559\ Normalization accounting
as applied to accelerated tax depreciation generally requires
regulatory tax expense to be computed using the depreciation
methods and periods used for regulatory, rather than Federal
income tax, purposes. Any deferred tax reserve resulting from
the use of the normalization method of accounting may be used
to reduce the rate base upon which a utility earns its rate of
return.
---------------------------------------------------------------------------
\559\ Sec. 168(i)(9).
---------------------------------------------------------------------------

Explanation of Provision

The provision extends the 50-percent additional first-year
depreciation deduction for one year, generally through 2013
(through 2014 for certain longer-lived and transportation
property).
The provision provides that solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of 7 years or less which is placed in service
after December 31, 2012 and before January 1, 2014 (January 1,
2015, in the case of certain longer-lived and transportation
property) is taken into account as a cost allocated to the
contract as if bonus depreciation had not been enacted.
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, 2012, and before January 1, 2014,
(January 1, 2015 in the case of certain longer-lived and
transportation property). The provision applies with respect to
``round 3 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, 2012.\560\
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\560\ An election under new section 168(k)(4)(J) with respect to
round 3 extension property is binding for any property that is eligible
qualified property solely by reason of the amendments made by section
331(a) of the Act (and the application of such extension to this
paragraph pursuant to the amendment made by section 331(c)(1) of the
Act), even if such property is placed in service in 2014.
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Under the provision, a corporation that has previously made
an election to claim credits in lieu of bonus depreciation may
choose not to make this previous election apply for round 3
extension property. The provision also allows a corporation
that has not made a previous election to claim credits in lieu
of bonus deprecation to make the election for round 3 extension
property for its first taxable year ending after December 31,
2012, and for each subsequent year. A separate bonus
depreciation amount, maximum amount, and maximum increase
amount is computed and applied to round 3 extension
property.\561\
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\561\ In computing the maximum amount, the maximum increase amount
for round 3 extension property is reduced by bonus depreciation amounts
for preceding taxable years only with respect to round 3 extension
property.
---------------------------------------------------------------------------
The provision clarifies that for public utility property
elections, such as an election out of bonus depreciation, must
be respected in determining when normalization accounting may
be used.

Effective Date

The provision is effective for property placed in service
after December 31, 2012, in taxable years ending after such
date.

TITLE IV--ENERGY TAX EXTENDERS

1. Credit for nonbusiness energy property (sec. 401 of the Act and sec.
25C of the Code)

Present Law

Present law \562\ 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.
---------------------------------------------------------------------------
\562\ Sec. 25C.
---------------------------------------------------------------------------
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, present law 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,\563\ (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,\564\ (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.
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\563\ 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.
\564\ 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.
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Biomass fuel property is a stove that burns biomass fuel to
heat a dwelling unit located in the United States and used as a
principal residence by the taxpayer, or to heat water for such
dwelling unit, and that has a thermal efficiency rating of at
least 75 percent. Biomass fuel is any plant-derived fuel
available on a renewable or recurring basis, including
agricultural crops and trees, wood and wood waste and residues
(including wood pellets), plants (including aquatic plants),
grasses, residues, and fibers.
The credit is available for property placed in service
prior to January 1, 2012. 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.

Reasons for Change \565\

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\565\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the credit for energy
efficient improvements and property expenditures will encourage
homeowners to make their homes more energy efficient, thus
helping to reduce residential energy consumption.

Explanation of Provision

The provision extends the credit for two years, through
December 31, 2013.

Effective Date

The provision applies to property placed in service after
December 31, 2011.

2. Alternative fuel vehicle refueling property (sec. 402 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.\566\ 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.
---------------------------------------------------------------------------
\566\ 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 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, 2012. In the case of
hydrogen refueling property, the property must be placed in
service before January 1, 2015.

Reasons for Change \567\

---------------------------------------------------------------------------
\567\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that continuing to provide incentives for
alternative fuel refueling property furthers America's
environmental and energy independence goals by reducing
gasoline consumption.

Explanation of Provision

The provision extends for two years (through 2013) the 30-
percent credit for alternative fuel refueling property (other
than hydrogen refueling property, the credit for which
continues under present law through 2014).

Effective Date

The provision is effective for taxable years beginning
after December 31, 2011.

3. Credit for electric motorcycles and three-wheeled vehicles (sec. 403
of the Act and sec. 30D of the Code)

Present Law

A 10-percent credit is available qualifying plug-in
electric low-speed vehicles, motorcycles, and three-wheeled
vehicles.\568\ Two or three-wheeled vehicles must have a
battery capacity of at least 2.5 kilowatt-hours. Other vehicles
must have a battery capacity of at least 4 kilowatt-hours. The
maximum credit for all qualifying vehicles is $2,500. The
credit is part of the general business credit. The credit is
available for vehicles acquired after February 17, 2009, and
before January 1, 2012.
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\568\ Sec. 30.
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Reasons for Change \569\

---------------------------------------------------------------------------
\569\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that continuing to provide incentives to
electric motorcycles and three-wheeled vehicles furthers
America's environmental and energy independence goals by
reducing gasoline consumption.

Explanation of Provision

The provision combines the credit for electric motorcycles
and three-wheeled vehicles (but not low-speed vehicles) with
the section 30D credit for plug-in electric drive motor
vehicles. The new credit provides the same incentives as the
existing credit and expires for vehicles acquired on or before
December 31, 2013.

Effective Date

The provision is effective for electric motorcycles and
three-wheeled vehicles acquired after December 31, 2011.

