[JPRT 114-1-16]
[From the U.S. Government Publishing Office]





                        [JOINT COMMITTEE PRINT]

 
                         GENERAL EXPLANATION OF
                    TAX LEGISLATION ENACTED IN 2015

                               ----------                              

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION



                 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                               MARCH 2016

                               ----------                              
                               

                   U.S. GOVERNMENT PRINTING OFFICE
98-305                    WASHINGTON : 2016              JCS-1-16





                      JOINT COMMITTEE ON TAXATION
                      114th Congress, 2nd Session

                                 ------                                
               SENATE                               HOUSE
ORRIN G. HATCH, Utah,                KEVIN BRADY, Texas,
  Chairman                             Vice Chairman
CHUCK GRASSLEY, Iowa                 SAM JOHNSON, Texas
MIKE CRAPO, Idaho                    DEVIN NUNES, California
RON WYDEN, Oregon                    SANDER M. LEVIN, Michigan
DEBBIE STABENOW, Michigan            CHARLES B. RANGEL, New York
                   Thomas A. Barthold, Chief of Staff
               Bernard A. Schmitt, Deputy Chief of Staff
                            SUMMARY CONTENTS

                              ----------                              
                                                                   Page
Part One: Slain Officer Family Support Act of 2015 (Public Law 
  114-7).........................................................     3

Part Two: Medicare Access and Chip Reauthorization Act of 2015 
  (Public Law 114-10)............................................     5

Part Three: Don't Tax Our Fallen Public Safety Heroes Act (Public 
  Law 114-14)....................................................     7

Part Four: Highway and Transportation Funding Act of 2015 (Public 
  Law 114-21)....................................................     9

Part Five: Defending Public Safety Employees' Retirement Act 
  (Public Law 114-26)............................................    10

Part Six: Trade Preferences Extension Act of 2015 (Public Law 
  114-27)........................................................    12

Part Seven: Surface Transportation and Veterans Health Care 
  Choice Improvement Act of 2015 (Public Law 114-41).............    24

Part Eight: Airport and Airway Extension Act of 2015 (Public Law 
  114-55)........................................................    42

Part Nine: Surface Transportation Extension Act of 2015 (Public 
  Law 114-73)....................................................    44

Part Ten: Bipartisan Budget Act of 2015 (Public Law 114-74)......    45

Part Eleven: Surface Transportation Extension Act of 2015, Part 
  II (Public Law 114-87).........................................    85

Part Twelve: Fixing America's Surface Transportation Act (``Fast 
  Act'') (Public Law 114-94).....................................    86

Part Thirteen: Consolidated Appropriations Act, 2016 (Public Law 
  114-113).......................................................    99


                            C O N T E N T S

                              ----------                              
                                                                   Page
INTRODUCTION.....................................................     1

Part One: Slain Officer Family Support Act of 2015 (Public Law 
  114-7).........................................................     3
          A.  Acceleration of Income Tax Benefits for Charitable 
              Cash Contributions for Relief of the Families of 
              New York Police Department Detectives Wenjian Liu 
              and Rafael Ramos (sec. 2 of the Act)...............     3

Part Two: Medicare Access and Chip Reauthorization Act of 2015 
  (Public Law 114-10)............................................     5
          A.  Increase Continuous Levy Authority on Payments to 
              Medicare Providers and Suppliers (sec. 413 of the 
              Act and sec. 6331(h) of the Code)..................     5

Part Three: Don't Tax Our Fallen Public Safety Heroes Act (Public 
  Law 114-14)....................................................     7
          A.  Exclusion of Certain Compensation Received by 
              Public Safety Officers and Their Dependents (sec. 2 
              of the Act and sec. 104(a) of the Code)............     7

Part Four: Highway and Transportation Funding Act of 2015 (Public 
  Law 114-21)....................................................     9
          A.  Extension of Highway Trust Fund Expenditure 
              Authority (sec. 2001 of the Act and secs. 9503, 
              9504, and 9508 of the Code)........................     9

Part Five: Defending Public Safety Employees' Retirement Act 
  (Public Law 114-26)............................................    10
          A.  Early Retirement Distributions to Federal Law 
              Enforcement Officers, Firefighters, and Air Traffic 
              Controllers in Governmental Plans (sec. 2 of the 
              Act and sec. 72(t) of the Code)....................    10

Part Six: Trade Preferences Extension Act of 2015 (Public Law 
  114-27)........................................................    12

TITLE IV--EXTENSION OF TRADE ADJUSTMENT ASSISTANCE...............    12

          A.  Extension and Modification of Health Coverage Tax 
              Credit (sec. 407 of the Act and sec. 35 of the 
              Code)..............................................    12

TITLE VIII--OFFSETS..............................................    17

          A.  Time for Payment of Corporate Estimated Taxes (sec. 
              803 of the Act and sec. 6655 of the Code)..........    17

          B.  Payee Statement Required to Claim Certain Education 
              Tax Benefits (sec. 804 of the Act and secs. 25A and 
              222 of the Code)...................................    18

          C.  Special Rule for Educational Institutions Unable to 
              Collect Taxpayer Identification Numbers of 
              Individuals with Respect to Higher Education 
              Tuition and Related Expenses (sec. 805 of the Act 
              and sec. 6724 of the Code).........................    18

          D.  Increase Penalty for Failure to File Information 
              Returns and Payee Statements (sec. 806 of the Act 
              and secs. 6721 and 6722 of the Code)...............    19

          E.  Child Tax Credit Not Refundable For Taxpayers 
              Electing To Exclude Foreign Earned Income From Tax 
              (sec. 807 of the Act and sec. 24 of the Code)......    21

Part Seven: Surface Transportation and Veterans Health Care 
  Choice Improvement Act of 2015 (Public Law 114-41).............    24

TITLE II--REVENUE PROVISIONS.....................................    24

          A.  Extension of Highway Trust Fund Expenditure 
              Authority (sec. 2001 of the Act and secs. 9503, 
              9504, and 9308 of the Code)........................    24

          B.  Funding of Highway Trust Fund (sec. 2002 of the Act 
              and sec. 9503(f) of the Code)......................    24

          C.  Modification of Mortgage Reporting Requirements 
              (sec. 2003 of the Act and sec. 6050H of the Code)..    25

          D.  Consistent Basis Reporting between Estate and 
              Person Acquiring Property from Decedent (sec. 2004 
              of the Act and secs. 1014 and 6035 of the Code)....    26

          E.  Clarification of 6-Year Statute of Limitations in 
              Case of Overstatement of Basis (sec. 2005 of Act 
              and sec. 6501 of the Code).........................    28

          F.  Tax Return Due Date Simplification (sec. 2006 of 
              the Act and secs. 6071, 6072, and 6081 of the Code)    30

          G.  Transfers of Excess Pension Assets to Retiree 
              Health Accounts (sec. 2007 of the Act and sec. 420 
              of the Code).......................................    34

          H.  Equalization of Highway Trust Fund Excise Taxes on 
              Liquefied Natural Gas, Liquefied Petroleum Gas, and 
              Compressed Natural Gas (sec. 2008 of the Act and 
              sec. 4041 of the Code).............................    35

TITLE IV--VETERANS PROVISIONS....................................    37

          A.  Exemption in Determination of Employer Health 
              Insurance Mandate (sec. 4007(a) of the Act and sec. 
              4980H of the Code).................................    37

          B.  Eligibility for Health Savings Account Not Affected 
              by Receipt of Medical Care for a Service-Connected 
              Disability (sec. 4007(b) of the Act and sec. 223 of 
              the Code)..........................................    40

Part Eight: Airport and Airway Extension Act of 2015 (Public Law 
  114-55)........................................................    42

          A.  Extension of Spending Authority and Taxes Funding 
              Airport and Airway Trust Fund (secs. 201 and 202 of 
              the Act and secs. 4083, 4801, 4261, 4271, and 9502 
              of the Code).......................................    42

Part Nine: Surface Transportation Extension Act of 2015 (Public 
  Law 114-73)....................................................    44

          A.  Extension of Highway Trust Fund Expenditure 
              Authority (sec. 2001 of the Act and secs. 9503, 
              9504, and 9508 of the Code)........................    44

Part Ten: Bipartisan Budget Act of 2015 (Public Law 114-74)......    45

TITLE V--PENSIONS................................................    45

          A.  Mortality Tables and Extension of Current Funding 
              Stabilization Percentages to 2018, 2019, and 2020 
              (secs. 503-504 of the Act, sec. 430 of the Code, 
              and secs. 101(f) and 303 of ERISA).................    45

TITLE XI--REVENUE PROVISIONS RELATED TO TAX COMPLIANCE...........    51

          A.  Partnership Audits and Adjustments (sec. 1101 of 
              the Act and secs. 6221-6241 of the Code)...........    51

          B.  Partnership Interests Created by Gift (sec. 1102 of 
              the Act and secs. 704(e) and 761(b) of the Code)...    83

Part Eleven: Surface Transportation Extension Act of 2015, Part 
  II (Public Law 114-87).........................................    85

          A.  Extension of Highway Trust Fund Expenditure 
              Authority (sec. 2001 of the Act and secs. 9503, 
              9504, and 9508 of the Code)........................    85

Part Twelve: Fixing America's Surface Transportation act (``FAST 
  ACT'') (Public Law 114-94).....................................    86

Division C--Finance..............................................    86

TITLE XXXI--HIGHWAY TRUST FUND AND RELATED TAXES.................    86

          A.  Extension of Highway Trust Fund Expenditure 
              Authority (secs. 31101 of the Act and secs. 9503, 
              9504, and 9508 of the Code)........................    86

          B.  Extension of Highway-Related Taxes (sec. 31102 of 
              the Act and secs. 4041, 4051, 4071, 4081, 4221, 
              4481, 4483, and 6412 of the Code)..................    87

          C.  Additional Transfers to the Highway Trust Fund 
              (sec. 31201 of the Act and sec. 9503 of the Code)..    88

          D.  Transfer to Highway Trust Fund of Certain Motor 
              Vehicle Safety Penalties (sec. 31202 of the Act and 
              sec. 9503 of the Code).............................    90

          E.  Appropriation From Leaking Underground Storage Tank 
              Trust Fund (sec. 31203 of the Act and secs. 9503 
              and 9508 of the Code)..............................    90

TITLE XXXII--OFFSETS.............................................    91

          A.  Revocation or Denial of Passport in Case of Certain 
              Unpaid Taxes (sec. 32101 of the Act and secs. 6320, 
              6331, 7345 and 6103(k)(11) of the Code)............    91

          B.  Reform of Rules Related to Qualified Tax Collection 
              Contracts, and Special Compliance Personnel Program 
              (secs. 32102-32103 of the Act and sec. 6306 of the 
              Code)..............................................    93

          C.  Repeal of Modification of Automatic Extension of 
              Return Due Date for Certain Employee Benefit Plans 
              (sec. 32104 of the Act and secs. 6058 and 6059 of 
              the Code)..........................................    96

Part Thirteen: Consolidated Appropriations Act, 2016 (Public Law 
  114-113).......................................................    99

Division P--Tax-Related Provisions...............................    99

          A.  High Cost Employer-Sponsored Health Coverage Excise 
              Tax (secs. 101-103 of the Act and sec. 4980I of the 
              Code)..............................................    99

          B.  Annual Fee on Health Insurance Providers (sec. 201 
              of the Act and sec. 9010 of the Patient Protection 
              and Affordable Care Act)...........................   102

          C.  Miscellaneous Provisions...........................   103

               1. Extension and phaseout of credits with respect 
                  to facilities producing electricity from wind 
                  (secs. 301-302 of the Act and secs. 45 and 48 
                  of the Code)...................................   103

               2. Modification of energy investment credit (sec. 
                  303 of the Act and sec. 48 of the Code)........   104

               3. Credit for residential energy efficient 
                  property (section 304 of the Act and 25D of the 
                  Code)..........................................   107

               4. Treatment of transportation costs of 
                  independent refiners (sec. 305 of the Act and 
                  sec. 199 of the Code)..........................   108

Division Q--Protecting Americans From Tax Hikes Act of 2015......   110

TITLE I--EXTENDERS...............................................   110

          A.  Permanent Extensions...............................   110

               1. Reduced earnings threshold for additional child 
                  tax credit made permanent (sec. 101 of the Act 
                  and sec. 24 of the Code).......................   110

               2. American opportunity tax credit made permanent 
                  (sec. 102 of the Act and sec. 25A of the Code).   112

               3. Modification of the earned income tax credit 
                  made permanent (sec. 103 of the Act and sec. 32 
                  of the Code)...................................   114

               4. Extension and modification of deduction for 
                  certain expenses of elementary and secondary 
                  school teachers (sec. 104 of the Act and sec. 
                  62(a)(2)(D) of the Code).......................   117

               5. Extension of parity for exclusion from income 
                  for employer-provided mass transit and parking 
                  benefits (sec. 105 of the Act and 132(f) of the 
                  Code)..........................................   118

               6. Deduction for State and local sales taxes (sec. 
                  106 of the Act and sec. 164 of the Code).......   119

               7. Special rule for qualified conservation 
                  contributions made permanent (sec. 111 of the 
                  Act and sec. 170(b) of the Code)...............   121

               8. Tax-free distributions from individual 
                  retirement plans for charitable purposes (sec. 
                  112 of the Act and sec. 408(d)(8) of the Code).   124

               9. Extension and expansion of charitable deduction 
                  for contributions of food inventory (sec. 113 
                  of the Act and sec. 170 of the Code)...........   128

              10. Extension of modification of tax treatment of 
                  certain payments to controlling exempt 
                  organizations (sec. 114 of the Act and sec. 512 
                  of the Code)...................................   131

              11. Extension of basis adjustment to stock of S 
                  corporations making charitable contributions of 
                  property (sec. 115 of the Act and sec. 1367 of 
                  the Code)......................................   132

              12. Extension and modification of research credit 
                  (sec. 121 of the Act and secs. 38 and 41 and 
                  new sec. 3111(f) of the Code)..................   133

              13. Extension and modification of employer wage 
                  credit for employees who are active duty 
                  members of the uniformed services (sec. 122 of 
                  the Act and sec. 45P of the Code)..............   139

              14. Extension of 15-year straight-line cost 
                  recovery for qualified leasehold improvements, 
                  qualified restaurant buildings and 
                  improvements, and qualified retail improvements 
                  (sec. 123 of the Act and sec. 168 of the Code).   140

              15. Extension and modification of increased 
                  expensing limitations and treatment of certain 
                  real property as section 179 property (sec. 124 
                  of the Act and sec. 179 of the Code)...........   143

              16. Extension of treatment of certain dividends of 
                  regulated investment companies (sec. 125 of the 
                  Act and sec. 871(k) of the Code)...............   145

              17. Extension of exclusion of 100 percent of gain 
                  on certain small business stock (sec. 126 of 
                  the Act and sec. 1202 of the Code).............   146

              18. Extension of reduction in S corporation 
                  recognition period for built-in gains tax (sec. 
                  127 of the Act and sec. 1374 of the Code)......   147

              19. Extension of subpart F exception for active 
                  financing income (sec. 128 of the Act and secs. 
                  953 and 954 of the Code).......................   150

              20. Extension of temporary minimum low-income 
                  housing tax credit rate for non-Federally 
                  subsidized buildings (sec. 131 of the Act and 
                  sec. 42 of the Code)...........................   152

              21. Extension of military housing allowance 
                  exclusion for determining whether a tenant in 
                  certain counties is low-income (sec. 132 of the 
                  Act and secs. 42 and 142 of the Code)..........   153

              22. Extension of RIC qualified investment entity 
                  treatment under FIRPTA (sec. 133 of the Act and 
                  secs. 897 and 1445 of the Code)................   155

          B.  Extensions Through 2019............................   156

               1. Extension of new markets tax credit (sec. 141 
                  of the Act and sec. 45D of the Code)...........   156

               2. Extension and modification of work opportunity 
                  tax credit (sec. 142 of the Act and secs. 51 
                  and 52 of the Code)............................   158

               3. Extension and modification of bonus 
                  depreciation (sec. 143 of the Act and sec. 
                  168(k) of the Code)............................   164

               4. Extension of look-through treatment of payments 
                  between related controlled foreign corporations 
                  under foreign personal holding company rules 
                  (sec. 144 of the Act and sec. 954(c)(6) of the 
                  Code)..........................................   171

          C.  Extensions Through 2016............................   172

               1. Extension and modification of exclusion from 
                  gross income of discharges of acquisition 
                  indebtedness on principal residences (sec. 151 
                  of the Act and sec. 108 of the Code)...........   172

               2. Extension of mortgage insurance premiums 
                  treated as qualified residence interest (sec. 
                  152 of the Act and sec. 163 of the Code).......   174

               3. Extension of above-the-line deduction for 
                  qualified tuition and related expenses (sec. 
                  153 of the Act and sec. 222 of the Code).......   175

               4. Extension of Indian employment tax credit (sec. 
                  161 of the Act and sec. 45A of the Code).......   177

               5. Extension and modification of railroad track 
                  maintenance credit (sec. 162 of the Act and 
                  sec. 45G of the Code)..........................   178

               6. Extension of mine rescue team training credit 
                  (sec. 163 of the Act and sec. 45N of the Code).   179

               7. Extension of qualified zone academy bonds (sec. 
                  164 of the Act and sec. 54E of the Code).......   180

               8. Extension of classification of certain race 
                  horses as three-year property (sec. 165 of the 
                  Act and sec. 168 of the Code)..................   182

               9. Extension of seven-year recovery period for 
                  motorsports entertainment complexes (sec. 166 
                  of the Act and sec. 168 of the Code)...........   183

              10. Extension and modification of accelerated 
                  depreciation for business property on an Indian 
                  reservation (sec. 167 of the Act and sec. 
                  168(j) of the Code)............................   184

              11. Extension of election to expense mine safety 
                  equipment (sec. 168 of the Act and sec. 179E of 
                  the Code)......................................   185

              12. Extension of special expensing rules for 
                  certain film and television productions; 
                  special expensing for live theatrical 
                  productions (sec. 169 of the Act and sec. 181 
                  of the Code)...................................   186

              13. Extension of deduction allowable with respect 
                  to income attributable to domestic production 
                  activities in Puerto Rico (sec. 170 of the Act 
                  and sec. 199 of the Code)......................   188

              14. Extension and modification of empowerment zone 
                  tax incentives (sec. 171 of the Act and secs. 
                  1391 and 1394 of the Code).....................   189

              15. Extension of temporary increase in limit on 
                  cover over of rum excise taxes to Puerto Rico 
                  and the Virgin Islands (sec. 172 of the Act and 
                  sec. 7652(f) of the Code)......................   195

              16. Extension of American Samoa economic 
                  development credit (sec. 173 of the Act and 
                  sec. 119 of Pub. L. No. 109-432)...............   196

              17. Suspension of medical device excise tax (sec. 
                  174 of the Act and sec. 4191 of the Code)......   198

              18. Extension and modification of credit for 
                  nonbusiness energy property (sec. 181 of the 
                  Act and sec. 25C of the Code)..................   200

              19. Extension of credit for alternative fuel 
                  vehicle refueling property (sec. 182 of the Act 
                  and section 30C of the Code)...................   202

              20. Extension of credit for electric motorcycles 
                  (sec. 183 of the Act and sec. 30D of the Code).   203

              21. Extension of second generation biofuel producer 
                  credit (sec. 184 of the Act and sec. 40(b)(6) 
                  of the Code)...................................   203

              22. Extension of biodiesel and renewable diesel 
                  incentives (sec. 185 of the Act and sec. 40A of 
                  the Code)......................................   204

              23. Extension of credit for the production of 
                  Indian coal facilities (sec. 186 of the Act and 
                  sec. 45 of the Code)...........................   207

              24. Extension of credits with respect to facilities 
                  producing energy from certain renewable 
                  resources (sec. 187 of the Act and secs. 45 and 
                  48 of the Code)................................   208

              25. Extension of credit for energy-efficient new 
                  homes (sec. 188 of the Act and sec. 45L of the 
                  Code)..........................................   209

              26. Extension of special allowance for second 
                  generation biofuel plant property (sec. 189 of 
                  the Act and sec. 168(l) of the Code)...........   210

              27. Extension of energy efficient commercial 
                  buildings deduction (sec. 190 of the Act and 
                  sec. 179D of the Code).........................   211

              28. Extension of special rule for sales or 
                  dispositions to implement FERC or State 
                  electric restructuring policy for qualified 
                  electric utilities (sec. 191 of the Act and 
                  sec. 451(i) of the Code).......................   213

              29. Extension of excise tax credits and payment 
                  provisions relating to alternative fuel (sec. 
                  192 of the Act and secs. 6426 and 6427 of the 
                  Code)..........................................   215

              30. Extension of credit for fuel cell vehicles 
                  (sec. 193 of the Act and sec. 30B of the Code).   216

TITLE II--PROGRAM INTEGRITY......................................   217

               1. Modification of filing dates of returns and 
                  statements relating to employee wage 
                  information and nonemployee compensation to 
                  improve compliance (sec. 201 of the Act and 
                  secs. 6071 and 6402 of the Code)...............   217

               2. Safe harbor for de minimis errors on 
                  information returns, payee statements, and 
                  withholding (sec. 202 of the Act and secs. 6721 
                  and 6722 of the Code)..........................   220

               3. Requirements for the issuance of ITINs (sec. 
                  203 of the Act and sec. 6109 of the Code)......   222

               4. Prevention of retroactive claims of earned 
                  income credit, child tax credit, and American 
                  Opportunity Tax Credit (secs. 204, 205, and 206 
                  of the Act and secs. 24, 25A and 32 of the 
                  Code)..........................................   225

               5. Procedures to reduce improper claims (sec. 207 
                  of the Act and secs. 24, 25A, 32, and 6695 of 
                  the Code)......................................   227

               6. Restrictions on taxpayers who improperly 
                  claimed credits in prior year (sec. 208 of the 
                  Act and secs. 24, 25A and 6213 of the Code)....   231

               7. Treatment of credits for purposes of certain 
                  penalties (sec. 209 of the Act and secs. 6664 
                  and 6676 of the Code)..........................   235

               8. Increase the penalty applicable to paid tax 
                  preparers who engage in willful or reckless 
                  conduct (sec. 210 of the Act and sec. 6694 of 
                  the Code)......................................   237

               9. Employer identification number required for 
                  American opportunity tax credit (sec. 211 of 
                  the Act and secs. 25A and 6050S of the Code)...   238

              10. Higher education information reporting only to 
                  include qualified tuition and related expenses 
                  actually paid (sec. 212 of the Act and sec. 
                  6050S of the Code).............................   239

TITLE III--MISCELLANEOUS PROVISIONS..............................   240

          A.  Family Tax Relief..................................   240

               1. Exclusion for amounts received under the work 
                  colleges program (sec. 301 of the Act and sec. 
                  117 of the Code)...............................   240

               2. Modification of rules relating to section 529 
                  programs (sec. 302 of the Act and sec. 529 of 
                  the Code)......................................   241

               3. Modification to qualified ABLE programs (sec. 
                  303 of the Act and sec. 529A of the Code)......   244

               4. Exclusion from gross income of certain amounts 
                  received by wrongly incarcerated individuals 
                  (sec. 304 of the Act and new sec. 139F of the 
                  Code)..........................................   248

               5. Clarification of special rule for certain 
                  governmental plans (sec. 305 of the Act and 
                  sec. 105(j) of the Code).......................   249

               6. Rollovers permitted from other retirement plans 
                  into SIMPLE retirement accounts (sec. 306 of 
                  the Act and sec. 408(p)(1)(B) of the Code).....   250

               7. Technical amendment relating to rollover of 
                  certain airline payment amounts (sec. 307 of 
                  the Act and sec. 1106 of the FAA Modernization 
                  and Reform Act of 2012)........................   252

               8. Treatment of early retirement distributions for 
                  nuclear materials couriers, United States 
                  Capitol Police, Supreme Court Police, and 
                  diplomatic security special agents (sec. 308 of 
                  the Act and sec. 72(t) of the Code)............   255

               9. Prevention of extension of tax collection 
                  period for members of the Armed Forces who are 
                  hospitalized as a result of combat zone 
                  injuries (sec. 309 of the Act and secs. 6502 
                  and 7508(e) of the Code).......................   256

          B.  Real Estate Investment Trusts......................   257

               1. Restriction on tax-free spinoffs involving 
                  REITs (sec. 311 of the Act and secs. 355 and 
                  856 of the Code)...............................   262

               2. Reduction in percentage limitation on assets of 
                  REIT which may be taxable REIT subsidiaries 
                  (sec. 312 of the Act and sec. 856 of the Code).   265

               3. Prohibited transaction safe harbors (sec. 313 
                  of the Act and sec. 857 of the Code)...........   265

               4. Repeal of preferential dividend rule for 
                  publicly offered REITS; authority for 
                  alternative remedies to address certain REIT 
                  distribution failures (secs. 314 and 315 of the 
                  Act and sec. 562 of the Code)..................   267

               5. Limitations on designation of dividends by 
                  REITs (sec. 316 of the Act and sec. 857 of the 
                  Code)..........................................   267

               6. Debt instruments of publicly offered REITs and 
                  mortgages treated as real estate assets (sec. 
                  317 of the Act and sec. 856 of the Code).......   269

               7. Asset and income test clarification regarding 
                  ancillary personal property (sec. 318 of the 
                  Act and sec. 856 of the Code)..................   270

               8. Hedging provisions (sec. 319 of the Act and 
                  sec. 857 of the Code)..........................   271

               9. Modification of REIT earnings and profits 
                  calculation to avoid duplicate taxation (sec. 
                  320 of the Act and secs. 562 and 857 of the 
                  Code)..........................................   273

              10. Treatment of certain services provided by 
                  taxable REIT subsidiaries (sec. 321 of the Act 
                  and sec. 857 of the Code)......................   274

              11. Exception from FIRPTA for certain stock of 
                  REITs; exception for interests held by foreign 
                  retirement and pension funds (secs. 322 and 323 
                  of the Act and secs. 897 and 1445 of the Code).   277

              12. Increase in rate of withholding of tax on 
                  dispositions of United States real property 
                  interests (sec. 324 of the Act and sec. 1445 of 
                  the Code)......................................   284

              13. Interests in RICs and REITs not excluded from 
                  definition of United States real property 
                  interests (sec. 325 of the Act and sec. 897 of 
                  the Code)......................................   285

              14. Dividends derived from RICs and REITs 
                  ineligible for deduction for United States 
                  source portion of dividends from certain 
                  foreign corporations (sec. 326 of the Act and 
                  sec. 245 of the Code)..........................   286

          C.  Additional Provisions..............................   287

               1. Provide special rules concerning charitable 
                  contributions to, and public charity status of, 
                  agricultural research organizations (sec. 331 
                  of the Act and secs. 170(b) and 501(h) of the 
                  Code)..........................................   287

               2. Remove bonding requirements for certain 
                  taxpayers subject to Federal excise taxes on 
                  distilled spirits, wine, and beer (sec. 332 of 
                  the Act and secs. 5061(d), 5173(a), 5351, 5401 
                  and 5551 of the Code)..........................   290

               3. Modification to alternative tax for certain 
                  small insurance companies (sec. 333 of the Act 
                  and sec. 831(b) of the Code)...................   291

               4. Treatment of timber gains (sec. 334 of the Act 
                  and sec. 1201 of the Code).....................   294

               5. Modification of definition of hard cider (sec. 
                  335 of the Act and sec. 5041 of the Code)......   295

               6. Church plan clarification (sec. 336 of the Act 
                  and sec. 414 of the Code)......................   296

          D.  Revenue Provisions.................................   305

               1. Updated ASHRAE standards for energy efficient 
                  commercial buildings deduction (sec. 341 of the 
                  Act and sec. 179D of the Code).................   305

               2. Excise tax equivalency for liquefied petroleum 
                  gas and liquefied natural gas (sec. 342 of the 
                  Act and sec. 6426 of the Code).................   307

               3. Exclusion from gross income of certain clean 
                  coal power grants (sec. 343 of the Act)........   308

               4. Clarification of valuation rule for early 
                  termination of certain charitable remainder 
                  unitrusts (sec. 344 of the Act and sec. 664(e) 
                  of the Code)...................................   309

               5. Prevention of transfer of certain losses from 
                  tax indifferent parties (sec. 345 of the Act 
                  and sec. 267 of the Code)......................   311

               6. Treatment of certain persons as employers with 
                  respect to motion picture projects (sec. 346 of 
                  the Act and new sec. 3512 of the Code).........   313

TITLE IV--TAX ADMINISTRATION.....................................   316

          A.  Internal Revenue Service Reforms...................   316

               1. Duty to ensure that Internal Revenue Service 
                  employees are familiar with and act in 
                  accordance with certain taxpayer rights (sec. 
                  401 of Act and sec. 7803 of the Code)..........   316

               2. Prohibition of use of personal e-mail for 
                  official government business (sec. 402 of the 
                  Act)...........................................   317

               3. Release of information regarding the status of 
                  certain investigations (sec. 403 of the Act and 
                  sec. 6103 of the Code).........................   318

               4. Require the Secretary of the Treasury to 
                  describe administrative appeals procedures 
                  relating to adverse determinations of tax-
                  exempt status of certain organizations (sec. 
                  404 of the Act and sec. 7123 of the Code)......   320

               5. Require section 501(c)(4) organizations to 
                  provide notice of formation (sec. 405 of the 
                  Act, secs. 6033 and 6652 of the Code, and new 
                  sec. 506 of the Code)..........................   325

               6. Declaratory judgments for section 501(c)(4) and 
                  other exempt organizations (sec. 406 of the Act 
                  and sec. 7428 of the Code).....................   330

               7. Termination of employment of Internal Revenue 
                  Service employees for taking official actions 
                  for political purposes (sec. 407 of the Act and 
                  sec. 1203(b) of the Internal Revenue Service 
                  Restructuring and Reform Act of 1998)..........   331

               8. Gift tax not to apply to gifts made to certain 
                  exempt organizations (sec. 408 of the Act and 
                  sec. 2501(a) of the Code)......................   333

               9. Extend the Internal Revenue Service authority 
                  to require a truncated Social Security Number 
                  (``SS'') on Form W-2 (sec. 409 of the Act and 
                  sec. 6051 of the Code).........................   335

              10. Clarification of enrolled agent credentials 
                  (sec. 410 of the Act)..........................   336

              11. Partnership audit rules (sec. 411 of the Act 
                  and secs. 6225, 6226, 6234, 6235, and 6031 of 
                  the Code)......................................   336

          B. United States Tax Court.............................   340

               1. Filing period for interest abatement cases 
                  (sec. 421 of the Act and sec. 6404 of the Code)   340

               2. Small tax case election for interest abatement 
                  cases (sec. 422 of the Act and secs. 6404 and 
                  7463 of the Code)..............................   341

               3. Venue for appeal of spousal relief and 
                  collection cases (sec. 423 of the Act and sec. 
                  7482 of the Code)..............................   342

               4. Suspension of running of period for filing 
                  petition of spousal relief and collection cases 
                  (sec. 424 of the Act and secs. 6015 and 6330 of 
                  the Code)......................................   342

               5. Application of Federal rules of evidence (sec. 
                  425 of the Act and sec. 7453 of the Code)......   343

               6. Judicial conduct and disability procedures 
                  (sec. 431 of the Act and new sec. 7466 of the 
                  Code)..........................................   344

               7. Administration, judicial conference, and fees 
                  (sec. 432 of the Act; Code sec. 7473 and new 
                  secs. 7470 and 7470A of the Code)..............   345

               8. Clarification relating to the United States Tax 
                  Court (sec. 441 of the Act and sec. 7441 of the 
                  Code)..........................................   346

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  2015...........................................................   349

                              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 
2015. 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 2015 (JCS-
1-16), March 2016.
---------------------------------------------------------------------------
    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 and does not reflect changes to the law made by the 
provision or by subsequent legislation. In a case where a 
Committee report accompanies a bill, this document is based on 
the language of the report. For a bill with no Committee report 
but with a contemporaneous technical explanation prepared and 
published by the staff of the Joint Committee on Taxation, this 
document is based on the language of the explanation.
    Section references are to the Internal Revenue Code of 
1986, as amended, unless otherwise indicated.
    Part One is an explanation of the provisions of the Slain 
Officer Family Support Act of 2015 (Pub. L. No. 114-7).
    Part Two is an explanation of the revenue provision of the 
Medicare Access and Chip Reauthorization Act of 2015 (Pub. L. 
No. 114-10).
    Part Three is an explanation of the Don't Tax Our Fallen 
Public Safety Heroes Act (Pub. L. No. 114-14).
    Part Four is an explanation of the revenue provisions of 
the Highway and Transportation Funding Act of 2015 (Pub. L. No. 
114-21).
    Part Five is an explanation of the Defending Public Safety 
Employees' Retirement Act (Pub. L. No. 114-26).
    Part Six is an explanation of the revenue provisions of the 
Trade Preferences Extension Act of 2015 (Pub. L. No. 114-27).
    Part Seven is an explanation of the revenue provisions of 
the Surface Transportation and Veterans Health Care Choice 
Improvement Act of 2015 (Pub. L. No. 114-41).
    Part Eight is an explanation of the revenue provisions of 
the Airport and Airway Extension Act of 2015 (Pub. L. No. 114-
55).
    Part Nine is an explanation of the revenue provisions of 
the Surface Transportation Extension Act of 2015 (Pub. L. No. 
114-73).
    Part Ten is an explanation of the revenue provisions of the 
Bipartisan Budget Act of 2015 (Pub. L. No. 114-74).
    Part Eleven is an explanation of the revenue provisions of 
the Surface Transportation Extension Act of 2015, Part II (Pub. 
L. No. 114-87).
    Part Twelve is an explanation of the revenue provisions of 
Fixing America's Surface Transportation Act (``FAST Act'') 
(Pub. L. No. 114-94).
    Part Thirteen is an explanation of the revenue provisions 
of the Consolidated Appropriations Act, 2016 (Pub. L. No. 114-
113).
    The Appendix provides the estimated budget effects of tax 
legislation enacted in 2015.
    The first footnote in each Part gives the legislative 
history of the Act explained in that Part.

           PART ONE: SLAIN OFFICER FAMILY SUPPORT ACT OF 2015

                         (PUBLIC LAW 114-7) \2\
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    \2\ H.R. 1527. The House passed H.R. 1527 on March 25, 2015. The 
Senate passed the bill without amendment on March 27, 2015. The 
President signed the bill on April 1, 2015.
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      A. Acceleration of Income Tax Benefits for Charitable Cash 
Contributions for Relief of the Families of New York Police Department 
      Detectives Wenjian Liu and Rafael Ramos (sec. 2 of the Act)

                              Present Law

Tax exemption for charitable organizations
    Organizations described in section 501(c)(3) (generally, 
charitable organizations) are exempt from Federal income 
taxation under section 501(a). A section 501(c)(3) organization 
must be organized and operated exclusively for exempt purposes, 
and no part of the net earnings of such an organization may 
inure to the benefit of any private shareholder or individual. 
An organization is not organized or operated exclusively for 
one or more exempt purposes unless the organization serves a 
public rather than a private interest. Thus, an organization 
described in section 501(c)(3) generally must serve a 
charitable class of persons that is indefinite or of sufficient 
size.
Deduction for charitable contributions
    In general, under present law, taxpayers may claim an 
income tax deduction for charitable contributions. The 
charitable deduction generally is available for the taxable 
year in which the contribution is made. The tax benefit of a 
charitable contribution, however, often is not realized until 
the following calendar year when the tax return is filed.
    A donor who claims a charitable deduction for a 
contribution of money, regardless of amount, must maintain as a 
record of the contribution a bank record or a written 
communication from the donee showing the name of the donee 
organization, the date of the contribution, and the amount of 
the contribution.\3\ In addition to the foregoing recordkeeping 
requirements, substantiation requirements apply in the case of 
charitable contributions with a value of $250 or more.\4\ No 
charitable deduction is allowed for any contribution of $250 or 
more unless the taxpayer substantiates the contribution by a 
contemporaneous written acknowledgment of the contribution by 
the donee organization.
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    \3\ Sec. 170(f)(17).
    \4\ Sec. 170(f)(8).
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                        Explanation of Provision

Acceleration of donor's tax benefit for charitable contribution
    The provision permits a taxpayer to treat a charitable 
contribution of cash made between January 1, 2015, and April 
15, 2015, as a contribution made on December 31, 2014, if such 
contribution was for the relief of the families of slain New 
York Police Department detectives Wenjian Liu and Rafael Ramos. 
Thus, the effect of the provision is to give a calendar-year 
taxpayer who makes charitable contributions of cash for the 
relief of such detectives' families between January 1, 2015, 
and April 15, 2015, the opportunity to accelerate the tax 
benefit. Under the provision, such a taxpayer may realize the 
tax benefit of the contribution by taking a deduction on the 
taxpayer's 2014 income tax return.
    The provision clarifies the recordkeeping requirement for 
monetary contributions eligible for the accelerated income tax 
benefits described above. With respect to such contributions, a 
telephone bill will satisfy the recordkeeping requirement if it 
shows the name of the donee organization, the date of the 
contribution, and the amount of the contribution. Thus, for 
example, in the case of a charitable contribution made by text 
message and chargeable to a telephone or wireless account, a 
bill from the telecommunications company containing the 
relevant information will satisfy the recordkeeping 
requirement.
    The provision also clarifies that a contribution described 
in the provision that is made on or after December 20, 2014, 
will not fail to qualify for a charitable deduction, or for the 
acceleration of the deduction under the provision, merely 
because the contribution is for the exclusive benefit of the 
families of the slain detectives.
Payment by organization treated as related to organization's exempt 
        purpose
    Under the provision, certain payments are treated as: (1) 
related to the purpose or function constituting the basis for 
the organization's exempt status; and (2) are not treated as 
inuring to the benefit of any private individual, if the 
payments are made in good faith using a reasonable and 
objective formula that is consistently applied. Such payments 
include payments made: (1) on or after December 20, 2014, and 
on or before October 15, 2015; (2) to the spouse or any 
dependent (as defined in section 152 of the Code) of slain New 
York Police Department detectives Wenjian Liu or Rafael Ramos; 
and (3) by an organization that is exempt from tax under 
section 501(a) (determined without regard to such payments).

                             Effective Date

    The provision is effective on the date of enactment (April 
1, 2015).

PART TWO: MEDICARE ACCESS AND CHIP REAUTHORIZATION ACT OF 2015 (PUBLIC 
                            LAW 114-10) \5\
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    \5\ H.R. 2. The House passed H.R. 2 on March 26, 2015. The Senate 
passed the bill without amendment on April 14, 2015. The President 
signed the bill on April 16, 2015.
---------------------------------------------------------------------------

A. Increase Continuous Levy Authority on Payments to Medicare Providers 
    and Suppliers (sec. 413 of the Act and sec. 6331(h) of the Code)

                              Present Law

In general 
    Levy is the administrative authority of the IRS to seize a 
taxpayer's property, or rights to property, to pay the 
taxpayer's tax liability.\6\ Generally, the IRS is entitled to 
seize a taxpayer's property by levy if a Federal tax lien has 
attached to such property,\7\ the property is not exempt from 
levy,\8\ and the IRS has provided both notice of intention to 
levy \9\ and notice of the right to an administrative hearing 
(the notice is referred to as a ``collections due process 
notice'' or ``CDP notice'' and the hearing is referred to as 
the ``CDP hearing'') \10\ at least 30 days before the levy is 
made. A levy on salary or wages generally is continuously in 
effect until released.\11\ 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.\12\
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    \6\ 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.
    \7\ Ibid.
    \8\ Sec. 6334.
    \9\ Sec. 6331(d).
    \10\ Sec. 6330. The notice and the hearing are referred to 
collectively as the CDP requirements.
    \11\ Secs. 6331(e) and 6343.
    \12\ 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.\13\
---------------------------------------------------------------------------
    \13\ Secs. 6331(d)(3) and 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.\14\
---------------------------------------------------------------------------
    \14\ Sec. 6330(f).
---------------------------------------------------------------------------
Federal payment levy program
    To help the IRS collect taxes more effectively, the 
Taxpayer Relief Act of 1997 \15\ 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'' by the Federal government if the payees 
are delinquent on their tax obligations. With respect to 
payments to vendors of goods, services, or property sold or 
leased to the Federal government, the continuous levy may be up 
to 100 percent of each payment.\16\ For payments to Medicare 
providers and suppliers, the levy is up to 15 percent for 
payments made within 180 days after December 19, 2014. For 
payments made after that date, the levy is up to 30 
percent.\17\
---------------------------------------------------------------------------
    \15\ Pub. L. No. 105-34.
    \16\ Sec. 6331(h)(3).
    \17\ Pub. L. No. 113-295, Division B.
---------------------------------------------------------------------------
    Under FPLP, the IRS matches its accounts receivable records 
with Federal payment records maintained by Treasury's Bureau of 
Fiscal Service (``BFS''), 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 BFS to levy the taxpayer's 
Federal payments. Subsequent payments are continuously levied 
until such time that the tax debt is paid or the IRS releases 
the levy.

                        Explanation of Provision

    The present limitation of 30 percent of certain specified 
payments is increased to 100 percent.

