[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

                              ----------                              
                                                                   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

                              ----------                              
                                                                   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\)
---------------------------------------------------------------------------

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

  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

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.\7\ 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.
---------------------------------------------------------------------------
    \7\ 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 October 1, 
2011.\8\
---------------------------------------------------------------------------
    \8\ For Federal budget scorekeeping purposes, the LUST Trust Fund 
tax, like other excise taxes dedicated to trust funds, is assumed to be 
permanent.
---------------------------------------------------------------------------

                        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\
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------
    \15\ Sec. 4481.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \50\ In addition, a revision may occur only if the terms of the 
plan so provide.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------
    \51\ Sec. 401(h) and Treas. Reg. sec. 1.401-1(b).
    \52\ Treas. Reg. sec. 1.72-15(h).
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------
    \59\ Sec. 79.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \60\ Treas. Reg. sec. 1.401-1(b).
    \61\ Secs. 72(m)(3) and 79(b)(3).
---------------------------------------------------------------------------

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

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

    \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.
---------------------------------------------------------------------------
    \124\ Sec. 501(c)(9).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \125\ This ARRA provision applies to plan years beginning after 
February 17, 2009, and before January 1, 2011.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \130\ Special transition rules apply with respect to the extension 
of certain provisions.
---------------------------------------------------------------------------

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

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

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

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

    \133\ All public laws enacted in the 112th Congress affecting this 
provision are described in Part Thirteen of this document.
---------------------------------------------------------------------------
    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\

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

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

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

    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \142\ Secs. 1441 and 1442.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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

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
------------------------------------------------------------------------

    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.

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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \176\ $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 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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------

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

 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \185\ Sec. 7275.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \186\ Sec. 4271.
---------------------------------------------------------------------------

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

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

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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \211\ Sec. 3102.
    \212\ Sec. 3402.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \264\ Sec. 530.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \267\ Qualified higher education expenses are defined in the same 
manner as for qualified tuition programs.
    \268\ Sec. 530(b)(2)(B).
---------------------------------------------------------------------------
    The term ``qualified elementary and secondary education 
expenses,'' means expenses for: (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and other 
equipment incurred in connection with the enrollment or 
attendance of the beneficiary at a public, private, or 
religious school providing elementary or secondary education 
(kindergarten through grade 12) as determined under State law; 
(2) room and board, uniforms, transportation, and supplementary 
items or services (including extended day programs) required or 
provided by such a school in connection with such enrollment or 
attendance of the beneficiary; and (3) the purchase of any 
computer technology or equipment (as defined in section 
170(e)(6)(F)(i)) or Internet access and related services, if 
such technology, equipment, or services are to be used by the 
beneficiary and the beneficiary's family during any of the 
years the beneficiary is in elementary or secondary school. 
Computer software primarily involving sports, games, or hobbies 
is not considered a qualified elementary and secondary 
education expense unless the software is predominantly 
educational in nature.
    Qualified education expenses generally include only out-of-
pocket expenses. Such qualified education expenses do not 
include expenses covered by employer-provided educational 
assistance or scholarships for the benefit of the beneficiary 
that are excludable from gross income. Thus, total qualified 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income, 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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \274\ Sec. 142(a)(13), (k).
---------------------------------------------------------------------------
    A public-private partnership agreement is defined as an 
arrangement pursuant to which the for-profit corporate party 
constructs, rehabilitates, refurbishes, or equips a school 
facility for a public school agency (typically pursuant to a 
lease arrangement). The agreement must provide that, at the end 
of the contract term, ownership of the bond-financed property 
is transferred to the public school agency party to the 
agreement for no additional consideration.
    Issuance of these bonds is subject to a separate annual 
per-State private activity bond volume limit equal to $10 per 
resident ($5 million, if greater) in lieu of the present-law 
State private activity bond volume limits. As with the present-
law State private activity bond volume limits, States can 
decide how to allocate the bond authority to State and local 
government agencies. Bond authority that is unused in the year 
in which it arises may be carried forward for up to three years 
for public school projects under rules similar to the 
carryforward rules of the present-law private activity bond 
volume limits.