4. Extension and modification of cellulosic biofuel producer credit
(sec. 404 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.\570\
---------------------------------------------------------------------------
\570\ 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. The
alcohol mixture credit and small ethanol producer credits expired
December 31, 2011, so there is no reduction for cellulosic biofuel that
is alcohol if produced after December 31, 2011.
---------------------------------------------------------------------------
``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. Cellulosic biofuel does not include fuels that (1) are
more than four percent (determined by weight) water and
sediment in any combination, (2) have an ash content of more
than one percent (determined by weight), or (3) have an acid
number greater than 25 (``unprocessed or excluded
fuels'').\571\
---------------------------------------------------------------------------
\571\ Section 40(b)(6)(e)(iii). 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.
---------------------------------------------------------------------------
The cellulosic biofuel producer credit cannot be claimed
unless the taxpayer is registered by the Internal Revenue
Service (``IRS'') as a producer of cellulosic biofuel. The IRS
permits a taxpayer to register as a cellulosic biofuel producer
after the cellulosic biofuel has been produced. Thus, a person
may register as a cellulosic biofuel producer in 2010 for
cellulosic biofuel produced in 2009 and then claim the credit.
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.\572\
---------------------------------------------------------------------------
\572\ 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.

Reasons for Change \573\

---------------------------------------------------------------------------
\573\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the cellulosic biofuel producer
credit is an appropriate incentive to encourage the further
development of biofuels on a commercial scale and that fuels
from algae should be included within the scope of the
incentive. Development of such fuels on a commercial scale will
assist in securing energy independence by providing diversity
in fuel sources.

Explanation of Provision

The provision extends the income tax credit for cellulosic
biofuel for one additional year (through December 31, 2013).
The provision makes a technical drafting correction by
separately restating, apart from the general section 40
termination provisions, the rule that the cellulosic biofuel
producer credit may only be carried forward three years after
any termination of the cellulosic biofuel producer credit.
The provision expands qualified cellulosic biofuel
production to include algae-based fuel. Producers of fuel
derived from cultivated algae, cyanobacteria, or lemna will
qualify for the cellulosic biofuel producer credit, a $1.01
income tax credit for each gallon of qualified cellulosic
biofuel production. In addition, for algae-based fuel, the
proposal expands qualified cellulosic biofuel production to
include fuel derived from algae that is sold by the taxpayer to
another person for refining by such other person into a fuel
that meets the registration requirements for fuels and fuel
additives under section 211 of the Clean Air Act. Thus, algae-
based fuel sold for further refining, not just as end use as a
fuel, would qualify for the credit.

Effective Date

The provision generally is effective on the date of
enactment. The technical drafting correction is effective as if
included in section 15321(b) of the Heartland, Habitat,
Harvest, and Horticulture Act of 2008.

5. Incentives for biodiesel and renewable diesel (sec. 405 of the Act
and secs. 40A, 6426, and 6427 of the Code)

Present Law

Biodiesel

Present law provides an income tax credit for biodiesel
fuels (the ``biodiesel fuels credit'').\574\ 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, 2011.
---------------------------------------------------------------------------
\574\ 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.\575\ Thus, a
qualified biodiesel mixture can contain 99.9 percent biodiesel
and 0.1 percent diesel fuel.
---------------------------------------------------------------------------
\575\ 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.''
---------------------------------------------------------------------------
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.\576\ 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.\577\
---------------------------------------------------------------------------
\576\ Sec. 6426(c).
\577\ Sec. 6426(c)(4).
---------------------------------------------------------------------------
The credit is not available for any sale or use for any
period after December 31, 2011. 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.\578\ 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, 2011.
---------------------------------------------------------------------------
\578\ 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.\579\ 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, 2011.
---------------------------------------------------------------------------
\579\ Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------

Reasons for Change \580\

---------------------------------------------------------------------------
\580\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the biodiesel and
renewable diesel incentives through 2013 will give the industry
certainty and allow for business planning.

Explanation of Provision

The provision extends the income tax credit, excise tax
credit and payment provisions for biodiesel and renewable
diesel for two years (through December 31, 2013).

Effective Date

The provision is effective for sales and uses after
December 31, 2011.

6. Credit for the production of Indian coal (sec. 406 of the Act and
sec. 45 of the Code)

Present Law

A credit is available for the production of Indian coal
sold to an unrelated third party from a qualified facility for
a seven-year period beginning January 1, 2006, and ending
December 31, 2012. The amount of the credit for Indian coal is
$1.50 per ton for the first four years of the seven-year period
and $2.00 per ton for the last three years of the seven-year
period. Beginning in calendar years after 2006, the credit
amounts are indexed annually for inflation using 2005 as the
base year. The credit amount for 2012 is $2.267 per ton.
A qualified Indian coal facility is a facility placed in
service before January 1, 2009, that produces coal from
reserves that on June 14, 2005, were owned by a Federally
recognized tribe of Indians or were held in trust by the United
States for a tribe or its members.
The credit is a component of the general business
credit,\581\ 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.
---------------------------------------------------------------------------
\581\ Sec. 38(b)(8).
---------------------------------------------------------------------------

Reasons for Change \582\

---------------------------------------------------------------------------
\582\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the credit for Indian coal
will encourage continued mining of coal resources on Indian
lands.

Explanation of Provision

The provision extends the credit for the production of
Indian coal for one year (through December 31, 2013). The
placed-in-service date for qualified facilities is not
extended.

Effective Date

The provision is effective for Indian coal produced after
December 31, 2012.

7. Extension and modification of incentives for renewable electricity
property (sec. 407 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'').\583\ 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.
---------------------------------------------------------------------------
\583\ 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
----------------------------------------------------------------------------------------------------------------
Credit amount for
Eligible electricity production activity (sec. 45) 2012\1\ (cents per Expiration \2\
kilowatt-hour)
----------------------------------------------------------------------------------------------------------------
Wind................................................... 2.2 December 31, 2012
Closed-loop biomass.................................... 2.2 December 31, 2013
Open-loop biomass (including agricultural livestock 1.1 December 31, 2013
waste nutrient facilities)............................
Geothermal............................................. 2.2 December 31, 2013
Solar (pre-2006 facilities only)....................... 2.2 December 31, 2005
Small irrigation power................................. 1.1 December 31, 2013
Municipal solid waste (including landfill gas 1.1 December 31, 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.