                             Effective Date

    The provision is effective for payments made after 180 days 
after the date of enactment (April 16, 2015).

 PART THREE: DON'T TAX OUR FALLEN PUBLIC SAFETY HEROES ACT (PUBLIC LAW 
                              114-14) \18\
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    \18\ H.R. 606. The House passed H.R. 606 on May 12, 2015. The 
Senate passed the bill without amendment on May 14, 2015. The President 
signed the bill on May 22, 2015.
---------------------------------------------------------------------------

A. Exclusion of Certain Compensation Received by Public Safety Officers 
  and Their Dependents (sec. 2 of the Act and sec. 104(a) of the Code)

                              Present Law

    Amounts received under a workmen's compensation act as 
compensation for personal injuries or sickness are excluded 
from gross income.\19\ This exclusion applies to amounts 
received by an employee under a workmen's compensation act, or 
under a statute in the nature of a workmen's compensation act 
that provides compensation to employees for personal injuries 
or sickness incurred in the course of employment, as well as to 
compensation paid under a workmen's compensation act to the 
survivor or survivors of a deceased employee.\20\
---------------------------------------------------------------------------
    \19\ Sec. 104(a)(1).
    \20\ Treas. Reg. sec. 1.104-1(b).
---------------------------------------------------------------------------
    Under the Omnibus Crime Control and Safe Streets Act of 
1968, if the Bureau of Justice Assistance (``BJA''), an agency 
of the U.S. Department of Justice, determines that a public 
safety officer has died as the direct and proximate result of a 
personal injury sustained in the line of duty, the BJA will pay 
a monetary benefit to surviving family members or other 
beneficiary (``public safety officer survivor's benefit'').\21\ 
In addition, if the BJA determines that a public safety officer 
has become permanently and totally disabled as the direct and 
proximate result of a personal injury sustained in the line of 
duty, the BJA will pay a monetary benefit to the public safety 
officer (``public safety officer disability benefit'').\22\
---------------------------------------------------------------------------
    \21\ 42 U.S.C. sec. 3796(a).
    \22\ 42 U.S.C. sec. 3796(b).
---------------------------------------------------------------------------
    With respect to payments made by the Law Enforcement 
Assistance Administration (a previous agency of the U.S. 
Department of Justice) under the Public Safety Officers' 
Benefits Act of 1976 to a surviving dependent of a public 
safety officer who died as the direct and proximate result of a 
personal injury sustained in the line of duty, the Internal 
Revenue Service has ruled that the payments are made under a 
statute in the nature of a workmen's compensation act and are 
thus excluded from gross income.\23\
---------------------------------------------------------------------------
    \23\ Rev. Rul. 77-235, 1977-2 C.B. 45.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends the Code to provide a specific 
exclusion from gross income for amounts paid (1) by the BJA as 
a public safety officer survivor's benefit or public safety 
officer disability benefit, or (2) under a State program that 
provides monetary compensation for surviving dependents of a 
public safety officer who has died as the direct and proximate 
result of a personal injury sustained in the line of duty, 
except that the exclusion does not apply to any amounts that 
would have been payable if the death of the public safety 
officer had occurred other than as the direct and proximate 
result of a personal injury sustained in the line of duty.

                             Effective Date

    The provision is effective on the date of enactment (May 
22, 2015).

 PART FOUR: HIGHWAY AND TRANSPORTATION FUNDING ACT OF 2015 (PUBLIC LAW 
                              114-21) \24\
---------------------------------------------------------------------------

    \24\ H. R. 2353. The House passed H. R. 2353 on May 19, 2015. The 
bill passed the Senate without amendment on May 23, 2015. The President 
signed the bill on May 29, 2015.
---------------------------------------------------------------------------

A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of 
          the Act and secs. 9503, 9504, and 9508 of the Code)

                              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 and Leaking Underground Storage Tank Trust 
Fund) through May 31, 2015, for purposes provided in specified 
authorizing legislation as in effect on the date of enactment.

                        Explanation of Provision

    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund and Leaking 
Underground Storage Tank Trust Fund) through July 31, 2015.

                             Effective Date

    The provision is effective on date of enactment (May 29, 
2015).

 PART FIVE: DEFENDING PUBLIC SAFETY EMPLOYEES' RETIREMENT ACT (PUBLIC 
                            LAW 114-26) \25\
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    \25\ H.R. 2146. The House passed H.R. 2146 on May 12, 2015. The 
Senate passed the bill with an amendment on June 4, 2015. The House 
passed the bill with a further amendment on June 18, 2015. The Senate 
agreed to the House amendment on June 24, 2015. The President signed 
the bill on June 29, 2015.
---------------------------------------------------------------------------

A. Early Retirement Distributions to Federal Law Enforcement Officers, 
Firefighters, and Air Traffic Controllers in Governmental Plans (sec. 2 
                 of the Act and sec. 72(t) of the Code)

                              Present Law

    An individual who receives a distribution from a qualified 
retirement plan before age 59\1/2\, death, or disability is 
subject to a 10-percent early withdrawal tax on the amount 
includible in income unless an exception to the tax 
applies.\26\ Among other exceptions, the early distribution tax 
does not apply to distributions made to an employee who 
separates from service after age 55 (the ``separation from 
service'' exception), or to distributions that are part of a 
series of substantially equal periodic payments made for the 
life, or life expectancy, of the employee or the joint lives, 
or life expectancies, of the employee and his or her 
beneficiary (the ``equal periodic payments'' exception).\27\
---------------------------------------------------------------------------
    \26\ Sec. 72(t).
    \27\ Sec. 72(t)(2)(iv) and (v). Section 72(t)(4) provides a 
recapture rule under which, in general, if the series of payments 
eligible for the equal periodic payments exception is modified within 
five years of the first payment or before age 59\1/2\, an additional 
tax applies equal to the early withdrawal tax that would have applied 
in the absence of the exception.
---------------------------------------------------------------------------
    Under a special rule for qualified public safety employees, 
the separation from service exception applies to distributions 
from a governmental defined benefit pension plan if the 
employee separates from service after age 50 (rather than age 
55). A qualified public safety employee is an employee of a 
State or political subdivision of a State if the employee 
provides police protection, firefighting services, or emergency 
medical services for any area within the jurisdiction of such 
State or political subdivision.

                     Explanation of Provision \28\
---------------------------------------------------------------------------

    \28\ See Part Thirteen, Division Q, Title III, Item A.8 for an 
explanation of a related amendment.
---------------------------------------------------------------------------
    The provision revises the special rule for applying the 
separation from service exception to qualified public safety 
employees.\29\ First, the definition of qualified public safety 
employee is expanded to include Federal law enforcement 
officers, Federal customs and border protection officers, 
Federal firefighters, and air traffic controllers.\30\ In 
addition, the special rule is extended to distributions from 
governmental defined contribution plans (rather than just 
governmental defined benefit plans).\31\
---------------------------------------------------------------------------
    \29\ This provision also allows a qualified public safety employee 
to modify a series of payments to which the equal periodic payments 
exception has applied without being subject to the recapture rule 
described above.
    \30\ These positions are defined by reference to the provisions of 
the Civil Service Retirement System and the Federal Employees 
Retirement System.
    \31\ Under section 7701(j), the Federal Thrift Savings plan is 
treated as a qualified defined contribution plan.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for distributions after December 
31, 2015.

 PART SIX: TRADE PREFERENCES EXTENSION ACT OF 2015 (PUBLIC LAW 114-27) 
                                  \32\
---------------------------------------------------------------------------

    \32\ H.R. 1295. The House Committee on Ways and Means reported H.R. 
1295 on April 13, 2015 (H.R. Rep. No. 114-71). The House passed the 
bill on April 15, 2015. The Senate passed the bill with an amendment on 
May 14, 2015. The House agreed to an amendment to the Senate amendment 
on June 11, 2015. The Senate concurred in the House amendment with a 
further amendment on June 24, 2015. The House agreed to the Senate 
amendment on June 25, 2015. The President signed the bill on June 29, 
2015. In addition, the House Committee on Ways and Means reported H.R. 
1892 (Trade Adjustment Assistance Reauthorization Act of 2015) on May 
8, 2015 (H.R. Rep. No. 114-108) and the Senate Committee on Finance 
reported S. 1268 (An Original Bill to Extend the Trade Adjustment 
Assistance Program, and for Other Purposes) on May 12, 2015 (S. Rep. 
No. 114-44).
---------------------------------------------------------------------------

           TITLE IV--EXTENSION OF TRADE ADJUSTMENT ASSISTANCE

 A. Extension and Modification of Health Coverage Tax Credit (sec. 407 
                  of the Act and sec. 35 of the Code)

                              Present Law

Health Coverage Tax Credit
            Eligible coverage months
    In the case of an eligible individual, a refundable tax 
credit is provided for 72.5 percent of the individual's 
premiums for qualified health insurance of the individual and 
qualifying family members for each eligible coverage month 
beginning in the taxable year.\33\ 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 
individual for the qualified health insurance.
---------------------------------------------------------------------------
    \33\ Qualifying family members are the individual's spouse and any 
dependent for whom the individual is entitled to claim a dependency 
exemption. Any individual who has certain specified coverage is not a 
qualifying family member.
---------------------------------------------------------------------------
    Eligibility for the credit is determined on a monthly 
basis. In general, an eligible coverage month is any month if 
(1) the month begins before January 1, 2014, and (2) as of the 
first day of the month, the individual is an eligible 
individual, is covered by qualified health insurance, the 
premium for which is paid by the individual, does not have 
other specified coverage, and is not imprisoned under Federal, 
State, or local authority. In the case of a joint return, the 
eligibility requirements are met if at least one spouse 
satisfies the requirements.
            Eligible individuals
    An eligible individual is an individual who is (1) an 
eligible Trade Adjustment Assistance (``TAA'') recipient, (2) 
an eligible alternative TAA recipient or an eligible 
reemployment TAA recipient, or (3) an eligible Pension Benefit 
Guaranty Corporation (``PBGC'') pension recipient. In general, 
an individual is an eligible TAA recipient for a month if the 
individual (1) receives for any day of the month a trade 
readjustment allowance under the Trade Act of 1974 or would be 
eligible to receive such an allowance but for the requirement 
that the individual exhaust unemployment benefits before being 
eligible to receive an allowance and (2) with respect to such 
allowance, is covered under a required certification. An 
individual is an eligible alternative TAA recipient or an 
eligible reemployment TAA recipient for a month if the 
individual participates in a certain program under the Trade 
Act of 1974 and receives a related benefit for the month. 
Generally, an individual is an eligible PBGC pension recipient 
for any month if the individual (1) is age 55 or over as of the 
first day of the month and (2) receives a benefit for the 
month, any portion of which is paid by the PBGC. A person who 
may be claimed as a dependent on another person's tax return is 
not an eligible individual. In addition, an otherwise eligible 
individual is not eligible for the credit for a month if, as of 
the first day of the month, the individual has certain 
specified coverage, such as certain employer-provided coverage 
or coverage under certain governmental health programs.
            Qualified health insurance
    Qualified health insurance eligible for the credit is: (1) 
coverage under a COBRA continuation provision; \34\ (2) State-
based continuation coverage provided by the State under a State 
law that requires such coverage; (3) coverage offered through a 
qualified State high risk pool; (4) coverage under a health 
insurance program offered to State employees or a comparable 
program; (5) coverage through an arrangement entered into by a 
State and a group health plan, an issuer of health insurance 
coverage, an administrator, or an employer; (6) coverage 
offered through a State arrangement with a private sector 
health care coverage purchasing pool; (7) coverage under a 
State-operated health plan that does not receive any Federal 
financial participation; (8) coverage under a group health plan 
that is available through the employment of the eligible 
individual's spouse; (9) coverage under individual health 
insurance \35\ if the eligible individual was covered under 
individual health insurance during the entire 30-day period 
that ends on the date the individual became separated from the 
employment which qualified the individual for the TAA 
allowance, the benefit for an eligible alternative TAA 
recipient or an eligible reemployment TAA recipient, or a 
pension benefit from the PBGC, whichever applies (``30-day 
requirement''); and (10) coverage under an employee benefit 
plan funded by a voluntary employee beneficiary association 
(``VEBA'') \36\ established pursuant to an order of a 
bankruptcy court (or by agreement with an authorized 
representative).\37\
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    \34\ COBRA continuation provision is defined by section 9832(d)(1).
    \35\ For this purpose, ``individual health insurance'' means any 
insurance that constitutes medical care offered to individuals other 
than in connection with a group health plan. Such term does not include 
Federal- or State-based health insurance coverage.
    \36\ See section 501(c)(9) for the definition of a VEBA.
    \37\ See 11 U.S.C. sec. 1114.
---------------------------------------------------------------------------
    Qualified health insurance does not include any State-based 
coverage (i.e., coverage described in (2)-(7) in the preceding 
paragraph) unless the State has elected to have such coverage 
treated as qualified health insurance and such coverage meets 
certain consumer-protection requirements.\38\ Such State 
coverage must provide that each qualifying individual is 
guaranteed enrollment if the individual pays the premium for 
enrollment or provides a qualified health insurance costs 
eligibility certificate and pays the remainder of the premium. 
In addition, the State-based coverage cannot impose any pre-
existing condition limitation with respect to qualifying 
individuals. State-based coverage cannot require a qualifying 
individual to pay a premium or contribution that is greater 
than the premium or contribution for a similarly situated 
individual who is not a qualified individual. Finally, benefits 
under the State-based coverage must be the same as (or 
substantially similar to) benefits provided to similarly 
situated individuals who are not qualifying individuals.
---------------------------------------------------------------------------
    \38\ For guidance on how a State elects a health program to be 
qualified health insurance for purposes of the credit, see Rev. Proc. 
2004-12, 2004-1 C.B. 528.
---------------------------------------------------------------------------
    A qualifying individual for this purpose is an eligible 
individual who seeks to enroll in the State-based coverage and 
who has aggregate periods of creditable coverage \39\ of three 
months or longer, does not have other specified coverage, and 
is not imprisoned. However, State-based coverage that satisfies 
any or all of the consumer-protection requirements for State-
based coverage with respect to all eligible individuals is also 
qualified health insurance for purposes of HCTC.\40\
---------------------------------------------------------------------------
    \39\ Creditable coverage is determined under section 9801(c).
    \40\ See Q&A-10 of Notice 2005-50, 2005-2 C.B. 14.
---------------------------------------------------------------------------
    Qualified health insurance does not include coverage under 
a flexible spending or similar arrangement or any insurance if 
substantially all of the coverage is for excepted benefits.
            Advance payment of HCTC
    The credit is available on an advance payment basis by 
means of payments by the Department of the Treasury 
(``Treasury'') once a qualified health insurance costs credit 
eligibility certificate is in effect.\41\ In some cases, 
Treasury may also make retroactive payments on behalf of a 
certified individual for qualified health insurance coverage 
for eligible coverage months occurring before the first month 
for which an advance payment is otherwise made on behalf of the 
individual. With respect to any taxable year, the amount which 
is allowed as HCTC for an eligible individual for a taxable 
year is reduced (but not below zero) by the aggregate amount of 
advance HCTC payments on behalf of the eligible individual for 
months beginning in the taxable year.
---------------------------------------------------------------------------
    \41\ Sec. 7527.
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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.\42\ 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.
---------------------------------------------------------------------------
    \42\ Sec. 36B.
---------------------------------------------------------------------------
    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. The premium assistance credit amount is 
generally the lower of (1) the premium for the qualified health 
plan in which the individual or family enrolls, and (2) the 
premium for the second lowest cost silver plan \43\ in the 
rating area where the individual resides, reduced by the 
individual's or family's share of premiums.
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    \43\ A qualified health plan is categorized by level (bronze, 
silver, gold or platinum), depending on its actuarial value, that is, 
the percentage of the plan's share of the total costs of benefits under 
the plan. A silver level plan must have an actuarial value of 70 
percent.
---------------------------------------------------------------------------
    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 taxpayers with 
household income below 400 percent of FPL, the liability for 
the overpayment for a taxable year is limited to a specific 
dollar amount which varies depending on the taxpayer's 
household income as a percentage of FPL.

                        Explanation of Provision

Extension of HCTC
    The provision amends the definition of eligible coverage 
month for HCTC purposes to include months beginning before 
January 1, 2020, if the requirements for an eligible coverage 
month are otherwise met.\44\
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    \44\ Title IV of the Act also provides for extension to June 30, 
2021, of certain expired provisions of the Trade Act of 1974, Pub. L. 
No. 93-618, as amended, including provisions related to individuals 
eligible for trade adjustment assistance.
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Election of HCTC
    In order to coordinate eligibility for the premium 
assistance credit with eligibility for HCTC, under the 
provision, to be eligible for the HCTC for any eligible 
coverage month during a taxable year, the eligible individual 
must elect the HCTC. Further, except as the Secretary of 
Treasury may provide, the election applies for that coverage 
month and all subsequent eligible coverage months during the 
taxable year, must be made no later than the due date, with any 
extension, for filing his or her income tax return for the 
year, and is irrevocable. Further, the period for assessing any 
deficiency attributable to the election (or revocation of the 
election, if permitted) does not expire before one year after 
the date on which the Secretary of Treasury is notified of the 
election (or revocation). The taxpayer is not entitled to the 
premium assistance credit for any coverage month for which the 
individual elects the HCTC.

Qualified health insurance

    The provision eliminates the 30-day requirement as a 
requirement for individual health insurance to be qualified 
health insurance for purposes of the HCTC, but the provision 
adds a requirement that the individual health insurance not be 
purchased through an American Health Benefit Exchange. The 
provision otherwise extends pre-2014 law for qualified health 
insurance, including the rules for State-based coverage, and 
the treatment of COBRA continuation coverage and coverage under 
certain VEBAs as qualified health insurance.

Advance payment

    In the case of an eligible individual on whose behalf 
advance HCTC payment or advance premium assistance payment is 
made for months occurring during a taxable year and who 
subsequently elects HCTC for any eligible months,\45\ the 
individual's income tax liability is increased by the amount of 
the advance payment, but then offset by the amount of the HCTC 
allowed to the individual.\46\ If the individual on whose 
behalf the advance HCTC payment is made does not elect HCTC but 
instead claims the premium assistance credit for any coverage 
months, the increase in tax liability equal to the advance 
payment is offset by the amount of the allowable premium 
assistance credit, and any remaining tax liability attributable 
to the advance payment (and advance premium assistance payment, 
if any) is limited in the same way as if the advance HCTC 
payment had instead been advance premium assistance payment.
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    \45\ Receipt of advance HCTC payments during a year does not in 
itself constitute an election of the HCTC for the year.
    \46\ If a premium assistance credit is also allowed to the 
individual for months before the first month for which the HCTC is 
elected, the amount of the individual's allowed premium assistance 
credit is also taken into account in applying the offset.
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    Under the provision, the Secretary of Treasury is directed 
to establish, no later than one year after date of enactment of 
the provision, a new program for making advance HCTC payments 
to providers of insurance on behalf of enrolled eligible 
individuals. The program shall only provide retroactive 
payments for coverage months occurring after the end of such 
one year period.

Agency outreach

    The Secretaries of the Treasury, Health and Human Services, 
and Labor and the Director of the PBGC are directed to carry 
out programs of public outreach, including on the Internet, to 
inform potential HCTC-eligible individuals of the extension of 
HCTC availability and the availability of the election to claim 
such credit retroactively for coverage months beginning after 
December 31, 2013.

Effective Date

    The provision is generally effective for coverage months in 
taxable years beginning after December 31, 2013. For any 
taxable year beginning after December 31, 2013, and before the 
date of enactment (June 29, 2015), the election to claim the 
HCTC may be made any time on or after the date of enactment and 
before the expiration of the 3-year period of limitation with 
respect to such taxable year \47\ and may be made on an amended 
income tax return. The requirement that, in order to be 
qualified health insurance, individual health insurance not be 
purchased through an American Health Benefit Exchange is 
effective for coverage months in taxable years beginning after 
December 31, 2015.
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    \47\ Sec. 6511(a).
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                          TITLE VIII--OFFSETS


 A. Time for Payment of Corporate Estimated Taxes (sec. 803 of the Act 
                       and sec. 6655 of the Code)


                              Present Law

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability.\48\ 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. The amount of any required 
estimated payment is 25 percent of the required annual 
payment.\49\ The required annual payment is 100 percent of the 
tax liability for the taxable year or the preceding taxable 
year. The option to use the preceding taxable year is not 
available if the preceding taxable year was not a 12-month 
taxable year or the corporation did not file a return in the 
preceding taxable year showing a liability for tax. Further, in 
the case of a corporation with taxable income of at least $1 
million in any of the three immediately preceding taxable 
years, the option to use the preceding taxable year is only 
available for the first installment of such corporation's 
taxable year.\50\ In addition, in the case of a corporation 
with assets of at least $1 billion (determined as of the end of 
the preceding taxable year), the installment due in July, 
August or September of 2017, is increased to 100.25 percent of 
the payment otherwise due.\51\ For each of the periods 
affected, the next required installment is reduced accordingly 
(i.e., the payment due in October, November, or December of 
2017 is reduced by the amount that the prior payment was 
increased).
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    \48\ Sec. 6655.
    \49\ Sec. 6655(d)(1).
    \50\ Sec. 6655(d)(2) and (g)(2).
    \51\ African Growth and Opportunity Amendments, Pub. L. No. 112-
163, sec. 4.
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                        Explanation of Provision

    In the case of a corporation with assets of at least $1 
billion (determined as of the end of the preceding taxable 
year), the provision increases the amount of the required 
installment of estimated tax otherwise due in July, August, or 
September of 2020 by 8 percent of that amount (determined 
without regard to any increase in such amount not contained in 
the Internal Revenue Code) (i.e., the installment due in July, 
August or September of 2020, is increased to 108 percent of the 
payment otherwise due). The next required installment is 
reduced accordingly (i.e., the payment due in October, 
November, or December of 2020 is reduced by the amount that the 
prior payment was increased).

                             Effective Date

    The provision is effective on the date of enactment (June 
29, 2015).

  B. Payee Statement Required to Claim Certain Education Tax Benefits 
        (sec. 804 of the Act and secs. 25A and 222 of the Code)


                            Present Law \52\

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    \52\ This description of present law does not incorporate changes 
made to the tuition reporting requirements in the ``Protecting 
Americans From Tax Hikes Act of 2015,'' Pub. L. No. 114-113. See Part 
Thirteen, Division Q, Title II, item 10.
---------------------------------------------------------------------------
    The Code contains provisions providing for either a credit 
against tax or an above-the-line deduction for certain amounts 
paid for qualified tuition and related expenses.\53\
---------------------------------------------------------------------------
    \53\ Secs. 25A and 222. For a detailed description of these 
provisions, see description of the ``Protecting Americans From Tax 
Hikes Act of 2015,'' Pub. L. No. 114-113, secs. 102 and 153, infra.
---------------------------------------------------------------------------
    Under section 6050S of the Code, eligible educational 
institutions that enroll individuals for any academic period 
are required to furnish, both to the IRS and to the student, an 
information return known as Form 1098-T. Among the information 
the educational institution is required to remit is (i) either 
the aggregate amount of payments received, or the aggregate 
amount billed, for qualified tuition with respect to the 
student to whom the Form 1098-T pertains; and (ii) the 
aggregate amount of grants received by such individual for 
payment of costs of attendance that are administered and 
processed by the institution during the calendar year.

                        Explanation of Provision

    Under the provision, except as provided by the Secretary, 
no taxpayer may claim the credits for qualified tuition and 
related expenses, or the deduction for qualified tuition and 
fees, unless the taxpayer receives a statement required under 
section 6050S of the Code (the Form 1098-T), containing both 
the identifying information of the taxpayer (including the 
taxpayer's taxpayer identification number) as well information 
related to the calculation of the relevant credits and 
deduction.\54\ In the case of a taxpayer who claims the credit 
or deduction with respect to an eligible student who is a 
dependent, the eligible student's receipt of the Form 1098-T 
will suffice for purposes of this requirement.
---------------------------------------------------------------------------
    \54\ This information is required under section 6050S(b)(2)(B). The 
requirement to report tuition amounts either billed or paid under 
section 6050S(b)(2)(B)(i) was subsequently modified as a result of 
changes made to the tuition reporting requirements in the ``Protecting 
Americans From Tax Hikes Act of 2015,'' Pub. L. No. 114-113, described 
infra. That modification required that institutions report only amounts 
paid, rather than amounts billed.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (June 29, 2015).

C. Special Rule for Educational Institutions Unable to Collect Taxpayer 
Identification Numbers of Individuals with Respect to Higher Education 
Tuition and Related Expenses (sec. 805 of the Act and sec. 6724 of the 
                                 Code)


                              Present Law

    Eligible educational institutions that enroll individuals 
for any academic period are required to furnish, both to the 
IRS and to the student, an information return known as Form 
1098-T.\55\ Among the information the educational institution 
is required to remit is the taxpayer identification number 
(``TIN'') of the student to whom the form relates.\56\
---------------------------------------------------------------------------
    \55\ Sec. 6050S.
    \56\ Sec. 6050S(b)(2)(A); Treas. Reg. sec. 1.6050S-1(b)(2)(ii)(A).
---------------------------------------------------------------------------
    A penalty under section 6721 or 6722 of the Code may apply 
to a payee that fails to include the information required on 
the Form 1098-T.\57\ The Treasury regulations provide for a 
waiver of the section 6721 and 6722 penalties in the case of 
institutions that fail to include a correct TIN of the student. 
Such institutions will not be liable for these penalties if the 
failure to include the correct TIN was due to reasonable 
cause.\58\ Reasonable cause may be established if the failure 
arose from events beyond the institution's control, such as 
failure of the student to furnish a TIN. However, the 
regulations require that the institution establish that it 
acted in a ``responsible manner'' both before and after the 
failure. The Treasury regulations set out detailed guidelines 
regarding the solicitation of TINs by the institution for 
purposes of making this determination.
---------------------------------------------------------------------------
    \57\ Treas. Reg. sec. 1.6050S-3(f)(1), (2). The section 6721 
penalty is applicable to information returns (i.e., statements required 
to be remitted to the IRS under section 6050S), while the section 6722 
penalty is applicable to payee statements (i.e., statements required to 
be remitted to the taxpayer under section 6050S).
    \58\ Treas. Reg. sec. 1.6050S-3(f)(3).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, no penalty shall be imposed on an 
eligible educational institution under sections 6721 or 6722 
solely by reason of failing to provide a correct TIN of an 
individual as required under section 6050S, if such institution 
makes, at the time of the filing of the Form 1098-T, a true and 
accurate certification under penalties of perjury that it has 
complied with standards promulgated by the Secretary for 
obtaining such individual's TIN.

                             Effective Date

    The provision is effective for returns required to be made, 
and statements required to be furnished, after December 31, 
2015.

 D. Increase Penalty for Failure to File Information Returns and Payee 
  Statements (sec. 806 of the Act and secs. 6721 and 6722 of the Code)


                              Present Law

    Failure to comply with the information reporting 
requirements of the Code results in penalties, which may 
include a penalty for failure to file the information 
return,\59\ to furnish payee statements,\60\ or to comply with 
other various reporting requirements.\61\ No penalty is imposed 
if the failure is due to reasonable cause.\62\
---------------------------------------------------------------------------
    \59\ Sec. 6721.
    \60\ Sec. 6722.
    \61\ Sec. 6723. The penalty for failure to comply timely with a 
specified information reporting requirement is $50 per failure, not to 
exceed $100,000 per calendar year.
    \62\ Sec. 6724.
---------------------------------------------------------------------------
    Any person who is required to file an information return, 
or furnish a payee statement, but who fails to do so on or 
before the prescribed due date, is subject to a penalty that 
varies based on when, if at all, the information return is 
filed. Both the failure to file and failure to furnish 
penalties are adjusted annually to account for inflation.
    If a person files an information return after the 
prescribed filing date but on or before the date that is 30 
days after the prescribed filing date, the amount of the 
penalty is $30 per return (``first-tier penalty''), with a 
maximum penalty of $250,000 per calendar year. If a person 
files an information return after the date that is 30 days 
after the prescribed filing date but on or before August 1, the 
amount of the penalty is $60 per return (``second-tier 
penalty''), with a maximum penalty of $500,000 per calendar 
year. If an information return is not filed on or before August 
1 of any year, the amount of the penalty is $100 per return 
(``third-tier penalty''), with a maximum penalty of $1,500,000 
per calendar year. If a failure to file is due to intentional 
disregard of a filing requirement, the minimum penalty for each 
failure is $250, with no calendar year limit.
    Lower maximum levels for this failure to file correct 
information return penalty apply to small businesses. Small 
businesses are defined as firms having average annual gross 
receipts for the most recent three taxable years that do not 
exceed $5 million. The maximum penalties for small businesses 
are: $75,000 (instead of $250,000) if the failures are 
corrected on or before 30 days after the prescribed filing 
date; $200,000 (instead of $500,000) if the failures are 
corrected on or before August 1; and $500,000 (instead of 
$1,500,000) if the failures are not corrected on or before 
August 1.
    Any person who is required to furnish a payee statement who 
fails to do so on or before the prescribed filing date is 
subject to a penalty that varies based on when, if at all, the 
payee statement is furnished, similar to the penalty for filing 
an information return discussed above. A first-tier penalty is 
$30, subject to a maximum of $250,000, a second-tier penalty is 
$60 per statement, up to $500,000, and a third-tier penalty is 
$100, up to a maximum of $1,500,000. Lower maximum levels for 
this failure to furnish correct payee statement penalty apply 
to small businesses. For purposes of the penalty, small 
businesses are firms having average annual gross receipts for 
the most recent three taxable years that do not exceed $5 
million. The maximum penalties for small businesses are: 
$75,000 (instead of $250,000) if the failures are corrected on 
or before 30 days after the prescribed filing date; $200,000 
(instead of $500,000) if the failures are corrected on or 
before August 1; and $500,000 (instead of $1,500,000) if the 
failures are not corrected on or before August 1.
    In cases in which the failure to file an information return 
or to furnish the correct payee statement is due to intentional 
disregard, the minimum penalty for each failure is $250, with 
no calendar year limit. No distinction is made between small 
businesses and other persons required to report.

                        Explanation of Provision

    The provision increases the penalties to the following 
amounts for information returns or payee statements due after 
December 31, 2015. The first-tier penalty is $50 per return, 
with a maximum penalty of $500,000 per calendar year. The 
second-tier penalty increases to $100 per return, with a 
maximum penalty of $1,500,000 per calendar year. The third-tier 
penalty increases to $250 per return, with a maximum penalty of 
$3,000,000 per calendar year.
    The provision also increases the lower maximum levels 
applicable to small businesses, as follows. The maximum 
penalties for small businesses are: $175,000 if the failures 
are corrected on or before 30 days after the prescribed filing 
date; $500,000 if the failures are corrected on or before 
August 1; and $1,000,000 if the failures are not corrected on 
or before August 1.
    For failures or misstatements due to intentional disregard, 
the penalty per return or statement increases to $500, with no 
calendar year limit. As with present law, there is no 
distinction between small businesses and other persons required 
to report in such cases.

                             Effective Date

    The provision applies to information returns required to be 
filed and payee statements required to be furnished after 
December 31, 2015.

 E. Child Tax Credit Not Refundable For Taxpayers Electing To Exclude 
Foreign Earned Income From Tax (sec. 807 of the Act and sec. 24 of the 
                                 Code)


                            Present Law \63\

---------------------------------------------------------------------------
    \63\ This description of present law does not incorporate changes 
made to the child tax credit in the ``Protecting Americans From Tax 
Hikes Act of 2015,'' Pub. L. No. 114-113. See Part Thirteen, Division 
Q, Title I, item A.1.
---------------------------------------------------------------------------

Child tax credit

    An individual may claim a tax credit for each qualifying 
child under the age of 17. The amount of the credit per child 
is $1,000.\64\ A child who is not a citizen, national, or 
resident of the United States cannot be a qualifying child.\65\
---------------------------------------------------------------------------
    \64\ Sec. 24(a).
    \65\ 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, 
described below.\66\
---------------------------------------------------------------------------
    \66\ Sec. 24(b).
---------------------------------------------------------------------------
    The credit is allowable against both the regular tax and 
against the alternative minimum tax (``AMT''). In addition, a 
taxpayer is allowed an ``additional child tax credit'' which is 
refundable to the extent the credit exceeds the taxpayer's 
income tax (reduced by nonrefundable credits).\67\ The 
additional child tax credit is equal to 15 percent of earned 
income in excess of a threshold dollar amount (the ``earned 
income'' formula).\68\ The threshold dollar amount is $3,000 
for taxable years beginning before 2018 ($10,000 indexed for 
inflation since 2001 for taxable years beginning after 2017). 
For purposes of determining the additional child credit, earned 
income includes only earned income that is taken into account 
in determining taxable income. As a result, a citizen living 
abroad who earns more than the maximum section 911 exclusion 
(discussed below) will have residual earnings taken into 
account in determining taxable income, and thus will 
potentially be eligible for the additional child credit. For 
example, a married couple with earnings of $113,800 in 2015 
would have earnings that exceeded the maximum section 911 
exclusion by $13,000, or $10,000 in excess of the additional 
child credit refundability threshold of $3,000. If they had two 
qualifying children, the family would be potentially eligible 
for child credits of $1,800 ($200 of the otherwise allowed 
child credits is lost due to the income based phase-out of the 
child credit). The couple faces no U.S. regular income tax 
liability on the $13,000 against which to claim the credit. 
However, the couple is eligible for refundable child credits of 
$1,500 (15 percent of $10,000). In contrast to this couple, a 
couple earning less than the maximum section 911 exclusion and 
who claimed the exclusion would have no earnings taken into 
account in determining taxable income, and thus would not be 
eligible for the additional child credit. Thus certain higher 
income citizens working abroad face lower U.S. tax liabilities 
than lower income citizens working abroad.
---------------------------------------------------------------------------
    \67\ Secs. 24(d) and 6401(b).
    \68\ Sec. 24(d)(1)(B)(i).
---------------------------------------------------------------------------
    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'').
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. Combat pay is treated as earned income 
taken into account in determining taxable income, regardless of 
whether it is excluded from gross income for other purposes.

Foreign earned income exclusion

    A U.S. citizen or resident living abroad may be eligible to 
elect to exclude from U.S. taxable income certain foreign 
earned income and foreign housing costs.\69\ This exclusion 
applies regardless of whether any foreign tax is paid on the 
foreign earned income or housing costs. To qualify for these 
exclusions, an individual (a ``qualified individual'') must 
have his or her tax home in a foreign country and must be 
either (1) a U.S. citizen \70\ who is a bona fide resident of a 
foreign country or countries for an uninterrupted period that 
includes an entire taxable year, or (2) a U.S. citizen or 
resident present in a foreign country or countries for at least 
330 full days in any 12-consecutive-month period.
---------------------------------------------------------------------------
    \69\ Sec. 911.
    \70\ Generally, only U.S. citizens may qualify under the bona fide 
residence test. A U.S. resident alien who is a citizen of a country 
with which the United States has a tax treaty may, however, qualify for 
the section 911 exclusions under the bona fide residence test by 
application of a nondiscrimination provision of the treaty.
---------------------------------------------------------------------------
    The maximum amount of foreign earned income that an 
individual may exclude in 2015 is $100,800.\71\ The maximum 
amount of foreign housing costs that an individual may exclude 
in 2015 is, in the absence of Treasury adjustment for 
geographic differences in housing costs, $16,128.\72\ The 
combined foreign earned income exclusion and housing cost 
exclusion may not exceed the taxpayer's total foreign earned 
income for the taxable year. The taxpayer's foreign tax credit 
is reduced by the amount of the credit that is attributable to 
excluded income.
---------------------------------------------------------------------------
    \71\ Sec. 911(b)(2)(D)(i). This amount is adjusted annually for 
inflation. The exclusion amount is taken against the lowest marginal 
tax rates. See sec. 911(f).
    \72\ Sec. 911(c)(1) and (2). The Secretary of the Treasury has 
authority to issue guidance making geographic cost-based adjustments. 
See sec. 911(c)(2)(B). The Secretary has exercised this authority 
annually. The most recent guidance, Notice 2015-33 (April 14, 2015), 
includes adjustments for many locations. Under these adjustments, the 
maximum housing cost exclusion for any geographic area is $114,300 for 
expenses for housing in Hong Kong, China.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a taxpayer who elects to exclude from 
gross income for a taxable year any amount of foreign earned 
income or foreign housing costs may not claim the refundable 
portion of the child tax credit for the taxable year.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2014.

  PART SEVEN: SURFACE TRANSPORTATION AND VETERANS HEALTH CARE CHOICE 
            IMPROVEMENT ACT OF 2015 (PUBLIC LAW 114-41) \73\
---------------------------------------------------------------------------

    \73\ H.R. 3236. The House passed H.R. 3236 on July 29, 2015. The 
bill passed the Senate without amendment on July 30, 2015. The 
President signed the bill on July 31, 2015.
---------------------------------------------------------------------------

                      TITLE II--REVENUE PROVISIONS

A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of 
          the Act and secs. 9503, 9504, and 9308 of the Code)

                              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 and Leaking Underground Storage Tank Trust 
Fund) through July 31, 2015, for purposes provided in specified 
authorizing legislation as in effect on the date of enactment.

                        Explanation of Provision

    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund and Leaking 
Underground Storage Tank Trust Fund) through October 29, 2015.

                             Effective Date

    The provision is effective on the date of enactment (July 
31, 2015).

B. Funding of Highway Trust Fund (sec. 2002 of the Act and sec. 9503(f) 
                              of the Code)

    Public Law No. 110-318, ``an Act to amend the Internal 
Revenue Code of 1986 to restore the Highway Trust Fund 
balance'' transferred, out of money in the Treasury not 
otherwise appropriated, $8,017,000,000 to the Highway Trust 
Fund effective September 15, 2008. Public Law No. 111-46, ``an 
Act to restore sums to the Highway Trust Fund and for other 
purposes,'' transferred, out of money in the Treasury not 
otherwise appropriated, $7 billion to the Highway Trust Fund 
effective August 7, 2009. The Hiring Incentives to Restore 
Employment Act transferred, out of money in the Treasury not 
otherwise appropriated, $14,700,000,000 to the Highway Trust 
Fund and $4,800,000,000 to the Mass Transit Account in the 
Highway Trust Fund.\74\ The HIRE Act provisions generally were 
effective as of March 18, 2010.
---------------------------------------------------------------------------
    \74\ The Hiring Incentives to Restore Employment Act (the ``HIRE'' 
Act), Pub. L. No. 111-147, sec. 442.
---------------------------------------------------------------------------
    Moving Ahead for Progress in the 21st Century (``MAP-21'') 
\75\ provided that, out of money in the Treasury not otherwise 
appropriated, the following transfers were to be made from the 
General Fund to the Highway Trust Fund:
---------------------------------------------------------------------------
    \75\ Moving Ahead for Progress in the 21st Century Act (``MAP-
21''), Pub. L. No. 112-141, sec. 40201(a)(2), and sec. 40251.

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

    MAP-21 also transferred $2.4 billion from the Leaking 
Underground Storage Tank Trust Fund to the Highway Account in 
the Highway Trust Fund.
    The Highway and Transportation Funding Act of 2014 
transferred $7.765 billion from the General Fund to the Highway 
Account of the Highway Trust Fund, $2 billion from the General 
Fund to the Mass Transit Account of the Highway Trust Fund, and 
$1 billion from the Leaking Underground Storage Tank Trust Fund 
to the Highway Account of the Highway Trust Fund.\76\ The 
provisions were effective August 8, 2014.
---------------------------------------------------------------------------
    \76\ Highway and Transportation Funding Act of 2014, Pub. L. No. 
113-159, sec. 2002.
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                        Explanation of Provision

    The provision 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: $6.068 
billion to the Highway Account and $2 billion to the Mass 
Transit Account.

                             Effective Date

    The provision is effective on the date of enactment (July 
31, 2015).

 C. Modification of Mortgage Reporting Requirements (sec. 2003 of the 
                    Act and sec. 6050H of the Code)


                              Present Law

    Any person who, in the course of a trade or business during 
a calendar year, received from an individual $600 or more of 
interest during a calendar year on an obligation secured by 
real property (such as mortgage interest) must file an 
information return with the IRS and must provide a copy of that 
return to the payor.\77\ The information return generally must 
include the name, address, and taxpayer identification number 
of the individual from whom the interest was received, and the 
amount of the interest and points received for the calendar 
year.
---------------------------------------------------------------------------
    \77\ Sec. 6050H.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the following additional information 
is required to be included in information returns filed with 
the IRS and statements furnished to the payor with respect to a 
debt secured by real property: (i) the amount of outstanding 
principal on the mortgage as of the beginning of the calendar 
year, (ii) the loan origination date, and (iii) the address (or 
other description in the case of property without an address) 
of the property securing the debt.

                             Effective Date

    The provision applies to returns required to be made, and 
statements required to be furnished, after December 31, 2016.