                        Explanation of Provision

    The 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \276\ Sec. 21.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \280\ Sec. 646.
    \281\ Sec. 6039H.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \282\ Sec. 2010.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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

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

                             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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    \292\ Pub. L. No. 111-312.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\

---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \313\ Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \320\ Secs. 170(c)(3)-(5).
    \321\ Sec. 170(c)(1).
---------------------------------------------------------------------------
    The amount of the deduction allowable for a taxable year 
with respect to a charitable contribution of property may be 
reduced depending on the type of property contributed, the type 
of charitable organization to which the property is 
contributed, and the income of the taxpayer.\322\
---------------------------------------------------------------------------
    \322\ Secs. 170(b) and (e).
---------------------------------------------------------------------------
    A taxpayer who takes the standard deduction (i.e., who does 
not itemize deductions) may not take a separate deduction for 
charitable contributions.\323\
---------------------------------------------------------------------------
    \323\ Sec. 170(a).
---------------------------------------------------------------------------
    A payment to a charity (regardless of whether it is termed 
a ``contribution'') in exchange for which the donor receives an 
economic benefit is not deductible, except to the extent that 
the donor can demonstrate, among other things, that the payment 
exceeds the fair market value of the benefit received from the 
charity. To facilitate distinguishing charitable contributions 
from purchases of goods or services from charities, present law 
provides that no charitable contribution deduction is allowed 
for a separate contribution of $250 or more unless the donor 
obtains a contemporaneous written acknowledgement of the 
contribution from the charity indicating whether the charity 
provided any good or service (and an estimate of the value of 
any such good or service provided) to the taxpayer in 
consideration for the contribution.\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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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

    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
    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

    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).
    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

    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

    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

    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.\399\ 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.
---------------------------------------------------------------------------
    \399\ Sec. 168.
---------------------------------------------------------------------------

Depreciation of leasehold improvements

    Generally, depreciation allowances for improvements made on 
leased property are determined under MACRS, even if the MACRS 
recovery period assigned to the property is longer than the 
term of the lease. This rule applies regardless of whether the 
lessor or the lessee places the leasehold improvements in 
service. If a leasehold improvement constitutes an addition or 
improvement to nonresidential real property already placed in 
service, the improvement generally is depreciated using the 
straight-line method over a 39-year recovery period, beginning 
in the month the addition or improvement was placed in service. 
However, exceptions exist for certain qualified leasehold 
improvements, qualified restaurant property, and qualified 
retail improvement property.

Qualified leasehold improvement property

    Section 168(e)(3)(E)(iv) provides a statutory 15-year 
recovery period for qualified leasehold improvement property 
placed in service before January 1, 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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

    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 foreign corporations end.

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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \500\ Sec. 1374(d)(8).
    \501\ Sec. 1374(d)(8)(B).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

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

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

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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \525\ Sec. 1397C(c).
---------------------------------------------------------------------------
    A qualified business is defined as any trade or business 
other than a trade or business that consists predominantly of 
the development or holding of intangibles for sale or license 
or any business prohibited in connection with the employment 
credit.\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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\

---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \548\ Assume that the cost of the property is not eligible for 
expensing under section 179.
---------------------------------------------------------------------------
    Property qualifying for the additional first-year 
depreciation deduction must meet all of the following 
requirements. First, the property must be (1) property to which 
MACRS applies with an applicable recovery period of 20 years or 
less; (2) water utility property (as defined in section 
168(e)(5)); (3) computer software other than computer software 
covered by section 197; or (4) qualified leasehold improvement 
property (as defined in section 168(k)(3)).\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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \555\ Sec. 168(k)(2)(F).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \558\ Special election rules apply as the result of prior 
extensions of this provision.
---------------------------------------------------------------------------

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

---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \568\ Sec. 30.
---------------------------------------------------------------------------

                        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'').
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \636\ Q&A-4 of Notice 2010-84.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \637\ Q&A-3 of Notice 2010-84.
---------------------------------------------------------------------------

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

                        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\
---------------------------------------------------------------------------
    \642\ Pub. L. No. 112-40, secs. 2 & 262.
    \643\ Pub. L. No. 112-40, sec. 262.
---------------------------------------------------------------------------

                             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\
---------------------------------------------------------------------------
    \644\ Pub. L. No. 112-41, sec. 504.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \645\ Pub. L. No. 112-41, sec. 503.
---------------------------------------------------------------------------

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

                             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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
      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.
---------------------------------------------------------------------------
    \649\ Pub. L. No. 112-41, sec. 505.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \650\ Pub. L. No. 112-42, sec. 603.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \651\ Pub. L. No. 112-43, sec. 502.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \652\ Pub. L. No. 112-96, sec. 7001.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \653\ Pub. L. No. 112-163, sec. 4.
---------------------------------------------------------------------------

                             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