Municipal solid waste

One feedstock that can be used to generate credit-eligible
renewable electricity is municipal solid waste. For this
purpose, the term ``municipal solid waste'' has the meaning
given the term ``solid waste'' under section 2(27) of the Solid
Waste Disposal Act.\584\ Under that Act, the term ``solid
waste'' generally means any garbage, refuse, or sludge from a
waste treatment plant, water supply treatment plant, or air
pollution control facility and other discarded material,
including solid, liquid, semisolid, or contained gaseous
material resulting from industrial, commercial, mining, and
agricultural operations, and from community activities, but
does not include solid or dissolved material in domestic
sewage, or solid or dissolved materials in irrigation return
flows or industrial discharges.
---------------------------------------------------------------------------
\584\ Sec. 45(c)(6).
---------------------------------------------------------------------------

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.

Reasons for Change \585\

---------------------------------------------------------------------------
\585\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that building additional renewable energy
infrastructure advances America's environmental and energy
independence goals. Congress believes that additional renewable
energy infrastructure will be built if the tax incentives for
renewable energy are extended. Congress also believes that
certain renewable power projects do not move forward because
developers and investors are concerned that those projects
cannot be completed before the renewable electricity production
credit expires. Congress intends to reduce this uncertainty by
replacing the placed-in-service expiration date with an
expiration date based on when construction begins on a
particular project. Finally, Congress is concerned that
recyclable paper that has been segregated from the municipal
solid waste stream may be diverted to trash combustion
facilities. Congress seeks to prevent this from happening by
modifying the definition of municipal solid waste to exclude
such paper.

Explanation of Provision

The provision extends and modifies the expiration dates for
the renewable electricity production credit and the 30-percent
investment credit in lieu of such production credit. The
provision extends the wind credits (production and investment)
for one year, through December 31, 2013. In addition, the
expiration date for all renewable power facilities (including
wind facilities) is modified such that qualified facilities or
property will be eligible for the renewable electricity
production credit, or the investment credit in lieu of such
credit, if the construction of such facilities or property
begins before January 1, 2014.
The provision also modifies the definition of municipal
solid waste to exclude commonly recycled paper that has been
segregated from such waste for purposes of this credit.

Effective Date

The provision is effective on the date of enactment.

8. Credit for energy efficient new homes (sec. 408 of the Act and sec.
45L of the Code)

Present Law

Present law 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, 2012. The credit is part of the general business
credit.

Reasons for Change \586\

---------------------------------------------------------------------------
\586\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the credit for energy
efficient new homes will provide incentives for contractors and
home manufacturers to produce such housing, thus helping to
reduce residential energy consumption.

Explanation of Provision

The provision extends the credit to homes that are acquired
prior to January 1, 2014. Additionally, the provision updates
the home construction standard from the 2003 International
Energy Conservation Code to the 2006 International Energy
Conservation Code as in effect on January 1, 2006.

Effective Date

The provision applies to homes acquired after December 31,
2011.

9. Energy efficient appliance credit (sec. 409 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).
$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
$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.
$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
$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.
$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.
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, 2010, may not exceed $25 million, with the
exception that the $200 refrigerator credit and the $225
clothes washer credit are not limited. Additionally, the credit
allowed in a taxable year for all appliances may not exceed
four 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.

Reasons for Change \587\

---------------------------------------------------------------------------
\587\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that extending the credit for energy
efficient appliances will spur their production and use, thus
helping to reduce residential energy consumption.

Explanation of Provision

The provision extends the credits available for appliance
production in 2011 for two additional years (through 2013),
with the exception that the $25 dishwasher credit and the $175
clothes washer credit are not extended.

Effective Date

The provision applies to appliances produced after December
31, 2011.

10. Extension of special depreciation allowance for cellulosic biofuel
plant property (sec. 410 of the Act and sec. 168(l) of the
Code)

Present Law

Present law \588\ allows an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of qualified cellulosic biofuel plant property. In order
to qualify, the property generally must be placed in service
before January 1, 2013.
---------------------------------------------------------------------------
\588\ Sec. 168(l).
---------------------------------------------------------------------------
Qualified cellulosic biofuel plant property means property
used in the U.S. solely to produce cellulosic biofuel. For this
purpose, cellulosic biofuel means any liquid fuel which is
produced from any lignocellulosic or hemicellulosic matter that
is available on a renewable or recurring basis.
The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes for
the taxable year in which the property is placed in service.
The additional first-year depreciation deduction is subject to
the general rules regarding whether an item is deductible under
section 162 or subject to capitalization under section 263 or
section 263A. The basis of the property and the depreciation
allowances in the year of purchase and later years are
appropriately adjusted to reflect the additional first-year
depreciation deduction. In addition, there is no adjustment to
the allowable amount of depreciation for purposes of computing
a taxpayer's alternative minimum taxable income with respect to
property to which the provision applies. A taxpayer is allowed
to elect out of the additional first-year depreciation for any
class of property for any taxable year.
In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following
requirements. The original use of the property must commence
with the taxpayer on or after December 20, 2006. The property
must be acquired by purchase (as defined under section 179(d))
by the taxpayer after December 20, 2006, and placed in service
before January 1, 2013. Property does not qualify if a binding
written contract for the acquisition of such property was in
effect on or before December 20, 2006.
Property that is manufactured, constructed, or produced by
the taxpayer for use by the taxpayer qualifies if the taxpayer
begins the manufacture, construction, or production of the
property after December 20, 2006, and the property is placed in
service before January 1, 2013 (and all other requirements are
met). Property that is manufactured, constructed, or produced
for the taxpayer by another person under a contract that is
entered into prior to the manufacture, construction, or
production of the property is considered to be manufactured,
constructed, or produced by the taxpayer.
Property any portion of which is financed with the proceeds
of a tax-exempt obligation under section 103 is not eligible
for the additional first-year depreciation deduction.\589\
Recapture rules apply if the property ceases to be qualified
cellulosic biofuel plant property.\590\
---------------------------------------------------------------------------
\589\ Sec. 168(l)(4)(C).
\590\ Sec. 168(l)(7).
---------------------------------------------------------------------------
Property with respect to which the taxpayer has elected 50
percent expensing under section 179C is not eligible for the
additional first-year depreciation deduction.\591\
---------------------------------------------------------------------------
\591\ Sec. 168(l)(8).
---------------------------------------------------------------------------