   D. Consistent Basis Reporting Between Estate and Person Acquiring 
Property From Decedent (sec. 2004 of the Act and secs. 1014 and 6035 of 
                               the Code)


                              Present Law

    The value of an asset for purposes of the estate tax 
generally is the fair market value at the time of death or at 
the alternate valuation date.\78\ The basis of property 
acquired from a decedent is the fair market value of the 
property at the time of the decedent's death or as of an 
alternate valuation date, if elected by the executor.\79\ Under 
regulations, the fair market value of the property at the date 
of the decedent's death (or alternate valuation date) is deemed 
to be its value as appraised for estate tax purposes.\80\ 
However, the value of property as reported on the decedent's 
estate tax return provides only a rebuttable presumption of the 
property's basis in the hands of the heir.\81\ Unless the heir 
is estopped by his or her previous actions or statements with 
regard to the estate tax valuation, the heir may rebut the use 
of the estate's valuation as his or her basis by clear and 
convincing evidence. The heir is free to rebut the presumption 
in two situations: (1) the heir has not used the estate tax 
value for tax purposes, the IRS has not relied on the heir's 
representations, and the statute of limitations on assessments 
has not barred adjustments; and (2) the heir does not have a 
special relationship to the estate which imposes a duty of 
consistency.\82\
---------------------------------------------------------------------------
    \78\ Secs. 2031 and 2032.
    \79\ Sec. 1014. See section 1022 for special basis rules apply to 
property acquired from an electing estate of a decedent who died during 
2010.
    \80\ Treas. Reg. sec. 1.1014-3(a).
    \81\ See Rev. Rul. 54-97, 1954-1 C.B. 113, 1954.
    \82\ See Technical Advice Memorandum 199933001, January 7, 1999.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends section 1014 generally to require 
consistency between the estate tax value of property and basis 
of property acquired from a decedent. Under the provision, if 
the value of property to which the provision applies has been 
finally determined for estate tax purposes, the basis in the 
hands of the recipient can be no greater than the value of the 
property as finally determined. If the value of such property 
has not been finally determined for estate tax purposes, then 
the basis in the hands of the recipient can be no greater than 
the value reported in a required statement. The provision 
applies to property the inclusion of which in the decedent's 
estate increased the liability for estate tax on such estate, 
but does not include any property of an estate if the liability 
for such tax does not exceed the credits allowable against such 
tax. For purposes of the provision, the value of property has 
been finally determined for estate tax purposes if: (1) the 
value of the property is shown on an estate tax return, and the 
value is not contested by the Secretary before the expiration 
of the time for assessing estate tax; (2) in a case not 
described in (1), the value is specified by the Secretary and 
such value is not timely contested by the executor of the 
estate; or (3) the value is determined by a court or pursuant 
to a settlement agreement with the Secretary.
    An executor of a decedent's estate that is required to file 
an estate tax return under section 6018(a) is required to 
report to both the recipient and the IRS the value of each 
interest in property included in the gross estate. A person 
that is required to file an estate tax return under section 
6018(b) (returns by beneficiaries) is required to report to 
each other person holding a legal or beneficial interest in 
property to which the return relates and to the IRS the value 
of each interest in property included in the gross estate. The 
required reports must be furnished by the time prescribed by 
the Secretary, but in no case later than the earlier of 30 days 
after the return is due under section 6018 or 30 days after the 
return is filed. In any case where reported information is 
adjusted after a statement has been filed, a supplemental 
statement must be filed not later than 30 days after such 
adjustment is made.
    The provision grants the Secretary authority to prescribe 
regulations necessary to carry out the provision, including the 
application of the provision when no estate tax return is 
required to be filed and when the surviving joint tenant or 
other recipient may have better information than the executor 
regarding the basis or fair market value of the property.
    The provision applies the penalty for failure to file 
correct information returns under section 6721, and failure to 
furnish correct payee statements under section 6722, to failure 
to file the new information returns required under the 
proposal. Additionally, the provision applies the accuracy-
related penalty under section 6662 to any inconsistent estate 
basis. For this purpose, there is an inconsistent estate basis 
if the basis of property claimed on a return exceeds the basis 
as determined under the above-described new rules that 
generally require consistency between the estate tax value of 
property and the basis of property acquired from a decedent 
under section 1014.

                             Effective Date

    The provision is applicable to property with respect to 
which an estate tax return is filed after the date of enactment 
(July 31, 2015).

     E. Clarification of 6-Year Statute of Limitations in Case of 
  Overstatement of Basis (sec. 2005 of Act and sec. 6501 of the Code)


                              Present Law

    Taxes are generally required to be assessed within three 
years after a taxpayer's return is filed, whether or not it was 
timely filed.\83\ There are several circumstances under which 
the general three-year limitations period does not begin to 
run. If no return is filed,\84\ if a false or fraudulent return 
with the intent to evade tax is filed, if private foundation 
status is terminated, or a gift tax for certain gifts is not 
properly disclosed, the tax may be assessed, or a proceeding in 
court for collection of such tax may commence without 
assessment, at any time.\85\
---------------------------------------------------------------------------
    \83\ Sec. 6501(a). Returns that are filed before the date they are 
due are deemed filed on the due date. See sec. 6501(b)(1) and (2).
    \84\ Sec. 6501(c)(3).
    \85\ Sec. 6501(c)(1) and (2).
---------------------------------------------------------------------------
    Other exceptions to the general rule result in an extension 
of the limitations period otherwise applicable. For example, 
the limitation period may be extended by taxpayer consent.\86\ 
Failure to disclose or report certain information may also 
result in extensions of the statute of limitations. For 
example, failure to disclose a listed transaction as required 
under section 6011 on any return or statement for a taxable 
year will result in an extension that ensures that the 
limitations period remains open for at least one year from the 
date the requisite information is provided. The limitation 
period with respect to such transaction will not expire before 
the date which is one year after the earlier of (1) the date on 
which the Secretary is provided the information so required, or 
(2) the date that a ``material advisor'' (as defined in section 
6111) makes its section 6112(a) list available for inspection 
pursuant to a request by the Secretary under section 
6112(b)(1)(A).\87\ In addition to the exceptions described 
above, there are also circumstances under which the three-year 
limitations period is suspended.\88\
---------------------------------------------------------------------------
    \86\ Sec. 6501(c)(4).
    \87\ Sec. 6501(c)(10).
    \88\ For example, service of an administrative summons triggers the 
suspension either (1) beginning six months after service (in the case 
of John Doe summonses) or (2) when a proceeding to quash a summons is 
initiated by a taxpayer named in a summons to a third-party record-
keeper. Judicial proceedings initiated by the government to enforce a 
summons generally do not suspend the limitation period.
---------------------------------------------------------------------------
    A separate limitations period of six years from the date a 
return is filed is established for substantial omissions of 
items from gross income. For a trade or business, the term 
``gross income'' means the total amount received or accrued 
from the sale of goods or services (if such amounts are 
required to be shown on the return) prior to diminution by the 
cost of such sales or services (generally, gross receipts). An 
omission from gross income is substantial if the omission 
exceeds 25 percent of the gross income reported on the return 
or the amount omitted is attributable to a foreign financial 
asset within the meaning of section 6038D (without regard to 
dollar thresholds and regulatory exceptions to reporting based 
on existence of duplicative disclosure requirements) and 
exceeds $5,000.\89\ Amounts that are adequately disclosed on a 
return, even if not reflected in the amount recorded as gross 
income, are generally not considered to have been omitted for 
purposes of determining whether the 25 percent threshold was 
exceeded. An amount is considered to have been adequately 
disclosed on a return if it is presented in a manner that is 
``adequate to apprise the Secretary of the nature and amount of 
such item.'' \90\
---------------------------------------------------------------------------
    \89\ Sec. 6501(e)(1). Similar six year limitations periods are 
established for estate and gift taxes as well as excise taxes, based on 
25 percent omissions from items required to be reported on the relevant 
tax returns. See secs. 6501(e)(2) and 6501(e)(3).
    \90\ Sec. 6501(e)(1)(B).
---------------------------------------------------------------------------
    The six-year statute was enacted in 1954, patterned on an 
earlier five-year limitations period, with several 
differences.\91\ The earlier statute was shortly thereafter the 
subject of an opinion of the U.S. Supreme Court, in which the 
Court held that the statute was clear on its face in requiring 
an omission of income to trigger the exception.\92\ Neither the 
present statute nor its predecessor explicitly addresses the 
treatment of overstatements of basis.
---------------------------------------------------------------------------
    \91\ Section 275(c) of the Internal Revenue Code of 1939 stated in 
its entirety ``If the taxpayer omits from gross income an amount 
properly includible therein which is in excess of 25 per centum of the 
amount of gross income stated in the return, the tax may be assessed, 
or a proceeding in court for the collection of such tax may be begun 
without assessment, at any time within 5 years after the return was 
filed.'' 53 Stat. at Large 86 (1st Sess., 76th Cong. 1939). It did not 
include language comparable to subparagraph 6501(e)(1)(B)(ii), 
requiring adequacy of disclosure, nor did it distinguish between gross 
receipts of a trade or business and other income.
    \92\ The Colony, Inc., v. Commissioner, 357 U.S. 28 (1958).
---------------------------------------------------------------------------
    A series of courts have considered the issue of whether a 
basis overstatement on a return may be considered an omission 
from a taxpayer's income for purposes of the limitations 
period. The cases dealt with adjustments to ``listed'' 
transactions \93\ on partnership returns. The litigation 
results varied, with the result often depending upon the view 
of the deciding court regarding the vitality of the opinion in 
The Colony, Inc.\94\ In cases in which the taxpayer prevailed, 
the courts generally followed the principle set forth in The 
Colony, Inc., that ``the extended period of limitations applies 
to situations where specific income receipts have been `left 
out' in the computation of gross income and not when an 
understatement of gross income resulted from an overstatement 
of basis.''
---------------------------------------------------------------------------
    \93\ ``Listed transactions'' refers to transactions that are the 
same or substantially similar to transactions that the IRS has 
identified in a published notice as potentially abusive and therefore 
subject to the reporting requirements under section 6011, 
notwithstanding the fact that the transaction may not otherwise trigger 
the reporting requirements.
    \94\ The Federal, Ninth and Fourth Circuit Courts of Appeals and 
the U.S. Tax Court held for the taxpayers. See Salman Ranch Ltd. v. 
United States, 573 F.3d 1362 (Fed. Cir. 2009); Bakersfield Energy 
Partners v. Commissioner, 128 T.C. 207 (2007), aff'd, 568 F.3d 767 (9th 
Cir. 2009); and Home Concrete & Supply, LLC. v. United States, 634 F.3d 
249 (4th Cir. 2011), aff'd 132 S. Ct. 1836 (2012), for proceedings 
consistent with the holding in Home Concrete & Supply, LLC.). The Tenth 
Circuit held for the government in Salman Ranch Ltd. v. Commissioner, 
(647 F.3d 929 (10th Cir. 2011), cert. granted, judgment vacated and 
remanded, (132 S. Ct. 2100 (2012) for proceedings consistent with the 
holding in Home Concrete & Supply, LLC.).
---------------------------------------------------------------------------
    The Secretary promulgated regulations intended to resolve 
the issue going forward, making it explicit that the portion of 
income understated by reason of an overstated basis is to be 
included in determining whether an understatement constituted a 
25 percent omission for purposes of the statute of 
limitations.\95\
---------------------------------------------------------------------------
    \95\ Treas. Regs. secs. 301.6229(c)(2)-1 and 301.6501(e)-1. The 
Federal Circuit granted deference to the regulations issued subsequent 
to its Salman Ranch opinion and held for the government. Grapevine 
Imports, Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011) cert. 
granted, judgment vacated and remanded, 132 S. Ct. 2099 (2012).
---------------------------------------------------------------------------
    In Home Concrete & Supply, LLC. v. United States, the U.S. 
Supreme Court held that an overstatement of basis that 
contributes to an understatement of income due is not itself 
considered to be an omission of income, without regard to 
whether the return reveals the computation of basis.\96\ In 
deciding in favor of the taxpayer, the Supreme Court followed 
its interpretation of the word ``omits'' in the predecessor to 
section 6501 in The Colony, Inc. Having previously interpreted 
an unambiguous term in the statute, the Court held that the 
contrary interpretation by the Secretary in Treasury 
regulations was invalid.
---------------------------------------------------------------------------
    \96\ 132 S. Ct. 1836; 182 L. Ed. 2d 746 (2012).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that in determining whether an 
amount greater than 25 percent of gross income was omitted from 
a return, an understatement of gross income by reason of an 
overstatement of unrecovered cost or other basis is an omission 
of gross income, without regard to whether or not the amount of 
unrecovered cost or basis claimed is disclosed on the return.

                             Effective Date

    The provision is effective for returns filed after the date 
of enactment (July 31, 2015), as well as to any other return 
for which the assessment period specified in section 6501 had 
not yet expired as of that date.

 F. Tax Return Due Date Simplification (sec. 2006 of the Act and secs. 
                   6071, 6072, and 6081 of the Code)


                              Present Law

    Persons required to file income tax returns \97\ must file 
such returns in the manner prescribed by the Secretary, in 
compliance with due dates established in the Code, if any, or 
by regulations. The Code includes a general rule that requires 
income tax returns to be filed on or before the 15th day of the 
fourth month following the end of the taxable year, but certain 
exceptions are provided both in the Code and in regulations.
---------------------------------------------------------------------------
    \97\ Section 6012 provides general rules identifying who must file 
an income tax return, while other Code provisions referenced herein 
specifically address filing requirements of partnerships, corporations, 
and other entities.
---------------------------------------------------------------------------
    A partnership generally is required to file a Federal 
income tax return on or before the 15th day of the fourth month 
after the end of the partnership taxable year.\98\ For a 
partnership with a taxable year that is a calendar year, for 
example, the partnership return due date (and the date by which 
Schedules K-1 must be furnished to partners) is April 15. 
However, a partnership is allowed an automatic five-month 
extension of time to file the partnership return and the 
Schedule K-1s (to September 15 in the foregoing example) by 
submitting an application on Form 7004 in accordance with the 
rules prescribed by the Treasury regulations.\99\
---------------------------------------------------------------------------
    \98\ Secs. 6031, 6072.
    \99\ Sec. 6081. Treas. Reg. sec. 1.6081-2. See Department of the 
Treasury, Internal Revenue Service, 2011 Instructions for Form 1065, 
U.S. Return of Partnership Income, p. 3. Unlike other partnerships, an 
electing large partnership is required to furnish a Schedule K-1 to 
each partner by the first March 15 following the close of the 
partnership's taxable year (sec. 6031(b)). However, an electing large 
partnership is allowed an automatic six-month extension of time to file 
the partnership return and the Schedule K-1s by submitting an 
application on form 7004 in accordance with the rules prescribed by the 
Treasury Regulations. Treas. Reg. sec. 1.6081-2(a)(2).
---------------------------------------------------------------------------
    A C corporation or an S corporation generally is required 
to file a Federal income tax return on or before the 15th day 
of the third month following the close of the corporation's 
taxable year. For a corporation with a taxable year that is a 
calendar year, for example, the corporate return due date is 
March 15.\100\ However, a corporation is allowed an automatic 
six-month extension of time to file the corporate return (to 
September 15 in the foregoing example) by submitting an 
application on Form 7004 in accordance with the rules 
prescribed by the Treasury regulations.\101\
---------------------------------------------------------------------------
    \100\ Secs. 6012, 6037, 6072. Section 6012(a)(2) provides that 
every corporation subject to taxation under subtitle A shall be 
required to file an income tax return. Section 6037, which governs the 
returns of S corporations, provides that any return filed pursuant to 
section 6037 shall, for purposes of chapter 66 (relating to 
limitations) be treated as a return filed by the corporation under 
section 6012. Section 6072, which sets forth the due dates for filing 
various income tax returns, provides that returns of corporations with 
a taxable year that is a calendar year under section 6012 (and section 
6037 based on the language in that section) are due March 15.
    \101\ Section 6081(b) provides that a corporation is allowed an 
automatic extension of three months to file its income tax return if 
the corporation files the form prescribed by the Secretary and pays on 
or before the due date prescribed for payment, the amount properly 
estimated as its tax. However, section 6081(a) provides that the 
Secretary may grant an automatic extension of up to six months to file 
and the Treasury regulations do so provide. Treas. Reg. sec. 1.6081-3.
---------------------------------------------------------------------------
    To assist taxpayers in preparing their income tax returns 
and to help the Internal Revenue Service (``IRS'') determine 
whether such income tax returns are correct and complete, 
present law imposes a variety of information reporting 
requirements on participants in certain transactions.\102\ The 
primary provision governing information reporting by payors 
requires an information return by every person engaged in a 
trade or business who makes payments aggregating $600 or more 
in any taxable year to a single payee in the course of the 
payor's trade or business.\103\ Payments subject to reporting 
include fixed or determinable income or compensation, but do 
not include payments for goods or certain enumerated types of 
payments that are subject to other specific reporting 
requirements.\104\ 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) paid to U.S. 
persons.\105\
---------------------------------------------------------------------------
    \102\ Secs. 6031 through 6060.
    \103\ Sec. 6041(a). The information return generally is submitted 
electronically as a Form-1099 or Form-1096, although certain payments 
to beneficiaries or employees may require use of Forms W-3 or W-2, 
respectively. Treas. Reg. sec. 1.6041-1(a)(2).
    \104\ Sec. 6041(a) requires reporting as to fixed or determinable 
gains, profits, and income (other than payments to which section 
6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) applies and other 
than payments with respect to which a statement is required under 
authority of section 6042(a), 6044(a)(2) or 6045). These payments 
excepted from section 6041(a) include most interest, royalties, and 
dividends.
    \105\ Secs. 6042 (dividends), 6045 (broker reporting) and 6049 
(interest) and the Treasury regulations thereunder.
---------------------------------------------------------------------------
    The payor of amounts described above is required to provide 
the recipient of the payment with an annual statement showing 
the aggregate payments made and contact information for the 
payor.\106\ The statement must be supplied to taxpayers by the 
payors by January 31 of the year following the calendar year 
for which the return must be filed. Payors generally must file 
the information return with the IRS on or before the last day 
of February of the year following the calendar year for which 
the return must be filed,\107\ unless they file electronically, 
in which event the information returns are due March 31.\108\
---------------------------------------------------------------------------
    \106\ Sec. 6041(d).
    \107\ Treas. Reg. sec. 31.6071(a)-1(a)(3)(i).
    \108\ Secs. 6011(e) and 6071(b) apply to ``returns made under 
subparts B and C of part III of this subchapter''; Treas. Reg. sec. 
301.6011-2(b), mandates use of magnetic media by persons filing 
information returns identified in the regulation or subsequent or 
contemporaneous revenue procedures and permits use of magnetic media 
for all others.
---------------------------------------------------------------------------
    Payors also must report wage amounts paid to employees on 
information returns. For wages paid to, and taxes withheld 
from, employees, the payors must file an information return 
with the Social Security Administration (``SSA'') on or before 
the last day of February of the year following the calendar 
year for which the return must be filed.\109\ However, the due 
date for information returns that are filed electronically is 
March 31.
---------------------------------------------------------------------------
    \109\ Treas. Reg. sec. 31.6051-2; IRS, ``Filing Information Returns 
Electronically,'' Pub. 3609 (Rev. 12-2011); Treas. Reg. sec. 
31.6071(a)-1(a)(3)(i).
---------------------------------------------------------------------------
    Under the combined annual wage reporting (``CAWR'') system, 
the SSA and the IRS have an agreement, in the form of a 
Memorandum of Understanding, to share wage data and to resolve, 
or reconcile, the differences in the wages reported to them. 
Employers submit Forms W-2, Wage and Tax Statement (listing 
Social Security wages earned by individual employees), and W-3, 
Transmittal of Wage and Tax Statements (providing an aggregate 
summary of wages paid and taxes withheld) directly to SSA.\110\ 
After it records the Forms W-2 and W-3 wage information in its 
individual Social Security wage account records, SSA forwards 
the Forms W-2 and W-3 information to IRS.\111\
---------------------------------------------------------------------------
    \110\ Pub. L. No. 94-202, sec. 232, 89 Stat. 1135 (1976) (effective 
with respect to statements reporting income received after 1977).
    \111\ Employers submit quarterly reports to IRS on Form 941 
regarding aggregate quarterly totals of wages paid and taxes due. IRS 
then compares the W-3 wage totals to the Form 941 wage totals.
---------------------------------------------------------------------------
    U.S. persons who transfer assets to, and hold interests in, 
foreign bank accounts or foreign entities may be subject to 
self-reporting requirements under both Title 26 (the Internal 
Revenue Code) and Title 31 (the Bank Secrecy Act) of the United 
States Code. With respect to account holders, a U.S. citizen, 
resident, or person doing business in the United States is 
required to keep records and file reports, as specified by the 
Secretary, when that person enters into a transaction or 
maintains an account with a foreign financial agency.\112\ 
Regulations promulgated pursuant to broad regulatory authority 
granted to the Secretary in the Bank Secrecy Act \113\ provide 
additional guidance regarding the disclosure obligation with 
respect to foreign accounts and require filing FinCEN Report 
114, Report of Foreign Bank and Financial Accounts (``FBAR''), 
by June 30 of the year following the year in which the $10,000 
filing threshold is met.\114\ The FBAR is required to be filed 
electronically with the Treasury Department through the FinCEN 
BSA E-filing System.\115\ Failure to file the FBAR is subject 
to both criminal \116\ and civil penalties.\117\ The 
regulations do not provide for extensions of time in which to 
file the FBAR.
---------------------------------------------------------------------------
    \112\ 31 U.S.C. sec. 5314. The term ``agency'' in the Bank Secrecy 
Act includes financial institutions.
    \113\ 31 U.S.C. sec. 5314(a) provides: ``Considering the need to 
avoid impeding or controlling the export or import of monetary 
instruments and the need to avoid burdening unreasonably a person 
making a transaction with a foreign financial agency, the Secretary of 
the Treasury shall require a resident or citizen of the United States 
or a person in, and doing business in, the United States, to keep 
records, file reports, or keep records and file reports, when the 
resident, citizen, or person makes a transaction or maintains a 
relation for any person with a foreign financial agency.''
    \114\ 31 C.F.R. sec. 103.27(c). The $10,000 threshold is the 
aggregate value of all foreign financial accounts in which a U.S. 
person has a financial interest or over which the U.S. person has 
signature or other authority.
    \115\ See http://bsaefiling.fincen.treas.gov/main.html. The 
predecessor form, Treasury Form TD F 90-22.1, was filed with the IRS 
Detroit Computing Center.
    \116\ 31 U.S.C. sec. 5322 (failure to file is punishable by a fine 
up to $250,000 and imprisonment for five years, which may double if the 
violation occurs in conjunction with certain other violations).
    \117\ 31 U.S.C. sec. 5321(a)(5).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision includes the following changes: (i) filing 
deadline for partnerships and S corporations precede the due 
dates of their individual and corporate investors and (ii) the 
due date for filing returns by C corporations to be determined 
under general rule, with effect that it is a later return than 
under present law. It also includes statutory confirmation that 
six-month extension for time to file corporate income tax 
return is automatic, and requires regulatory updates to the 
rules regarding extension of time to file a return, including 
changes to conform the FBAR filing due date with income tax 
filing dates for individuals.
            Filing deadlines for business income tax returns
    The provision accelerates the due date for filing of 
Federal income tax returns of partnerships and S corporations 
by one month, to the 15th day of the third month following the 
close of the taxable year. It also removes C corporations from 
the scope of the exception to the general rule that requires 
income tax returns to be filed by the 15th day of the fourth 
month after the end of a taxable year, with the result that C 
corporation returns are generally due on or before the 15th day 
of the fourth month following the close of a taxable year, with 
the exception of certain C corporations electing a fiscal year 
ending on June 30. For those C corporations, the first return 
for which the due date as amended applies is the return with 
respect to a fiscal year beginning in 2026.
            Extensions of time to file tax returns
    The provision modifies the statute (consistent with current 
Treasury regulations) to grant an automatic six-month extension 
of time to file a Federal corporate income tax return, with two 
exceptions. First, C corporations with a taxable year ending on 
June 30 are granted a seven-month extension for returns with 
respect to taxable years beginning before January 1, 2026. For 
C corporations with a taxable year ending on December 31, the 
extension available for taxable years beginning before January 
1, 2026 is five months. As with present law, the eligibility 
for the automatic extension is contingent on the corporation 
filing the form prescribed by the Secretary and paying all tax 
estimated to be due on or before the due date prescribed for 
payment.
    The provision requires that the Treasury Department modify 
its regulations to conform the extension periods prescribed to 
the following terms. The maximum extension for the returns of 
partnerships using a calendar year is a six-month period ending 
on September 15. The maximum extension for the returns of 
trusts using a calendar year is a 5\1/2\ month period ending on 
September 30. The maximum extension for the returns of employee 
benefit plans using a calendar year is an automatic 3\1/2\ 
month period ending on November 15.\118\ The maximum extension 
for the returns of tax-exempt organizations using a calendar 
year is an automatic six-month period ending on November 15. 
The due date for forms relating to the Annual Information 
Return of Foreign Trust with a United States Owner for calendar 
year filers is April 15 with a maximum extension for a six-
month period ending on October 15.
---------------------------------------------------------------------------
    \118\ The provision relating to returns of employee benefit plans 
was repealed by section 32104 of the Fixing America's Surface 
Transportation (``FAST'') Act, Pub. L. No. 114-94, as described in Part 
Twelve, Title XXXII, item C.
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            FBAR due date conformity with income tax filing
    In addition to requiring modification of the regulatory 
deadlines established for extensions of time to file income tax 
returns, the provision also requires that regulations 
establishing the due date for the form required under FBAR be 
amended. Under the provision, the FBAR due date is April 15 
with regulatory authority to grant an extension of up to a six-
month period ending on October 15. The provision permits the 
Secretary to waive any penalties for failure to file a timely 
request for an extension if the reporting period to which the 
penalty relates is the first period for which the taxpayer was 
subject to the FBAR requirements.

                             Effective Date

    Changes to the filing due dates for partnerships, S 
corporations and C corporations are effective for returns for 
taxable years beginning after December 31, 2015, with one 
exception. For returns for C corporations with fiscal years 
ending on June 30, the amended due date does not apply until 
taxable years beginning after December 31, 2025.
    The requirements that the Secretary revise certain filing 
due dates and extensions for taxable years beginning after 
December 31, 2016 are effective upon date of enactment (July 
31, 2015).
    Finally, the automatic six-month extension of time to file 
corporate income tax returns is effective for taxable years 
beginning after December 31, 2015 of all corporations, with the 
exceptions of C corporations with taxable years ending either 
June 30 or December 31. For years beginning before January 1, 
2026, C corporations with a taxable year ending June 30 are 
permitted a seven month extension of time to file rather than 
six months. For C corporations with a taxable year ending 
December 31, the maximum extension of time to file for years 
beginning before January 1, 2026 is five months rather than six 
months.

G. Transfers of Excess Pension Assets to Retiree Health Accounts (sec. 
               2007 of the Act and sec. 420 of the Code)


                              Present Law

    Subject to various conditions, a qualified transfer of 
excess assets of a defined benefit plan may be made to a 
retiree medical account or life insurance account within the 
plan to fund retiree health benefits and group term life 
insurance benefits (``applicable retiree benefits'').\119\ 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 (as defined under the funding rules for single-
employer plans). A qualified transfer does not result in plan 
disqualification, is not a prohibited transaction, and is not 
treated as a reversion. No deduction is allowed to the employer 
for (1) a qualified transfer, or (2) the payment of applicable 
retiree benefits out of transferred funds (and any income 
thereon).
---------------------------------------------------------------------------
    \119\ Sec. 420. Qualified transfers of excess assets are generally 
made within single-employer defined benefit plans, but are permitted 
also within multiemployer plans.
---------------------------------------------------------------------------
    In order for the transfer to be qualified, accrued 
retirement benefits under the 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 addition, 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.\120\
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    \120\ Sec. 101(e) of the Employee Retirement Income Security Act of 
1974.
---------------------------------------------------------------------------
    No more than one qualified transfer may be made in any 
taxable year. For this purpose, a transfer to a retiree medical 
account and a transfer to a retiree life insurance account in 
the same year are treated as one transfer. No qualified 
transfer may be made after December 31, 2021.

                        Explanation of Provision

    Under the provision, no qualified transfers may be made 
after December 31, 2025. Thus, qualified transfers are 
permitted through that date.

                             Effective Date

    The provision is effective on the date of enactment (July 
31, 2015).

H. Equalization of Highway Trust Fund Excise Taxes on Liquefied Natural 
Gas, Liquefied Petroleum Gas, and Compressed Natural Gas (sec. 2008 of 
                   the Act and sec. 4041 of the Code)


                              Present Law

    The Code imposes an excise tax on gasoline, diesel fuel, 
kerosene, and certain alternative fuels at the following rates: 
\121\
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    \121\ These fuels are subject to an additional 0.1-cent-per-gallon 
excise tax to fund the Leaking Underground Storage Tank (``LUST'') 
Trust Fund (secs. 4041(d) and 4081(a)(2)(B)). That tax is imposed as an 
``add-on'' to other existing taxes.
    \122\ Diesel-water emulsions are taxed at 19.7 cents per gallon 
(sec. 4081(a)(2)(D)).
    \123\ The rate of tax is 24.3 cents per gallon in the case of 
liquefied natural gas, any liquid fuel (other than ethanol or methanol) 
derived from coal, and liquid hydrocarbons derived from biomass. Other 
alternative fuels sold or used as motor fuel are generally taxed at 
18.3 cents per gallon. ``Alternative fuel'' also includes compressed 
natural gas. The rate for compressed natural gas is 18.3 cents per 
energy equivalent of a gallon of gasoline. See sec. 4041(a)(2) and (3).

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Gasoline..........................  18.3 cents per gallon
Diesel fuel and kerosene..........  24.3 cents per gallon \122\
Alternative fuels.................  24.3 and 18.3 cents per gallon \123\
------------------------------------------------------------------------

    The Code imposes tax on gasoline, diesel fuel, and kerosene 
upon removal from a refinery or on importation, unless the fuel 
is transferred in bulk by registered pipeline or barge to a 
registered terminal facility.\124\ The imposition of tax on 
alternative fuels generally occurs at retail when the fuel is 
sold to an owner, lessee or other operator of a motor vehicle 
or motorboat for use as a fuel in such motor vehicle or 
motorboat.
---------------------------------------------------------------------------
    \124\ Sec. 4081(a)(1).
---------------------------------------------------------------------------
    Liquefied natural gas (``LNG'') and liquefied petroleum gas 
(also known as propane) are classified as alternative fuels. 
LNG is taxed at the same per gallon rate as diesel, 24.3 cents 
per gallon. According to the Oak Ridge National Laboratory, 
diesel fuel has an energy content of 128,700 Btu per gallon 
(lower heating value) and LNG has an energy content of 74,700 
Btu per gallon (lower heating value). Therefore, a gallon of 
LNG produces approximately 58 percent of the energy produced by 
a gallon of diesel fuel.
    Liquefied petroleum gas is taxed at the same per gallon 
rate as gasoline, 18.3 cents per gallon. According to the Oak 
Ridge National Laboratory, gasoline has an energy content of 
115,400 Btu per gallon (lower heating value), and liquefied 
petroleum gas has an energy content of 83,500 Btu per gallon 
(lower heating value). Therefore, a gallon of liquefied 
petroleum gas produces approximately 72 percent of the energy 
produced by a gallon of gasoline.
    Compressed natural gas is taxed at 18.3 cents per energy 
equivalent of a gasoline gallon of gasoline. In Notice 2006-92, 
the IRS provided that this rate is 18.3 cents per 126.67 cubic 
feet of compressed natural gas.

                        Explanation of Provision

    The provision changes the tax rate of LNG to a rate based 
on its energy equivalent of a gallon of diesel and changes the 
tax rate of liquefied petroleum gas to a rate based on its 
energy equivalent of a gallon of gasoline.
    Specifically, the provision provides that liquefied 
petroleum gas is taxed at 18.3 cents per energy equivalent of a 
gallon of gasoline. For this purpose, ``energy equivalent of a 
gallon of gasoline'' means, with respect to liquefied petroleum 
gas, the amount of such fuel having a Btu content of 115,400 
(lower heating value), which is 5.75 pounds of liquefied 
petroleum gas.
    LNG is taxed at 24.3 cents per energy equivalent of a 
gallon of diesel fuel. For this purpose, ``energy equivalent of 
a gallon of diesel'' means, with respect to a liquefied natural 
gas fuel, the amount of such fuel having a Btu content of 
128,700 (lower heating value), which is 6.06 pounds of 
liquefied natural gas.
    Compressed natural gas is taxed at 18.3 cents per energy 
equivalent of a gallon of gasoline, which is 5.66 pounds of 
compressed natural gas.

                             Effective Date

    The provision is effective for fuel sold or used after 
December 31, 2015.

                     TITLE IV--VETERANS PROVISIONS


  A. Exemption in Determination of Employer Health Insurance Mandate 
          (sec. 4007(a) of the Act and sec. 4980H of the Code)


                              Present Law


Employer shared responsibility for health coverage

            In general
    Under the Patient Protection and Affordable Care Act 
(``PPACA''),\125\ as amended by the Health Care and Education 
Reconciliation Act of 20101A\126\ (referred to collectively as 
the ``Affordable Care Act'' or ``ACA''), an applicable large 
employer may be subject to a tax, called an ``assessable 
payment,'' for a month if one or more of its full-time 
employees is certified to the employer as receiving for the 
month a premium assistance credit for health insurance 
purchased on an American Health Benefit Exchange or reduced 
cost-sharing for the employee's share of expenses covered by 
such health insurance.\127\ As discussed below, whether an 
applicable large employer owes an assessable payment and the 
amount of any assessable payment depend on whether the employer 
offers its full-time employees and their dependents the 
opportunity to enroll in minimum essential coverage under a 
group health plan sponsored by the employer and, if it does, 
whether the coverage offered is affordable and provides minimum 
value.\128\
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    \125\ Pub. L. No. 111-148.
    \126\ Pub. L. No. 111-152.
    \127\ Sec. 4980H. This is sometimes referred to as the employer 
shared responsibility requirement or employer mandate. An applicable 
large employer is also subject to annual reporting requirements under 
section 6056. Premium assistance credits for health insurance purchased 
on an American Health Benefit Exchange are provided under section 36B. 
Reduced cost-sharing for an individual's share of expenses covered by 
such health insurance is provided under section 1402 of PPACA. For 
further information on these provisions, see Part II.B-D of Joint 
Committee on Taxation, Present Law and Background Relating to the Tax-
Related Provisions in the Affordable Care Act (JCX-6-13), March 4, 
2013, available at www.jct.gov.
    \128\ Under the ACA, these rules are effective for months beginning 
after December 31, 2013. However, in Notice 2013-45, 2013-31 I.R.B. 
116, Part III, Q&A-2, the Internal Revenue Service (``IRS'') announced 
that no assessable payments will be assessed for 2014. In addition, in 
2014, the IRS announced that no assessable payments for 2015 will apply 
to applicable large employers that have fewer than 100 full-time 
employees and full-time equivalent employees and meet certain other 
requirements. Section XV.D.6 of the preamble to the final regulations, 
T.D. 9655, 79 Fed. Reg. 8544, 8574-8575, February 12, 2014.
---------------------------------------------------------------------------
            Definitions of full-time employee and applicable large 
                    employer
    For purposes of applying these rules, full-time employee 
means, with respect to any month, an employee who is employed 
on average at least 30 hours of service per week. Hours of 
service are to be determined under regulations, rules, and 
guidance prescribed by the Secretary of the Treasury 
(``Secretary''), in consultation with the Secretary of Labor, 
including rules for employees who are not compensated on an 
hourly basis.
    Applicable large employer generally means, with respect to 
a calendar year, an employer who employed an average of at 
least 50 full-time employees on business days during the 
preceding calendar year.\129\ Solely for purposes of 
determining whether an employer is an applicable large employer 
(that is, whether the employer has at least 50 full-time 
employees), besides the number of full-time employees, the 
employer must include the number of its full-time equivalent 
employees for a month, determined by dividing the aggregate 
number of hours of service for that month (up to a maximum of 
120 for any employee) of employees who are not full-time 
employees for the month by 120. In addition, in determining 
whether an employer is an applicable large employer, members of 
the same controlled group, group under common control, and 
affiliated service group are treated as a single employer.\130\
---------------------------------------------------------------------------
    \129\ Additional rules apply, for example, in the case of an 
employer that was not in existence for the entire preceding calendar 
year.
    \130\ The rules for determining controlled group, group under 
common control, and affiliated service group under section 414(b), (c), 
(m) and (o) apply for this purpose. If the group is an applicable large 
employer under this test, each member of the group is an applicable 
large employer and subject to the employer shared responsibility 
requirement even if the member by itself would not be an applicable 
large employer. In addition, in determining assessable payments (as 
discussed herein), only one 30-employee reduction in full-time 
employees applies to the group and is allocated among the members 
ratably based on the number of full-time employees employed by each 
member.
---------------------------------------------------------------------------
            Assessable payments
    If an applicable large employer does not offer its full-
time employees and their dependents minimum essential coverage 
under an employer-sponsored plan for a month and at least one 
full-time employee is certified as receiving for the month a 
premium assistance credit or reduced cost-sharing, the employer 
may be subject to an assessable payment of $2,0001A\131\ 
(divided by 12 and applied on a monthly basis) multiplied by 
the number of its full-time employees minus 30, regardless of 
the number of full-time employees so certified. For example, in 
2016, Employer A fails to offer minimum essential coverage and 
has 100 full-time employees, 10 of whom receive premium 
assistance credits for the entire year. The employer's 
assessable payment is $2,000 for each full-time employee over 
the 30-employee threshold, for a total of $140,000 ($2,000 
multiplied by 70 (100 - 30)).
---------------------------------------------------------------------------
    \131\ For calendar years after 2014, the $2,000 dollar amount, and 
the $3,000 dollar amount referenced herein, are increased by the 
percentage (if any) by which the average per capita premium for health 
insurance coverage in the United States for the preceding calendar year 
(as estimated by the Secretary of Health and Human Services (``HHS'') 
no later than October 1 of the preceding calendar year) exceeds the 
average per capita premium for 2013 (as determined by the Secretary of 
HHS), rounded down to the nearest $10.
---------------------------------------------------------------------------
    Generally, an employee who is offered minimum essential 
coverage under an employer-sponsored plan is not eligible for a 
premium assistance credit or reduced cost-sharing unless the 
coverage is unaffordable or fails to provide minimum 
value.\132\ However, if an employer offers its full-time 
employees and their dependents minimum essential coverage under 
an employer-sponsored plan and at least one full-time employee 
is certified as receiving a premium assistance credit or 
reduced cost-sharing (because the coverage is unaffordable or 
fails to provide minimum value), the employer may be subject to 
an assessable payment of $3,000 (divided by 12 and applied on a 
monthly basis) multiplied by the number of such full-time 
employees. However, the assessable payment in this case is 
capped at the amount that would apply if the employer failed to 
offer its full-time employees and their dependents minimum 
essential coverage. For example, in 2016, Employer A offers 
minimum essential coverage and has 100 full-time employees, 20 
of whom receive premium assistance credits for the entire year. 
The employer's assessable payment before consideration of the 
cap is $3,000 for each full-time employee receiving a credit, 
for a total of $60,000 ($3,000 multiplied by 20). The cap on 
the assessable payment is the amount that would have applied if 
the employer failed to offer coverage, or $140,000 ($2,000 
multiplied by 70 (100 - 30)). In this example, the cap 
therefore does not affect the amount of the assessable payment, 
which remains at $60,000.
---------------------------------------------------------------------------
    \132\ Under section 36B(c)(2)(C), coverage under an employer-
sponsored plan is unaffordable if the employee's share of the premium 
for self-only coverage exceeds 9.5 percent of household income, and the 
coverage fails to provide minimum value if the plan's share of total 
allowed cost of provided benefits is less than 60 percent of such 
costs.
---------------------------------------------------------------------------

TRICARE and veterans health programs

    The Military Health System provides active and retired 
members of the armed forces and their families (including 
certain survivors and former spouses) with medical coverage, 
primarily through the TRICARE program.\133\ The TRICARE program 
offers various health plans, including a managed care option 
and fee-for-service options.
---------------------------------------------------------------------------
    \133\ 110 U.S.C. chapter 55. Under section 5000A(f)(1)(A)(iv), this 
coverage satisfies the requirement under ACA that individuals have 
minimum essential coverage.
---------------------------------------------------------------------------
    The Veterans Health Administration (``VHA''), within the 
Department of Veterans Affairs, provides certain veterans and 
family members (including certain survivors) with medical 
coverage through its health care programs.\134\ Enrolled 
veterans are provided a medical benefits package that covers a 
range of medical care, including inpatient, outpatient, and 
preventive services. Medical coverage for eligible family 
members of veterans is provided through the Civilian Health and 
Medical Program of the Department of Veterans Affairs 
(``CHAMPVA'').\135\
---------------------------------------------------------------------------
    \134\ 138 U.S.C. chapters 17 and 18.
    \135\ Under section 5000A(f)(1)(A)(v), minimum essential coverage 
includes coverage under a VHA health care program, as determined by the 
Secretary of Veterans Affairs, in coordination with the Secretary of 
Health and Human Services and the Secretary. Under Treas. Reg. sec. 
1.5000A-2(b)(1)(v), the medical benefits package that enrolled veterans 
receive and CHAMPVA coverage are minimum essential coverage, as well as 
the comprehensive health care program for certain children of Vietnam 
Veterans and Veterans of covered service in Korea who are suffering 
from spina bifida.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, solely for purposes of determining 
whether an employer is an applicable large employer (and 
possibly subject to an assessable payment), an individual is 
not taken into account as an employee for the month if the 
individual has medical coverage for the month under (1) a 
program for members of the armed forces, including coverage 
under the TRICARE program, or (2) under a VHA health care 
program, as determined by the Secretary of Veterans Affairs, in 
coordination with the Secretary of Health and Human Services 
and the Secretary. The provision affects only the determination 
of applicable large employer status, not whether an employer 
that is an applicable large employer, after application of the 
provision, is subject to an assessable payment or the amount of 
any assessable payment.