Reasons for Change \592\

---------------------------------------------------------------------------
\592\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress acknowledges that encouraging manufacturing of
biofuels in the United States is important for fostering
innovative new technology, encouraging energy independence, and
creating manufacturing jobs in the United States. Further,
expansion of the special depreciation allowance to include
property related to algae-based fuels recognizes the potential
of these fuels and supports their commercial production.

Explanation of Provision

The provision extends the present law special depreciation
allowance for one year, to qualified cellulosic biofuel plant
property placed in service prior to January 1, 2014. The
provision expands the definition of qualified cellulosic
biofuel plant property to include property used in the U.S.
solely to produce algae-based fuel, including fuel derived from
cultivated algae, cyanobacteria, or lemna.

Effective Date

The provision to extend the placed in service date is
effective for property placed in service after December 31,
2012. The provision to expand the definition of qualified
cellulosic biofuel plant property is effective for property
placed in service after the date of enactment.

11. Special rule for sales or dispositions to implement FERC or State
electric restructuring policy for qualified electric utilities
(sec. 411 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
\593\ (the ``reinvestment property'').\594\ 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.
---------------------------------------------------------------------------
\593\ The applicable period for a taxpayer to reinvest the proceeds
is the four year period beginning on the date the qualifying electric
transmission transaction occurs.
\594\ 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, 2012. 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) \595\ with respect to the transmission facilities to
which the election applies, and (2) an electric utility (as
defined in the Federal Power Act).\596\
---------------------------------------------------------------------------
\595\ 16 U.S.C. sec. 796 (23), 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.
\596\ 16 U.S.C. sec. 796 (22), 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 \597\ 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).
---------------------------------------------------------------------------
\597\ 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).

Reasons for Change \598\

---------------------------------------------------------------------------
\598\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes that the ``unbundling'' of electric
transmission assets held by vertically integrated utilities,
with the transmission assets ultimately placed under the
ownership or control of independent transmission providers (or
other similarly-approved operators), continues to be an
important policy. To facilitate the implementation of this
policy, Congress believes it is appropriate to assist taxpayers
in moving forward with industry restructuring by providing a
tax deferral for gain associated with certain dispositions of
electric transmission assets.

Explanation of Provision

The provision extends for two years the treatment under the
present-law deferral provision to sales or dispositions by a
qualified electric utility that occur prior to January 1, 2014.

Effective Date

The provision applies to dispositions after December 31,
2011.

12. Alternative fuel and alternative fuel mixtures (sec. 412 of the Act
and secs. 6426 and 6427(e) of the Code)

Present Law

Fuel excise taxes

Fuel excise taxes are imposed on taxable fuel (gasoline,
diesel fuel or kerosene) under section 4081. In general, these
fuels are taxed when removed from a refinery, terminal rack,
upon entry into the United States, or upon sale to an
unregistered person. A back-up tax under section 4041 is
imposed on previously untaxed fuel and alternative fuel used or
sold for use as fuel in a motor vehicle or motorboat to the
supply tank of a highway vehicle. In general, the rates of tax
are 18.3 cents per gallon (or in the case of compressed natural
gas 18.3 cents per gasoline gallon equivalent), and in the case
of liquefied natural gas, and liquid fuel derived from coal or
biomass, 24.3 cents per gallon.

Alternative fuel and alternative fuel mixture credits and payments

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 December 30, 2009, the
fuel must be certified as having been derived from coal
produced at a gasification facility that separates and
sequesters 75 percent of such facility's total carbon dioxide
emissions.
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 \599\ 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.
---------------------------------------------------------------------------
\599\ ``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 (gasoline, diesel fuel or kerosene) 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 expire after
December 31, 2011 (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. The alternative fuel credit and alternative fuel
mixture credit must first be applied to the applicable excise
tax liability under section 4041 or 4081, and any excess credit
may be taken as a payment. These payment provisions generally
also expire after December 31, 2011. With respect to liquefied
hydrogen, the payment provisions expire after September 30,
2014.
For purposes of the alternative fuel credit, alternative
fuel mixture credit and related payment provisions,
``alternative fuel'' does not include fuel (including lignin,
wood residues, or spent pulping liquors) derived from the
production of paper or pulp.

Reasons for Change \600\

---------------------------------------------------------------------------
\600\ See S. 3521, the ``Family and Business Tax Cut Certainty Act
of 2012,'' which was reported by the Senate Finance Committee on August
28, 2012 (S. Rep. No. 112-208).
---------------------------------------------------------------------------
Congress believes it is appropriate to extend the
incentives for alternative fuel to provide certainty to the
industry and allow for business planning. It has come to the
attention of Congress that the refundable aspect of the
alternative fuel mixture credit, in combination with requiring
only \1/10\ of one percent of diesel fuel to qualify as a
mixture, has encouraged taxpayers to be aggressive in making
large and questionable claims for payment.\601\ Because the
claims can be made weekly and are subject to interest if not
paid timely, it is the understanding of Congress that these
circumstances result in the IRS often examining such claims
after payment and having to recover an erroneous overpayment.
If the payment cannot be recovered from the taxpayer, it
results not only in administrative expenses to the Federal
Government, but a loss of revenue as well. Therefore, Congress
believes that to deter abusive claims for payment, it is
appropriate not to extend the outlay payments for alternative
fuel mixtures.
---------------------------------------------------------------------------
\601\ For an example of aggressive claims relating to alternative
fuel mixtures see IRS Chief Counsel Advice 201133010, 2011 WL 3636293
(July 12, 2011).
---------------------------------------------------------------------------

Explanation of Provision

The provision extends the alternative fuel excise tax
credit, and related payment provisions (for non-hydrogen
fuels), for two additional years (through December 31, 2013).
The alternative fuel mixture excise tax credit is extended for
two additional years (through December 31, 2013) but the
companion payment (outlay) provision is not extended.

Effective Date

The provision is effective for fuel sold or used after
December 31, 2011.

TITLE IX--BUDGET PROVISION

1. Amounts in applicable retirement plans may be transferred to
designated Roth accounts without distribution (sec. 902 of the
Act and sec. 402A of the Code)

Present Law

Individual retirement arrangements

There are two basic types of individual retirement
arrangements (``IRAs'') under present law: traditional
IRAs,\602\ to which both deductible and nondeductible
contributions may be made,\603\ and Roth IRAs, to which only
nondeductible contributions may be made.\604\ An annual limit
applies to contributions to IRAs.\605\
---------------------------------------------------------------------------
\602\ Sec. 408.
\603\ Sec. 219.
\604\ Sec. 408A.
\605\ 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 ($5,500 for 2013) or the individual's
compensation. In the case of a married couple, contributions can be
made up to the dollar limit for each spouse if the combined
compensation of the spouses is at least equal to the contributed
amount. An individual who has attained age 50 before the end of the
taxable year may also make catch-up contributions to an IRA. For this
purpose, the aggregate dollar limit is increased by $1,000. In
addition, deductible contributions to traditional IRAs, and
contributions to Roth IRAs, generally are subject to AGI limits. IRA
contributions generally must be made in cash.
---------------------------------------------------------------------------
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 and may
be subject to the 10-percent additional tax on early
distributions.\606\ For a Roth IRA, all contributions are
after-tax (no deduction is allowed) but amounts held in a Roth
IRA that are withdrawn as a qualified distribution are not
includible in income or subject to the 10-percent early
withdrawal tax. 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.
---------------------------------------------------------------------------
\606\ Under section 72(t), unless another exception applies,
distributions from IRAs, qualified retirement plans, and section 403(b)
plans before the employee or IRA owner attains age 59\1/2\ are subject
to an additional tax equal to 10 percent of the amount of the
distribution that is includible in gross income.
---------------------------------------------------------------------------
Distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings.\607\ Under special ordering rules,
after-tax contributions are recovered before earnings rather
than being recovered pro rata with earnings.\608\ The amount
includible in income is also subject to the 10-percent early
withdrawal tax unless an exception applies.
---------------------------------------------------------------------------
\607\ This tax treatment applies also to distributions from a
traditional IRA to which nondeductible contributions were made, with
the portion attributable to earnings determined on a pro rata basis.
\608\ Sec. 408A(d)(4).
---------------------------------------------------------------------------

Roth IRA conversions

Taxpayers generally may convert amounts in a traditional
IRA that are eligible for rollover.\609\ A conversion may be
accomplished by means of a 60-day rollover,\610\ 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. 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.\611\
---------------------------------------------------------------------------
\609\ Under section 408(d)(3), most distributions from an IRA are
eligible for rollover. The exceptions are distribution to a beneficiary
other than a surviving spouse and distributions that are required
minimum distributions.
\610\ A 60-day rollover is a rollover under which an amount
distributed that is eligible for rollover is contributed to an eligible
retirement plan within 60 days of the distribution. See section
408(d)(3)(A)(ii) and section 402(c)(3).
\611\ Sec. 408A(d)(3)(F), Treas. Reg. sec. 1.408A-6, A-5, and
Notice 2008-30, Q&A-3.
---------------------------------------------------------------------------