                             Effective Date

    The provision applies to months beginning after December 
31, 2013.

 B. Eligibility for Health Savings Account Not Affected by Receipt of 
 Medical Care for a Service-Connected Disability (sec. 4007(b) of the 
                     Act and sec. 223 of the Code)


                              Present Law

    An individual with a high deductible health plan and no 
other health plan (other than a plan that provides certain 
permitted insurance or permitted coverage) is generally 
eligible to make deductible contributions to a health savings 
account (``HSA''), subject to certain limits (an ``eligible 
individual''). HSA contributions made on behalf of an eligible 
individual by an employer are excludible from income and wages 
for employment tax purposes. Eligibility for HSA contributions 
is generally determined monthly, based on the individual's 
status and health plan coverage as of the first day of the 
month. Contributions to an HSA cannot be made once an 
individual is enrolled in Medicare.
    An individual with other coverage in addition to a high 
deductible health plan is still eligible to make HSA 
contributions if such other coverage is permitted insurance or 
permitted coverage. Permitted insurance is: (1) insurance if 
substantially all of the coverage provided under such insurance 
relates to (a) liabilities incurred under worker's compensation 
law, (b) tort liabilities, (c) liabilities relating to 
ownership or use of property (e.g., auto insurance), or (d) 
such other similar liabilities as the Secretary of the Treasury 
may prescribe by regulations; (2) insurance for a specified 
disease or illness; and (3) insurance that provides a fixed 
payment per day (or other period) for hospitalization. 
Permitted coverage is coverage (whether provided through 
insurance or otherwise) for accidents, disability, dental care, 
vision care, or long-term care. Coverage under certain health 
flexible spending arrangements or health reimbursement 
arrangements is also permitted.
    Under IRS guidance, an otherwise eligible individual who is 
eligible for medical benefits under a program of the Department 
of Veterans Affairs (``VA''), but who has not actually received 
such benefits during the preceding three months, is an eligible 
individual.\136\ However, an individual is not eligible to make 
HSA contributions for any month if the individual has received 
VA medical benefits at any time during the previous three 
months unless the benefits are for permissible coverage or 
preventive care.\137\
---------------------------------------------------------------------------
    \136\ Notice 2004-50, 2004-2 C.B. 196, Q&A-5.
    \137\ Notice 2004-50, Q&A-5 Notice 2008-59, 2008-2 C.B. 123, Q&A-
9.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, an individual does not fail to be 
treated as an eligible individual for any period merely because 
the individual receives hospital care or medical services under 
any law administered by the VA for a service-connected 
disability.\138\
---------------------------------------------------------------------------
    \138\ For this purpose, the definition of service-connected 
disability under 38 U.S.C. sec. 101(16) applies.
---------------------------------------------------------------------------
    The provision does not otherwise change the application of 
the present-law rule for individuals eligible for VA medical 
benefits. Thus, an otherwise eligible individual who is 
eligible for VA medical benefits, but who has not actually 
received such benefits during the preceding three months, 
continues to be an eligible individual. However, an individual 
is not eligible to make HSA contributions for any month if the 
individual has received VA medical benefits at any time during 
the previous three months unless the benefits are for 
permissible coverage or preventive care or for a service-
connected disability.

                             Effective Date

    The provision applies to months beginning after December 
31, 2015.

 PART EIGHT: AIRPORT AND AIRWAY EXTENSION ACT OF 2015 (PUBLIC LAW 114-
                               55) \139\
---------------------------------------------------------------------------

    \139\ H.R. 3614. The House passed H.R. 3614 on September 28, 2015. 
The Senate passed the bill without amendment on September 29, 2015. The 
President signed the bill on September 30, 2015.
---------------------------------------------------------------------------

A. Extension of Spending Authority and Taxes Funding Airport and Airway 
 Trust Fund (secs. 201 and 202 of the Act and secs. 4083, 4801, 4261, 
                      4271, and 9502 of the Code)

                              Present Law

Taxes dedicated to the Airport and Airway Trust Fund
    Excise taxes are imposed on amounts paid for commercial air 
passenger and freight transportation and on fuels used in 
commercial and noncommercial (i.e., transportation that is not 
``for hire'') aviation to fund the Airport and Airway Trust 
Fund.\140\ The present aviation excise taxes and rates are as 
follows:
---------------------------------------------------------------------------
    \140\ Air transportation through U.S. airspace that neither lands 
in nor takes off from a point in the United States (or the 225-mile 
zone, described below) is exempt from the aviation excise taxes, but 
the transportation provider is subject to certain ``overflight fees'' 
imposed by the Federal Aviation Administration pursuant to 
Congressional authorization.
    \141\ 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'')). Special rules 
apply to air transportation between the continental United States and 
Alaska or Hawaii and between Alaska and Hawaii. The portion of such 
transportation that is not within the United States (e.g., the portion 
over the Pacific Ocean) is not subject to the 7.5-percent domestic air 
passenger excise tax. In addition to this pro-rated ad valorem tax, an 
$8.90 (2015) international tax rate for the excluded portion of the 
travel is imposed. The domestic flight segment component of tax applies 
under the same rules as for flights within the continental United 
States. Further, transportation within Alaska or Hawaii is taxed in the 
same manner as domestic transportation within the continental United 
States.
    \142\ The international arrival and departure tax rate is adjusted 
annually for inflation (measured by changes in the CPI).

------------------------------------------------------------------------
          Tax (and Code section)                      Tax Rates
------------------------------------------------------------------------
Domestic air passengers (sec. 4261).......  7.5 percent of fare, plus
                                             $4.00 (2015) per domestic
                                             flight segment generally
                                             \141\
International air passengers (sec. 4261)..  $17.70 (2015) per arrival or
                                             departure \142\
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 (sec.    6.25 percent of amount
 4271).                                      charged for domestic
                                             transportation; no tax on
                                             international cargo
                                             transportation
------------------------------------------------------------------------


------------------------------------------------------------------------
          Tax (and Code section)                      Tax Rates
------------------------------------------------------------------------
Aviation fuels (sec. 4081): \143\
    Commercial aviation...................  4.3 cents per gallon
    Non-commercial (general) aviation:      ............................
        Aviation gasoline.................  19.3 cents per gallon
        Jet fuel..........................  21.8 cents per gallon
    Fractional aircraft fuel surtax (sec.   14.1 cents per gallon
     4043).
------------------------------------------------------------------------

    The Airport and Airway Trust Fund excise taxes (except for 
4.3 cents per gallon of the taxes on aviation fuels and the 
14.1 cents per gallon fractional aircraft fuel surtax) are 
scheduled to expire after September 30, 2015. The 4.3-cents-
per-gallon fuels tax rate is permanent.
---------------------------------------------------------------------------
    \143\ Like most other taxable motor fuels, aviation fuels are 
subject to an additional 0.1-cent-per-gallon excise tax to fund the 
LUST Trust Fund.
---------------------------------------------------------------------------
    With respect to fractional aircraft, the exemption from the 
excise tax on commercial transportation for fractional aircraft 
is scheduled to expire after September 30, 2015.\144\ The 
fractional aircraft fuel surtax expires after September 30, 
2021.
---------------------------------------------------------------------------
    \144\ Sec. 4261(i).
---------------------------------------------------------------------------
Airport and Airway Trust Fund expenditure provisions
    The Airport and Airway Trust Fund was established in 1970 
to finance a major portion of national aviation programs 
(previously funded entirely with General Fund revenues). 
Operation of the Trust Fund is governed by parallel provisions 
of the Code and authorizing statutes.\145\ The Code provisions 
govern deposit of revenues into the Trust Fund and approve 
expenditure purposes in authorizing statutes as in effect on 
the date of enactment of the latest authorizing Act. The 
authorizing Acts provide for specific Trust Fund expenditure 
programs.
---------------------------------------------------------------------------
    \145\ Sec. 9502 and 49 U.S.C. sec. 48101, et. seq.
---------------------------------------------------------------------------
    No expenditures are permitted to be made from the Airport 
and Airway Trust Fund after September 30, 2015. 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 FAA 
Modernization and Reform Act of 2012; therefore, the Code must 
be amended in order to authorize new Airport and Airway Trust 
Fund expenditure purposes.\146\ The Code contains a specific 
enforcement provision to prevent expenditure of Trust Fund 
monies for purposes not authorized under Code section 
9502.\147\ This provision provides that, should such unapproved 
expenditures occur, no further aviation excise tax receipts 
will be transferred to the Trust Fund. Rather, the aviation 
taxes will continue to be imposed, but the receipts will be 
retained in the General Fund.
---------------------------------------------------------------------------
    \146\ Sec. 9502(d).
    \147\ Sec. 9502(e)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act extends through March 31, 2016, the taxes, 
exemptions, and expenditure authority that were scheduled to 
expire on September 30, 2015.

                             Effective Date

    The provision is effective on the date of enactment 
(September 30, 2015).

  PART NINE: SURFACE TRANSPORTATION EXTENSION ACT OF 2015 (PUBLIC LAW 
                             114-73) \148\
---------------------------------------------------------------------------

    \148\ H.R. 3819. The House passed H.R. 3819 on October 27, 2015. 
The bill passed the Senate without amendment on October 28, 2015. The 
President signed the bill on October 29, 2015.
---------------------------------------------------------------------------

A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of 
          the Act and secs. 9503, 9504, and 9508 of the Code)

                              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 and Leaking Underground Storage Tank Trust 
Fund) through October 29, 2015, for purposes provided in 
specified authorizing legislation as in effect on the date of 
enactment.

                        Explanation of Provision

    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund and Leaking 
Underground Storage Tank Trust Fund) through November 20, 2015.

                             Effective Date

    The provision is effective on date of enactment (October 
29, 2015).

   PART TEN: BIPARTISAN BUDGET ACT OF 2015 (PUBLIC LAW 114-74) \149\
---------------------------------------------------------------------------

    \149\ H.R. 1314. The House Ways and Means Committee reported H.R. 
1314 on April 13, 2015 (H.R. Rep. No. 114-67). The House passed the 
bill on April 15, 2015. The Senate passed the bill with an amendment on 
May 22, 2015. The House agreed to an amendment to the Senate amendment 
on October 28, 2015. The Senate agreed to the House amendment on 
October 30, 2015. The President signed the bill on November 2, 2015.
---------------------------------------------------------------------------

                           TITLE V--PENSIONS

  A. Mortality Tables and Extension of Current Funding Stabilization 
Percentages to 2018, 2019, and 2020 (secs. 503-504 of the Act, sec. 430 
          of the Code, and secs. 101(f) and 303 of ERISA)\150\
---------------------------------------------------------------------------

    \150\ Sections 501-502 of the Act change the premiums required to 
be paid to the Pension Benefit Guaranty Corporation with respect to 
single-employer defined benefit plans under sections 4006-4007 of the 
Employee Retirement Income Security Act of 1974 (``ERISA'').
---------------------------------------------------------------------------

                              Present Law

Minimum funding rules
    A defined benefit plan maintained by a single employer is 
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.\151\ The minimum funding 
rules for single-employer defined benefit plans were 
substantially revised by the Pension Protection Act of 2006 
(``PPA'').\152\
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    \151\ Secs. 412 and 430; ERISA secs. 302-303. For purposes of 
whether a plan is maintained by a single employer, certain related 
entities, such as the members of a controlled group, are treated as a 
single employer. Different funding rules apply to multiemployer and 
certain multiple-employer defined benefit plans, which are types of 
plans maintained by two or more unrelated employers. 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 
generally applies if the minimum funding requirements are not 
satisfied.
    \152\ 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. Subsequent changes were made by the Worker, 
Retiree, and Employer Recovery Act of 2008 (``WRERA''), Pub. L. No. 
110-458; the Preservation of Access to Care for Medicare Beneficiaries 
and Pension Relief Act of 2010 (``PRA 2010''), Pub. L. No. 111-192; and 
the Moving Ahead for Progress in the 21st Century Act, Pub. L. No. 112-
141, and the Highway and Transportation Funding Act of 2014, Pub. L. 
No. 113-159, discussed further herein.
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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''),\153\ 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.
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    \153\ 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 plan 
contributions 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.
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    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).\154\ 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.
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    \154\ 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.
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            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.\155\ 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).\156\
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    \155\ 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.
    \156\ 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.
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    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 (that is, 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.\157\ 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.
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    \157\ Any amortization base relating to a funding waiver for a 
previous year is also eliminated.
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Mortality tables

            In general
    In determining the present value of benefits for purposes 
of a plan's target normal cost and funding target, specific 
mortality tables prescribed by the IRS generally must be used. 
\158\ These tables are to be based on the actual experience of 
pension plans and projected trends in such experience. In 
prescribing tables, the IRS is required to take into account 
results of available independent studies of mortality of 
individuals covered by pension plans. In addition, the IRS is 
required (at least every 10 years) to revise any table in 
effect to reflect the actual experience of pension plans and 
projected trends in such experience. The currently applicable 
mortality tables are specified in regulations, as updated in 
subsequent IRS guidance.\159\
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    \158\ Sec. 430(h)(3) and ERISA sec. 303(h)(3). Separate mortality 
tables are required to be used with respect to disabled participants.
    \159\ Treas. Reg. sec. 1.430(h)(3)-2, as updated by Notice 2008-85, 
2008-42 I.R.B. 905, for valuation dates occurring in 2009-2013, Notice 
2013-49, 2013-32 I.R.B. 127, for valuation dates occurring in calendar 
years 2014 and 2015, and Notice 2015-53, 2015-33 I.R.B. 190, for 
valuation dates occurring in calendar year 2016. These tables are based 
on the tables contained in a report issued by the Society of Actuaries 
in July 2000, the RP-2000 Mortality Tables Report, after a study of 
mortality experience for retirement plan participants. Notices 2013-49 
and 2015-53 discuss the Society of Actuaries' recent studies and 
reports on mortality experience for retirement plan participants and 
the expectation that the Treasury Department and IRS will issue 
proposed regulations providing updated mortality tables.
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            Substitute mortality table
    In some cases, a separate mortality table (a ``substitute'' 
mortality table) may be used upon request of the plan sponsor 
and approval by the IRS.\160\ Two requirements must be met in 
order for a substitute mortality table to be used: (1) the 
table must reflect the actual experience of the pension plans 
maintained by the plan sponsor and projected trends in general 
mortality experience, and (2) there must be a sufficient number 
of plan participants, and the pension plans must have been 
maintained for a sufficient period of time, to have credible 
information necessary for purposes of requirement (1). In 
addition, a substitute mortality table generally may not be 
used for any plan unless (1) a separate mortality table is 
established and used for each other plan maintained by the plan 
sponsor and, if the plan sponsor is a member of a controlled 
group, each member of the controlled group, and (2) the 
requirements for using a substitute mortality table are met 
with respect to the mortality table established for each plan, 
taking into account only the participants of that plan, the 
time that plan has been in existence, and the actual experience 
of that plan.
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    \160\ Sec. 430(h)(3)(C) and ERISA sec. 303(h)(3)(C).
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    In general, a substitute mortality table may be used during 
the period of consecutive year plan years (not to exceed 10) 
specified in the plan sponsor's request. However, a substitute 
mortality table ceases to be in effect as of the earlier of (1) 
the date on which there is a significant change in the 
participants in the plan by reason of a plan spinoff or merger 
or otherwise, or (2) the date on which the plan actuary 
determines that the table does not meet the requirements for 
being used, as described above.
    Treasury regulations and IRS guidance provide details as to 
the requirements for a substitute mortality table and the 
procedure for requesting approval to use a substitute mortality 
table.\161\
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    \161\ Treas. Reg. sec. 1.430(h)(3)-2; Rev. Proc. 2008-62, 2008-2 
C.B. 935, superseding Rev. Proc. 2007-37, 2007-1 C.B. 1433.
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Interest rate used to determine target normal cost and funding target

    The minimum funding rules for single-employer plans also 
specify the interest rates 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 generally 
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.\162\
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    \162\ Sec. 430(h)(2) and ERISA sec. 303(h)(2).
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    The first segment rate applies to benefits reasonably 
determined to be payable during the five-year period beginning 
on the plan's annual valuation date;\163\ 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 after the end of that 15-
year period. Under the funding rules as enacted in PPA (``PPA'' 
rules), each segment rate is a single interest rate determined 
monthly by the Secretary of the Treasury, on the basis of a 
corporate bond yield curve, taking into account only the 
portion of the yield curve based on corporate bonds maturing 
during the particular segment rate period. 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.\164\ The 
Internal Revenue Service (``IRS'') publishes the segment rates 
each month.
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    \163\ Subject to an exception for small plans with no more than 100 
participants, the annual valuation date for a plan must be the first 
day of the plan year.
    \164\ Solely for purposes of determining minimum required 
contributions, in lieu of the segment rates, 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 (that is, 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.
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    Under the Moving Ahead for Progress in the 21st Century Act 
(``MAP-21'') and the Highway and Transportation Funding Act of 
2014 (``2014 Highway Act''), for plan years beginning after 
December 31, 2011, a segment rate determined under the PPA 
rules is adjusted if it falls outside a specified percentage 
range of the average segment rates for a preceding period. In 
particular, if a segment rate determined under the PPA rules is 
less than the applicable minimum percentage in the specified 
range, the segment rate is adjusted upward to match the minimum 
percentage. If a segment rate determined under the PPA rules is 
more than the applicable maximum percentage in the specified 
range, the segment rate is adjusted downward to match the 
maximum percentage. For this purpose, an average segment rate 
is the average of the segment rates determined under the PPA 
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 PPA rules are not available. The Secretary 
is directed to publish the average segment rates each month.
    The specified percentage range (that is, the range from the 
applicable minimum percentage to the applicable maximum 
percentage) for a plan year is determined by reference to the 
calendar year in which the plan year begins as follows:
           90 percent to 110 percent for 2012 through 
        2017,
           85 percent to 115 percent for 2018,
           80 percent to 120 percent for 2019,
           75 percent to 125 percent for 2020, and
           70 percent to 130 percent for 2021 or later.

Annual funding notice

    The plan administrator of a single-employer defined benefit 
plan must provide an annual funding notice to each participant 
and beneficiary, each labor organization representing 
participants or beneficiaries, and the Pension Benefit Guaranty 
Corporation (``PBGC'').\165\ In addition to the information 
required to be provided in all funding notices, in the case of 
a single-employer defined benefit plan, the notice must include 
(1) the plan's funding target attainment percentage for the 
plan year to which the notice relates and the two preceding 
plan years, (2) the value of the plan's assets and benefit 
liabilities (that is, the present value of benefits owed under 
the plan) for the plan year and the two preceding years, 
determined in the same manner as under the funding rules, and 
(3) the value of the plan's assets and benefit liabilities as 
of the last day of the plan year to which the notice relates, 
determined using the fair market value of plan assets (rather 
than value determined under the funding rules) and, in 
computing benefit liabilities, the interest rates used in 
computing variable-rate PBGC premiums.\166\
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    \165\ ERISA sec. 101(f). Annual funding notice requirements, with 
some differences, apply also to multiemployer and multiple-employer 
plans.
    \166\ In applying the funding rules, the value of plan assets may 
be determined on the basis of average fair market values over a period 
of up to 24 months. PBGC variable-rate premiums are based on a plan's 
unfunded vested benefit liabilities, computed using the first, second 
and third segment rates as determined under the PPA rules (without the 
adjustments applicable for funding purposes), but based on a monthly 
corporate bond yield curve, rather than a yield curve reflecting 
average yields for a 24-month period.
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    Additional information must be included in a single-
employer plan's 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, 2020, 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, (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. Specifically, the 
notice must include (1) a statement that MAP-21 and the 2014 
Highway Act 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 two-year 
average, (2) a statement that, as a result of MAP-21 and the 
2014 Highway Act, the plan sponsor may contribute less money to 
the plan when interest rates are at historical lows, and (3) 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.

                        Explanation of Provision


Mortality tables

    The provision relates to the requirement that there must be 
a sufficient number of plan participants, and the pension plans 
must have been maintained for a sufficient period of time, to 
have credible information, in order for a substitute mortality 
table to be used. Under the provision, the determination of 
whether plans have credible information is to be made in 
accordance with established actuarial credibility theory. The 
provision specifies that this standard permits the use of 
tables that reflect adjustments to the generally applicable 
mortality tables prescribed by the IRS if the adjustments are 
based on the actual experience of the pension plans maintained 
by the plan sponsor and projected trends in general mortality 
experience.\167\
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    \167\ The provision specifies also that this standard is materially 
different from rules relating to substitute mortality tables in effect 
on the date of enactment of the provision, including Rev. Proc. 2007-
37.
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Applicable minimum and maximum percentages and annual funding notice

    The provision revises the specified percentage ranges (that 
is, the range from the applicable minimum percentage to the 
applicable maximum percentage of average segment rates) for 
determining whether a segment rate must be adjusted upward or 
downward. Under the provision, the specified percentage range 
for a plan year is determined by reference to the calendar year 
in which the plan year begins as follows:
           90 percent to 110 percent for 2012 through 
        2020,
           85 percent to 115 percent for 2021,
           80 percent to 120 percent for 2022,
           75 percent to 125 percent for 2023, and
           70 percent to 130 percent for 2024 or later.
    In addition, for purposes of the additional information 
that must be provided in a funding notice for an applicable 
plan year, an applicable plan year includes any plan year that 
begins after December 31, 2011, and before January 1, 2023, and 
that otherwise meets the definition of applicable plan year.

                             Effective Date

    The provision applies to plan years beginning after 
December 31, 2015.

         TITLE XI--REVENUE PROVISIONS RELATED TO TAX COMPLIANCE


 A. Partnership Audits and Adjustments (sec. 1101 of the Act and secs. 
                         6221-6241 of the Code)


                              Present Law


Reporting requirements of partnerships generally

    For Federal income tax purposes, a partnership is not a 
taxable entity. Instead, a partnership is a conduit and the 
items of partnership income, deduction, gain, loss, and credit 
are taken into account on the partners' income tax returns. A 
partnership is required to file an annual information return 
setting forth items of partnership information necessary to 
carry out the income tax (Form 1065).\168\ A partnership is 
also required to furnish to each partner a statement of such 
partnership information as is relevant to the partner's income 
tax (Schedule K-1).\169\ For taxable years beginning after 
December 31, 2015, partnership returns and partner statements 
are generally due by the 15th day of the third month after the 
end of the partnership taxable year.\170\
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    \168\ Sec. 6031(a).
    \169\ Sec. 6031(b).
    \170\ See sec. 6072(b) as amended by Pub. L. No. 114-41, sec. 2006 
(114th Congress). For taxable years beginning after December 31, 2015, 
a partnership can request a six-month extension of time to file. See 
also Department of the Treasury, Internal Revenue Service, 2011 
Instructions for Form 1065, U.S. Return of Partnership Income, p. 4.
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Rules relating to audit and adjustment procedures for partnerships

    There are three sets of rules for tax audits and 
adjustments for partners and partnerships. First, for 
partnerships with more than 100 partners and that so elect, the 
electing large partnership rules enacted in 1997 apply.\171\ 
Relatively few partnerships have made this election. Second, 
for partnerships with more than 10 partners or with 
passthroughs as partners (and that are not electing large 
partnerships), the TEFRA rules enacted in 1982 apply.\172\ 
Under these two sets of rules, partnership items generally are 
determined at the partnership level under unified procedures. 
Third, for partnerships with 10 or fewer partners that have not 
elected the TEFRA audit rules, audit and adjustment rules 
applicable generally to taxpayers subject to the Federal income 
tax apply.\173\
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    \171\ Secs. 6240-6255.
    \172\ Secs. 6221-6234. TEFRA refers to the Tax Equity and Fiscal 
Responsibility Act of 1982 (Pub. L. No. 97-248), in which these rules 
were enacted.
    \173\ Secs. 6231 and 6201 et seq.
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    For a partnership with few partners that does not elect to 
be governed by TEFRA rules, the tax treatment of an adjustment 
to a partnership's items of income, gain, loss, deduction, or 
credit is determined for each partner in separate proceedings, 
both administrative and judicial. These are known as deficiency 
proceedings. Adjustments to items of income, gains, losses, 
deductions, or credits of the partnership generally are made in 
separate actions for each partner. Particularly in the case of 
a partnership with partners in different locations, this may 
result in separate judicial determinations in different courts 
that are potentially subject to different appellate 
jurisdiction. Prior to the 1982 enactment of TEFRA, these had 
been the rules for all adjustments with respect to partners, 
regardless of the number of partners in the partnership.

TEFRA rules

            Unified rules
    TEFRA established unified rules. These rules require the 
tax treatment of all ``partnership items'' to be determined at 
the partnership, rather than the partner, level. Partnership 
items are those items that are more appropriately determined at 
the partnership level than at the partner level, as provided by 
regulations.\174\ The IRS may challenge the reporting position 
of a partnership by conducting a single administrative 
proceeding to resolve issues with respect to all partners.
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    \174\ Sec. 6231(a)(3). Any item that is affected by a partnership 
item (for example, on the partner's return) is an ``affected item.'' 
Affected items of a partner are subject to determination at the partner 
level. Sec. 6231(a)(5).
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    The rationale stated in 1982 for adding new rules for 
partnerships was that ``[d]etermination of the tax liability of 
partners resulted in administrative problems under prior law 
due to the fragmented nature of such determinations. These 
problems became excessively burdensome as partnership 
syndications have developed and grown in recent years. Large 
partnerships with partners in many audit jurisdictions result 
in the statute of limitations expiring with respect to some 
partners while other partners are required to pay additional 
taxes. Where there are tiered partnerships, identifying the 
taxpayer is difficult.'' \175\
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    \175\ See Joint Committee on Taxation, General Explanation of the 
Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 
1982 (JCS-38-82), December 31, 1982, p. 268. Additional reasons for the 
1982 change mentioned include the problems of duplication of 
administrative and judicial effort, inconsistent results, difficulty of 
reaching settlement, and inadequacy of prior-law filing and 
recordkeeping requirements for foreign partnerships with U.S. partners.
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    The TEFRA rules do not, however, change the process for 
collecting underpayments with respect to deficiencies at the 
partner (not the partnership) level, though a settlement 
agreement with respect to partnership items binds all parties 
to the settlement.\176\
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    \176\ Sec. 6224(c). The IRS has set forth procedures for entering 
into such partnership audit settlement agreements, which are summarized 
in Part F of Chief Counsel Notice 2009-27, ``Frequently Asked Questions 
Regarding The Unified Partnership Audit And Litigation Procedures Set 
Forth In Sections 6221-6234,'' IRS CC Notice 2009-027, August 21, 2009.
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            Tax Matters Partner
    The TEFRA rules establish the Tax Matters Partner as the 
primary representative of a partnership in dealings with the 
IRS. The Tax Matters Partner is a general partner designated by 
the partnership or, in the absence of designation, the general 
partner with the largest profits interest at the close of the 
taxable year. If no Tax Matters Partner is designated, and it 
is impractical to apply the largest profits interest rule, the 
IRS may select any partner as the Tax Matters Partner.
            Notice requirements: notice required to partners separately
    The IRS generally is required to give notice of the 
beginning of partnership-level administrative proceedings and 
any resulting administrative adjustment to all partners whose 
names and addresses are furnished to the IRS. For partnerships 
with more than 100 partners, however, the IRS generally is not 
required to give notice to any partner whose profits interest 
is less than one percent.
            Partners must report items consistently with the 
                    partnership
    Partners are required to report partnership items 
consistently with the partnership's reporting, unless the 
partner notifies the IRS of inconsistent treatment. If a 
partner fails to notify the IRS of inconsistent treatment, the 
IRS can assess that partner under its math error authority. 
That is, the IRS may make a computational adjustment and 
immediately assess any additional tax that results.\177\ 
Additional tax attributable to an adjustment of a partnership 
item is assessed against each of the taxpayers who were 
partners in the year in which the understatement of tax 
liability arose.
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    \177\ Secs. 6222 and 6230(b).
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            Partners' limited ability to challenge partnership 
                    treatment
    Partners have rights to participate in administrative 
proceedings at the partnership level, and can request an 
administrative adjustment or a refund for the partner's own 
separate tax liability. To the extent that a settlement is 
reached with respect to partnership items, all partners are 
entitled to consistent treatment.\178\
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    \178\ Sec. 6224.
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            Statute of limitations
    Absent an agreement to extend the statute of limitations, 
the IRS generally cannot adjust a partnership item for a 
partnership taxable year if more than three years have elapsed 
since the later of the filing of the partnership return, or the 
last day for the filing of the partnership return (without 
extensions). The statute of limitations is extended in 
specified circumstances such as in the case of a false return, 
a substantial omission of income, or no return.
            One-year period
    If the administrative adjustment is timely made within the 
limitations period described above, the tax resulting from that 
adjustment, as well as the tax attributable to affected items, 
including related penalties or additions to tax, must be timely 
assessed. The period in which the tax must be assessed against 
the partners does not expire before one year following the date 
on which the final partnership administrative adjustment may no 
longer be petitioned to the U.S. Tax Court or, if a petition 
was filed, a decision of the court with respect to such 
petition is final.\179\
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    \179\ Sec. 6229(d) and (g).
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            Adjudication of disputes concerning partnership items
    After the IRS makes an administrative adjustment, the Tax 
Matters Partner (and, in limited circumstances, certain other 
partners) may file a petition for readjustment of partnership 
items in the Tax Court, the district court in which the 
partnership's principal place of business is located, or the 
Court of Federal Claims.

Electing large partnership audit rules

            Definition of electing large partnership
    In 1997, an additional audit system was enacted for 
electing large partnerships.\180\ The 1997 legislation also 
enacted specific simplified reporting rules for electing large 
partnerships.\181\ The provisions define an electing large 
partnership as any partnership that elects to be subject to the 
specified reporting and audit rules, if the number of partners 
in the partnership's preceding taxable year is 100 or 
more.\182\
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    \180\ Secs. 6240-6255, enacted by the Taxpayer Relief Act of 1997, 
Pub. L. No. 105-34.
    \181\ Secs. 771-777.
    \182\ Sec. 775.
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    The rationale stated in 1997 for adding new audit rules for 
large partnerships was that ``[a]udit procedures for large 
partnerships are inefficient and more complex than those for 
other large entities. The IRS must assess any deficiency 
arising from a partnership audit against a large number of 
partners, many of whom cannot easily be located and some of 
whom are no longer partners. In addition, audit procedures are 
cumbersome and can be complicated further by the intervention 
of partners acting individually.'' \183\
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    \183\ See Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in 1997 (JCS-23-97), December 17, 1997, p. 363.
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            Unified rules
    As under the TEFRA partnership rules, electing large 
partnerships and their partners are subject to unified audit 
rules. Thus, the tax treatment of partnership items is 
determined at the partnership, rather than the partner, level.
            Partnership representative
    Each electing large partnership is required to designate a 
partner or other person to act on its behalf. If an electing 
large partnership fails to designate such a person, the IRS is 
permitted to designate any one of the partners as the person 
authorized to act on the partnership's behalf.
            Notice requirements: separate partner notices not required
    Unlike the TEFRA partnership audit rules, the IRS is not 
required to give notice to individual partners of the 
commencement of an administrative proceeding or of a final 
adjustment. Instead, the IRS is authorized to send notice of a 
partnership adjustment to the partnership itself by certified 
or registered mail. The IRS may give proper notice by mailing 
the notice to the last known address of the partnership, even 
if the partnership had terminated its existence.
            Partners must report items consistently with the 
                    partnership
    Under the electing large partnership audit rules, a partner 
is not permitted to report any partnership items inconsistently 
with the partnership return, even if the partner notifies the 
IRS of the inconsistency. The IRS may adjust a partnership item 
that was reported inconsistently by a partner and immediately 
assess any additional tax without first auditing the 
partnership.\184\
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    \184\ Sec. 6241(b).
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            Adjustments flow through to persons that are partners in 
                    the year in which the adjustment takes effect
    Unlike the TEFRA partnership audit rules, however, 
partnership adjustments generally flow through to the partners 
for the year in which the adjustment takes effect.\185\ Thus, 
the current-year partners' share of current-year partnership 
items of income, gains, losses, deductions, or credits are 
adjusted to reflect partnership adjustments that take effect in 
that year. The adjustments generally do not affect prior-year 
returns of any partners (except in the case of changes to any 
partner's distributive shares).
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    \185\ Sec. 6242.
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            Partnership's payment of imputed underpayment is permitted
    In lieu of passing through an adjustment to its partners, 
the partnership may elect to pay an imputed underpayment. The 
imputed underpayment generally is calculated by netting the 
adjustments to the income, gain, loss, or deductions of the 
partnership and multiplying that amount by the highest Federal 
income tax rate (whether individual or corporate). Adjustments 
to credits are taken into account as increases or decreases in 
the amount of tax. A partner may not file a claim for credit or 
refund of his allocable share of the payment. A partnership may 
make this election only if it meets requirements set forth in 
Treasury regulations designed to ensure payment (for example, 
in the case of a foreign partnership).
    Regardless of whether a partnership adjustment passes 
through to the partners, an adjustment must be offset if it 
requires another adjustment in a year that is after the 
adjusted year and before the year the adjustment that was made 
takes effect.
    For example, assume that an electing large partnership 
expenses a $1,000 item in year one. However, on audit in year 
four, it is determined that the item should have been 
capitalized and amortized ratably over 10 years rather than 
deducted in full in year one. The $900 adjustment for the 
improper deduction ($1,000 minus the year one amortization of 
$100) is offset by $100 of adjustments for amortization 
deductions in each of years two and three. The adjustment in 
year four is $700 (that is, $1,000 minus $300, the sum of the 
first three years' ratable amortization of $100 per year), 
apart from any interest or penalty. The year four partners are 
required to include an additional $700 in income for that year. 
The partnership ratably amortizes the $700 in years four to 10.
            Partnership, not partners separately, is liable for any 
                    penalties and interest
    The partnership, rather than the partners individually, 
generally is liable for any interest and penalties that result 
from a partnership adjustment. Interest is computed for the 
period beginning on the return due date for the adjusted year 
and ending on the earlier of the return due date for the 
partnership taxable year in which the adjustment takes effect 
or the date the partnership pays the imputed underpayment. 
Thus, in the above example, the partnership is liable for four 
years' worth of interest (on a declining principal amount).
    Penalties (such as the accuracy and fraud penalties) are 
determined on a year-by-year basis (without offsets) based on 
an imputed underpayment. All accuracy penalty criteria and 
waiver criteria (such as reasonable cause or substantial 
authority) are determined as if the partnership were a taxable 
individual. Accuracy and fraud penalties are assessed and 
accrue interest in the same manner as if asserted against a 
taxable individual.
    Any payment (for Federal income taxes, interest, or 
penalties) that an electing large partnership is required to 
make is nondeductible.
    If a partnership ceases to exist before a partnership 
adjustment takes effect, the former partners are required to 
take the adjustment into account, as provided by regulations. 
Regulations are also authorized to prevent abuse and to enforce 
efficiently the audit rules in circumstances that present 
special enforcement considerations (such as partnership 
bankruptcy).
            Partners cannot request refunds separately
    The IRS may challenge the reporting position of a 
partnership by conducting a single administrative proceeding to 
resolve the issue with respect to all partners. Unlike the 
TEFRA partnership audit rules, however, partners have no right 
individually to participate in settlement conferences or to 
request a refund.
            Timing of Schedules K-1 to partners
    An electing large partnership is required to furnish copies 
of information returns (Schedule K-1, Partner's Share of 
Income, Deductions, Credits, etc.) to partners by March 15 
following the close of the partnership's taxable year (often a 
calendar year).\186\
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    \186\ Sec. 6031(b).
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            Statute of limitations
    Absent an agreement to extend the statute of limitations, 
the IRS generally cannot adjust a partnership item for a 
partnership taxable year if more than three years have elapsed 
since the later of the filing of the partnership return or the 
last day for the filing of the partnership return. The statute 
of limitations is extended in specified circumstances such as 
in the case of a false return, a substantial omission of 
income, or no return.
            Adjudication of disputes concerning partnership items
    As under the TEFRA rules, a partnership adjustment can be 
challenged in the Tax Court, the district court in which the 
partnership's principal place of business is located, or the 
Court of Federal Claims. However, only the partnership, and not 
partners individually, can petition for a readjustment of 
partnership items.
    If a petition for readjustment of partnership items is 
filed by the partnership, the court with which the petition is 
filed has jurisdiction to determine the tax treatment of all 
partnership items of the partnership for the partnership 
taxable year to which the notice of partnership adjustment 
relates, and the proper allocation of such items among the 
partners. Thus, the court's jurisdiction is not limited to the 
items adjusted in the notice.

                        Explanation of Provision


Repeal of TEFRA and electing large partnership rules

    Generally for returns filed for partnership taxable years 
beginning after 2017, the provision repeals the tax reporting 
provisions and voluntary centralized audit procedures for 
electing large partnerships, as well as the TEFRA partnership 
audit and adjustment rules. In place of the repealed 
procedures, a centralized system for audit, adjustment, 
assessment, and collection of tax applies to all partnerships, 
except those eligible partnerships that have filed a valid 
election out. Electing out of the centralized system leaves 
applicable the present-law rules for deficiency proceedings. 
The centralized system is located in subchapter C of chapter 63 
of the Code.

                               In General


Determination at partnership level

    Under the centralized system, the audit of a partnership 
takes place at the partnership level. Any adjustment to items 
of income, gain, loss, deduction, or credit of a partnership 
for a partnership taxable year, and any partner's distributive 
share thereof, generally are determined at the partnership 
level.\187\ Any tax attributable to these items generally is 
assessed and collected at the partnership level. The 
applicability of any penalty, addition to tax, or additional 
amount that relates to an adjustment of any item of income, 
gain, loss, deduction, or credit of a partnership for a 
partnership taxable year or to any partner's distributive share 
thereof is determined at the partnership level. Unlike prior 
law, distinctions between partnership items and affected items 
are no longer made. An underpayment of tax determined as a 
result of an examination of a taxable year is imputed to the 
year during which the adjustment is finally determined, and 
generally is assessed against and collected from the 
partnership with respect to that year rather than the reviewed 
year.
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    \187\ Sec. 6221(a).
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    Under the centralized system, a partnership may seek 
modification of the imputed underpayment amount by providing 
the Secretary with specified information about the tax status 
of partners and about the nature and amount of items of income 
or gain, by means of reviewed-year partners filing amended 
returns with payment, or on the basis of other factors in 
regulations or guidance. A partnership may elect an alternative 
to partnership payment of the imputed underpayment in which 
each reviewed-year partner is furnished a statement of the 
partner's share of the adjustments (similar to Schedule K-1) 
and each such reviewed-year partner increases its tax for the 
year the statement is furnished. A partnership may file an 
administrative adjustment request.
    Rules are provided relating to statutes of limitation and 
other applicable time periods, interest and penalties, judicial 
review, and other aspects of the centralized system under the 
provision.

Election out

    The centralized system is applicable to any partnership 
unless it meets eligibility requirements and has made a valid 
election out for a taxable year.\188\
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    \188\ Sec. 6221(b).
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            100 or fewer statements
    A partnership may elect out of the centralized system (and 
it and its partners are governed by the present-law deficiency 
proceedings) for a partnership taxable year if it meets 
eligibility requirements. One of the eligibility requirements 
is that for the taxable year, the partnership is required to 
furnish 100 or fewer statements under section 6031(b) 
(Schedules K-1) with respect to its partners.
    A further eligibility requirement for a partnership to make 
the election is that each of its partners is an individual, a 
deceased partner's estate, a C corporation, a foreign entity 
that would be required to be treated as a C corporation if it 
were a domestic entity, or an S corporation (provided special 
rules are met). A partnership with a foreign entity as a 
partner can meet this eligibility requirement if, under the 
rules of section 7701, the foreign entity would be taxable as a 
C corporation if it were domestic; that is, the foreign entity 
has elected to be, or is, treated as a per se corporation under 
the check-the-box regulatory rules under section 7701.\189\ A C 
corporation partner that is a regulated investment company 
(``RIC'') or a real estate investment trust (``REIT'') does not 
prevent the partnership from being able to elect out, provided 
the applicable requirements are met.
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    \189\ See Treas. Reg. sec. 301.7701-2 and -3.
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            Example
    For example, a partnership is formed to conduct a joint 
venture between two corporations, X and Y. X's domestic C 
corporation subsidiary, W, owns a 50-percent interest in the 
partnership, and Y's domestic C corporation subsidiary, Z, owns 
a 50-percent interest in the partnership. The partnership is 
required to furnish two statements (Schedules K-1), one to W 
and one to Z. The partnership is eligible to elect out of the 
centralized system for the taxable year, provided that the 
partnership meets the requirements (described below) as to the 
time and manner of electing out, including (among other 
requirements) disclosing to the Secretary the names and 
employer identification numbers of W and Z.
            Time and manner of election out
    The election is to be made with a timely-filed return of 
the partnership taxable year to which the election relates; the 
election is valid only for that year. The election must include 
the name and taxpayer identification number of each partner of 
the partnership in the manner prescribed by the Secretary. The 
partnership must notify each of its partners of the election in 
the manner prescribed by the Secretary.
            S corporation partners
    For a partnership with a partner that is an S corporation 
to elect out, the partnership is required to include with its 
election (in the manner prescribed by the Secretary) a 
disclosure of the name and taxpayer identification number of 
each person with respect to whom the S corporation must furnish 
a statement under section 6037(b) for the S corporation's 
taxable year ending with or within the partnership's taxable 
year for which the election is made. This requirement is met if 
the partnership discloses the name and taxpayer identification 
number of each S corporation shareholder with respect to which 
a statement (Schedule K-1) is required to be furnished under 
section 6037(b). These statements required to be furnished by 
the S corporation are treated as statements required to be 
furnished by the partnership for purposes of the 100-or-fewer-
statements criterion for the partnership's eligibility to elect 
out.
            Example
    For example, if a partnership has 50 partners, 49 of which 
are individuals and one of which is an S corporation with 30 
shareholders all of whom are individuals, the partnership is 
treated as being required to furnish 80 statements. This is the 
sum of 49 statements for individual partners, one statement for 
the S corporation partner, and 30 statements for individuals 
with respect to whom the S corporation must furnish statements. 
The partnership meets the 100-or-fewer-statements criterion for 
the partnership's eligibility to elect out.
            Foreign partners
    The Secretary may provide for an alternative form of 
identification of any foreign partners (for example, if the 
foreign partners do not have U.S. taxpayer identification 
numbers) for purposes of the requirement of disclosure of the 
name and taxpayer identification number of each partner by the 
partnership.
            Other persons as partners
    The Secretary may by regulation or other guidance identify 
other types of partners to whom rules similar to the special 
rules in the case of a partner that is an S corporation can 
apply. This guidance shall take into account, for purposes of 
applying the 100-or-fewer-statements criterion,\190\ each 
direct and indirect interest in the partnership of any person 
to which a statement (comparable to the partner statement under 
section 6031(b)) is required to be furnished by any person. 
Such guidance may also take into account any person with 
respect to which a comparable statement is not required to be 
furnished but which has an interest (direct or indirect) in the 
partnership. Further, such guidance shall require the 
partnership to disclose to the Secretary the name and taxpayer 
identification number of each person with respect to which a 
statement (comparable to the partner statement under section 
6031(b)) is required to be furnished and of other persons with 
an interest (direct or indirect) in the partnership.
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    \190\ Sec. 6221(b)(1)(B).
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            Examples
    For example, assume that a partner of a partnership is a 
disregarded entity such as a State-law limited liability 
company (``LLC'') with only one member, a domestic corporation. 
Such guidance may provide that the partnership can make the 
election if the partnership includes (in the manner prescribed 
by the Secretary) a disclosure of the name and taxpayer 
identification number of each of the disregarded entity and the 
corporation that is its sole member, and each of them is taken 
into account as if each were a statement recipient in 
determining whether the 100-or-fewer-statements criterion is 
met.
    As another example, such guidance may provide that a 
partnership with a trust as a partner can make the election if 
the partnership includes (in the manner prescribed by the 
Secretary) a disclosure of the name and taxpayer identification 
number of the trustee, each person who is or is deemed to be an 
owner of the trust, and any other person that the Secretary 
determines to be necessary and appropriate, and each one of 
such persons is taken into account as if each were a statement 
recipient in determining whether the 100-or-fewer-statements 
criterion is met. Similar guidance may be provided with respect 
to a partnership with a partner that is a grantor trust, a 
former grantor trust that continues in existence for the two-
year period following the death of the deemed owner, or a trust 
receiving property from a decedent's estate for a two-year 
period.
    As a further example, to the extent that such rules are 
consistent with prompt and efficient collection of tax 
attributable to the income of partnerships and partners, such 
guidance may provide rules permitting election out in the case 
of a partnership (the first partnership) with one or more 
direct or indirect partners which are themselves partnerships. 
Under any such guidance with respect to tiered partnerships, 
the sum of all direct and indirect partners (including each 
partnership and its partners) may not exceed 100 persons with 
respect to which a section 6031(b) statement must be furnished, 
and each partner must be identified. That is, eligibility of 
the first partnership to make the election requires the first 
partnership to include (in the manner prescribed by the 
Secretary) a disclosure of the name and taxpayer identification 
number of each direct partner of the first partnership and each 
indirect partner (including each partnership and its partners) 
in every tier, and requires that each is taken into account in 
determining whether the 100-or-fewer-statements criterion is 
met.

Requirement of consistency with partnership return

    The centralized system imposes a consistency requirement. A 
partner on its return must treat each item of income, gain, 
loss, deduction or credit attributable to a partnership in a 
manner that is consistent with the treatment of such income, 
gain, loss, deduction, or credit on the partnership 
return.\191\ An underpayment that results from a failure of a 
partner to conform to the partnership reporting of an item is 
treated as a math error on the partner's return and cannot be 
abated under section 6213(b)(2).\192\ The underpayment may be 
subject to additions to tax.
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    \191\ Sec. 6222(a).
    \192\ Sec. 6222(b).
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            Notice of inconsistent position
    If the partnership has filed a return but the partner's 
treatment on the partner's return is (or may be) inconsistent 
with the partnership's return, or if the partnership has not 
filed a return, the math error treatment and nonabatement 
treatment do not apply if the partner files a statement 
identifying the inconsistent position.\193\ Further, a partner 
is treated as having complied with the obligation to file a 
statement identifying the inconsistent position in the 
circumstance in which the partner demonstrates to the 
satisfaction of the Secretary that the treatment of the item on 
the partner's return is consistent with the treatment of the 
item on the statement furnished to the partner by the 
partnership, and the partner elects the application of this 
rule.
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    \193\ Sec. 6222(c).
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    A final decision in an administrative or judicial 
proceeding with respect to a partnership under the centralized 
system is binding on the partnership and all partners of the 
partnership.\194\ In contrast, a final determination in an 
administrative or judicial proceeding with respect to a 
partner's identified inconsistent position is not binding on 
the partnership if the partnership is not a party to the 
proceeding.\195\ No inference is intended that the partnership 
is bound by any other proceeding to which it is not a party, 
such as an administrative or judicial proceeding with respect 
to a partner's unidentified inconsistent position.
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    \194\ Sec. 6223(b).
    \195\ Sec. 6222(d).
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Partners bound by actions of partnership; designation of partnership 
        representative

    For purposes of the centralized system, the partnership 
acts through its partnership representative. The partnership 
representative has the sole authority to act on behalf of the 
partnership under the centralized system.\196\ Under the 
centralized system, the partnership and all partners of the 
partnership are bound by actions taken by the partnership.\197\ 
Thus, for example, partners may not participate in or contest 
results of an examination of a partnership by the Secretary. A 
partnership and all partners of the partnership are also bound 
by any final decision in a proceeding with respect to the 
partnership brought under the centralized system of subchapter 
C. Thus, for example, a settlement agreement entered into by 
the partnership, a notice of final partnership adjustment with 
respect to the partnership that is not contested, or the final 
decision of the court with respect to the partnership if the 
notice of final partnership adjustment is contested, bind the 
partnership and all partners of the partnership.
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    \196\ Sec. 6223(a).
    \197\ Sec. 6223(b).
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    Each partnership is required to designate a partner (or 
other person) with a substantial presence in the United States 
as the partnership representative. A substantial presence in 
the United States enables the partnership representative to 
meet with the Secretary in the United States as is necessary or 
appropriate, and facilitates communication during the audit 
process and during any other proceedings in which the 
partnership is involved. In any case in which such a 
designation by the partnership is not in effect, the Secretary 
may select any person as the partnership representative.

                        Partnership Adjustments


Partnership adjustments by the Secretary

    The centralized system provides that any adjustment to 
items of income, gain, loss, deduction, or credit of a 
partnership for a partnership taxable year, and any partner's 
distributive share thereof, are determined at the partnership 
level. Any tax attributable to these items is assessed and 
generally is collected at the partnership level as an imputed 
underpayment paid by the partnership.
            Reviewed year and adjustment year
    For purposes of the centralized system, the reviewed year 
means the partnership taxable year to which the item being 
adjusted relates. For example, in an examination by the 
Secretary of a partnership's taxable year 2018, 2018 is the 
reviewed year.\198\
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    \198\ Sec. 6225(d)(1).
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    The adjustment year means (1) in the case of an adjustment 
pursuant to the decision of a court (under the centralized 
system's judicial review provisions), the partnership taxable 
year in which the decision becomes final; (2) in the case of an 
administrative adjustment request, the partnership taxable year 
in which the administrative adjustment request is made; or (3) 
in any other case, the partnership taxable year in which the 
notice of final partnership adjustment is mailed.\199\ For 
example, in the case of adjustments with respect to partnership 
taxable year 2018 resulting in an imputed underpayment assessed 
in 2020 that the partnership then litigates in Tax Court, the 
decision of which is not appealed and becomes final in 2021, 
the adjustment year is 2021.
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    \199\ Sec. 6225(d)(2).
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            Payment of imputed underpayment by the partnership
    Any adjustment to items of income, gain, loss, deduction, 
or credit of a partnership for a partnership taxable year, and 
any partner's distributive share thereof, are determined at the 
partnership level. In the event of any adjustment by the 
Secretary in the amount of any item of income, gain, loss, 
deduction, or credit of a partnership, or any partner's 
distributive share, that results in an imputed underpayment, 
the partnership is required to pay the imputed underpayment in 
the adjustment year.\200\
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    \200\ Sec. 6225(a)(1).
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            Interest at partnership level
    Interest due is determined at the partnership level and 
accrues at the rate applicable to underpayments.\201\
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    \201\ Sec. 6621(a)(2). Rules relating to interest, penalties, and 
additions to tax are further described below.
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            Adjustment that does not result in imputed underpayment
    Any adjustment by the Secretary in the amount of any item 
of income, gain, loss, deduction, or credit of a partnership, 
or any partner's distributive share, that does not result in an 
imputed underpayment is taken into account by the partnership 
in the adjustment year. The amount of the adjustment is treated 
as a reduction in non-separately stated income or an increase 
in non-separately stated loss (whichever is appropriate). It 
may also be appropriate to treat the amount of an adjustment as 
a reduction (or increase) in a separately stated amount of 
income, gain, loss, or deduction. The amount of an adjustment 
in a credit is taken into account as a separately stated 
item.\202\
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    \202\ Sec. 6225(a)(2).
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            Determination of imputed underpayment amount
    An imputed underpayment of tax with respect to a 
partnership adjustment for any reviewed year is determined by 
netting all adjustments of items of income, gain, loss, or 
deduction and multiplying the net amount by the highest rate of 
Federal income tax applicable either to individuals or to 
corporations that is in effect for the reviewed year.\203\ Any 
adjustments to items of credit are taken into account as an 
increase or decrease, as the case may be, in the figure 
resulting from this multiplication. Any net increase or 
decrease in loss is treated as a decrease or increase, 
respectively, in income. Netting is done taking into account 
applicable limitations, restrictions, and special rules under 
present law.
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    \203\ Sec. 6225(b)(1). The rule for determining the imputed 
underpayment applies except as provided in subsection 6225(c), which 
provides that the Secretary shall establish procedures under which the 
imputed underpayment amount may be modified consistent with 
requirements imposed thereunder.
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            Examples
    Example.--Assume that a partnership reports the following 
items on its return for taxable year 2018 (dollar amounts in 
thousands):
           rental income of $100
           depreciation deduction of <$70>
           interest expense deduction of <$20>
           deduction for compensation paid of <$50>
    In an examination of the partnership's taxable year 2018, 
the Secretary determines that depreciation was <$80>, not 
<$70>, for the year. (Assume that this change does not affect 
depreciation in other taxable years.) The Secretary also finds 
that $5 of rental income was omitted, for total rental income 
of $105, not $100, for the year. The adjustment reflecting an 
increase of $5 of rental income is netted with the adjustment 
reflecting the <$10> change in the depreciation (both ordinary 
in character and not subject to differing limitations or 
restrictions). The resulting adjustment is a net increase in 
loss of <$5>. There is no imputed underpayment. For the 
adjustment year (not 2018, the reviewed year), the partnership 
has an increase in non-separately stated loss of <$5> (or a 
reduction in non-separately income of <$5>).
    Example.--As another example, assume a partnership reports 
the following items on its return for taxable year 2019 (dollar 
amounts in thousands):
           ordinary income of $300
           long-term capital gain (from asset sales) of 
        $125, long-term capital loss (from asset sales) of 
        <$75>, for a net long-term capital gain of $50
           depreciation deduction of <$100>
           tax credit of $5
    In an examination of the partnership's taxable year 2019, 
the Secretary adjusts these items as follows and finds:
           ordinary income of $500 (a $200 adjustment)
           long-term capital gain of $200 (a $75 
        adjustment) and long-term capital loss of <$25> (a 
        <$50> adjustment), for a net long-term capital gain of 
        $175 (a $125 adjustment)
           depreciation deduction of <$70> (a <$30> 
        adjustment)
           tax credit of $3 (a <$2> credit adjustment)
    These are netted under the provision as follows. The 
adjustments to ordinary income and to the ordinary depreciation 
deduction are netted: $200 minus <$30> yields $230. The 
adjustments to long-term capital gain and loss are netted: $75 
minus <$50> yields $125. The adjustments total $355. Assume 
that the highest rate of Federal income tax applicable to 
individuals or corporations in 2019 is 39.6 percent. The 
product of $355 and 39.6 percent is $140.58. The credit 
adjustment of <$2> increases that figure, yielding an imputed 
underpayment of $142.58 (not taking into account possible 
modifications further described below). The partnership pays 
the imputed underpayment in the adjustment year.
            Determining imputed underpayment amount: adjustments to 
                    distributive shares
    In determining an imputed underpayment, any adjustment that 
reallocates the distributive share of any item from one partner 
to another is taken into account by disregarding any decrease 
in any item of income or gain and disregarding any increase in 
any item of deduction, loss, or credit.\204\
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    \204\ Sec. 6225(b)(2).
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            Example
    For example, assume that a partnership has two partners, L 
and M. Under the partnership agreement, $100 of rental income 
is allocated to L and $70 of depreciation and interest 
deductions are allocated to M for the taxable year. The 
Secretary notifies the partnership and the partnership 
representative of an administrative proceeding initiated at the 
partnership level with respect to the partnership's return for 
2024. Assume that the Secretary determines that the $70 
distributive share of depreciation and interest deductions 
should be reallocated from M to L. The imputed underpayment of 
the partnership is determined without decreasing the $100 of 
rental income by the $70 of depreciation and interest 
deductions. The adjustment is a $70 increase in income. Assume 
that the highest rate of Federal income tax applicable to 
individuals or corporations in 2024 is 39.6 percent. The 
product of $70 and 39.6 percent is $27.72, the amount of the 
imputed underpayment. However, the partnership may implement 
procedures for modifying the imputed underpayment as so 
determined.
            Modification of imputed underpayment amount
    When an audit of a partnership is commenced, the Secretary 
notifies the partnership and the partnership representative of 
the administrative proceeding initiated at the partnership 
level. The Secretary also notifies the partnership and the 
partnership representative of any proposed partnership 
adjustment developed during the proceeding.\205\ The Secretary 
must establish procedures for modification of the amount of an 
imputed underpayment.\206\ One or more modification procedures 
may be implemented by the partnership after the initiation of 
the administrative proceeding, including before any notice of 
proposed adjustment. These procedures include the filing of 
amended returns by reviewed year partners, determination of the 
imputed underpayment without regard to the portion of it 
allocable to a tax-exempt partner, and modification of the 
applicable highest tax rates, including determining the portion 
of an imputed underpayment to which a lower rate applies.\207\ 
In addition, the Secretary may by regulations or guidance 
provide for additional procedures to modify imputed 
underpayment amounts on the basis of factors that the Secretary 
determines are necessary or appropriate to carry out the 
function of the modification provisions, that is, to determine 
the amount of tax due as closely as possible to the tax due if 
the partnership and partners had correctly reported and paid 
while at the same time to implement the most efficient and 
prompt assessment and collection of tax attributable to the 
income of the partnership and partners.
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    \205\ Sec. 6231(a)(1) and (2).
    \206\ Sec. 6225(c).
    \207\ See section 411 of the Protecting Americans from Tax Hikes 
Act of 2015 (Division Q of Pub. L. No. 114-113). Under the provision, 
certain section 469(k) passive activity losses can reduce the imputed 
underpayment of a publicly traded partnership under the centralized 
system. The imputed underpayment can be determined without regard to 
the portion of the underpayment that the partnership demonstrates is 
attributable to (i.e., would be offset by) specified passive activity 
losses attributable to a specified partner. The amount of the specified 
passive activity loss is concomitantly decreased, and the partnership 
takes the net decrease into account as an adjustment in the adjustment 
year with respect to the specified partners to which the net decrease 
relates. A specified passive activity loss for any specified partner of 
a publicly traded partnership means the lesser of the section 469(k) 
passive activity loss of that partner which is separately determined 
with respect to the partnership (1) for the partner's taxable year in 
which or with which the reviewed year of the partnership ends, or (2) 
for the partner's taxable year in which or with which the adjustment 
year of the partnership ends. A specified partner is a person who 
continuously meets each of three requirements for the period starting 
with the partner's taxable year in which or with which the partnership 
reviewed year ends through the partner's taxable year in which or with 
which the partnership adjustment year ends. These three requirements 
are that the person is a partner of the publicly traded partnership; 
the person is an individual, estate, trust, closely held C corporation, 
or personal service corporation; and the person has a specified passive 
activity loss with respect to the publicly traded partnership.
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    Anything required to be submitted pursuant to the 
modification of the amount of an imputed underpayment must be 
submitted to the Secretary not later than the close of the 270-
day period beginning on the date the notice of a proposed 
partnership adjustment is mailed, unless the 270-day period is 
extended with the consent of the Secretary.
    Any modification of the amount of an imputed underpayment 
is made only upon approval of the modification by the 
Secretary.
            Modification procedures: amended returns of reviewed year 
                    partners
    Payments made by reviewed year partners with amended 
returns can reduce the amount of an imputed underpayment.\208\ 
Procedures for modification provide that the amount of an 
imputed underpayment is determined without regard to the 
portion of the underpayment taken into account by payment of 
tax included with amended returns of the reviewed year 
partners. The amended return relates to the taxable year of the 
partner that includes the end of the reviewed year of the 
partnership. The amended return is to take into account all 
adjustments in the amount of any item of income, gain, loss, 
deduction, or credit of the partnership (or any partner's 
distributive share) properly allocable to each partner, along 
with changes for any other taxable year with respect to which 
any tax attribute is affected by reason of the adjustments. 
Payment of any tax due is to be included with the amended 
return. In the case of an adjustment that reallocates the 
distributive share of any item from one partner to another, 
this modification procedure is only available if amended 
returns for the reviewed year are filed by all partners 
affected by the adjustment.
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    \208\ Sec. 6225(c)(2).
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            Modification procedures: tax-exempt partners
    Procedures for modification provide for determining the 
amount of the imputed underpayment without regard to the 
portion of it that the partnership demonstrates is allocable to 
a partner that would not owe tax by reason of its status as a 
tax-exempt entity for the reviewed year.\209\ For this purpose, 
a tax-exempt entity means (1) the United States, any State or 
political subdivision thereof, any possession of the United 
States, or any agency or instrumentality of any of these, (2) 
an organization (other than a cooperative) that is exempt from 
Federal income tax, (3) any foreign person or entity, and (4) 
any Indian tribal government determined by the Secretary in 
consultation with the Secretary of the Interior to exercise 
governmental functions. Under this procedure for modification, 
the partnership demonstrates the amounts of adjustments that 
are allocable to the tax-exempt partner and the resulting 
portion of the imputed underpayment allocable to that 
partner.\210\
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    \209\ Sec. 6225(c)(3).
    \210\ Secs. 6225(c)(3) and 168(h)(2)(A).
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            Modification procedures: modification of applicable highest 
                    tax rates
    Procedures for modification provide for taking into account 
a rate of tax lower than the highest rate of Federal income tax 
applicable either to individuals or to corporations that is in 
effect for the reviewed year, for certain types of taxpayers or 
types of income.\211\
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    \211\ Sec. 6225(c)(4).
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    The partnership may demonstrate that a portion of an 
imputed underpayment is allocable to a partner that is a C 
corporation, and for that C corporation partner, the highest 
marginal rate of Federal income tax (35 percent in 2016, for 
example) for ordinary income and capital gain \212\ for the 
reviewed year is lower than the highest marginal rate of 
Federal income tax for individuals (39.6 percent in 2016, for 
example). For a C corporation, the highest marginal rate of 
Federal income tax is the highest rate of tax specified in 
section 11(b).
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    \212\ The Secretary has regulatory authority under the provision, 
including authority to acknowledge or identify the types of income, 
gain, deduction, and loss to which the lower rate applies. See also 
section 411 of the Protecting Americans from Tax Hikes Act of 2015 
(Division Q of Pub. L. No. 114-113). A lower rate of tax may be taken 
into account in the case of either capital gain or ordinary income of a 
partner that is a C corporation.
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    Similarly, the partnership may demonstrate that a portion 
of an imputed underpayment relates to an item of long-term 
capital gain or qualified dividend income that is allocable to 
a partner who is an individual, and that the highest rate of 
tax with respect to that item of long-term capital gain or 
qualified dividend income for the reviewed year (20 percent for 
2016, for example) is lower than the highest rate of Federal 
income tax applicable to individuals for the reviewed year 
(39.6 percent in 2016, for example). The highest rate for the 
type of income and type of taxpayer applies under the 
modification. An S corporation is treated as an individual for 
this purpose.
    In general, the portion of the imputed underpayment to 
which the lower rate applies with respect to a partner is 
determined by reference to the partner's distributive share of 
items of income, gain, loss, deduction, and credit to which the 
imputed underpayment relates. However, if the partner's 
distributive share differs among items, then the portion of the 
imputed underpayment to which the lower rate applies is 
determined by reference to the amount of the partner's 
distributive share of net gain or loss if the partnership had 
sold all of its assets at their fair market value as of the 
close of the reviewed year. For example, adjustments are made 
to a partnership's rental income from property A and its 
depreciation deductions with respect to property B. A corporate 
partner has a 20 percent distributive share of rental income 
from property A, a 15 percent distributive share of 
depreciation deductions from property B, and a 20 percent 
distributive share of any gain in the reviewed year. However, 
if the partnership had sold its assets at fair market value as 
of the close of the reviewed year, the gain would have been 
$100, and based on its capital account, the corporate partner's 
distributive share would have been $20. Thus, the portion of 
the imputed underpayment to which the lower rate applies with 
respect to the corporate partner is 20 percent.
            Modification procedures: additional procedures
    Additional procedures to modify the amount of an imputed 
underpayment may be provided by the Secretary on the basis of 
factors the Secretary determines are necessary or appropriate 
to carry out the purposes of the provision. These procedures 
allow partnerships to demonstrate tax attributes or information 
with respect to the reviewed year and with respect to reviewed 
year partners that could permit modification of the imputed 
underpayment to more closely approximate the amount of tax due 
with respect to the reviewed year if the partnership and 
partners had correctly reported and paid the tax due.
    In the absence of regulations or guidance specifically 
addressing the manner in which these modifications or 
calculations are made, it is anticipated that partnerships will 
furnish to the Secretary the necessary documentation, data, and 
calculations to determine the amount of the reduction of the 
imputed underpayment with a reasonably high degree of accuracy.

Alternative to payment of imputed underpayment by partnership

    As an alternative to partnership payment of the imputed 
underpayment in the adjustment year, the audited partnership 
may elect to furnish to the Secretary and to each partner of 
the partnership for the reviewed year a statement of the 
partner's share of any adjustments to income, gain, loss, 
deduction and credit as determined in the notice of final 
partnership adjustment.\213\ In this case, each such partner 
takes these adjustments into account and pays the tax as 
provided under the provision.\214\
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    \213\ Sec. 6226(a).
    \214\ Sec. 6226(b).
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            Payment by reviewed year partners in year that includes 
                    date of the statement
    The reviewed year partner's tax is increased for the 
partner's taxable year that includes the date of the statement.
            Amount of the reviewed year partner's adjustment
    The reviewed year partner's tax is increased by an amount 
equal to the aggregate of the adjustment amounts as determined 
under the provision. This includes the amount by which the 
partner's tax would increase if the partner's distributive 
share of the adjustment amounts were included for the partner's 
taxable year that includes the end of the reviewed year, plus 
the amount by which the tax would increase by reason of 
adjustment to tax attributes in years after that year of the 
partner and before the year of the date of the statement. Tax 
attributes in any subsequent taxable year are required to be 
appropriately adjusted.
            Penalties, additions to tax, additional amounts
    Penalties, additions to tax, and additional amounts are 
determined at the partnership level; \215\ each reviewed year 
partner is liable for its share of the penalty, addition to 
tax, and additional amount.\216\
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    \215\ Secs. 6221 and 6226(c).
    \216\ Sec. 6226(c).
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            Interest at partner level from reviewed year, with 
                    adjustments
    In the case of an imputed underpayment for which the 
election under this provision is made, interest is determined 
at the partner level.\217\ Interest is determined from the due 
date of the partner's return for the taxable year to which the 
increase is attributable. Interest is determined taking into 
account any increases attributable to a change in tax 
attributes for an intervening tax year. The rate of interest 
determined at the partner level is the underpayment rate as 
modified under the provision, that is, the rate is the sum of 
the Federal short-term rate (determined monthly) plus 5 
percentage points.
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    \217\ Sec. 6226(c)(2).
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            Time and manner of making election
    The partnership may make this election not later than 45 
days after the notice of final partnership adjustment.\218\ The 
election is revocable only with the consent of the Secretary. 
The election may be made whether or not the partnership files a 
petition for judicial review of the notice of final partnership 
adjustment.\219\
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    \218\ Sec. 6226(a)(1).
    \219\ Sec. 6226(d). See section 411 of the Protecting Americans 
from Tax Hikes Act of 2015 (Division Q of Pub. L. No. 114-113).
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    The partnership may make the election within 45 days from 
the notice of final partnership adjustment, and within 90 days 
from the notice of final partnership adjustment may file a 
petition for readjustment with the Tax Court, district court, 
or Court of Federal Claims.\220\ Upon the final court decision, 
dismissal of the case, or settlement, the partnership is to 
implement the election by furnishing statements (at the time 
and manner prescribed by the Secretary) to the reviewed year 
partners showing each partner's share of the adjustments as 
finally determined. As part of any settlement, for example, it 
is contemplated that the Secretary may permit revocation of a 
previously made election, and the partnership may pay at the 
partnership level.
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    \220\ Sec. 6234.
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            Time and manner of furnishing statement
    The statement is to be furnished to the Secretary and to 
partners within such time and in such manner as is prescribed 
by the Secretary. In the absence of such guidance, the 
statements are to be furnished to the Secretary and to all 
partners within a reasonable period following the last day on 
which to make the election under this provision. The date the 
statement is furnished (as well as the date of the statement) 
is the date the statement is mailed, for this purpose.
            Information furnished on statement to the Secretary and to 
                    partners
    The statement furnished to the Secretary and to partners is 
to include the amounts of and tax attributes of the adjustments 
allocable to the recipient partner. Under regulatory authority, 
the Secretary may require the statement to show the amount of 
the imputed underpayment allocable to the recipient partner. In 
addition, the statement is to include the name and taxpayer 
identification number of the recipient partner. The Secretary 
may require that the statement include such additional 
information as is necessary or appropriate to carry out the 
purposes of the provision, such as the address of the recipient 
partner and the date the statement is mailed.
            Treatment of tiered partnerships and other tiered entities
    Tiered partnerships.--In the case of tiered partnerships, a 
partnership that receives a statement from the audited 
partnership is treated similarly to an individual \221\ who 
receives a statement from the audited partnership. That is, the 
recipient partnership takes into account the aggregate of the 
adjustment amounts determined for the partner's taxable year 
including the end of the reviewed year, plus the adjustments to 
tax attributes in the following taxable years of the recipient 
partnership. The recipient partnership pays the tax 
attributable to adjustments with respect to the reviewed year 
and the intervening years, calculated as if it were an 
individual (consistently with section 703), for the taxable 
year that includes the date of the statement. The recipient 
partnership, its partners in the taxable year that is the 
reviewed year of the audited partnership, and its partners in 
the year that includes the date of the statement, may have 
entered into indemnification agreements under the partnership 
agreement with respect to the risk of tax liability of reviewed 
year partners being borne economically by partners in the year 
that includes the date of the statement. Because the payment of 
tax by a partnership under the centralized system is 
nondeductible, payments under an indemnification or similar 
agreement with respect to the tax are nondeductible.
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    \221\ See section 703, which states, ``the taxable income of a 
partnership shall be computed in the same manner as in the case of an 
individual . . .''.
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    Deficiency dividends.--A recipient partner that is a RIC or 
REIT and that receives a statement from an audited partnership 
including adjustments for a prior (reviewed) year may wish to 
make a deficiency dividend \222\ with respect to the reviewed 
year. Guidance coordinating the receipt of a statement from an 
audited partnership by a RIC or REIT with the deficiency 
dividend procedures is expected to be issued by the Secretary.
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    \222\ Sec. 860.
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Administrative adjustment request by partnership

    A partnership may file a request for an administrative 
adjustment in the amount of one or more items of income, gain, 
loss, deduction, or credit of the partnership for a partnership 
taxable year.\223\ Following the filing of the administrative 
adjustment request, the partnership may apply most of the 
procedures for modification \224\ in a manner similar to 
modification of an imputed underpayment under new section 
6225(c). Like the partnership audit, tax resulting from the 
adjustment may be paid by the partners in the manner in which a 
partnership pays an imputed underpayment in the adjustment year 
under new section 6225. Alternatively, the adjustment may be 
taken into account by the partnership and partners, and the tax 
paid by reviewed year partners upon receipt of statements 
showing the adjustments, similar to new section 6226.\225\ 
However, in the case of an adjustment (pursuant to a 
partnership's administrative adjustment request) that would not 
result in an imputed underpayment, any refund is not paid to 
the partnership; rather, procedures similar to the procedure 
for furnishing reviewed year partners with statements 
reflecting the requested adjustment apply, with appropriate 
adjustments.
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    \223\ Sec. 6227.
    \224\ Not including the modifications pursuant to filing of amended 
returns of reviewed year partners in new section 6225(c)(2).
    \225\ Sec. 6227(b)(2); interest is computed at the underpayment 
rate (sec. 6621(a)(2)) without substituting ``5 percentage points'' for 
``3 percentage points'' as under section 6226(c)(2)(C).
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            Time for making administrative adjustment request
    A partnership may not file an administrative adjustment 
request more than three years after the later of (1) the date 
on which the partnership return for the year in question is 
filed, or (2) the last day for filing the partnership return 
for that year (without extensions).
    In no event may a partnership file an administrative 
adjustment request after a notice of an administrative 
proceeding with respect to the taxable year is mailed.
            Tiered partnerships
    In the case of tiered partnerships, a partnership's 
partners that are themselves partnerships may choose to file an 
administrative adjustment request with respect to their 
distributive shares of an adjustment. The partners and indirect 
partners that are themselves partnerships may choose to 
coordinate the filing of administrative adjustment requests as 
a group to the extent permitted by the Secretary.

                            Procedural Rules


In general \226\
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    \226\ Secs. 6231 through 6235.
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    The new centralized system provides rules governing 
notices, time limitations, restrictions on assessment and the 
imposition of interest and penalties in the context of a 
partnership adjustment.\227\ The provisions include specific 
grants of regulatory authority to address the identification of 
foreign partners, the manner of notifying partners of an 
election out of centralized procedures, the manner in which a 
partnership representative is selected, and the extent to which 
the new centralized system may be applied before the generally 
applicable effective date.
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    \227\ Secs. 6231-6235.
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Notice of proceedings and adjustments

    The centralized system contemplates three types of 
principal notifications by the Secretary to the partnership and 
the partnership representative in the course of an 
administrative proceeding with respect to that partnership. The 
notifications also apply to any proceeding with respect to an 
administrative adjustment request filed by a partnership.\228\ 
These notices are (1) notice of any administrative proceeding 
initiated at the partnership level; (2) notice of a proposed 
partnership adjustment resulting from the proceeding; and (3) 
notice of any final partnership adjustment resulting from the 
proceeding. Such notices are sufficient if mailed to the last 
known address of the partnership representative or the 
partnership, even if the partnership has terminated its 
existence.
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    \228\ Secs. 6231(a) and 6227.
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    A notice of proposed adjustments informs the partnership of 
any adjustments tentatively determined by the Secretary and the 
amount of any imputed underpayment resulting from such 
adjustments. The issuance of a notice of proposed partnership 
adjustment begins the running of a period of 270 days in which 
to supply all information required by the Secretary in support 
of a request for modification. During that same period, the 
Secretary may not issue a notice of final partnership 
adjustment.\229\ The Secretary is required to establish 
procedures and timeframes for the modification process in 
published guidance, which may include conditions under which 
extensions of time in which to submit final documentation of a 
modification request may be permitted by the Secretary.\230\
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    \229\ Sec. 6231(a).
    \230\ Sec. 6225(c)(7).
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    With the issuance of a notice of final partnership 
adjustment to the partnership, a 90-day period begins during 
which the partnership may seek judicial review of the 
partnership adjustment. The issuance of a notice of final 
partnership adjustment also marks the beginning of the 45-day 
period in which the partnership may elect the alternative 
payment procedures.\231\ Further notices of adjustment or 
assessments of tax against the partnership with respect to the 
partnership taxable year that is the subject of the notice of 
final partnership adjustment are prohibited during the period 
in which judicial review may be sought or during which a 
judicial proceeding is pending (absent a showing of fraud, 
malfeasance, or misrepresentation of a material fact).\232\
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    \231\ Sec. 6226.
    \232\ Sec. 6231(b).
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    Any notice of partnership adjustment may be rescinded by 
the Secretary, if the partnership consents. If the notice is 
rescinded, it is a nullity, and does not confer a right to seek 
judicial review, nor does it bar issuance of further notices.

Assessment, collection and payment

    An imputed underpayment is assessed and collected in the 
same manner as if it were a tax imposed for the adjustment year 
under the Federal income tax.\233\ The general provisions for 
assessment, collection and payment under subtitle F of the Code 
apply unless superseded by rules of the new centralized system. 
As a result, an imputed underpayment may be assessed against a 
partnership if the partnership agrees with the results of the 
examination, following the expiration of the 90th day after 
issuance of a notice of final partnership adjustment without 
initiation of judicial proceedings, or in the case of timely 
judicial proceedings, following the entry of final decision of 
such proceedings. If no court proceeding is initiated within 
the 90-day period, the amount that may be assessed against the 
partnership is limited to the imputed underpayment shown in the 
notice.\234\
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    \233\ Sec. 6232.
    \234\ Sec. 6232(e).
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    In the case of an administrative adjustment request for 
which the adjustment is determined and taken into account by 
the partnership in the partnership taxable year in which the 
request is made,\235\ the imputed underpayment is required to 
be paid when the request is filed, and is assessed at that 
time. If the administrative adjustment request is subsequently 
audited and results in an imputed underpayment greater than 
that reported and paid with the originally filed request, the 
additional amount of the imputed underpayment may be assessed 
in the same manner and subject to same restrictions as any 
other imputed underpayment determined after examination.
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    \235\ Secs. 6232(a) and 6227(b)(1).
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            Restrictions on assessment, levy, and collection
    The centralized system provides a limitation on the time 
for assessment of a deficiency as well as levy and court 
proceedings for collection. Except as otherwise provided, no 
assessment of a deficiency may be made, and no levy or court 
proceeding for collection of any amount resulting from an 
adjustment may be made, begun, or prosecuted with respect to 
the partnership taxable year in issue before the close of the 
90th day after the day that a notice of final partnership 
adjustment was mailed. If a petition for judicial review is 
filed,\236\ no such assessment may be made and no such levy or 
court proceeding may be made, begun, or prosecuted before the 
decision of the court has become final.\237\
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    \236\ Sec. 6234.
    \237\ Sec. 6232(b).
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    A premature action (i.e., one that violates the limitation 
on the time of assessment, levy, and court proceeding for 
collection) may be enjoined in the proper court, including the 
Tax Court.\238\ This rule applies notwithstanding the general 
rule prohibiting suits for the purpose of restraining the 
assessment or collection of any tax.\239\ The Tax Court has no 
jurisdiction to enjoin any such premature action unless a 
timely petition for judicial review has been filed,\240\ and 
then only in respect of the adjustments that are the subject of 
the petition.
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    \238\ Sec. 6232(c).
    \239\ Sec. 7421(a).
    \240\ Sec. 6234.
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    Several exceptions to the restrictions on assessment are 
provided.\241\ First, rules similar to the math error authority 
under section 6213(b) are permitted as exceptions to the 
restrictions on assessment described above. The exceptions 
apply to instances in which a partnership is notified that 
adjustments to its return are necessary to correct errors 
arising from mathematical or clerical errors and in the case of 
a tiered partnership that fails to prepare its partnership 
return consistently with that of the partnership in which it is 
a partner. In the case of an inconsistent return position, the 
rules similar to those in section 6213(b) (providing for 
subsequent abatement of any resulting assessments if challenged 
within 60 days) are not applicable. Finally, a partnership may 
waive the restrictions on the making of any partnership 
adjustment.
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    \241\ Sec. 6232(d).
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Interest and penalties

            Interest
    In general, interest due is determined at the partnership 
level and accrues at the rate applicable to underpayments.\242\ 
Two periods are relevant in computing the total interest due: 
the period in which the imputed underpayment of income tax 
exists, and the period attributable only to late payment of any 
imputed underpayment after notice and demand. For an imputed 
underpayment, interest accrues for the period from the due date 
of the return for the reviewed year until the due date of the 
adjustment year return, or, if earlier, payment of the imputed 
tax. If the imputed underpayment is not timely paid with the 
return for the adjustment year, interest is computed from the 
return due date for the adjustment year until payment.
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    \242\ Sec. 6621(a)(2).
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    If the partnership elects the alternative payment method 
under section 6226, under which the underpayment is determined 
at the partner level, the interest due is computed at the 
partner level. The underpayment interest begins to accrue from 
the due date of the return for the taxable year to which the 
increase is attributable, at a rate two percentage points 
higher than the rate otherwise applicable to underpayments.
            Penalties
    Generally, the partnership is liable for any penalty, 
addition to tax, or additional amount.\243\ These amounts are 
determined at the partnership level as if the partnership were 
an individual who was subject to Federal income tax for the 
reviewed year, and the imputed underpayment were an actual 
underpayment or understatement for the reviewed year.
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    \243\ Sec. 6233(a)(1)(B).
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    A penalty, addition to tax, or additional amount may apply 
with respect to an adjustment year return of a partnership in 
the event of late payment of an imputed underpayment, or, in 
the case of an election by the partnership under section 6226, 
with respect to the adjustment year return of a partner. In 
such cases, the penalty for failure to pay applies.\244\ For 
purposes of accuracy-related and fraud penalties, the 
determination is made by treating the imputed underpayment as 
an underpayment of tax.\245\
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    \244\ Secs. 6233(b)(3)(A) and 6651(a)(2).
    \245\ Secs. 6662, 6662A, 6663, and 6664.
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Judicial review of partnership adjustment

    A partnership may seek judicial review of a notice of final 
partnership adjustment within 90 days after the notice is 
mailed. Judicial review is available in the U.S. Tax Court, the 
Court of Federal Claims or a U.S. district court for the 
district in which the partnership has its principal place of 
business.
    With respect to judicial review in either the Court of 
Federal Claims or a U.S. district court, jurisdiction is 
contingent on the partnership depositing with the Secretary, on 
or before the date of the petition, an amount equal to the full 
imputed underpayment. The deposit is not treated as a payment 
of tax other than for purposes of determining whether interest 
on any underpayment as ultimately determined would be due. The 
proceeding under this provision is a de novo proceeding, and 
determinations made pursuant to the proceeding are subject to 
review to the same extent as any other decision, decree or 
judgment of the court in question.
    Once a proceeding is initiated, a decision to dismiss the 
proceeding (other than a dismissal because the notice of final 
partnership adjustment was rescinded under section 6231(c)), is 
a judgment on the merits upholding the final partnership 
adjustments.