Qualified Roth contribution programs

Section 401(k) plans, section 403(b) plans, and
governmental section 457(b) plans
A qualified retirement plan \612\ that is a profit-sharing
plan or stock bonus plan (and certain money purchase pension
plans) 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.\613\ 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.\614\
---------------------------------------------------------------------------
\612\ Qualified retirement plans include plans qualified under
section 401(a) and section 403(a) annuity plans.
\613\ Sec. 401(k).
\614\ 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.
---------------------------------------------------------------------------
Amounts contributed pursuant to these qualified cash or
deferred arrangements and salary reduction agreements generally
are referred to as elective contributions. The elective
contributions generally are excludable from gross income
(pretax elective contributions) and only taxed along with
attributable earnings upon distribution from the plan.
Alternatively the plan may include a qualified Roth
contribution program under which eligible employees are offered
a choice of either making pretax elective contributions or
making elective contributions that are not excluded from income
and are designated as Roth contributions.\615\ Similar to
distributions from Roth IRAs, if certain requirements are
satisfied, distributions of designated Roth contributions and
attributable earnings are excluded from gross income. The
employer may also make nonelective and matching contributions
for employees under a section 401(k) or 403(b) plan. These are
not permitted to be designated as Roth contributions and
generally are pretax contributions.
---------------------------------------------------------------------------
\615\ Sec. 402A.
---------------------------------------------------------------------------
A dollar limit applies to the aggregate amount of elective
contributions that an employee is permitted to contribute to
section 401(k) and section 403(b) plans for a taxable year,
which is $17,500 for 2013.\616\ An additional catch-up amount
that employees age 50 or over are allowed to contribute is
$5,500 for 2013.\617\
---------------------------------------------------------------------------
\616\ An employee with compensation less than $17,500 may make
elective contributions only up to the amount of his or her
compensation. Pursuant to section 415(c) and 403(b)(1), total
contributions (including elective contributions) for an employee to a
section 401(k) plan or 403(b) plan for a plan year for an employee
generally cannot exceed $51,000 for 2013 (or the employee's
compensation, if less). In some cases additional elective contributions
or other contributions may be made under a section 403(b) plan.
\617\ The total of an employee's elective contributions, including
catch-up contributions, cannot exceed the employee's compensation.
---------------------------------------------------------------------------
Elective contributions under a section 401(k) plan are
subject to explicit statutory in-service distribution
restrictions under the plan.\618\ 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.\619\
---------------------------------------------------------------------------
\618\ Sec. 401(k)(2)(B).
\619\ Secs. 403(b)(7)(A)(ii) and 403(b)(11).
---------------------------------------------------------------------------
Amounts under a qualified plan are distributable only as
permitted under the plan terms. Even if no other statutory
distribution restriction applies to an amount, in order to meet
the regulatory definition for a profit-sharing plan, the plan
generally may only allow an in-service distribution of an
amount contributed to the plan after a fixed number of years
(not less than two).\620\ In the case of a money purchase
pension plan, the plan generally may not allow an in-service
distribution prior to attainment of age 62 (or attainment of
normal retirement age under the plan if earlier).\621\
---------------------------------------------------------------------------
\620\ Rev. Rul. 71-295, 1971-2, C.B. 184 and Treas. Reg. sec.
1.401-1(b)(1)(ii). Similar rules apply to a stock bonus plan. Treas.
Reg. sec. 1.401-1(b)(1)(iii).
\621\ Sec. 401(a)(37) and Treas. Reg. sec. 1.401(a)-1(b)(1).
---------------------------------------------------------------------------
The Thrift Savings Plan (``TSP'') is a qualified defined
contribution plan under which Federal employees may make
elective contributions.\622\ TSP includes a qualified Roth
contribution program and allows employees to make both pretax
elective contributions and designated Roth contributions
(subject to the applicable limit). These contributions are
generally subject to the same tax treatment as contributions to
a section 401(k) plan.\623\ The TSP also provides for employer
matching contributions and nonelective contributions.
Distributions from the TSP are permitted after separation from
employment or attainment of age 59\1/2\ or in the case of
financial hardship.\624\
---------------------------------------------------------------------------
\622\ The provisions of TSP are governed by sections 8430 through
8440f of Title 5 of the United States Code.
\623\ Sec 7701(j).
\624\ 5 U.S.C. sec. 8433.
---------------------------------------------------------------------------
A governmental section 457(b) plan may also provide for
elective contributions. Contributions to a governmental section
457(b) plan are subject to a dollar limit of $17,500 for 2013
plus an additional $5,500 catch-up contribution limit for
participants at least age 50 (or the participant's
compensation, if less).\625\ This limit is separate from the
limit on elective deferrals to section 401(k) and section
403(b) plans.\626\ As in the case of a section 401(k) plan or a
section 403(b) plan, the plan may include a qualified Roth
contribution program under which employees are given the choice
between making pretax elective contributions and designated
Roth contributions. Deferrals under a governmental section
457(b) plan are also subject to explicit statutory in-service
distribution restrictions similar to those applicable to
section 401(k) and 403(b) plans, except that distributions from
a governmental section 457(b) plan prior to severance from
employment are generally not permitted until the employee
attains age 70\1/2\ (rather than being allowed after attainment
of age 59\1/2\).\627\
---------------------------------------------------------------------------
\625\ Under a special rule, additional catch-up contributions may
be made by a participant to a governmental section 457(b) for the last
three years before attainment of normal retirement age.
\626\ For example, if an employee participates in both a section
403(b) plan and a governmental section 457(b) plan of the same
employer, the employee may contribute up to $17,500 (plus $5,500 catch-
up contributions if at least age 50) to the section 403(b) plan and up
to $17,000 (plus $5,500 catch-up contributions if at least age 50) to
the section 457(b) plan.
\627\ Sec. 457(d)(1)(A).
---------------------------------------------------------------------------
Designated Roth accounts
All designated Roth contributions made under the plan must
be maintained in a separate account (a designated Roth
account). A qualified distribution from a designated Roth
account is excludable from gross income. A qualified
distribution is a distribution that is made after (1) an
employee's completion of a specified 5-year period and (2) the
employee's attainment of age 59\1/2\, death, or disability.
A distribution from a designated Roth account (other than a
qualified 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.\628\
---------------------------------------------------------------------------
\628\ The special basis-first recovery rule for Roth IRAs does not
apply to distributions from designated Roth accounts.
---------------------------------------------------------------------------
Eligible rollover distributions from designated Roth
accounts may only be rolled over to another designated Roth
account or a Roth IRA.

Rollovers from eligible employer plans (other than from designated Roth
accounts)

Rollover to eligible retirement plan that is not a Roth IRA
or a designated Roth account
An eligible rollover distribution from an eligible employer
plan that is not from a designated Roth account may be rolled
over to another such plan (other than to a designated Roth
account) or to a traditional IRA. An eligible employer plan is
a qualified retirement plan, a section 403(b) plan, and a
governmental section 457(b) plan. If rolled over, the
distribution generally is not currently includible in the
distributee's gross income. 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.\629\ Only an employee, a surviving
spouse, or certain alternate payees are allowed to roll over an
eligible rollover distribution from an eligible employer plan
to another eligible employer plan.\630\
---------------------------------------------------------------------------
\629\ Sec. 402(c)(4).
\630\ Section 402(c)(10) allows nonspouse beneficiaries to make a
direct rollover to an IRA but not another eligible employer plan.
---------------------------------------------------------------------------
Rollover to a Roth IRA
A distribution from an eligible employer plan that is not
from a designated Roth account is also permitted to be rolled
over into a Roth IRA, subject to the rules that apply to
conversions from a traditional IRA into a Roth IRA. 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.\631\ 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.\632\ As in the case
of a Roth IRA conversion of an amount from a traditional IRA,
the special recapture rule relating to the 10-percent
additional tax on early distributions applies for distributions
made from the Roth IRA within a specified five-year period
after the rollover.\633\
---------------------------------------------------------------------------
\631\ Sec. 408A(d)(3) and Notice 2008-30, 2008-12 I.R.B. 638.
\632\ Treas. Reg. sec. 1.402(a)-1(a)(iii).
\633\ Sec. 408A(d)(3)(F), Treas. Reg. sec. 1.408A-6 A-5, and Notice
2008-30, Q&A-3.
---------------------------------------------------------------------------