Period of limitations on making adjustments

    In general, the Secretary may adjust an item on a 
partnership return at any time within three years of the date a 
return is filed (or the return due date, if the return is not 
filed) or an administrative adjustment request is made. The 
time within which the adjustment is made by the Secretary may 
be later if a notice of proposed adjustment \246\ is issued, 
because the issuance of a notice of proposed partnership 
adjustment begins the running of a period of 270 days in which 
the partnership may seek a modification of the imputed 
underpayment. Although the partnership generally is limited to 
270 days from the issuance of that notice to seek a 
modification of the imputed underpayment, extensions may be 
permitted by the IRS. During the 270-day period, the Secretary 
may not issue a notice of final partnership adjustment.
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    \246\ Sec. 6231.
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    After the timely issuance of a notice of proposed 
adjustment resulting in an imputed underpayment, the notice of 
final partnership adjustment may be issued no later than either 
the date which is 270 days after the partnership has completed 
its response seeking a revision of an imputed underpayment, or, 
if the partnership provides an incomplete or no response, no 
later than 330 days after the date of a notice of proposed 
adjustment.\247\
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    \247\ See section 411 of the Protecting Americans from Tax Hikes 
Act of 2015 (Division Q of Pub. L. No. 114-113), which rectifies the 
unintended conflict between section 6231 (barring the Secretary from 
issuing the notice of final partnership adjustment earlier than the 
expiration of the 270 days after the notice of a proposed adjustment) 
and section 6235 (requiring that a notice of final partnership 
adjustment be filed no later than 270 days after the notice of proposed 
adjustment in the case of a partnership that does not seek modification 
of the imputed underpayment). As amended, section 6235 provides that a 
notice of final partnership adjustment to a partnership that does not 
seek modification of an underpayment in response to a notice of 
proposed adjustment may be issued up to 330 days (plus any additional 
number of days that were agreed upon as an extension of time for 
taxpayer response) after the notice of proposed adjustment.
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    The partnership may consent to an extension of time within 
which a partnership adjustment may be made. In addition, the 
provision contemplates that the Secretary may agree to extend 
the period of time in which the request for modification is 
submitted, under procedures to be established for submitting 
and reviewing requests for modification. If an extension of the 
time within which to seek a modification is granted, a similar 
period is added to the time within which the Secretary may 
issue a notice of final partnership adjustment. The procedures 
for modifications of imputed underpayments are required to 
provide rules that exclude from any underpayment of tax the 
portion of adjustments that may have already been taken into 
consideration on amended returns filed by partners and for 
which the allocable underpayment of tax was paid.
    Several exceptions similar to those generally applicable 
outside the context of partnerships are provided to the 
limitations period. In the case of a fraudulent return or 
failure to file a return, a partnership adjustment may be made 
at any time. If a partnership files a return on which it makes 
a substantial omission of income within the meaning of section 
6501(e)(1)(A), the Secretary may make adjustments to the return 
within six years of the date the return was filed.
    In addition, if a notice of final partnership adjustment 
described in section 6231 is mailed, the limitations period is 
suspended for the period during which judicial remedies under 
section 6234 may be pursued or are pursued and for one year 
thereafter. Where a partnership elects to apply section 6226, 
this provision operates to ensure that the period in which the 
Secretary may assess the resulting underpayment due from each 
partner is open for at least one year after proceedings at the 
partnership level have concluded. The partner who is 
responsible for paying an underpayment arising from the 
partnership reviewed year must compute such tax with respect to 
his taxable year in which or with which the partnership 
reviewed year ends, and pay the additional tax with the return 
for the year in which the partnership mails the statements to 
partners under section 6226. Because the additional tax arises 
from an adjustment at the partnership level that is binding on 
the partner, the partner may neither contest the merits of the 
partnership adjustment, nor may the partner claim the Secretary 
is time-barred with respect to such adjustment.
            Examples
    The interaction of the notice requirements of new section 
6231 and the limitations period with regard to adjustments to 
partnership returns that result in imputed underpayments under 
new section 6235 is illustrated in this example regarding a 
partnership's taxable year 2018.
    On March 15, 2019, it files a timely income tax return for 
the taxable year 2018. Absent any other activity by the 
Secretary or the partnership, the general three-year 
limitations period in which any item on the return may be 
adjusted expires in three years, on March 15, 2022.
    On December 15, 2020, the Secretary notifies the 
partnership that it intends to initiate an administrative 
proceeding with respect to the 2018 partnership return. That 
notice neither shortens nor extends the period in which 
partnership adjustments may be made by the Secretary, but it 
ends the period in which the partnership may submit an 
administrative adjustment request with respect to that taxable 
year.
    On September 15, 2021, the Secretary issues a notice of 
proposed adjustments that result in an imputed underpayment. 
Issuance of this notice triggers a period of 270 days during 
which the Secretary may not issue a notice of final partnership 
adjustment and within which the partnership must submit all 
required documentation in support of a request for modification 
of the imputed underpayment. This 270-day periods ends on June 
15, 2022, which is later than the expiration of the otherwise 
applicable limitations period. The deadline for issuance of a 
notice of final partnership adjustment will depend upon whether 
and how the partnership responds to the proposed notice of 
adjustments.
    If nothing further is received from the partnership, the 
Secretary may issue a notice of final partnership adjustment no 
later than 330 days after the notice of proposed adjustments 
(i.e., within 60 days after the expiration of the 270-day 
period in which partnership was permitted to respond). Because 
the 330th day after September 15, 2021, falls on Sunday, August 
14, 2022, the final date on which the Secretary may issue a 
notice of final partnership adjustment is Monday, August 15, 
2022.\248\
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    \248\ See section 7503.
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    The partnership may instead respond to the notice with a 
timely request for modification of the imputed underpayment but 
ask for additional time to complete its submission in support 
of the request for modification. For example, the Secretary may 
grant a timely request for 45 additional days, allowing the 
partnership until Monday, August 1, 2022, to submit its 
complete response.
           If the partnership fails to provide the 
        required information by August 1, 2022 and no further 
        extension is granted, then the Secretary may issue a 
        notice of final partnership adjustment no later than 
        September 30, which is 60 days after August 1, 2022 
        (the end of the 270-day period plus the additional time 
        that was granted to the taxpayer to provide its 
        complete response).
           If the partnership instead provides its 
        complete response on August 1, a notice of final 
        partnership adjustment may be issued up to 270 days 
        after the date on which the information required by the 
        Secretary was submitted, or April 28, 2023. During this 
        270-day period ending with April 28, 2023, the 
        Secretary is expected to review the information that 
        was submitted and revise the adjustments that were 
        proposed if appropriate.
    In the alternative, consider a variation of the above facts 
in which the partnership submits an administrative adjustment 
request on June 1, 2020 that corrects several errors on its 
timely- filed 2018 return. The administrative adjustment 
request results in an imputed underpayment of tax, which the 
partnership pays in full, with interest from March 15, 2019 
(the filing date of the return) when it submits the 
administrative adjustment request. On December 15, 2020, the 
Secretary notifies the partnership that he will initiate an 
administrative proceeding with regard to taxable year 2018. On 
September 15, 2021, the Secretary issues a notice of proposed 
adjustments to the partnership 2018 return.
    As a result of submitting an administrative adjustment 
request, the period in which partnership adjustments to the 
taxable year 2018 may be made is extended to June 1, 2023, the 
date that is three years from the date the administrative 
adjustment request is submitted. Because that date is later 
than all of the extensions described in the preceding 
scenarios, the Secretary may issue a notice of final 
partnership adjustments on or before June 1, 2023, provided 
that such notice is issued after expiration of the 270-day 
period within which the partnership must respond to the notice 
of proposed adjustments issued September 15, 2021. The issuance 
of a notice of proposed adjustments cannot shorten the 
limitations period for making an adjustment to the partnership 
return.
    Issues raised by the partnership in its administrative 
adjustment request may be the subject of inquiry by the 
Secretary in several ways. If the original partnership return 
may be the subject of an examination, the administrative 
adjustment request is likely to be reviewed as part of that 
process. Alternatively, the administrative adjustment request 
may be subject to examination on its own. Interest on an 
imputed underpayment accrues from March 15, 2019, the 
unextended due date of the 2018 timely return until payment, 
whether the examination was prompted by the return or solely by 
the administrative adjustment request. However, full payment of 
the reported underpayment reported on the administrative 
adjustment request, plus interest calculated through the date 
of the administrative adjustment requests, ends accrual of 
additional interest with respect to that portion of the 
underpayment ultimately determined that was reported on the 
administrative adjustment request. If an increase in the 
imputed underpayment reported by the partnership results from 
the relevant examination, the additional tax that should have 
been reported and paid with the administrative adjustment 
request submitted during 2020 will incur interest from March 
15, 2019, unextended due date of the 2018 return, to the date 
the amount is paid.
    In addition, the issues presented in the administrative 
adjustment request may be relevant to determining the correct 
treatment of items reported by the partnership on returns for 
other periods. For example, the year in which the request is 
filed may be subject to examination for issues related to the 
items that were the subject of the administrative adjustment 
request. In that case, information from taxable year 2018 is 
relevant, regardless of whether an examination of 2018 is 
opened. However, no imputed underpayment for 2018 may be 
determined without initiating an administrative proceeding with 
respect to that year.

                     Definitions and Special Rules


Definitions and special rules \249\
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    \249\ Sec. 6241.
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            Partnership
    The term partnership means any partnership required to file 
a return under section 6031(a). This includes any partnership 
described in section 761 that is required to file a return.
            Partnership adjustment
    The term partnership adjustment means any adjustment in the 
amount of any item of income, gain, loss, deduction, or credit 
of a partnership, or any partner's distributed share thereof.
            Return due date
    The term return due date means, with respect to the taxable 
year, the date prescribed for filing the partnership return for 
such taxable year (determined without regard to extensions).
            Payments nondeductible
    No deduction is allowed under the Federal income tax for 
any payment required to be made by a partnership under the 
centralized system of partnership audit, assessment, and 
collection.
    Under the centralized system, the flowthrough nature of the 
partnership under subchapter K of the Code is unchanged, but 
the partnership is treated as a point of collection of 
underpayments that would otherwise be the responsibility of 
partners. The return filed by the partnership, though it is an 
information return, is treated as if it were a tax return where 
necessary to implement examination, assessment, and collection 
of the tax due and any penalties, additions to tax, and 
interest.
    A basis adjustment (reduction) to a partner's basis in its 
partnership interest is made to reflect the nondeductible 
payment by the partnership of the tax. Specifically, present-
law section 705(a)(2)(B) applies, providing that the adjusted 
basis of a partner's interest in a partnership is the basis of 
the interest determined under applicable rules relating to 
contributions and transfers, and decreased (but not below zero) 
by expenditures of the partnership that are not deductible in 
computing its taxable income and not properly chargeable to 
capital account. Concomitantly, the partnership's total 
adjusted basis in its assets is reduced by the cash payment of 
the tax. Thus, parallel basis reductions are made to outside 
and inside basis to reflect the partnership's payment of the 
tax. Partners, former partners, and the partnership may have 
entered into indemnification agreements under the partnership 
agreement with respect to the risk of tax liability of former 
or new partners being borne economically by new or former 
partners, respectively. Because the payment of tax by a 
partnership under the centralized system is nondeductible, 
payments under an indemnification or similar agreement with 
respect to or arising from the tax are nondeductible.
            Partnerships having principal place of business outside the 
                    United States
    For purposes of judicial review following a notice of final 
partnership adjustment, a principal place of business located 
outside the United States is treated as located in the District 
of Columbia.
            Suspension of period of limitations on making adjustment, 
                    assessment or collection
    The provision includes a rule similar to the present-law 
rule \250\ to conform the automatic stay of the Bankruptcy Code 
(Title 11) with the limitations period applicable under the 
centralized system for partnership adjustments. Any statute of 
limitations period provided under the centralized system on 
making a partnership adjustment, or on assessment or collection 
of an imputed underpayment, is suspended during the period the 
Secretary is prohibited by reason of the Title 11 case from 
making the adjustment, assessment, or collection. For 
adjustment or assessment, the relevant statute of limitations 
is extended for 60 days thereafter. For collection, the 
relevant statute of limitations is extended for six months 
thereafter.
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    \250\ Sec. 6213(f).
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    In a case under Title 11, the 90-day period to petition for 
judicial review after the mailing of the notice of final 
partnership adjustment \251\ is suspended during the period the 
partnership is prohibited by reason of the Title 11 case from 
filing such a petition for judicial review, and for 60 days 
thereafter.
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    \251\ Sec. 6234.
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            Treatment where partnership ceases to exist
    If a partnership ceases to exist before a partnership 
adjustment under the centralized system is made, the adjustment 
is taken into account by the former partners of the 
partnership, under regulations provided by the Secretary. 
Whether a partnership ceases to exist for this purpose is 
determined without regard to whether there is a technical 
termination of the partnership within the meaning of section 
708(b)(1)(B). The successor partnership in a technical 
termination succeeds to the adjustment or imputed underpayment, 
absent regulations to the contrary. A partnership that 
terminates within the meaning of section 708(b)(1)(A) is 
treated as ceasing to exist. In addition, a partnership also 
may be treated as ceasing to exist in other circumstances or 
based on other factors, under regulations provided by the 
Secretary. For example, for the purpose of whether a 
partnership ceases to exist under new section 6241(7), a 
partnership that has no significant income, revenue, assets, or 
activities at the time the partnership adjustment takes effect 
may be treated as having ceased to exist.
            Extension to entities filing partnership return
    If a partnership return (Form 1065) is filed by an entity 
for a taxable year but it is determined that the entity is not 
a partnership (or that there is no entity) for the year, then, 
to the extent provided in regulations, the provisions of this 
subchapter are extended in respect of that year to the entity 
and its items of income, gain, loss, deduction, and credit, and 
to persons holding an interest in the entity.
    For example, assume two taxpayers purport to create a 
partnership for taxable year 2018, and a Form 1065 is filed for 
that year. The partnership is the subject of an audit under the 
centralized system for 2018, and pursuant to the provisions for 
judicial review, the partnership is determined by a court not 
to exist as partnership. Nevertheless, the rules of the 
centralized system apply to the items of income, gain, loss, 
deduction and credit, and to the two taxpayers, in respect of 
2018. An imputed underpayment may be collected from the 
purported partnership in the adjustment year pursuant to new 
section 6225. Alternatively, the purported partnership 
representative may elect (at the time and in the manner 
prescribed by the Secretary) under new section 6226 to issue 
statements to the two taxpayers, which purported to hold 
partnership interests for the reviewed year. To the extent of 
the adjustments, each of the two taxpayer's tax may be 
increased for the taxpayer's taxable year that includes the 
date of the statement. In this situation, the amount of the 
increase for each of them is amount by which the taxpayer's tax 
would increase if the taxpayer's share of the adjustment 
amounts were included for the taxpayer's taxable year that 
includes the end of the reviewed year, plus the amount by which 
the tax would increase by reason of adjustment to tax 
attributes in years after that year of the taxpayer and before 
the year of the date of the statement.

Related provisions

            Binding nature of partnership adjustment proceedings
    The provision clarifies that the merits of an issue that is 
the subject of a final determination in a proceeding brought 
under the centralized system \252\ is among the issues that are 
precluded from being raised at a collection due process hearing 
(in connection with the right to, and opportunity for, such a 
hearing prior to a levy on any property or right to any 
property under present law).\253\ The provision does not 
restrict the authority of the Secretary to permit an 
opportunity for administrative review, similar to the 
Collection Appeals Program,\254\ nor does it limit a partner's 
right to seek review of the conduct of collection measures, 
such as whether notices of Federal tax lien or notice of intent 
to levy were timely issued.
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    \252\ That is, a proceeding brought under subchapter C of chapter 
63 of the Code.
    \253\ Section 6330 establishes the requirement that the IRS provide 
notice of potential collection action and offer an opportunity for a 
hearing before an impartial officer, and identifies which issues may be 
raised at such hearing and which are precluded. Issues permitted to be 
raised include the underlying liability only if the taxpayer did not 
receive a notice of deficiency or otherwise have an opportunity to 
contest the liability. Prior to amendment, the issues that were 
precluded listed those that were the subject of any previous 
administrative or judicial proceeding. Treas. Reg. 301-6330. The 
Secretary's power to levy is set forth in present-law section 6331.
    \254\ For example, under TEFRA, the IRS permits partners to raise 
computational issues, interest abatement questions and other collection 
due process rights in administrative appeals in order to assure 
consistency in the handling of the cases, even though the partners are 
precluded from questioning the substance of the partnership adjustment. 
See Internal Revenue Manual, paragraph 8.22.8.19, TEFRA Partnerships.
---------------------------------------------------------------------------
    For example, assume that a partnership is audited with 
respect to taxable year 2018. One of the adjustments reflects 
the partnership's omission of income of $1,000 in calculating 
partnership taxable income. Following receipt of the notice of 
final partnership adjustment, the partnership decides not to 
litigate. The partnership elects to issue statements to 
reviewed year partners, whose tax is increased for the 
partner's taxable year that includes the date of the statement, 
2021. Reviewed year partner A's adjustment is $100, resulting 
in an increase in tax of $35, but partner A does not pay the 
increased amount of tax. The time for the partnership to 
litigate the adjustments has elapsed and the notice of final 
partnership adjustment is a final determination. Prior to any 
levy on any property or right to any property of partner A in 
connection with collection of the $35 tax, partner A has the 
right to and is afforded the opportunity for a hearing (the 
collection due process hearing). At the hearing, partner A may 
not raise the issue of whether the $1,000 (or A's $100 share of 
it) was properly includable in determining partnership taxable 
income, because a final determination with respect to the issue 
was made in a proceeding brought under the centralized system. 
The result is the same if the partnership had decided to seek 
judicial review and the final determination of the court is 
that the $1,000 is includable in determining partnership 
taxable income.
            Restriction on authority to amend partner information 
                    statements
    The provision provides that partner information returns 
(currently Schedules K-1) required to be furnished by the 
partnership \255\ may not be amended after the due date of the 
partnership return to which the partner information returns 
relate. The due date takes into account the permitted extension 
period. For example, the Schedules K-1 furnished by a 
partnership with respect to its taxable year 2020 may not be 
amended after the due date for the partnership 2020 return. If 
the partnership has a calendar taxable year, the due date for 
its partnership 2020 return is September 15, 2021 (taking into 
account the permitted 6-month extension following the due date 
of March 15, 2021), after which date the Schedules K-1 for 2020 
may no longer be amended.\256\ The partnership may, however, 
file an administrative adjustment request pursuant to new 
section 6227, and the partnership may pay any resulting imputed 
underpayment at the partnership level.
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    \255\ The requirement of furnishing partner information returns is 
imposed by section 6031(b). See section 411 of the Protecting Americans 
from Tax Hikes Act of 2015 (Division Q of Pub. L. No. 114-113), 
correcting a conforming amendment to strike the last sentence of 
section 6031(b) under prior law, which sentence related to repealed 
provisions on electing large partnerships.
    \256\ This rule does not, however, preclude the filing of amended 
returns of reviewed-year partners pursuant to the procedure for 
modification of an imputed underpayment in section 6225(c)(2).
---------------------------------------------------------------------------
            Example
    For example, assume that a partnership files its Form 1065 
for taxable year 2020 on March 15, 2021. On November 3, 2021, 
the partnership discovers an omission from income for 2020. The 
partnership may not issue amended Schedules K-1 to its partners 
for 2020. However, the partnership may file an administrative 
adjustment request and pay the underpayment consistently with 
new section 6227(b)(1) for the partnership taxable year in 
which the administrative adjustment request is made. In this 
situation, the partnership does not furnish amended Schedules 
K-1 to the partners and the partners do not file amended 
Federal and State income tax returns with respect to the 
omitted income.\257\
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    \257\ The partnership that files the administrative adjustment 
request is not precluded from furnishing under section 6227(b)(2) an 
adjusted statement (similar to a Schedule K-1) to each reviewed-year 
partner, who is then required to pay tax attributable to the 
partnership adjustment (as provided under guidance provided by the 
Secretary).
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                             Effective Date

    The provision applies to returns filed for partnership 
taxable years beginning after December 31, 2017. The provision 
relating to administrative adjustment requests applies to 
requests with respect to returns filed for partnership taxable 
years beginning after December 31, 2017. The provision relating 
to the election of a partnership to furnish statements to 
partners (section 6226) applies to elections with respect to 
returns filed for partnership taxable years beginning after 
December 31, 2017.
    A partnership may elect for the provisions of the 
centralized system (other than the election out under section 
6221(b)) to apply to any return of the partnership filed for 
partnership taxable years beginning after the date of enactment 
and before January 1, 2018. This election is made at such time 
and in such form and manner as the Secretary of the Treasury 
may prescribe. A partnership may not elect out of the 
centralized system under section 6221(b) in combination with 
this election.
    A partnership may choose to make this election, for 
example, to be eligible before 2018 to pay at the partnership 
level, to obviate the need to furnish amended Schedules K-1 to 
correct a partnership-level error, or to obviate the need for 
partners receiving amended Schedules K-1 to file amended 
Federal and State income tax returns. A partnership may not 
elect out of the centralized system under section 6221(b) in 
combination with this election.

  B. Partnership Interests Created by Gift (sec. 1102 of the Act and 
                  secs. 704(e) and 761(b) of the Code)


                              Present Law

    Under present law, a partnership includes an unincorporated 
organization that carries on any business, financial operation, 
or venture which is not otherwise treated as a trust, estate, 
or corporation under the Internal Revenue Code.\258\ The 
Supreme Court has stated that the test of a partnership is 
``whether considering all the facts . . . the parties in good 
faith and acting with a business purpose intended to join 
together in the present conduct of the enterprise''.\259\ A 
partner means a member of a partnership.\260\
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    \258\ Sec. 761(a). See also sec. 7701(a)(2).
    \259\ Commissioner v. Culbertson, 337 U.S. 733, 742 (1949).
    \260\ Sec. 761(b).
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    Present law also provides that the manner in which a person 
acquires a capital interest is not determinative of whether 
that person is recognized as a partner for income tax purposes. 
If he owns a capital interest in a partnership in which capital 
is a material income-producing factor, whether or not the 
interest was derived by purchase or gift from any person, the 
owner is treated as a partner.\261\ The predecessor of this 
provision was enacted in 1951 to prevent the IRS from denying 
partner status to a taxpayer who shared actual ownership of the 
partnership's income-producing capital on the basis that the 
interest was acquired from a family member.\262\ According to 
the legislative history, ``Your committee's amendment makes it 
clear that, however the owner of a partnership interest may 
have acquired such interest, the income is taxed to the owner, 
if he is the real owner. If the ownership is real, it does not 
matter what motivated the transfer to him or whether the 
business benefitted from the entrance of the new partner.'' 
\263\ The focus of the legislation was on which party 
(transferor or transferee) actually owns a partnership 
interest, not on whether a particular interest qualifies as a 
partnership interest. The provision states the general 
principle that income derived from capital is taxed to the 
owner of the capital.\264\
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    \261\ Sec. 704(e)(1).
    \262\ Pub. L. No. 82-183, sec. 340(a).
    \263\ S. Rep. No. 781, 82d Cong., 1st Sess., 38, 39 (1951): H.R. 
Rep. No. 586, 82d Cong., 1st Sess. 32 (1951).
    \264\ See 4 Bittker and Lokken, Federal Taxation of Income, 
Estates, and Gifts, para. 86.3.1, at 86-29 (3rd ed. 2003). ``The 
reference to `ownership' of a capital interest is odd because it is a 
pervasive principle of tax law, seemingly needing no repetition for a 
limited class of assets, that income from property transferred by gift 
is thereafter taxed to the donee.''
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    In a partnership known as Castle Harbour, LLC, two foreign 
banks held interests, the nature of which was the subject of 
dispute for income tax purposes. At the trial level, the 
District Court held that the tax-indifferent banks were 
partners even though the interest was not ``bona fide 
partnership equity participation'' \265\ because the interest 
met the definition of a capital interest within the meaning of 
section 704(e)(1).\266\ Thus, the tax-indifferent banks were 
partners to which income could be allocated. The trial court 
was reversed on appeal.\267\
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    \265\ TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 
2006), reversing and remanding 342 F.Supp. 2d 94 (D. Conn. 2004). TIFD 
III-E, Inc. was tax matters partner for Castle Harbour, LLC.
    \266\ TIFD III-E, Inc. v. United States, 660 F. Supp. 2d 367 (D. 
Conn. 2009).
    \267\ TIFD III-E, Inc. v. United States, 666 F.3d 836 (2d Cir. 
2012).
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                        Explanation of Provision

    The provision clarifies that, in the case of a capital 
interest in a partnership in which capital is a material 
income-producing factor, the determination of whether a person 
is a partner with respect to the interest is made without 
regard to whether the interest was derived by gift from any 
other person. The provision strikes paragraph (1) of section 
704(e) and modifies the definition of partner in section 761 to 
eliminate any argument that the provision provides an 
alternative test as to whether the holder of a capital interest 
is a partner with respect to that interest, or whether the 
interest constitutes a capital interest in a partnership.
    The provision is intended to retain the present-law 
determination of which person (for example, the donor or the 
donee) is a partner. The provision is not intended to change 
the principle that the real owner of a capital interest is to 
be taxed on the income from the interest, regardless of the 
motivation behind or the means of the transfer of the interest. 
Thus, as under present law, the fact that an individual 
received such a partnership interest by gift from a family 
member does not determine whether that individual is (or is 
not) a partner.
    The provision places the new provision in section 761, 
relating to definitions, rather than section 704, relating to a 
partner's distributive share.\268\
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    \268\ The predecessor to section 704(e)(1) was located in the 
definitions at section 3797(a)(2) of the Internal Revenue Code of 1939. 
It was placed at section 704(e)(1) when the Code was recodified as the 
Internal Revenue Code of 1954.
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                             Effective Date

    The provision applies to partnership taxable years 
beginning after December 31, 2015.

  PART ELEVEN: SURFACE TRANSPORTATION EXTENSION ACT OF 2015, PART II 
                       (PUBLIC LAW 114-87) \269\
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    \269\ H.R. 3996. The House passed H.R. 3996 on November 16, 2015. 
The bill passed the Senate without amendment on November 19, 2015. The 
President signed the bill on November 20, 2015.
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A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of 
          the Act and secs. 9503, 9504, and 9508 of the Code)

                              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 and Leaking Underground Storage Tank Trust 
Fund) through November 20, 2015, for purposes provided in 
specified authorizing legislation as in effect on the date of 
enactment.

                        Explanation of Provision

    This provision extends the authority to make expenditures 
(subject to appropriations) from the Highway Trust Fund (and 
Sport Fish Restoration and Boating Trust Fund and Leaking 
Underground Storage Tank Trust Fund) through December 4, 2015.

                             Effective Date

    The provision is effective on date of enactment (November 
20, 2015).

PART TWELVE: FIXING AMERICA'S SURFACE TRANSPORTATION ACT (``FAST ACT'') 
                       (PUBLIC LAW 114-94) \270\
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    \270\ H.R. 22. The House passed H.R, 22 on January 6, 2015. The 
Senate Committee on Finance reported H.R. 22 on February 12, 2015 (S. 
Rep. No. 114-3). The Senate passed H.R. 22 with an amendment on July 
30, 2015. The conference report was filed on December 1, 2015 (H. Rep. 
No. 114-357) and was passed by the House on December 3, 2015, and the 
Senate on December 3, 2015. The President signed the bill on December 
4, 2015.
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                          DIVISION C--FINANCE

            TITLE XXXI--HIGHWAY TRUST FUND AND RELATED TAXES

 A. Extension of Highway Trust Fund Expenditure Authority (secs. 31101 
         of the Act and secs. 9503, 9504, and 9508 of the Code)

                              Present Law

In general
    Under present law, revenues from the highway excise taxes, 
as imposed through October 1, 2016, 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.\271\ The Code authorizes 
expenditures (subject to appropriations) from the Highway Trust 
Fund through December 4, 2015, 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 2015, Part II.
---------------------------------------------------------------------------
    \271\ 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.\272\ The Highway Trust Fund 
and the Mass Transit Account are funding sources for specific 
programs.
---------------------------------------------------------------------------
    \272\ 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. The Code provides that the authority to make 
expenditures from the Highway Trust Fund expires after December 
4, 2015. Thus, no Highway Trust Fund expenditures may occur 
after December 4, 2015, without an amendment to the Code.
    Section 9503 of the Code 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.\273\ 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.
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    \273\ Sec. 9503(b)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides for expenditure authority through 
September 30, 2020.\274\ The Code provisions governing the 
purposes for which monies in the Highway Trust Fund may be 
spent are updated to include the FAST Act.
---------------------------------------------------------------------------
    \274\ Cross-references to the reauthorization Act in the Code 
provisions governing the Sport Fish Restoration and Boating Trust Fund 
are also updated to include the FAST Act. In addition the date 
references in the Code provisions governing the Leaking Underground 
Storage Tank Trust Fund, and the Sport Fish Restoration and Boating 
Trust Fund are also updated.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment 
(December 4, 2015).

B. Extension of Highway-Related Taxes (sec. 31102 of the Act and secs. 
    4041, 4051, 4071, 4081, 4221, 4481, 4483, and 6412 of the Code)


              Present Law Highway Trust Fund Excise 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, 2017. Except for 4.3 cents per gallon of the 
Highway Trust Fund fuels tax rates, the remaining taxes are 
scheduled to expire after October 1, 2016. The 4.3-cents-per-
gallon portion of the fuels tax rates is permanent.\275\ The 
six taxes are summarized below.
---------------------------------------------------------------------------
    \275\ 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: \276\
---------------------------------------------------------------------------
    \276\ 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 Leaking 
Underground Storage Tank 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 \277\
------------------------------------------------------------------------

Non-fuel Highway Trust Fund excise taxes
---------------------------------------------------------------------------

    \277\ 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 the following articles: truck chassis and bodies, truck 
trailer and semitrailer chassis and bodies, and tractors of the 
kind chiefly used for highway transportation in combination 
with a trailer or semitrailer (generally, the taxes apply to 
trucks having a gross vehicle weight in excess of 33,000 pounds 
and trailers having such a weight in excess of 26,000 pounds); 
\278\
---------------------------------------------------------------------------
    \278\ 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; \279\ and
---------------------------------------------------------------------------
    \279\ Sec. 4071.
---------------------------------------------------------------------------
    3. An annual use tax imposed on highway vehicles having a 
taxable gross weight of 55,000 pounds or more.\280\ (The 
maximum rate for this tax is $550 per year, imposed on vehicles 
having a taxable gross weight over 75,000 pounds.)
---------------------------------------------------------------------------
    \280\ 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, 
2016, through September 30, 2016, the amount of the annual use 
tax is reduced by 75 percent.\281\
---------------------------------------------------------------------------
    \281\ Sec. 4482(c)(4) and (d).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision generally extends present-law taxes through 
September 30, 2022. The heavy vehicle use tax is extended 
through September 30, 2023.

                             Effective Date

    The provision is effective October 1, 2016.

 C. Additional Transfers to the Highway Trust Fund (sec. 31201 of the 
                     Act and sec. 9503 of the Code)


                              Present Law

    Public Law No. 110-318, ``an Act to amend the Internal 
Revenue Code of 1986 to restore the Highway Trust Fund 
balance'' transferred, out of money in the Treasury not 
otherwise appropriated, $8,017,000,000 to the Highway Trust 
Fund effective September 15, 2008. Public Law No. 111-46, ``an 
Act to restore sums to the Highway Trust Fund and for other 
purposes,'' transferred, out of money in the Treasury not 
otherwise appropriated, $7 billion to the Highway Trust Fund 
effective August 7, 2009. The Hiring Incentives to Restore 
Employment Act transferred, out of money in the Treasury not 
otherwise appropriated, $14,700,000,000 to the Highway Trust 
Fund and $4,800,000,000 to the Mass Transit Account in the 
Highway Trust Fund.\282\ The HIRE Act provisions generally were 
effective as of March 18, 2010.
---------------------------------------------------------------------------
    \282\ The Hiring Incentives to Restore Employment Act (the ``HIRE'' 
Act), Pub. L. No. 111-147, sec. 442.
---------------------------------------------------------------------------
    Moving Ahead for Progress in the 21st Century (``MAP-21'') 
\283\ provided that, out of money in the Treasury not otherwise 
appropriated, the following transfers were to be made from the 
General Fund to the Highway Trust Fund:
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    \283\ Moving Ahead for Progress in the 21st Century Act (``MAP-
21''), Pub. L. No. 112-141, sec. 40201(a)(2), and sec. 40251.

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

    MAP-21 also transferred $2.4 billion from the Leaking 
Underground Storage Tank Trust Fund to the Highway Account in 
the Highway Trust Fund.
    The Highway and Transportation Funding Act of 2014 
transferred $7.765 billion from the General Fund to the Highway 
Account of the Highway Trust Fund, $2 billion from the General 
Fund to the Mass Transit Account of the Highway Trust Fund, and 
$1 billion from the Leaking Underground Storage Tank Trust Fund 
to the Highway Account of the Highway Trust Fund.\284\ The 
provisions were effective on August 8, 2014.
---------------------------------------------------------------------------
    \284\ Highway and Transportation Funding Act of 2014, Pub. L. No. 
113-159, sec. 2002.
---------------------------------------------------------------------------
    The Surface Transportation and Veterans Health Care Choice 
Improvement Act of 2015, provided, out of money not otherwise 
appropriated, the following transfers from the General Fund to 
the Highway Trust Fund: $6.068 billion to the Highway Account, 
and $2 billion to the Mass Transit Account. The provision was 
effective July 31, 2015.

                        Explanation of Provision

    The provision 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: 
$51,900,000,000 to the Highway Account and $18,100,000,000 to 
the Mass Transit account.

                             Effective Date

    The provision is effective on the date of enactment 
(December 4, 2015).

   D. Transfer to Highway Trust Fund of Certain Motor Vehicle Safety 
      Penalties (sec. 31202 of the Act and sec. 9503 of the Code)


                              Present Law

    Present law imposes certain civil penalties related to 
violations of motor vehicle safety.

                        Explanation of Provision

    The provision deposits the civil penalties related to motor 
vehicle safety in the Highway Trust Fund instead of in the 
Treasury's General Fund.

                             Effective Date

    The provision is effective for amounts collected after the 
date of enactment (December 4, 2015).

E. Appropriation From Leaking Underground Storage Tank Trust Fund (sec. 
         31203 of the Act and secs. 9503 and 9508 of the Code)


                              Present Law

    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.\285\ 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.
---------------------------------------------------------------------------
    \285\ 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.

                        Explanation of Provision

    The provision transfers $100 million on the date of 
enactment (December 4, 2015), $100 million on October 1, 2016, 
and an additional $100 million on October 1, 2017, 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 
(December 4, 2015).

                          TITLE XXXII--OFFSETS


  A. Revocation or Denial of Passport in Case of Certain Unpaid Taxes 
 (sec. 32101 of the Act and secs. 6320, 6331, 7345 and 6103(k)(11) of 
                               the Code)


                              Present Law

    The administration of passports is the responsibility of 
the Department of State.\286\ The Secretary of State may refuse 
to issue or renew a passport if the applicant owes child 
support in excess of $2,500 or owes certain types of Federal 
debts, such as expenses incurred in providing assistance to an 
applicant to return to the United States. The scope of this 
authority does not extend to rejection or revocation of a 
passport on the basis of delinquent Federal taxes. Although 
issuance of a passport does not require a social security 
number or taxpayer identification number (``TIN''), the 
applicant is required under the Code to provide such number. 
Failure to provide a TIN is reported by the State Department to 
the IRS and may result in a $500 fine.\287\
---------------------------------------------------------------------------
    \286\ ``Passport Act of 1926,'' 22 U.S.C. sec. 211a et seq.
    \287\ Sec. 6039E.
---------------------------------------------------------------------------
    Returns and return information are confidential and may not 
be disclosed by the IRS, other Federal employees, State 
employees, and certain others having access to such information 
except as provided in the Internal Revenue Code.\288\ There are 
a number of exceptions to the general rule of nondisclosure 
that authorize disclosure in specifically identified 
circumstances, including disclosure of information about 
federal tax debts for purposes of reviewing an application for 
a Federal loan \289\ and for purposes of enhancing the 
integrity of the Medicare program.\290\
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    \288\ Sec. 6103.
    \289\ Sec. 6103(l)(3).
    \290\ Sec. 6103(l)(22).
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    Under the provision, the Secretary of State is required to 
deny a passport (or renewal of a passport) to a seriously 
delinquent taxpayer and is permitted to revoke any passport 
previously issued to such person. In addition to the revocation 
or denial of passports to delinquent taxpayers, the Secretary 
of State is authorized to deny an application for a passport if 
the applicant fails to provide a social security number or 
provides an incorrect or invalid social security number. With 
respect to an incorrect or invalid number, the inclusion of an 
erroneous number is a basis for rejection of the application 
only if the erroneous number was provided willfully, 
intentionally, recklessly or negligently. Exceptions to these 
rules are permitted for emergency or humanitarian 
circumstances, including the issuance of a passport for short-
term use to return to the United States by the delinquent 
taxpayer.
    The provision authorizes limited sharing of information 
between the Secretary of State and Secretary of the Treasury. 
If the Commissioner of Internal Revenue certifies to the 
Secretary of the Treasury the identity of persons who have 
seriously delinquent Federal taxes as defined in this 
provision, the Secretary of the Treasury or his delegate is 
authorized to transmit such certification to the Secretary of 
State for use in determining whether to issue, renew, or revoke 
a passport. Certification of a seriously delinquent tax debt 
under this provision is added to the list of actions for which 
the time in which the action must be performed may be postponed 
due to the taxpayer's service in a combat zone.\291\ Applicants 
whose names are included on the certifications provided to the 
Secretary of State are ineligible for a passport. The Secretary 
of State and Secretary of the Treasury are held harmless with 
respect to any certification issued pursuant to this provision.
---------------------------------------------------------------------------
    \291\ Sec. 7508(a).
---------------------------------------------------------------------------

Applicable only to ``seriously delinquent tax debt''

    The provision applies only to ``seriously delinquent tax 
debt,'' which includes any outstanding Federal tax liability 
(including interest and any penalties) in excess of $50,000 
\292\ for which a notice of lien or a notice of levy has been 
filed. With respect to debts for which a notice of lien has 
been filed, the debt is considered seriously delinquent only if 
the taxpayer's administrative review rights have been exhausted 
or lapsed. The amount is to be adjusted for inflation annually, 
using calendar year 2014, and a cost-of-living adjustment. Even 
if a tax debt otherwise meets the statutory threshold, it may 
not be considered seriously delinquent if (1) the debt is being 
paid in a timely manner pursuant to an installment agreement or 
offer-in-compromise, or (2) collection action with respect to 
the debt is suspended because a collection due process hearing 
or innocent spouse relief has been requested or is pending.
---------------------------------------------------------------------------
    \292\ The amount is indexed to inflation annually, based on 
calendar year 2015.
---------------------------------------------------------------------------

Taxpayer safeguards

    Several measures ensure that the IRS corrects erroneous 
certifications and considers actions taken by a taxpayer after 
action has been initiated under this provision if such actions 
would have the effect of removing the debt from the category of 
seriously delinquent debt. These measures include limits on the 
authority of the Commissioner, notification requirements, 
standards under which the Commissioner may reverse the 
certification of serious delinquency, and limits on authority 
to delegate the certification process.
    The Commissioner may not delegate the authority to provide 
certification of a seriously delinquent tax debt except to a 
Deputy Commissioner for Services and Enforcement, or to a 
Division Commissioner (the head of an IRS operating division). 
Neither official may redelegate such authority.
    The Commissioner must inform taxpayers regarding the 
procedures in three ways. First, the possible loss of a 
passport is added to the list of matters required to be 
included in notices to taxpayer of potential collection 
activity under sections 6320 or 6331. Second, the Commissioner 
must provide contemporaneous notice to a taxpayer when the 
Commissioner sends a certification of serious delinquency to 
the Secretary. Finally, in instances in which the Commissioner 
decertifies the taxpayer's status as a delinquent taxpayer, he 
is required to provide notice to the taxpayer at the same time 
as the notice to the Secretary of the Treasury.
    The decertification process provides a mechanism under 
which the Commissioner can correct an erroneous certification 
or end the certification because the debt is no longer 
seriously delinquent, due to certain events subsequent to the 
certification. If after certifying the delinquency to the 
Secretary, the IRS receives full payment of the seriously 
delinquent tax debt; the taxpayer enters into an installment 
agreement under section 6159; the IRS accepts an offer in 
compromise under section 7122; or a spouse files for relief 
from joint liability, the Commissioner must notify the 
Secretary that the taxpayer is not seriously delinquent. In 
each instance, the ``decertification'' is limited to the 
taxpayer who is the subject of one of the above actions. In the 
case of a claim for innocent spouse relief, the decertification 
is only with respect to the spouse claiming relief, not both 
spouses. The Commissioner must generally decertify within 30 
days of the event that requires decertification.
    The Commissioner must provide the notice of decertification 
to the Secretary of the Treasury, who must in turn promptly 
notify the Secretary of State of the decertification. The 
Secretary of State must delete the certification from the 
records regarding that taxpayer.
    In addition, the provision allows limited judicial review 
of a wrongful certification (or failure to decertify) in a 
Federal district court or the U.S. Tax Court. If the court 
determines that the certification is erroneous, the court may 
order the Secretary of the Treasury to notify the Secretary of 
State of the error. No other relief is authorized.

                             Effective Date

    The provision is effective on the date of enactment 
(December 4, 2015).

 B. Reform of Rules Related to Qualified Tax Collection Contracts, and 
Special Compliance Personnel Program (secs. 32102-32103 of the Act and 
                         sec. 6306 of the Code)


                              Present Law 

    Code section 6306 permits the IRS to use private debt 
collection companies to locate and contact taxpayers owing 
outstanding tax liabilities of any type \293\ and to arrange 
payment of those taxes by the taxpayers. There must be an 
assessment pursuant to section 6201 in order for there to be an 
outstanding tax liability. An assessment is the formal 
recording of the taxpayer's tax liability that fixes the amount 
payable. An assessment must be made before the IRS is permitted 
to commence enforcement actions to collect the amount payable. 
In general, an assessment is made at the conclusion of all 
examination and appeals processes within the IRS.\294\
---------------------------------------------------------------------------
    \293\ This provision generally applies to any type of tax imposed 
under the Internal Revenue Code.
    \294\ An amount of tax reported as due on the taxpayer's tax return 
is considered to be self-assessed. If the IRS determines that the 
assessment or collection of tax will be jeopardized by delay, it has 
the authority to assess the amount immediately (sec. 6861), subject to 
several procedural safeguards.
---------------------------------------------------------------------------
    Several steps are involved in the deployment of private 
debt collection companies. First, the private debt collection 
company contacts the taxpayer by letter.\295\ If the taxpayer's 
last known address is incorrect, the private debt collection 
company searches for the correct address. Second, the private 
debt collection company telephones the taxpayer to request full 
payment.\296\ If the taxpayer cannot pay in full immediately, 
the private debt collection company offers the taxpayer an 
installment agreement providing for full payment of the taxes 
over a period of as long as five years. If the taxpayer is 
unable to pay the outstanding tax liability in full over a 
five-year period, the private debt collection company obtains 
financial information from the taxpayer and will provide this 
information to the IRS for further processing and action by the 
IRS.
---------------------------------------------------------------------------
    \295\ The provision requires that the IRS disclose confidential 
taxpayer information to the private debt collection company. Section 
6103(n) permits disclosure of returns and return information for ``the 
providing of other services . . . for purposes of tax administration.''
    \296\ The private debt collection company is not permitted to 
accept payment directly. Payments are required to be processed by IRS 
employees.
---------------------------------------------------------------------------
    The Code specifies several procedural conditions under 
which the provision would operate. First, provisions of the 
Fair Debt Collection Practices Act apply to the private debt 
collection company. Second, the employees of private sector 
debt collection companies are prohibited from committing any 
act or omission which employees of the IRS are prohibited from 
committing in the performance of similar services. Third, 
subcontractors are prohibited from having contact with 
taxpayers, providing quality assurance services, and composing 
debt collection notices; any other service provided by a 
subcontractor must receive prior approval from the IRS.
    The Code creates a revolving fund from the amounts 
collected by the private debt collection companies. The private 
debt collection companies are paid out of this fund. The Code 
prohibits the payment of fees for all services in excess of 25 
percent of the amount collected under a tax collection 
contract.
    The Code provides that up to 25 percent of the amount 
collected may be used for IRS collection enforcement 
activities. The law also requires Treasury to provide a 
biennial report to the Committee on Finance and the Committee 
on Ways and Means. The report is to include, among other items, 
a cost benefit analysis, the impact of the debt collection 
contracts on collection enforcement staff levels in the IRS, 
and an evaluation of contractor performance.
    The Omnibus Appropriations Act of 2009 (the ``Act''), which 
made appropriations for the fiscal year ending September 30, 
2009, included a provision stating that none of the funds made 
available in the Act could be used to fund or administer 
section 6306.\297\ Around the same time, the IRS announced that 
the IRS would not renew its contracts with private debt 
collection agencies.\298\
---------------------------------------------------------------------------
    \297\  Pub. L. No. 111-8, March 11, 2009.
    \298\ IR-2009-19, March 5, 2009.
---------------------------------------------------------------------------

                        Explanation of Provision


Qualified tax collection contracts

    The provision requires the Secretary to enter into 
qualified tax collection contracts for the collection of 
inactive tax receivables. Inactive tax receivables are defined 
as any tax receivable (i) removed from the active inventory for 
lack of resources or inability to locate the taxpayer, (ii) for 
which more than 1/3 of the applicable limitations period has 
lapsed and no IRS employee has been assigned to collect the 
receivable; and (iii) for which, a receivable has been assigned 
for collection but more than 365 days have passed without 
interaction with the taxpayer or a third party for purposes of 
furthering the collection. Tax receivables are defined as any 
outstanding assessment which the IRS includes in potentially 
collectible inventory.
    The provision designates certain tax receivables as not 
eligible for collection under qualified tax collection 
contracts, specifically a contract that: (i) is subject to a 
pending or active offer-in-compromise or installment agreement; 
(ii) is classified as an innocent spouse case; (iii) involves a 
taxpayer identified by the Secretary as being (a) deceased, (b) 
under the age of 18, (c) in a designated combat zone, or (d) a 
victim of identity theft; (iv) is currently under examination, 
litigation, criminal investigation, or levy; or (v) is 
currently subject to a proper exercise of a right of appeal. 
The provision grants authority to the Secretary to prescribe 
procedures for taxpayers in Presidentially declared disaster 
areas to request relief from immediate collection measures 
under the provision.
    The provision requires the Secretary to give priority to 
private collection contractors and debt collection centers 
currently approved by the Treasury Department's Financial 
Management Service on the schedule required under section 
3711(g) of title 31 of the United States Code, to the extent 
appropriate to carry out the purposes of the provision.
    The provision adds an additional exception to section 6103 
to allow contractors to identify themselves as such and 
disclose the nature, subject, and reason for the contact. 
Disclosures are permitted only in situations and under 
conditions approved by the Secretary.
    The provision requires the Secretary to prepare two reports 
for the House Committee on Ways and Means and the Senate 
Committee on Finance. The first report is required annually and 
due not later than 90 days after each fiscal year and is 
required to include: (i) the total number and amount of tax 
receivables provided to each contractor for collection under 
this section, (ii) the total amounts collected by and 
installment agreements resulting from the collection efforts of 
each contactor and the collection costs incurred by the IRS; 
(iii) the impact of such contacts on the total number and 
amount of unpaid assessments, and on the number and amount of 
assessments collected by IRS personnel after initial contact by 
a contractor, (iv) the amount of fees retained by the Secretary 
under subsection (e) and a description of the use of such 
funds; and (v) a disclosure safeguard report in a form similar 
to that required under section 6103(p)(5).
    The second report is required biannually and is required to 
include: (i) an independent evaluation of contactor 
performance; and (ii) a measurement plan that includes a 
comparison of the best practices used by private collectors to 
the collection techniques used by the IRS and mechanisms to 
identify and capture information on successful collection 
techniques used by the contractors that could be adopted by the 
IRS.

Special compliance personnel program

    The provision requires that the amount that, under current 
law, is to be retained and used by the IRS for collection 
enforcement activities under section 6306 of the Code be 
instead used to fund a newly created special compliance 
personnel program. The provision also requires the Secretary to 
establish an account for the hiring, training, and employment 
of special compliance personnel. No other source of funding for 
the program is permitted, and funds deposited in the special 
account are restricted to use for the program, including 
reimbursement of the IRS and other agencies for the cost of 
administering the qualified debt collection program and all 
costs associated with employment of special compliance 
personnel and the retraining and reassignment of other 
personnel as special compliance personnel. Special compliance 
personnel are individuals employed by the IRS to serve either 
as revenue officers performing field collection functions, or 
as persons operating the automated collection system.
    The provision requires the Secretary to prepare annually a 
report for the House Committee on Ways and Means and the Senate 
Committee on Finance, to be submitted no later than March of 
each year. In the report, the Secretary is to describe for the 
preceding fiscal year accounting of all funds received in the 
account, administrative and program costs, number of special 
compliance personnel hired and employed as well as actual 
revenue collected by such personnel. Similar information for 
the current and following fiscal year, using both actual and 
estimated amounts, is required.

                             Effective Date

    The provision relating to qualified tax collection 
contracts applies to tax receivables identified by the 
Secretary after the date of enactment (December 4, 2015). The 
requirement to give priority to certain private collection 
contractors and debt collection centers applies to contracts 
and agreements entered into within three months after the date 
of enactment, and the new exception to section 6103 applies to 
disclosures made after the date of enactment. The requirement 
of the reports to Congress is effective on the date of 
enactment.
    The provision relating to the special compliance personnel 
program applies to amounts collected and retained by the 
Secretary after the date of enactment.

C. Repeal of Modification of Automatic Extension of Return Due Date for 
 Certain Employee Benefit Plans (sec. 32104 of the Act and secs. 6058 
                         and 6059 of the Code)


                              Present Law

    An employer that maintains a pension, annuity, stock bonus, 
profit-sharing or other funded deferred compensation plan (or 
the plan administrator of the plan) is required to file an 
annual return containing information required under regulations 
with respect to the qualification, financial condition, and 
operation of the plan.\299\ The plan administrator of a defined 
benefit plan subject to the minimum funding requirements \300\ 
is required to file an annual actuarial report.\301\ These 
filing requirements are met by filing an Annual Return/Report 
of Employee Benefit Plan, Form 5500, and providing the 
information as required on the form and related 
instructions.\302\
---------------------------------------------------------------------------
    \299\ Sec. 6058.
    \300\ Sec. 412. Most governmental plans (defined in section 414(d)) 
and church plans (defined in section 414(e)) are exempt from the 
minimum funding requirements.
    \301\ Sec. 6059.
    \302\ Treas. Reg. secs. 301.6058-1(a) and 301.6059-1. Form 5500 
consists of a main form and various schedules, some of which require 
additional information to be included. The schedules that must be filed 
and the additional information that must be included with Form 5500 
depend on the type and size of plan. A simplified annual reporting 
form, Annual Return/Report of Small Employee Benefit Plan, Form 5500-
SF, is available to certain plans (covering fewer than 100 employees) 
that are subject to reporting requirements under ERISA and the Code. 
References herein to Form 5500 include Form 5500-SF.
---------------------------------------------------------------------------
    Similarly, the Employee Retirement Income Security Act of 
1974 (``ERISA'') requires the administrator of certain pension 
and welfare benefit plans to file annual reports disclosing 
certain information to the Department of Labor (``DOL'') and, 
with respect to some defined benefit plans, to the Pension 
Benefit Guaranty Corporation (``PBGC'').\303\ Plan 
administrators also comply with these ERISA filing requirements 
by filing Form 5500.
---------------------------------------------------------------------------
    \303\ ERISA secs. 103, 104, and 4065. Most governmental plans and 
church plans are exempt from ERISA, including the ERISA reporting 
requirements. ERISA section 3004 requires that, when the IRS and DOL 
carry out provisions relating to the same subject matter, they must 
consult with each other and develop rules, regulations, practices and 
forms designed to reduce duplication of effort, duplication of 
reporting, and the burden of compliance by plan administrators and 
employers. Under ERISA section 4065, the PBGC is required to work with 
the IRS and DOL to combine the annual report to PBGC with reports 
required to be made to those agencies.
---------------------------------------------------------------------------
    Forms 5500 are filed with DOL, and information from Forms 
5500 is shared with the IRS and PBGC.\304\ Form 5500 is due by 
the last day of the seventh month following the close of the 
plan year.\305\ DOL and IRS rules allow the due date to be 
automatically extended by 2 months if a request for extension 
is filed.\306\ Thus, in the case of a plan that uses the 
calendar year as the plan year, the extended due date for Form 
5500 is October 15.
---------------------------------------------------------------------------
    \304\ Form 5500 filings are also publicly released in accordance 
with section 6104(b) and Treas. Reg. section 301.6104(b)-1 and ERISA 
sections 104(a)(1) and 106(a).
    \305\ Under ERISA section 104(a)(1), the annual report is due 
within 210 days after the close of the plan year or within such time as 
provided by regulations to reduce duplicative filings. DOL and IRS 
regulations provide for filing at the time required by the forms and 
instructions issued by the agencies. 29 C.F.R. sec. 2520.104a-5(a)(2) 
and Treas. Reg. secs. 301.6058-1(a)(4) and 301.6059-1(a).
    \306\ Treas. Reg. sec. 1.6081-11(a). Instructions for Form 5500 
also provide for an automatic extension of time to file the Form 5500 
until the due date of the Federal income tax return of the employer 
maintaining the plan if (1) the plan year and the employer's tax year 
are the same; (2) the employer has been granted an extension of time to 
file its federal income tax return to a date later than the normal due 
date for filing the Form 5500; and (3) a copy of the application for 
extension of time to file the Federal income tax return is maintained 
with the records of the Form 5500 filer. An extension granted by using 
this automatic extension procedure cannot be extended beyond a total of 
9+ months beyond the close of the plan year.
---------------------------------------------------------------------------
    Under the Surface Transportation and Veterans Health Care 
Choice Improvement Act of 2015, in the case of returns for 
taxable years beginning after December 31, 2015, the Secretary 
of the Treasury is directed to modify appropriate regulations 
to provide that the maximum extension for the returns of 
employee benefit plans filing Form 5500 is an automatic 3 month 
period ending on November 15 for calendar-year plans.\307\
---------------------------------------------------------------------------
    \307\ Sec. 2006(b)(3) of Pub. L. No. 114-41 (July 31, 2015). See 
Part Seven, Title II, item F.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision repeals the provision in the Surface 
Transportation and Veterans Health Care Choice Improvement Act 
of 2015 that provides for an automatic 3 month extension of the 
due date for filing Form 5500. Thus, the extended due date for 
Form 5500 is determined under DOL and IRS rules as in effect 
before enactment of the Surface Transportation and Veterans 
Health Care Choice Improvement Act of 2015.

                             Effective Date

    The provision is effective for returns for taxable years 
beginning after December 31, 2015.

 PART THIRTEEN: CONSOLIDATED APPROPRIATIONS ACT, 2016 (PUBLIC LAW 114-
                               113) \308\
---------------------------------------------------------------------------

    \308\ H.R. 2029. The House passed H.R. 2029 on April 30, 2015. The 
Senate passed the bill with an amendment on November 10, 2015. The 
House agreed to amendments to the Senate amendment on December 17, and 
December 18, 2015, and the bill, as amended, passed the House on 
December 18, 2015. The Senate agreed to the House amendments on 
December 18, 2015. The President signed the bill on December 18, 2015.
---------------------------------------------------------------------------

                   DIVISION P--TAX-RELATED PROVISIONS

 A. High Cost Employer-Sponsored Health Coverage Excise Tax (secs. 101-
               103 of the Act and sec. 4980I of the Code)

                              Present Law

In general
    Effective for years beginning after December 31, 2017, an 
excise tax is imposed on the provider of applicable employer-
sponsored health coverage (the ``coverage provider'') if the 
aggregate cost of the coverage for an employee (including a 
former employee, surviving spouse, or any other primary insured 
individual) exceeds a threshold amount (referred to as ``high 
cost health coverage'').\309\ The tax is 40 percent of the 
amount by which aggregate cost exceeds the threshold amount 
(the ``excess benefit'').
---------------------------------------------------------------------------
    \309\ Sec. 4980I, which was added to the Code by section 9001 of 
PPACA and amended by section 10901 of PPACA and section 1401 of HCERA.
---------------------------------------------------------------------------
    The annual threshold amount for 2018 is $10,200 for self-
only coverage and $27,500 for other coverage (such as family 
coverage), multiplied by a one-time health cost adjustment 
percentage.\310\ This threshold is then adjusted annually 
(including for 2018) by an age and gender adjusted excess 
premium amount.\311\ The age and gender adjusted excess premium 
amount is the excess, if any, of (1) the premium cost of 
standard FEHBP coverage for the type of coverage provided to an 
individual if priced for the age and gender characteristics of 
all employees of the employer, over (2) the premium cost of 
standard FEHBP coverage if priced for the age and gender 
characteristics of the national workforce. For this purpose, 
standard FEHBP coverage means the per employee cost of Blue 
Cross/Blue Shield standard benefit coverage under the Federal 
Employees Health Benefit Program.
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    \310\ The health cost adjustment percentage is 100 percent plus the 
excess, if any, of (1) the percentage by which the cost of standard 
FEHBP coverage for 2018 (determined according to specified criteria) 
exceeds the cost of standard FEHBP coverage for 2010, over (2) 55 
percent.
    \311\ Under section 4980I, the 2018 threshold amounts are increased 
by $1,650 for self-only coverage or $3,450 for other coverage in the 
case of certain retirees and participants in a plan covering employees 
in a high-risk profession or repair or installation of electrical or 
telecommunications lines. For years after 2018, the threshold amounts 
(after application of the health cost adjustment percentage), and the 
increases for certain retirees and participants in a plan covering 
employees in a high-risk profession or repair or installation of 
electrical or telecommunications lines, are indexed to the Consumer 
Price Index for Urban Consumers (``CPI-U'') (CPI-U increased by one 
percentage point for 2019 only), rounded to the nearest $50.
---------------------------------------------------------------------------
    The excise tax is determined on a monthly basis, by 
reference to the aggregate cost of applicable employer-
sponsored coverage for the month and 1/12 of the annual 
threshold amount. The excise tax is not deductible for income 
tax purposes.\312\
---------------------------------------------------------------------------
    \312\ Sec. 275(a)(6), referring to taxes imposed by chapter 43.
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Applicable employer-sponsored coverage and determination of cost
    Subject to certain exceptions, applicable employer-
sponsored coverage is coverage under any group health plan 
offered to an employee by an employer that is excludible from 
the employee's gross income or that would be excludible if it 
were employer-sponsored coverage.\313\ Thus, applicable 
employer-sponsored coverage includes coverage for which an 
employee pays on an after-tax basis. Applicable employer-
sponsored coverage includes coverage under any group health 
plan established and maintained primarily for its civilian 
employees by the Federal government or any Federal agency or 
instrumentality, or the government of any State or political 
subdivision thereof or any agency or instrumentality of a State 
or political subdivision.
---------------------------------------------------------------------------
    \313\ Section 106 provides an exclusion for employer-provided 
coverage.
---------------------------------------------------------------------------
    Applicable employer-sponsored coverage includes both 
insured and self-insured health coverage, including coverage in 
the form of reimbursements under a health flexible spending 
arrangement (``health FSA'') or a health reimbursement 
arrangement and contributions to a health savings account 
(``HSA'') or Archer medical savings account (``Archer 
MSA'').\314\ In the case of a self-employed individual, 
coverage is treated as applicable employer-sponsored coverage 
if the self-employed individual is allowed a deduction for all 
or any portion of the cost of coverage.\315\
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    \314\ Some types of coverage are not included in applicable 
employer-sponsored coverage, such as long-term care coverage, separate 
insurance coverage substantially all the benefits of which are for 
treatment of the mouth (including any organ or structure within the 
mouth) or of the eye, and certain excepted benefits. Excepted benefits 
for this purpose include (whether through insurance or otherwise) 
coverage only for accident, or disability income insurance, or any 
combination thereof; coverage issued as a supplement to liability 
insurance; liability insurance, including general liability insurance 
and automobile liability insurance; workers' compensation or similar 
insurance; automobile medical payment insurance; credit-only insurance; 
and other similar insurance coverage (as specified in regulations), 
under which benefits for medical care are secondary or incidental to 
other insurance benefits. Applicable employer-sponsored coverage does 
not include coverage only for a specified disease or illness or 
hospital indemnity or other fixed indemnity insurance if the cost of 
the coverage is not excludible from an employee's income or deductible 
by a self-employed individual.
    \315\ Section 162(l) allows a deduction to a self-employed 
individual for the cost of health insurance.
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    For purposes of the excise tax, the cost of applicable 
employer-sponsored coverage is generally determined under rules 
similar to the rules for determining the applicable premium for 
purposes of COBRA continuation coverage,\316\ except that any 
portion of the cost of coverage attributable to the excise tax 
is not taken into account. Cost is determined separately for 
self-only coverage and other coverage. Special valuation rules 
apply to certain retiree coverage, health FSAs, and 
contributions to HSAs and Archer MSAs.
---------------------------------------------------------------------------
    \316\ Sec. 4980B(f)(4).
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Calculation of excess benefit and imposition of excise tax
    In determining the excess benefit with respect to an 
employee (i.e., the amount by which the cost of applicable 
employer-sponsored coverage for the employee exceeds the 
threshold amount), the aggregate cost of all applicable 
employer-sponsored coverage of the employee is taken into 
account. The threshold amount for self-only coverage generally 
applies to an employee. The threshold amount for other coverage 
applies to an employee only if the coverage provides minimum 
essential coverage to the employee and at least one other 
beneficiary and the benefits provided do not vary based on 
whether the covered individual is the employee or other 
beneficiary. For purposes of the threshold amount, any coverage 
provided under a multiemployer plan is treated as coverage 
other than self-only coverage.\317\
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    \317\ As defined in section 414(f), a multiemployer plan is 
generally a plan to which more than one employer is required to 
contribute and that is maintained pursuant to one or more collective 
bargaining agreements between one or more employee organizations and 
more than one employer.
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    The excise tax is imposed on the coverage provider.\318\ In 
the case of insured coverage (i.e., coverage under a policy, 
certificate, or contract issued by an insurance company), the 
health insurance issuer is liable for the excise tax. In the 
case of self-insured coverage, the person that administers the 
plan benefits (``plan administrator'') is generally liable for 
the excise tax. The person that administers the plan benefits 
includes the plan sponsor if the plan sponsor administers 
benefits under the plan. In the case of employer contributions 
to an HSA or an Archer MSA, the employer is liable for the 
excise tax.
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    \318\ The excise tax is allocated pro rata among the coverage 
providers, with each responsible for the excise tax on an amount equal 
to the total excess benefit multiplied by a fraction, the numerator of 
which is the cost of the applicable employer-sponsored coverage of that 
coverage provider and the denominator of which is the aggregate cost of 
all applicable employer-sponsored coverage of the employee.
---------------------------------------------------------------------------
    The employer is generally responsible for calculating the 
amount of excess benefit allocable to each coverage provider 
and notifying each coverage provider (and the IRS) of the 
coverage provider's allocable share. In the case of applicable 
employer-sponsored coverage under a multiemployer plan, the 
plan sponsor is responsible for the calculation and 
notification.\319\
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    \319\ The employer or multiemployer plan sponsor may be liable for 
a penalty if the total excise tax due exceeds the tax on the excess 
benefit calculated and allocated among coverage providers by the 
employer or plan sponsor.
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                        Explanation of Provision


Changes related to the excise tax

    The Act includes two provisions that make changes with 
respect to this excise tax. One provision delays the effective 
date for the excise tax until years beginning after December 
31, 2019, thereby delaying by two years (from 2018 to 2020) the 
year when the excise tax first becomes effective. However, the 
provision retains the 2018 threshold amount and provides the 
same adjustments to that amount for purposes of determining the 
threshold amounts for 2020 and subsequent years, and 
adjustments thereto. Thus, the threshold amounts that apply in 
2020 and subsequent years include the same cost-of-living 
adjustments to the 2018 threshold amounts that apply under 
present law.
    The other provision eliminates the denial of the deduction 
of the excise tax for income tax purposes.\320\
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    \320\ The Act provides that section 275(a)(6) that denies a 
deduction for taxes imposed by chapter 43 does not apply to this excise 
tax.
---------------------------------------------------------------------------

GAO study of suitable benchmarks for age and gender adjustment

    The Act includes a provision that directs the Government 
Accountability Office to report to the Committee on Finance of 
the Senate and the Committee on Ways and Means of the House on 
(1) the suitability of the use of the premium cost of standard 
FEHBP coverage as a benchmark for the age and gender adjustment 
of the applicable dollar limit with respect to the excise tax 
and (2) recommendations regarding any more suitable benchmarks 
for the age and gender adjustment. The report is to be provided 
not later than 18 months after the date of enactment (December 
18, 2015) and to be prepared in consultation with the National 
Association of Insurance Commissioners.

                             Effective Date

    The provisions are effective on the date of enactment 
(December 18, 2015).

 B. Annual Fee on Health Insurance Providers (sec. 201 of the Act and 
   sec. 9010 of the Patient Protection and Affordable Care Act \321\)

---------------------------------------------------------------------------
    \321\ ``PPACA'', Pub. L. No. 111-148, as amended.
---------------------------------------------------------------------------

                              Present Law

    An annual fee applies to any covered entity engaged in the 
business of providing health insurance with respect to United 
States (``U.S.'') health risks.\322\ The aggregate annual fee 
for all covered entities is the applicable amount. The 
applicable amount is $8 billion for calendar year 2014, $11.3 
billion for calendar years 2015 and 2016, $13.9 billion for 
calendar year 2017, and $14.3 billion for calendar year 2018. 
For calendar years after 2018, the applicable amount is indexed 
to the rate of premium growth.
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    \322\ Sec. 9010 of PPACA.
---------------------------------------------------------------------------
    The aggregate annual fee is apportioned among the providers 
based on a ratio designed to reflect relative market share of 
U.S. health insurance business. For each covered entity, the 
fee for a calendar year is an amount that bears the same ratio 
to the applicable amount as (1) the covered entity's net 
premiums written during the preceding calendar year with 
respect to health insurance for any U.S. health risk, bears to 
(2) the aggregate net written premiums of all covered entities 
during such preceding calendar year with respect to such health 
insurance.

                        Explanation of Provision

    The provision applies a one-year moratorium to the annual 
fee on health insurance providers for calendar year 2017.

                             Effective Date

    The provision is effective upon date of enactment (December 
18, 2015).

                      C. Miscellaneous Provisions


1. Extension and phaseout of credits with respect to facilities 
        producing electricity from wind (secs. 301-302 of the Act and 
        secs. 45 and 48 of the Code) \323\
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    \323\ The Senate Committee on Finance reported S. 1946 (``Tax 
Relief Extension Act of 2015'') on August 5, 2015 (S. Rep. No. 114-
118). See sec. 157 of the bill as reported.
---------------------------------------------------------------------------

                              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'').\324\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
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.
---------------------------------------------------------------------------
    \324\ 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
    Eligible electricity        for 2015 \1\
  production activity (sec.      (cents per          Expiration \2\
             45)               kilowatt-hour)
------------------------------------------------------------------------
Wind........................             2.3   December 31, 2014
Closed-loop biomass.........             2.3   December 31, 2014
Open-loop biomass (including             1.2   December 31, 2014
 agricultural livestock
 waste nutrient facilities).
Geothermal..................             2.3   December 31, 2014
Municipal solid waste                    1.2   December 31, 2014
 (including landfill gas
 facilities and trash
 combustion facilities).
Qualified hydropower........             1.2   December 31, 2014
Marine and hydrokinetic.....             1.2   December 31, 2014
------------------------------------------------------------------------
\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 the construction of which begins after this
  date.

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.

                        Explanation of Provision

    For qualified wind power facilities, the provision extends 
for two years the full renewable electricity production credit 
and the election to claim the energy credit in lieu of the 
electricity production credit, through December 31, 2016. For 
wind facilities the construction of which begins in 2017, the 
credits are extended at a rate equal to 80 percent of the 
otherwise available credit rate. For wind facilities the 
construction of which begins in 2018, the credits are extended 
at a rate equal to 60 percent of the otherwise available credit 
rate. For wind facilities the construction of which begins in 
2019, the credits are extended at a rate equal to 40 percent of 
the otherwise available credit rate.

                             Effective Date

    The provision takes effect January 1, 2015.

2. Modification of energy investment credit (sec. 303 of the Act and 
        sec. 48 of the Code)

                              Present Law

            In general
    A nonrefundable, 10-percent business energy credit \325\ is 
allowed for the cost of new property that is equipment that 
either (1) uses solar energy to generate electricity, to heat 
or cool a structure, or to provide solar process heat or (2) is 
used to produce, distribute, or use energy derived from a 
geothermal deposit, but only, in the case of electricity 
generated by geothermal power, up to the electric transmission 
stage. Property used to generate energy for the purposes of 
heating a swimming pool is not eligible solar energy property.
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    \325\ Sec. 48.
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    The energy credit is a component of the general business 
credit.\326\ An unused general business credit generally may be 
carried back one year and carried forward 20 years.\327\ The 
taxpayer's basis in the property is reduced by one-half of the 
amount of the credit claimed. For projects whose construction 
time is expected to equal or exceed two years, the credit may 
be claimed as progress expenditures are made on the project, 
rather than during the year the property is placed in service. 
The credit is allowed against the alternative minimum tax.
---------------------------------------------------------------------------
    \326\ Sec. 38(b)(1).
    \327\ Sec. 39.
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            Special rules for solar energy property
    For periods prior to January 1, 2017, the credit for 
otherwise eligible solar energy property is increased to 30 
percent. In addition, equipment that uses fiber-optic 
distributed sunlight to illuminate the inside of a structure is 
solar energy property eligible for the 30-percent credit. For 
periods after December 31, 2016, the credit rate reverts to 10 
percent and fiber optic property no longer qualifies.
            Fuel cells and microturbines
    The energy credit applies to qualified fuel cell power 
plants, but only for periods prior to January 1, 2017. The 
credit rate is 30 percent.
    A qualified fuel cell power plant is an integrated system 
composed of a fuel cell stack assembly and associated balance 
of plant components that (1) converts a fuel into electricity 
using electrochemical means, and (2) has an electricity-only 
generation efficiency of greater than 30 percent and a capacity 
of at least one-half kilowatt. The credit may not exceed $1,500 
for each 0.5 kilowatt of capacity.
    The energy credit applies to qualifying stationary 
microturbine power plants for periods prior to January 1, 2017. 
The credit is limited to the lesser of 10 percent of the basis 
of the property or $200 for each kilowatt of capacity.
    A qualified stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a 
combustor, a recuperator or regenerator, a generator or 
alternator, and associated balance of plant components that 
converts a fuel into electricity and thermal energy. Such 
system also includes all secondary components located between 
the existing infrastructure for fuel delivery and the existing 
infrastructure for power distribution, including equipment and 
controls for meeting relevant power standards, such as voltage, 
frequency and power factors. Such system must have an 
electricity-only generation efficiency of not less than 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts.
            Geothermal heat pump property
    The energy credit applies to qualified geothermal heat pump 
property placed in service prior to January 1, 2017. The credit 
rate is 10 percent. Qualified geothermal heat pump property is 
equipment that uses the ground or ground water as a thermal 
energy source to heat a structure or as a thermal energy sink 
to cool a structure.
            Small wind property
    The energy credit applies to qualified small wind energy 
property placed in service prior to January 1, 2017. The credit 
rate is 30 percent. Qualified small wind energy property is 
property that uses a qualified wind turbine to generate 
electricity. A qualifying wind turbine means a wind turbine of 
100 kilowatts of rated capacity or less.
            Combined heat and power property
    The energy credit applies to combined heat and power 
(``CHP'') property placed in service prior to January 1, 2017. 
The credit rate is 10 percent.
    CHP property is property: (1) that uses the same energy 
source for the simultaneous or sequential generation of 
electrical power, mechanical shaft power, or both, in 
combination with the generation of steam or other forms of 
useful thermal energy (including heating and cooling 
applications); (2) that has an electrical capacity of not more 
than 50 megawatts or a mechanical energy capacity of not more 
than 67,000 horsepower or an equivalent combination of 
electrical and mechanical energy capacities; (3) that produces 
at least 20 percent of its total useful energy in the form of 
thermal energy that is not used to produce electrical or 
mechanical power, and produces at least 20 percent of its total 
useful energy in the form of electrical or mechanical power (or 
a combination thereof); and (4) the energy efficiency 
percentage of which exceeds 60 percent. CHP property does not 
include property used to transport the energy source to the 
generating facility or to distribute energy produced by the 
facility.
    The otherwise allowable credit with respect to CHP property 
is reduced to the extent the property has an electrical 
capacity or mechanical capacity in excess of any applicable 
limits. Property in excess of the applicable limit (15 
megawatts or a mechanical energy capacity of more than 20,000 
horsepower or an equivalent combination of electrical and 
mechanical energy capacities) is permitted to claim a fraction 
of the otherwise allowable credit. The fraction is equal to the 
applicable limit divided by the capacity of the property. For 
example, a 45 megawatt property would be eligible to claim 15/
45ths, or one third, of the otherwise allowable credit. Again, 
no credit is allowed if the property exceeds the 50 megawatt or 
67,000 horsepower limitations described above.
    Additionally, systems whose fuel source is at least 90 
percent open-loop biomass and that would qualify for the credit 
but for the failure to meet the efficiency standard are 
eligible for a credit that is reduced in proportion to the 
degree to which the system fails to meet the efficiency 
standard. For example, a system that would otherwise be 
required to meet the 60-percent efficiency standard, but which 
only achieves 30-percent efficiency, would be permitted a 
credit equal to one-half of the otherwise allowable credit 
(i.e., a 5-percent credit).
            Election of energy credit in lieu of section 45 production 
                    tax credit
    A taxpayer may make an irrevocable election to have certain 
qualified facilities placed in service after 2008 and whose 
construction begins before January 1, 2015, be treated as 
energy property eligible for a 30-percent investment credit 
under section 48.\328\ For this purpose, qualified facilities 
are facilities otherwise eligible for the renewable electricity 
production tax 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 production credit 
under section 45.
---------------------------------------------------------------------------
    \328\ See section 302 of the Act relating to an extension of the 
January 1, 2015, date in the case of wind facilities.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends and modifies the increased credit 
rate, but only with respect to property that uses solar energy 
to generate electricity, to heat or cool a structure, or to 
provide solar process heat. The credit rate is 30 percent for 
2017, 2018 and 2019; 26 percent for 2020; and 22 percent for 
2021. The credit rate is 10 percent for 2022 and thereafter, as 
provided for under present law. The credit rate is determined 
by the year in which construction of the property commences, 
and applies at the time the property is placed in service. 
Property must be placed in service prior to December 31, 2023, 
to qualify for a credit rate in excess of 10 percent.

                             Effective Date

    The provision is effective on the date of enactment 
(December 18, 2015).

3. Credit for residential energy efficient property (section 304 of the 
        Act and 25D of the Code)

                              Present Law


In general

    Present law (sec. 25D) provides a personal tax credit for 
the purchase of qualified solar electric property and qualified 
solar water heating property that is used exclusively for 
purposes other than heating swimming pools and hot tubs. The 
credit is equal to 30 percent of qualifying expenditures.
    Section 25D also provides a 30 percent credit for the 
purchase of qualified geothermal heat pump property, qualified 
small wind energy property, and qualified fuel cell power 
plants. The credit for any fuel cell may not exceed $500 for 
each 0.5 kilowatt of capacity.
    The credit is nonrefundable. The credit with respect to all 
qualifying property may be claimed against the alternative 
minimum tax.
    The credit applies to property placed in service prior to 
January 1, 2017.

Qualified property

    Qualified solar electric property is property that uses 
solar energy to generate electricity for use in a dwelling 
unit. Qualifying solar water heating property is property used 
to heat water for use in a dwelling unit located in the United 
States and used as a residence if at least half of the energy 
used by such property for such purpose is derived from the sun.
    A qualified fuel cell power plant is an integrated system 
comprised of a fuel cell stack assembly and associated balance 
of plant components that (1) converts a fuel into electricity 
using electrochemical means, (2) has an electricity-only 
generation efficiency of greater than 30 percent, and (3) has a 
nameplate capacity of at least 0.5 kilowatt. The qualified fuel 
cell power plant must be installed on or in connection with a 
dwelling unit located in the United States and used by the 
taxpayer as a principal residence.
    Qualified small wind energy property is property that uses 
a wind turbine to generate electricity for use in a dwelling 
unit located in the U.S. and used as a residence by the 
taxpayer.
    Qualified geothermal heat pump property means any equipment 
which (1) uses the ground or ground water as a thermal energy 
source to heat the dwelling unit or as a thermal energy sink to 
cool such dwelling unit, (2) meets the requirements of the 
Energy Star program which are in effect at the time that the 
expenditure for such equipment is made, and (3) is installed on 
or in connection with a dwelling unit located in the United 
States and used as a residence by the taxpayer.

Additional rules

    The depreciable basis of the property is reduced by the 
amount of the credit. Expenditures for labor costs allocable to 
onsite preparation, assembly, or original installation of 
property eligible for the credit are eligible expenditures.
    Special proration rules apply in the case of jointly owned 
property, condominiums, and tenant-stockholders in cooperative 
housing corporations. If less than 80 percent of the property 
is used for nonbusiness purposes, only that portion of 
expenditures that is used for nonbusiness purposes is taken 
into account.

                        Explanation of Provision

    The provision extends the credit for five years, through 
December 31, 2021, but only with respect to qualified solar 
electric property and qualified solar water heating property. 
The provision modifies the credit rate, reducing it to 26 
percent for property placed in service in 2020 and 22 percent 
for property placed in service in 2021.

                             Effective Date

    The provision is effective on January 1, 2017.

4. Treatment of transportation costs of independent refiners (sec. 305 
        of the Act and sec. 199 of the Code)

                              Present Law


In general

    Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income \329\) that 
is equal to nine percent of the lesser of the taxpayer's 
qualified production activities income or taxable income 
(determined without regard to the section 199 deduction) for 
the taxable year.\330\ For taxpayers subject to the 35-percent 
corporate income tax rate, the nine-percent deduction 
effectively reduces the corporate income tax rate to just under 
32 percent on qualified production activities income.\331\
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    \329\ For this purpose, adjusted gross income is determined after 
application of sections 86, 135, 137, 219, 221, 222, and 469, without 
regard to the section 199 deduction. Sec. 199(d)(2).
    \330\ Sec. 199.
    \331\ This example assumes the deduction does not exceed the wage 
limitation discussed below.
---------------------------------------------------------------------------
    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.\332\
---------------------------------------------------------------------------
    \332\ Sec. 199(c)(1). In computing qualified production activities 
income, the domestic production activities deduction itself is not an 
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs. 
1.199-1 through 1.199-9 where the Secretary has prescribed rules for 
the proper allocation of items of income, deduction, expense, and loss 
for purposes of determining qualified production activities income.
---------------------------------------------------------------------------
    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 \333\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States; \334\ 
(2) any sale, exchange, or other disposition, or any lease, 
rental, or license, of qualified film \335\ 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.\336\
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    \333\ Qualifying production property generally includes any 
tangible personal property, computer software, and sound recordings. 
Sec. 199(c)(5).
    \334\ When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the District 
of Columbia. Sec. 7701(a)(9). A special rule for determining domestic 
production gross receipts, however, provides that for taxable years 
beginning after December 31, 2005, and before January 1, 2017, 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 for such taxable year. Secs. 
199(d)(8)(A) and (C), as extended by section 170 of the Act. 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. Sec. 199(d)(8)(B).
    \335\ 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. Sec. 199(c)(6).
    \336\ Sec. 199(c)(4).
---------------------------------------------------------------------------
    The amount of the deduction for a taxable year is limited 
to 50 percent of the W-2 wages paid by the taxpayer, and 
properly allocable to domestic production gross receipts, 
during the calendar year that ends in such taxable year.\337\
---------------------------------------------------------------------------
    \337\ For purposes of the provision, ``W-2 wages'' include the sum 
of the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year. Elective deferrals include elective deferrals as defined in 
section 402(g)(3), amounts deferred under section 457, and, for taxable 
years beginning after December 31, 2005, designated Roth contributions 
(as defined in section 402A). See sec. 199(b)(2). The wage limitation 
for qualified films includes any compensation for services performed in 
the United States by actors, production personnel, directors, and 
producers and is not restricted to W-2 wages. Sec. 199(b)(2)(D), 
effective for taxable years beginning after December 31, 2007.
---------------------------------------------------------------------------

Limitation for oil related qualified production activities income

    With respect to a taxpayer that has oil related qualified 
production activities income, the nine percent deduction is 
reduced by three percent of the least of the taxpayer's oil 
related qualified production activities income, qualified 
production activities income, or taxable income (determined 
without regard to the section 199 deduction).\338\ The term 
``oil related qualified production activities income'' means 
the qualified production activities income attributable to the 
production, refining, processing, transportation, or 
distribution of oil, gas, or any primary product thereof (as 
defined in section 927(a)(2)(C) prior to its repeal).\339\
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    \338\ Sec. 199(d)(9). For example, assume a C corporation (the 
``taxpayer'') has qualified production activities income of $750,000--
of which $650,000 is oil related qualified production activities 
income--taxable income of $2,000,000, and has paid sufficient domestic 
production wages to not be subject to the wages paid limitation for the 
taxable year. The taxpayer's tentative section 199 deduction of $67,500 
($750,000 * 9 percent) is reduced by $19,500 ($650,000 * 3 percent), 
resulting in a section 199 deduction of $48,000 for the taxable year 
($67,500-$19,500).
    \339\ See also Prop. Treas. Reg. sec. 1.199-1(f) (REG-136459-09) 
where the Secretary has proposed guidance on oil related qualified 
production activities income. Prop. Treas. Reg. sec. 1.199-1(f) will 
apply to taxable years beginning on or after the date the final 
regulations are published in the Federal Register.
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                        Explanation of Provision

    For taxpayers in the trade or business of refining crude 
oil and who are not major integrated oil companies (within the 
meaning of section 167(h)(5)(B), determined without regard to 
clause (iii) thereof), the provision provides that in computing 
oil related qualified production activities income, only 25 
percent of the properly allocable costs related to the 
transportation of oil are allocated to domestic production 
gross receipts. This has the effect of increasing oil related 
qualified production activities income for independent refiners 
with transportation costs that are properly allocable to 
domestic production gross receipts.\340\
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    \340\ Continuing the above example, assume the taxpayer has 
properly allocable oil related transportation costs of $100,000 that 
were included in determining the qualified production activities income 
noted above. Under this provision, the taxpayer will only allocate 
$25,000 of such costs to domestic production gross receipts. Thus, the 
taxpayer's oil related qualified production activities income of 
$650,000 and qualified production activities income of $750,000 will 
each increase by $75,000 ($100,000-$25,000), resulting in oil related 
qualified production activities income of $725,000 and qualified 
production activities income of $825,000. Hence, the taxpayer's 
tentative section 199 deduction of $74,250 ($825,000 * 9 percent) is 
reduced by $21,750 ($725,000 * 3 percent), resulting in a section 199 
deduction of $52,500 for the taxable year ($74,250-$21,750) (compared 
to $48,000 under present law).
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                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2015, and before January 1, 2022.