In-plan Roth rollover

If a section 401(k) plan, section 403(b) plan, or
governmental section 457(b) plan has a qualified Roth
contribution program, any amount eligible under the plan for
distribution and rollover to another eligible employer plan is
permitted to be rolled over from an account under the plan that
is not a designated Roth account into a designated Roth account
under the plan for the individual (referred to as an ``in-plan
Roth rollover'').\634\ As in the case of a rollover of a
distribution from an eligible employer plan (other than from a
designated Roth Account) to a Roth IRA, this rollover is
essentially a form of Roth conversion, and the distribution is
subject to the rules that apply to conversions from a
traditional IRA into a Roth IRA. Thus, the amount transferred
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.\635\ An in-plan
Roth rollover 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) (an ``in-plan Roth direct rollover''), or by a
distribution of funds to the individual who then rolls over the
funds into his or her designated Roth account in the plan
within 60 days (an ``in-plan Roth 60-day rollover'').
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\634\ Sec. 402A(c)(4). Notice 2010-84, 2010-2 C.B. 872, provides
guidance on section 402A(c)(4).
\635\ As in the case of a rollover from an eligible employer plan
that is not from a designated Roth account to a Roth IRA, the special
recapture rule relating to the 10-percent additional tax on early
distributions applies.
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A plan that does not otherwise have a qualified Roth
contribution program is not permitted to establish designated
Roth accounts solely to accept these rollover contributions.
Further, whether the rollover is an in-plan Roth direct
rollover or an in-plan Roth 60-day rollover, the distribution
to be rolled over must be otherwise allowed under the plan and
be an eligible rollover distribution. For example, an amount
under a section 401(k) plan subject to distribution
restrictions cannot be rolled over to a designated Roth
account. If property is transferred in a direct in-plan Roth
rollover, the individual must be eligible for an in-kind
distribution of that property. 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 is permitted to allow a distribution only in
the form of a direct in-plan Roth rollover even though the plan
does not otherwise allow in-service distributions or
distributions prior to normal retirement age.\636\
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\636\ Q&A-4 of Notice 2010-84.
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Because an in-plan Roth direct rollover merely changes the
account in a plan under which an amount is held and the tax
character of the amount, a distribution that is rolled over in
an in-plan direct rollover is not treated as a distribution for
certain purposes under the plan, including certain purposes
related to participant or spousal consent, plan loans, and
anti-cut back protections under the plan.\637\
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\637\ Q&A-3 of Notice 2010-84.
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Explanation of Provision

The provision expands the amounts eligible for in-plan Roth
direct rollover to include amounts that are not distributable
under the plan. Under the provision, a section 401(k) plan
(including TSP), a section 403(b) plan or a governmental
section 457(b) plan that includes a qualified Roth contribution
program is permitted to allow individuals to elect an in-plan
transfer of any amount not otherwise distributable under the
plan from an account that is not a designated Roth account
under the plan to a designated Roth account maintained under
the plan for the benefit of the individual.
This in-plan transfer is treated as an in-plan Roth direct
rollover, even though the plan may not otherwise be allowed to
provide for distribution of the amount transferred. Thus, as in
the case of present-law in-plan Roth direct rollovers, the
transfer is essentially a form of Roth conversion, and the
amount transferred is subject to the rules that apply to
conversions from a traditional IRA into a Roth IRA. Thus, the
amount transferred 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 unless the
special recapture rule applies based on a subsequent
distribution.
The provision specifies that a plan is not treated as
violating the distribution restrictions applicable to section
401(k), 403(b) and governmental section 457(b) plans solely by
reason of an in-plan transfer under the provision. An in-plan
transfer under the provision is also permitted for an amount
that is not distributable for any other reason. For example, if
an amount in a profit-sharing plan is not distributable because
the requisite fixed number of years have not elapsed, the plan
would not be treated as violating this distribution limitation
solely by reason of an in-plan transfer of such amount under
the provision. Moreover, the statutory provision governing TSP
distributions is not violated solely by reason of an in-plan
transfer under the provision.
Similar to an in-plan Roth direct rollover for otherwise
distributable amounts, an amount transferred in an in-plan
transfer under the provision merely changes the account in a
plan under which an amount is held and the tax character of the
amount. Thus, the provision does not change the basic character
of these amounts as not being distributable under the plan. For
example, an amount subject to a distribution restriction in a
section 401(k), section 403(b) or governmental section 457(b)
plan before an in-plan transfer must remain subject to the
relevant distribution restriction after the transfer. As a
further example, an amount in a profit-sharing plan that is not
distributable because the requisite fixed number of years has
not elapsed remains not distributable for the remainder of the
fixed number of years.

Effective Date

The provision applies to transfers after December 31, 2012,
in taxable years ending after that date.

PART THIRTEEN: CUSTOMS USER FEES AND CORPORATE ESTIMATED TAXES

A. Extension of Custom User Fees

Present Law

Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (``COBRA'') \638\ authorized the
Secretary of the Treasury to collect certain service fees.
Section 412 of the Homeland Security Act of 2002 \639\
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.\640\ COBRA was amended
on several occasions but most recently prior to the start of
the 112th Congress by the Omnibus Trade Act of 2010,\641\ which
extended authorization for the collection of the passenger and
conveyance fees through January 14, 2020 and the merchandise
processing fees through January 7, 2020.
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\638\ Pub. L. No. 99-272.
\639\ Pub. L. No. 107-296
\640\ 19 U.S.C. sec. 58c.
\641\ Pub. L. No. 111-344.
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Explanation of Provision

Public Law Number 112-40 increases the maximum authorized
processing fee for merchandise that is formally entered or
released, from 0.21 to 0.3464 percent ad valorem, for the
period beginning October 1, 2011 and ending November 30,
2015.\642\ It also decreases the same maximum authorized
processing fee, from 0.21 to 0.1740 percent ad valorem, for the
period beginning October 1, 2016 and ending September 30,
2019.\643\
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\642\ Pub. L. No. 112-40, secs. 2 & 262.
\643\ Pub. L. No. 112-40, sec. 262.
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Effective Date

The provision is effective on the date of enactment
(October 21, 2011).

Explanation of Provision

The United States-Korea Free Trade Agreement Implementation
Act extends: (1) the passenger and conveyance processing fees
authorized under COBRA through December 8, 2020; and (2) the
merchandise processing fees authorized under COBRA through
August 2, 2021.\644\
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\644\ Pub. L. No. 112-41, sec. 504.
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It also increases the maximum authorized processing fee for
merchandise that is formally entered or released, from 0.21 to
0.3464 percent ad valorem, for the period beginning December 1,
2015 and ending June 30, 2021.\645\
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\645\ Pub. L. No. 112-41, sec. 503.
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Effective Date

The provision is effective on the date of enactment
(October 21, 2011).

Explanation of Provision

Public Law Number 112-163 extends: (1) the passenger and
conveyance processing fees authorized under COBRA through
October 29, 2021; and (2) the merchandise processing fees
authorized under COBRA through October 22, 2021.\646\
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\646\ Pub. L. No. 112-163, sec. 5. This section also repeals two
provisions that were enacted earlier in the term. Those provisions
authorized the passenger and conveyance fees and the merchandise
processing fees for specified periods during calendar years 2020 and
2021, notwithstanding the general termination provision. See United
States-Colombia Trade Promotion Agreement Implementation Act, Pub. L.
No. 112-42, sec. 602; United States-Panama Trade Promotion Agreement
Implementation Act, Pub. L. No. 112-43, sec. 501.
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Effective Date

The provision is effective on the date of enactment (August
10, 2012).

B. Time for Payment of Corporate Estimated Taxes

Present Law

In general, corporations are required to make quarterly
estimated tax payments of their income tax liability.\647\ 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): \648\
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\647\ Sec. 6655.
\648\ See also Joint Committee on Taxation, General Explanation of
Tax Legislation Enacted in the 111th Congress (JCS-2-11), March 2011,
pp. 698-701, and Part Ten of this General Explanation.
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1. payments due in July, August, or September, 2014, are
increased to 174.25 percent of the payment otherwise due;
2. payments due in July, August or September, 2015, are
increased to 163.75 percent of the payment otherwise due; and
3. payments due in July, August or September, 2019, are
increased to 106.5 percent of the payment otherwise due.
For each of the periods impacted, the next required payment
is reduced accordingly.

Explanation of Provision

The United States-Korea Free Trade Agreement Implementation
Act \649\ increases the amount of the required installment of
estimated tax otherwise due in July, August, or September of
2012 by 0.25 percent of such amount and the amount of the
required installment of estimated tax otherwise due in July,
August, or September of 2016 by 2.75 percent of such amount
(determined without regard to any increase in such amount not
contained in the Internal Revenue Code). The next required
installment is reduced accordingly.
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\649\ Pub. L. No. 112-41, sec. 505.
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Effective Date

The provision is effective on the date of enactment of the
Act.

Explanation of Provision

The United States-Colombia Trade Promotion Agreement
Implementation Act \650\ increases the amount of the required
installment of estimated tax otherwise due in July, August, or
September, 2016, by 0.50 percent of such amount (determined
without regard to any increase in such amount not contained in
the Internal Revenue Code). The next required installment is
reduced accordingly.
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\650\ Pub. L. No. 112-42, sec. 603.
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Effective Date

The provision is effective on the date of enactment of the
Act.

Explanation of Provision

The United States--Panama Trade Promotion Agreement
Implementation Act \651\ increases the amount of the required
installment of estimated tax otherwise due in July, August, or
September, 2012 by 0.25 percent of such amount and the amount
of the required installment of estimated tax otherwise due in
July, August, or September of 2016 by 0.25 percent of such
amount (determined without regard to any increase in such
amount not contained in the Internal Revenue Code). The next
required installment is reduced accordingly.
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\651\ Pub. L. No. 112-43, sec. 502.
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Effective Date

The provision is effective on the date of enactment of the
Act.

Explanation of Provision

The Middle Class Tax Relief and Job Creation Act of 2012
\652\ reduces the applicable percentage for 2012 (100.5
percent), 2014 (174.25 percent), 2015 (163.75 percent), 2016
(103.5 percent), and 2019 (106.5 percent) to 100 percent. Thus,
corporations will be required to make estimated tax payments in
2012, 2014, 2015, 2016, and 2019 as if the prior legislation
had never been enacted or amended.
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\652\ Pub. L. No. 112-96, sec. 7001.
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Effective Date

The provision is effective on the date of enactment of the
Act.

Explanation of Provision

The African Growth and Opportunity Act \653\ increases the
amount of the required installment of estimated tax otherwise
due in July, August, or September, 2017, by 0.25 percent of
such amount (determined without regard to any increase in such
amount not contained in the Internal Revenue Code). The next
required installment is reduced accordingly.
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\653\ Pub. L. No. 112-163, sec. 4.
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Effective Date

The provision is effective on the date of enactment of the
Act.

APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE
112TH CONGRESS