      DIVISION Q--PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015


                        TITLE I--EXTENDERS \341\

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    \341\ The Senate Committee on Finance reported S. 1946 (``Tax 
Relief Extension Act of 2015'') on August 5, 2015 (S. Rep. No. 114-
118). The bill generally extended expiring provisions through 2016 with 
some modifications. The House Committee on Ways and Means reported the 
following bills relating to the modification and making permanent or 
extending certain expiring provisions: H.R. 629 (``Permanent S 
Corporation Built-in Gain Recognition Period Act of 2015'') on February 
9, 2015 (H.R. Rep. No. 114-15), H.R. 630 (``Permanent S Corporation 
Charitable Contribution Act of 2015'') on February 9, 2015 (H.R. Rep. 
No. 114-16), H.R. 641 (``Conservation Easement Incentive Act of 2015'') 
on February 9, 2015 (H.R. Rep. No. 114-17), H.R. 644 (``America Gives 
More Act of 2015'') on February 9, 2015 (H.R. Rep. No. 114-18), H.R. 
637 (``Permanent IRA Charitable Contribution Act of 2015'') on February 
9, 2015 (H.R. Rep. No. 114-20), H.R. 636 (``America's Small Business 
Tax Relief Act of 2015'') on February 9, 2015 (H.R. Rep. No.114-21), 
H.R. 622 (``State and Local Sales Tax Deduction Fairness Act of 2015'') 
on April 6, 2015 (H.R. Rep. No. 114-51), H.R. 880 (``American Research 
and Competitiveness Act of 2015'') on May 14, 2015 (H.R. Rep. 114-113), 
H.R. 765 (``Restaurant and Retail Jobs and Growth Act of 2015'') on 
October 23, 2015 (H.R. Rep No. 114-306), H.R. 961 (``Permanent Active 
Financing Exception Act of 2015'') on October 23, 2015 (H.R. Rep. No. 
114-307), H.R. 1430 (``Permanent CFC Look-Through Act of 2015'') on 
October 23, 2015 (H.R. Rep. No. 114-309), H.R. 2940 (``Educator Tax 
Relief Act of 2015'') on October 23, 2015 (H.R. Rep. No. 114-310), and 
H.R 2510 (relating to bonus depreciation) on October 28, 2015 (H.R. 
Rep. No. 114-317, Part 1). Each of the bills reported by the House 
Committee on Ways and Means prior to October passed the House, either 
separately or in a bill combining certain of the provisions.
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                        A. Permanent Extensions


            Part 1--Tax Relief for Families and Individuals


1. Reduced earnings threshold for additional child tax credit made 
        permanent (sec. 101 of the Act and sec. 24 of the Code)

    An individual may claim a tax credit of $1,000 for each 
qualifying child under the age of 17. 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 both the regular tax and 
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). This 
threshold dollar amount is $10,000 indexed for inflation from 
2001. The American Recovery and Reinvestment Act, as 
subsequently extended by the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010 \342\ and the 
American Taxpayer Relief Act of 2012,\343\ set the threshold at 
$3,000 for taxable years 2009 to 2017.
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    \342\ Pub. L. No. 111-312.
    \343\ Pub. L. No. 112-240.
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    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'').
    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 makes permanent the earned income threshold 
of $3,000.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment (December 18, 2015).

2. American opportunity tax credit made permanent (sec. 102 of the Act 
        and sec. 25A of the Code)

                              Present Law


Hope credit and American opportunity tax credit

            Hope credit
    For taxable years beginning before 2009 and after 2017, 
individual taxpayers are allowed to claim a nonrefundable 
credit, the Hope credit, against Federal income taxes of up to 
$1,950 (estimated 2015 level) 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.\344\ The Hope credit rate is 100 percent 
on the first $1,300 of qualified tuition and related expenses, 
and 50 percent on the next $1,300 of qualified tuition and 
related expenses (estimated for 2015). 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 $1,300 of qualified tuition and related expenses for an 
eligible student is eligible (subject to the AGI phaseout 
described below) for a $1,300 Hope credit. If a taxpayer incurs 
$2,600 of qualified tuition and related expenses for an 
eligible student, then he or she is eligible for a $1,950 Hope 
credit.
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    \344\ Sec. 25A. For taxable years 2009-2017, the American 
Opportunity tax credit applies (discussed infra). Both the Hope credit 
and the American Opportunity tax credit (in the case of taxable years 
from 2009-2017) may be claimed against a taxpayer's alternative minimum 
tax liability.
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    The Hope credit that a taxpayer may otherwise claim is 
phased out ratably for taxpayers with modified AGI between 
$55,000 and $65,000 ($110,000 and $130,000 for married 
taxpayers filing a joint return), as estimated by the JCT staff 
for 2015. 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 for 
single and married taxpayers 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 claim only one of 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 for 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 (``AOTC'')
    The AOTC refers to modifications to the Hope credit that 
apply for taxable years beginning in 2009 through 2017. 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.
    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).

                        Explanation of Provision

    The provision makes the modifications to the Hope credit, 
known as the AOTC, permanent.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (December 18, 2015).

3. Modification of the earned income tax credit made permanent (sec. 
        103 of the Act and sec. 32 of the Code)

                              Present Law


Overview

    Low- and moderate-income workers may be eligible for the 
refundable earned income tax credit (``EITC''). Eligibility for 
the EITC is based on earned income, adjusted gross income 
(``AGI''), 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 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 $3,400 (for 2015). 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.\345\
---------------------------------------------------------------------------
    \345\ 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 $6,580, resulting in a maximum credit 
of $503 for 2015. The maximum is available for those with 
incomes between $6,580 and $8,240 ($13,750 if married filing 
jointly). The credit begins to phase out at a rate of 7.65 
percent of earnings above $8,240 ($13,750 if married filing 
jointly) resulting in a $0 credit at $14,820 of earnings 
($20,330 if married filing jointly).
    Taxpayers with one qualifying child may claim a credit in 
2015 of 34 percent of their earnings up to $9,880, resulting in 
a maximum credit of $3,359. The maximum credit is available for 
those with earnings between $9,880 and $18,110 ($23,630 if 
married filing jointly). The credit begins to phase out at a 
rate of 15.98 percent of earnings above $18,110 ($23,630 if 
married filing jointly). The credit is completely phased out at 
$39,131 of earnings ($44,651 if married filing jointly).
    Taxpayers with two qualifying children may claim a credit 
in 2015 of 40 percent of earnings up to $13,870, resulting in a 
maximum credit of $5,548. The maximum credit is available for 
those with earnings between $13,870 and $18,110 ($23,630 if 
married filing jointly). The credit begins to phase out at a 
rate of 21.06 percent of earnings $18,110 ($23,630 if married 
filing jointly). The credit is completely phased out at $44,454 
of earnings ($49,974 if married filing jointly).
    A temporary provision most recently extended in the 
American Taxpayer Relief Act of 2012 (``ATRA'') \346\ allows 
taxpayers with three or more qualifying children to claim a 
credit of 45 percent for taxable years through 2017. For 
example, in 2015 taxpayers with three or more qualifying 
children may claim a credit of 45 percent of earnings up to 
$13,870, resulting in a maximum credit of $6,242. The maximum 
credit is available for those with earnings between $13,870 and 
$18,110 ($23,630 if married filing jointly). The credit begins 
to phase out at a rate of 21.06 percent of earnings above 
$18,110 ($23,630 if married filing jointly). The credit is 
completely phased out at $47,747 of earnings ($53,267 if 
married filing jointly).
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    \346\ Pub. L. No. 112-240.
---------------------------------------------------------------------------
    Under an additional provision most recently extended in 
ATRA, the phase-out thresholds for married couples were raised 
to an amount $5,000 (indexed for inflation from 2009) above 
that for other filers. The increase is $5,520 for 2015. This 
increase is reflected in the description of the credit, above.
    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 makes permanent the EITC rate of 45 percent 
for taxpayers with three or more qualifying children.
    The provision makes permanent the higher phase-out 
thresholds for married couples filing joint returns.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2015.

4. Extension and modification of deduction for certain expenses of 
        elementary and secondary school teachers (sec. 104 of the Act 
        and sec. 62(a)(2)(D) of the Code)

                              Present Law

    In general, ordinary and necessary business expenses are 
deductible. However, unreimbursed employee business expenses 
generally are deductible only as an itemized deduction and only 
to the extent that the individual's total miscellaneous 
deductions (including employee business expenses) exceed two 
percent of adjusted gross income. An individual's otherwise 
allowable itemized deductions may be further limited by the 
overall limitation on itemized deductions, which reduces 
itemized deductions for taxpayers with adjusted gross income in 
excess of 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, 2015, 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.\347\ 
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).
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    \347\ 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, 2014.

                        Explanation of Provision

    The provision makes permanent the deduction for eligible 
educator expenses.
    The provision indexes the $250 maximum deduction amount for 
inflation, and provides that expenses for professional 
development shall also be considered eligible expenses for 
purposes of the deduction.

                             Effective Date

    The provision making above-the-line deduction permanent 
applies to taxable years beginning after December 31, 2014.
    The provisions pertaining to indexing the $250 maximum 
deduction amount and qualifying professional development 
expenses apply to taxable years beginning after December 31, 
2015.

5. Extension of parity for exclusion from income for employer-provided 
        mass transit and parking benefits (sec. 105 of the Act and 
        132(f) of the Code)

                              Present Law


Qualified transportation fringes

    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.\348\ Qualified transportation fringe benefits 
include qualified parking, transit passes, vanpool benefits, 
and qualified bicycle commuting reimbursements.
---------------------------------------------------------------------------
    \348\ Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16) 
and 3401(a)(19).
---------------------------------------------------------------------------
    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, 
in general, a cash reimbursement is considered a qualified 
transportation fringe benefit only if a voucher or similar item 
that can be exchanged only for a transit pass is not readily 
available for direct distribution by the employer to the 
employee.

Mass transit parity

    Before February 17, 2009, the amount that could be excluded 
as qualified transportation fringe benefits was subject to a 
monthly limit of $175 for qualified parking benefits and $100 
for combined transit pass and vanpool benefits, with each 
monthly limit adjusted annually for inflation, rounded down to 
the next lowest multiple of $5.00.\349\ Effective for months 
beginning on or after February 17, 2009, and before January 1, 
2015, parity in qualified transportation fringe benefits was 
provided by temporarily increasing the monthly exclusion for 
combined employer-provided transit pass and vanpool benefits to 
the same level as the monthly exclusion for employer-provided 
parking.\350\
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    \349\ The base year used for each adjustment reflects the year for 
which the particular monthly limit became effective. Specifically, a 
base year of 1998 is used for qualified parking benefits and a base 
year of 2001 for combined transit pass and vanpool benefits.
    \350\ Parity was provided originally by the American Recovery and 
Reinvestment Act of 2009 (``ARRA''), Pub. L. No. 111-5, effective for 
months beginning on or after February 17, 2009, the date of enactment 
of ARRA.
---------------------------------------------------------------------------
    As of January 1, 2015, a lower monthly limit again applies 
to the exclusion for combined transit pass and vanpool 
benefits. Specifically, for 2015, the amount that can be 
excluded as qualified transportation fringe benefits is limited 
to $130 per month in combined transit pass and vanpool benefits 
and $250 per month in qualified parking benefits. For 2016, the 
monthly exclusion limit for combined transit pass and vanpool 
benefits remains at $130; the monthly exclusion limit for 
qualified parking benefits increases to $255.

                        Explanation of Provision

    The provision reinstates parity in the exclusion for 
employer-provided parking benefits and for combined employer-
provided transit pass and vanpool benefits (by increasing the 
monthly exclusion amount for combined transit pass and vanpool 
benefits to $175 before adjustment for inflation \351\) and 
makes parity permanent. Thus, for 2015, the monthly limit on 
the exclusion for combined transit pass and vanpool benefits is 
$250, the same as the monthly limit on the exclusion for 
qualified parking benefits. Similarly, for 2016 and later 
years, the same monthly limit will apply to the exclusion for 
combined transit pass and vanpool benefits and the exclusion 
for qualified parking benefits.
---------------------------------------------------------------------------
    \351\ The provision failed to include a conforming change to repeal 
the base year applicable in adjusting the monthly amount for combined 
transit pass and vanpool benefits. A technical correction is needed to 
make this change.
---------------------------------------------------------------------------
    In order for the extension to be effective retroactive to 
January 1, 2015, expenses incurred for months beginning after 
December 31, 2014, and before the date of enactment of the 
provision (December 18, 2015), 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 $130 per month and are no 
more than $250 per month. It is intended that the rule that an 
employer reimbursement is excludible only if vouchers are not 
available to provide the benefit continues to apply, except in 
the case of reimbursements for vanpool or transit benefits 
between $130 and $250 for months beginning after December 31, 
2014, and before enactment of the provision. Further, it is 
intended that reimbursements of the additional amount for 
expenses incurred for months beginning after December 31, 2014, 
and before enactment of the provision, may be made in addition 
to the provision of benefits or reimbursements of up to the 
applicable monthly limit for expenses incurred for months 
beginning after enactment of the provision.

                             Effective Date

    The provision applies to months after December 31, 2014.

6. Deduction for State and local sales taxes (sec. 106 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 January 1, 2015, 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.\352\ 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.
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    \352\ 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.

                        Explanation of Provision

    The provision makes permanent the election to deduct State 
and local sales taxes in lieu of State and local income taxes.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

                Part 2--Incentives for Charitable Giving


7. Special rule for qualified conservation contributions made permanent 
        (sec. 111 of the Act and sec. 170(b) 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.\353\
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    \353\ Secs. 170, 2055, and 2522, respectively.
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    In general, in any taxable year, charitable contributions 
by a corporation are not deductible to the extent the aggregate 
contributions exceed ten 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.\354\ 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.
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    \354\ Secs. 170(f)(3)(B)(iii) and 170(h).
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    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 \355\ the 30-percent 
contribution base limitation on deductions for 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.
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    \355\ Sec. 170(b)(1)(E).
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    Individuals are allowed to carry over any qualified 
conservation contributions that exceed the 50-percent 
limitation for up to 15 years.
    For example, assume an individual with a contribution base 
of $100 makes a qualified conservation contribution of property 
with a fair market value of $80 and makes other charitable 
contributions subject to the 50-percent limitation of $60. The 
individual is allowed a deduction of $50 in the current taxable 
year for the non-conservation contributions (50 percent of the 
$100 contribution base) and is allowed to carry over the excess 
$10 for up to 5 years. No current deduction is allowed for the 
qualified conservation contribution, but the entire $80 
qualified conservation contribution may be carried forward for 
up to 15 years.
            Farmers and ranchers
    In the case of an individual who is a qualified farmer or 
rancher for the taxable year in which the contribution is made, 
a qualified conservation contribution is deductible 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 deductible 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.\356\
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    \356\ 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, 2014.\357\
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    \357\ Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
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                        Explanation of Provision

    The provision reinstates and makes permanent the increased 
percentage limits and extended carryforward period for 
qualified conservation contributions made in taxable years 
beginning after December 31, 2014.
    The provision also includes special rules for qualified 
conservation contributions by certain Native Corporations. For 
this purpose, the term Native Corporation has the meaning given 
such term by section 3(m) of the Alaska Native Claims 
Settlement Act.\358\ In the case of any qualified conservation 
contribution which is made by a Native Corporation and is a 
contribution of property that was land conveyed under the 
Alaska Native Claims Settlement Act, a deduction for the 
contribution is allowed to the extent that the aggregate amount 
of such contributions does not exceed the excess of 100 percent 
of the taxpayer's taxable income 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. The provision shall not be construed to 
modify the existing property rights validly conveyed to Native 
Corporations under the Alaska Native Claims Settlement Act.
---------------------------------------------------------------------------
    \358\ 43 U.S.C. sec. 1602(m) (providing that the term Native 
Corporation includes ``any Regional Corporation, any Village 
Corporation, any Urban Corporation, and any Group Corporation,'' as 
those terms are defined under the Alaska Native Claims Settlement Act).
---------------------------------------------------------------------------

                             Effective Date

    The provision generally applies to contributions made in 
taxable years beginning after December 31, 2014.
    The provision for qualified conservation contributions by 
certain Native Corporations applies to contributions made in 
taxable years beginning after December 31, 2015.

8. Tax-free distributions from individual retirement plans for 
        charitable purposes (sec. 112 of the Act and sec. 408(d)(8) 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; \359\ and (3) a Federal, 
State, or local governmental entity, but only if the 
contribution is made for exclusively public purposes.\360\ The 
deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
---------------------------------------------------------------------------
    \359\ Secs. 170(c)(3)-(5).
    \360\ 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.\361\
---------------------------------------------------------------------------
    \361\ 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.\362\
---------------------------------------------------------------------------
    \362\ 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.\363\ 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.\364\
---------------------------------------------------------------------------
    \363\ 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).
    \364\ 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.\365\ 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.\366\ For such interests, a 
charitable deduction is allowed to the extent of the present 
value of the interest designated for a charitable organization.
---------------------------------------------------------------------------
    \365\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \366\ 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\.\367\
---------------------------------------------------------------------------
    \367\ 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; \368\ (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.
---------------------------------------------------------------------------
    \368\ 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.\369\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
---------------------------------------------------------------------------
    \369\ Sec. 3405.
---------------------------------------------------------------------------

Qualified charitable distributions

    Otherwise taxable IRA distributions from a traditional or 
Roth IRA are excluded from gross income to the extent they are 
qualified charitable distributions.\370\ 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.
---------------------------------------------------------------------------
    \370\ 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) (generally, public charities) 
other than a supporting organization (as 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, 2014.

                        Explanation of Provision

    The provision reinstates and makes permanent the exclusion 
from gross income for qualified charitable distributions from 
an IRA.

                             Effective Date

    The provision applies to distributions made in taxable 
years beginning after December 31, 2014.

9. Extension and expansion of charitable deduction for contributions of 
        food inventory (sec. 113 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.\371\ In the case of an individual, the 
deduction is limited to various percentages of the contribution 
base, depending on the donee and the property contributed. In 
the case of a corporation,\372\ the deduction generally is 
limited to ten percent of the taxable income (with 
modifications).\373\ Contributions in excess of these 
limitations may be carried forward for up to five taxable 
years.
---------------------------------------------------------------------------
    \371\ Sec. 170.
    \372\ Sec. 170(b)(1). The contribution base is the adjusted gross 
income determined without regard net operating loss carrybacks.
    \373\ Sec. 170(b)(2).
---------------------------------------------------------------------------
    Charitable contributions of cash are deductible in the 
amount contributed. Subject to several exceptions, 
contributions of property are deductible at the fair market 
value of the property. One exception provides that the amount 
of the charitable contribution is reduced by the amount of any 
gain which would not have been long-term capital gain if the 
property contributed had been sold by the taxpayer at its fair 
market value at the time of the contribution.\374\
---------------------------------------------------------------------------
    \374\ Sec. 170(e)(1)(A).
---------------------------------------------------------------------------

General rules regarding contributions of inventory

    As a result of the exception described above, 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.
    However, for certain contributions of inventory, a C 
corporation 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.\375\ 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. 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.\376\
---------------------------------------------------------------------------
    \375\ Sec. 170(e)(3).
    \376\ Sec. 170(e)(3)(A)(iv).
---------------------------------------------------------------------------
    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.\377\
---------------------------------------------------------------------------
    \377\ Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) 
(holding that the value of surplus bread inventory donated to charity 
was the full retail price of the bread rather than half the retail 
price, as the IRS asserted).
---------------------------------------------------------------------------

Temporary rule expanding and modifying the enhanced deduction for 
        contributions of food inventory

    Under a temporary provision, 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.\378\ For taxpayers other than C corporations, the 
total deduction for donations of food inventory in a taxable 
year generally may not exceed ten 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 ten 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 ten 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.\379\
---------------------------------------------------------------------------
    \378\ Sec. 170(e)(3)(C).
    \379\ The ten-percent limitation does not affect the application of 
the generally applicable percentage limitations. For example, if ten 
percent of a sole proprietor's net income from the proprietor's trade 
or business is greater than 50 percent of the proprietor's contribution 
base which otherwise limits the deduction, the available deduction for 
the taxable year (with respect to contributions to public charities) is 
50 percent of the proprietor's contribution base. Consistent with 
present law, these 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 ten-percent 
limitation but do not exceed the 50-percent limitation may 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 provision does not apply to contributions made after 
December 31, 2014.

                        Explanation of Provision

    The provision reinstates and makes permanent the enhanced 
deduction for contributions of food inventory for contributions 
made after December 31, 2014.
    For taxable years beginning after December 31, 2015, the 
provision also modifies the enhanced deduction for food 
inventory contributions by: (1) increasing the charitable 
percentage limitation for food inventory contributions and 
clarifying the carryover and coordination rules for these 
contributions; (2) including a presumption concerning the tax 
basis of food inventory donated by certain businesses; and (3) 
including presumptions that may be used when valuing donated 
food inventory.
    First, the ten-percent limitation described above 
applicable to taxpayers other than C corporations is increased 
to 15 percent. For C corporations, these contributions are made 
subject to a limitation of 15 percent of taxable income (as 
modified). The general ten-percent limitation for a C 
corporation does not apply to these contributions, but the ten-
percent limitation applicable to other contributions is reduced 
by the amount of these contributions. Qualifying food inventory 
contributions in excess of these 15-percent limitations may be 
carried forward and treated as qualifying food inventory 
contributions in each of the five succeeding taxable years in 
order of time.
    Second, if the taxpayer does not account for inventory 
under section 471 and is not required to capitalize indirect 
costs under section 263A, the taxpayer may elect, solely for 
computing the enhanced deduction for food inventory, to treat 
the basis of any apparently wholesome food as being equal to 25 
percent of the fair market value of such food.
    Third, in the case of any contribution of apparently 
wholesome food which cannot or will not be sold solely by 
reason of internal standards of the taxpayer, lack of market, 
or similar circumstances, or by reason of being produced by the 
taxpayer exclusively for the purposes of transferring the food 
to an organization described in section 501(c)(3), the fair 
market value of such contribution shall be determined (1) 
without regard to such internal standards, such lack of market 
or similar circumstances, or such exclusive purpose, and (2) by 
taking into account the price at which the same or 
substantially the same food items (as to both type and quality) 
are sold by the taxpayer at the time of the contributions (or, 
if not so sold at such time, in the recent past).

                             Effective Date

    The provision generally applies to contributions made after 
December 31, 2014.
    The modifications to increase the corporate percentage 
limit and to provide for presumptions relating to basis and 
valuation apply to taxable years beginning after December 31, 
2015.

10. Extension of modification of tax treatment of certain payments to 
        controlling exempt organizations (sec. 114 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.\380\ In 
general, interest, rents, royalties, and annuities are excluded 
from the unrelated business income of tax-exempt 
organizations.\381\
---------------------------------------------------------------------------
    \380\ Sec. 511.
    \381\ Sec. 512(b).
---------------------------------------------------------------------------
    Section 512(b)(13) provides 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).
    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).
    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).\382\ A 20-percent penalty 
is imposed 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. This special rule does not apply to payments 
received or accrued after December 31, 2014.
---------------------------------------------------------------------------
    \382\ Sec. 512(b)(13)(E).
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                        Explanation of Provision

    The provision reinstates the special rule and makes it 
permanent. Accordingly, under the provision, payments of rent, 
royalties, annuities, or interest 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 applies to payments received or accrued after 
December 31, 2014.

11. Extension of basis adjustment to stock of S corporations making 
        charitable contributions of property (sec. 115 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.\383\ 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.\384\
---------------------------------------------------------------------------
    \383\ Sec. 1366(a)(1)(A).
    \384\ Sec. 1367(a)(2)(B).
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    In the case of charitable contributions made in taxable 
years beginning before January 1, 2015, 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, 2014, the amount of 
the reduction is the shareholder's pro rata share of the fair 
market value of the contributed property.

                        Explanation of Provision

    The provision makes the pre-2015 rule relating to the basis 
reduction on account of charitable contributions of property 
permanent.

                             Effective Date

    The provision applies to charitable contributions made in 
taxable years beginning after December 31, 2014.

    Part 3--Incentives for Growth, Jobs, Investment, and Innovation


12. Extension and modification of research credit (sec. 121 of the Act 
        and secs. 38 and 41 and new sec. 3111(f) of the Code)

                              Present Law


Research credit

            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.\385\ Thus, the research 
credit is generally available with respect to incremental 
increases in qualified research. An alternative simplified 
credit (with a 14-percent rate and a different base amount) may 
be claimed in lieu of this credit.\386\
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    \385\ Sec. 41(a)(1).
    \386\ Sec. 41(c)(5).
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    A 20-percent research tax credit also is 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.\387\ This separate 
credit computation commonly is referred to as the basic 
research credit.
---------------------------------------------------------------------------
    \387\ Sec. 41(a)(2) and (e). The base period for the basic research 
credit generally extends from 1981 through 1983.
---------------------------------------------------------------------------
    Finally, a research credit is available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium.\388\ This separate credit computation commonly is 
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.
---------------------------------------------------------------------------
    \388\ Sec. 41(a)(3).
---------------------------------------------------------------------------
    The research credit, including the basic research credit 
and the energy research credit, expires for amounts paid or 
incurred after December 31, 2014.\389\
---------------------------------------------------------------------------
    \389\ Sec. 41(h).
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            Computation of general research credit
    The general research tax credit applies only to the extent 
that the taxpayer's qualified research expenses for the current 
taxable year exceed its base amount. The base amount for the 
current year generally is computed by multiplying the 
taxpayer's fixed-base percentage by the average amount of the 
taxpayer's gross receipts for the four preceding years. If a 
taxpayer both incurred qualified research expenses and had 
gross receipts during each of at least three years from 1984 
through 1988, then its fixed-base percentage is the ratio that 
its total qualified research expenses for the 1984-1988 period 
bears to its total gross receipts for that period (subject to a 
maximum fixed-base percentage of 16 percent). Special rules 
apply to all other taxpayers (so called start-up firms).\390\ 
In computing the research credit, a taxpayer's base amount 
cannot be less than 50 percent of its current-year qualified 
research expenses.
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    \390\ 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).
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            Alternative simplified credit
    The alternative simplified 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.\391\ The rate is reduced to 6 percent if a 
taxpayer has no qualified research expenses in any one of the 
three preceding taxable years.\392\ An election to use the 
alternative simplified credit applies to all succeeding taxable 
years unless revoked with the consent of the Secretary.\393\
---------------------------------------------------------------------------
    \391\ Sec. 41(c)(5)(A).
    \392\ Sec. 41(c)(5)(B).
    \393\ Sec. 41(c)(5)(C).
---------------------------------------------------------------------------
            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).\394\ 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.
---------------------------------------------------------------------------
    \394\ 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 section 174, 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.\395\ 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) conducted outside the United States, Puerto Rico, or any 
U.S. possession; (7) in the social sciences, arts, or 
humanities; or (8) funded by any grant, contract, or otherwise 
by another person (or government entity).\396\
---------------------------------------------------------------------------
    \395\ Sec. 41(d)(3).
    \396\ Sec. 41(d)(4).
---------------------------------------------------------------------------
            Relation to deduction
    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.\397\ Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed.\398\
---------------------------------------------------------------------------
    \397\ Sec. 280C(c). For example, assume that a taxpayer makes 
credit-eligible research expenditures of $1 million during the year and 
that the base period amount is $600,000. Under the standard credit 
calculation (i.e., where a taxpayer may claim a research credit equal 
to 20 percent of the amount by which its qualified expenses for the 
year exceed its base period amount), the taxpayer is allowed a credit 
equal to 20 percent of the $400,000 increase in research expenditures, 
or $80,000 (($1 million - $600,000) * 20% = $80,000). To avoid a double 
benefit, the amount of the taxpayer's deduction under section 174 is 
reduced by $80,000 (the amount of the research credit), leaving a 
deduction of $920,000 ($1 million - $80,000).
    \398\ Sec. 280C(c)(3). Taxpayers making this election reduce the 
allowable research credit by the maximum corporate tax rate (currently 
35 percent). Continuing with the example from the prior footnote, an 
electing taxpayer would have its credit reduced to $52,000 ($80,000 - 
($80,000 * 0.35%)), but would retain its $1 million deduction for 
research expenses. This option might be desirable for a taxpayer who 
cannot claim the full amount of the research credit otherwise allowable 
due to the limitation imposed by the alternative minimum tax.
---------------------------------------------------------------------------

Specified credits allowed against alternative minimum tax

    For any taxable year, the general business credit (which is 
the sum of the various business credits) generally may not 
exceed the excess of the taxpayer's net income tax \399\ over 
the greater of (1) the taxpayer's tentative minimum tax or (2) 
25 percent of so much of the taxpayer's net regular tax 
liability \400\ as exceeds $25,000.\401\ Any general business 
credit in excess of this limitation may be carried back one 
year and forward up to 20 years.\402\ The tentative minimum tax 
is an amount equal to specified rates of tax imposed on the 
excess of the alternative minimum taxable income over an 
exemption amount.\403\ Generally, the tentative minimum tax of 
a C corporation with average annual gross receipts of less than 
$7.5 million for prior three-year periods is zero.\404\
---------------------------------------------------------------------------
    \399\ The term ``net income tax'' means the sum of the regular tax 
liability and the alternative minimum tax, reduced by the credits 
allowable under sections 21 through 30D. Sec. 38(c)(1).
    \400\ The term ``net regular tax liability'' means the regular tax 
liability reduced by the sum of certain nonrefundable personal and 
other credits. Sec. 38(c)(1).
    \401\ Sec. 38(c)(1).
    \402\ Sec. 39(a)(1).
    \403\ Sec. 55(b). For example, assume a taxpayer has a regular tax 
liability of $80,000, a tentative minimum tax of $100,000, and a 
research credit determined under section 41 of $90,000 for the taxable 
year (and no other credits). Under present law, the taxpayer's research 
credit is limited to the excess of $100,000 over the greater of (1) 
$100,000 or (2) $13,750 (25% of the excess of $80,000 over $25,000). 
Accordingly, no research credit may be claimed ($100,000 - $100,000 = 
$0) for the taxable year and the taxpayer's net tax liability is 
$100,000. The $90,000 research credit may be carried back or forward 
under the rules applicable to the general business credit.
    \404\ Sec. 55(e).
---------------------------------------------------------------------------
    In applying the tax liability limitation to a list of 
``specified credits'' that are part of the general business 
credit, the tentative minimum tax is treated as being 
zero.\405\ Thus, the specified credits generally may offset 
both regular tax and alternative minimum tax (``AMT'') 
liabilities.
---------------------------------------------------------------------------
    \405\ See section 38(c)(4)(B) for the list of specified credits, 
which does not presently include the research credit determined under 
section 41.
---------------------------------------------------------------------------
    For taxable years beginning in 2010, an eligible small 
business was allowed to offset both the regular and AMT 
liability with the general business credits determined for the 
taxable year (``eligible small business credits'').\406\ For 
this purpose, an eligible small business was, with respect to 
any taxable year, a corporation, the stock of which was not 
publicly traded, a partnership, or a sole proprietor, if the 
average annual gross receipts did not exceed $50 million.\407\ 
Credits determined with respect to a partnership or S 
corporation were not treated as eligible small business credits 
by a partner or shareholder unless the partner or shareholder 
met the gross receipts test for the taxable year in which the 
credits were treated as current year business credits.\408\
---------------------------------------------------------------------------
    \406\ Sec. 38(c)(5)(B).
    \407\ Sec. 38(c)(5)(C).
    \408\ Sec. 38(c)(5)(D).
---------------------------------------------------------------------------

FICA taxes

    The Federal Insurance Contributions Act (``FICA'') imposes 
tax on employers and employees based on the amount of wages (as 
defined for FICA purposes) paid to an employee during the year, 
often referred to as ``payroll'' taxes.\409\ The tax imposed on 
the employer and on the employee is each composed of two parts: 
(1) the Social Security or old age, survivors, and disability 
insurance (``OASDI'') tax equal to 6.2 percent of covered wages 
up to the taxable wage base ($118,500 for 2015); and (2) the 
Medicare or hospital insurance (``HI'') tax equal to 1.45 
percent of all covered wages.\410\ The employee portion of the 
FICA tax generally must be withheld and remitted to the Federal 
government by the employer.
---------------------------------------------------------------------------
    \409\ Secs. 3101-3128.
    \410\ The employee portion of the HI tax under FICA (not the 
employer portion) is increased by an additional tax of 0.9 percent on 
wages received in excess of a threshold amount. The threshold amount is 
$250,000 in the case of a joint return, $125,000 in the case of a 
married individual filing a separate return, and $200,000 in any other 
case.
---------------------------------------------------------------------------
    An employer generally files quarterly employment tax 
returns showing its liability for FICA taxes with respect to 
its employees' wages for the quarter, as well as the employee 
FICA taxes and income taxes withheld from the employees' wages.

                        Explanation of Provision


Research credit

    The provision makes permanent the present law credit.\411\
---------------------------------------------------------------------------
    \411\ In making the present law research credit permanent, Congress 
did not intend to reinstate the previously terminated alternative 
incremental research credit. See letter dated January 27, 2016, 
reprinted in Tax Notes Today (Doc 2016-2887, 2016 Tax Notes Today 27-
38), from Chairmen Brady and Hatch and Ranking Members Levin and Wyden 
to Secretary of the Treasury Lew and Commissioner of Internal Revenue 
Service Koskinen so stating and announcing their intention to introduce 
technical correction legislation to strike the alternative incremental 
research credit from the Code, effective as if included in the PATH 
Act.
---------------------------------------------------------------------------

Specified credits allowed against alternative minimum tax

    The provision provides that, in the case of an eligible 
small business (as defined in section 38(c)(5)(C), after 
application of rules similar to the rules of section 
38(c)(5)(D)), the research credit determined under section 41 
for taxable years beginning after December 31, 2015, is a 
specified credit. Thus, these research credits of an eligible 
small business may offset both regular tax and AMT 
liabilities.\412\
---------------------------------------------------------------------------
    \412\ Using the above example, under this provision, the limitation 
would be the excess of $100,000 over the greater of (1) $0 or (2) 
$13,750. Since $13,750 is greater than $0, the $100,000 would be 
reduced by $13,750 such that the research credit would be limited to 
$86,250. Hence, the taxpayer would be able to claim a research credit 
of $86,250 against its $100,000 net income tax (the sum of $80,000 
regular tax liability and $20,000 alternative minimum tax), which would 
result in $13,750 of total net tax owed ($100,000--$86,250). The 
remaining $3,750 of its research credit ($90,000--$86,250) may be 
carried back or forward, as applicable.
---------------------------------------------------------------------------

Payroll tax credit

            In general
    Under the provision, for taxable years beginning after 
December 31, 2015, a qualified small business may elect for any 
taxable year to claim a certain amount of its research credit 
as a payroll tax credit against its employer OASDI liability, 
rather than against its income tax liability.\413\ If a 
taxpayer makes an election under this provision, the amount so 
elected is treated as a research credit for purposes of section 
280C.\414\
---------------------------------------------------------------------------
    \413\ The credit does not apply against its employer HI liability 
or against the employee portion of FICA taxes the employer is required 
to withhold and remit to the government.
    \414\ Thus, taxpayers are either denied a section 174 deduction in 
the amount of the credit or may elect a reduced research credit amount. 
The election is not taken into account for purposes of determining any 
amount allowable as a payroll tax deduction.
---------------------------------------------------------------------------
    A qualified small business is defined, with respect to any 
taxable year, as a corporation (including an S corporation) or 
partnership (1) with gross receipts of less than $5 million for 
the taxable year,\415\ and (2) that did not have gross receipts 
for any taxable year before the five taxable year period ending 
with the taxable year. An individual carrying on one or more 
trades or businesses also may be considered a qualified small 
business if the individual meets the conditions set forth in 
(1) and (2), taking into account its aggregate gross receipts 
received with respect to all trades or businesses. A qualified 
small business does not include an organization exempt from 
income tax under section 501.
---------------------------------------------------------------------------
    \415\ For this purpose, gross receipts are determined under the 
rules of section 448(c)(3), without regard to subparagraph (A) thereof.
---------------------------------------------------------------------------
    The payroll tax credit portion is the least of (1) an 
amount specified by the taxpayer that does not exceed $250,000, 
(2) the research credit determined for the taxable year, or (3) 
in the case of a qualified small business other than a 
partnership or S corporation, the amount of the business credit 
carryforward under section 39 from the taxable year (determined 
before the application of this provision to the taxable year).
    For purposes of this provision, all members of the same 
controlled group or group under common control are treated as a 
single taxpayer.\416\ The $250,000 amount is allocated among 
the members in proportion to each member's expenses on which 
the research credit is based. Each member may separately elect 
the payroll tax credit, but not in excess of its allocated 
dollar amount.
---------------------------------------------------------------------------
    \416\ For this purpose, all persons or entities treated as a single 
taxpayer under section 41(f)(1) are treated as a single person.
---------------------------------------------------------------------------
    A taxpayer may make an annual election under this section, 
specifying the amount of its research credit not to exceed 
$250,000 that may be used as a payroll tax credit, on or before 
the due date (including extensions) of its originally filed 
return.\417\ A taxpayer may not make an election for a taxable 
year if it has made such an election for five or more preceding 
taxable years. An election to apply the research credit against 
OASDI liability may not be revoked without the consent of the 
Secretary of the Treasury (``Secretary''). In the case of a 
partnership or S corporation, an election to apply the credit 
against its OASDI liability is made at the entity level.
---------------------------------------------------------------------------
    \417\ In the case of a qualified small business that is a 
partnership, this is the return required to be filed under section 
6031. In the case of a qualified small business that is an S 
corporation, this is the return required to be filed under section 
6037. In the case of any other qualified small business, this is the 
return of tax for the taxable year.
---------------------------------------------------------------------------
            Application of credit against OASDI tax liability
    The payroll tax portion of the research credit is allowed 
as a credit against the qualified small business's OASDI tax 
liability for the first calendar quarter beginning after the 
date on which the qualified small business files its income tax 
or information return for the taxable year. The credit may not 
exceed the OASDI tax liability for a calendar quarter on the 
wages paid with respect to all employees of the qualified small 
business.
    If the payroll tax portion of the credit exceeds the 
qualified small business's OASDI tax liability for a calendar 
quarter, the excess is allowed as a credit against the OASDI 
liability for the following calendar quarter.
            Other rules
    The Secretary is directed to prescribe such regulations as 
are necessary to carry out the purposes of the provision, 
including (1) to prevent the avoidance of the purposes of the 
limitations and aggregation rules through the use of successor 
companies or other means, (2) to minimize compliance and 
record-keeping burdens, and (3) for recapture of the credit 
amount applied against OASDI taxes in the case of an adjustment 
to the payroll tax portion of the research credit, including 
requiring amended returns in such a case.

                             Effective Date

    The provision to make the research credit permanent applies 
to amounts paid or incurred after December 31, 2014.
    The provision to allow the research credit against AMT 
applies to research credits of eligible small businesses 
determined for taxable years beginning after December 31, 2015.
    The provision to allow the research credit against FICA 
taxes applies to taxable years beginning after December 31, 
2015.

13. Extension and modification of employer wage credit for employees 
        who are active duty members of the uniformed services (sec. 122 
        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 unless the expense must be 
capitalized.\418\ 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.''
---------------------------------------------------------------------------
    \418\ Sec. 162(a)(1).
---------------------------------------------------------------------------

Wage credit for differential pay

    If an employer qualifies as an eligible small business 
employer, the employer is allowed 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 during the year.
    An eligible small business employer means, with respect to 
a taxable year, an employer that: (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. For 
this purpose, members of controlled groups, groups under common 
control, and affiliated service groups are treated as a single 
employer.\419\ The credit is not available with respect to an 
employer that has failed to comply with the employment and 
reemployment rights of members of the uniformed services.\420\
---------------------------------------------------------------------------
    \419\ Sec. 414(b), (c), (m) and (o).
    \420\ Chapter 43 of Title 38 of the United States Code deals with 
these rights.
---------------------------------------------------------------------------
    Differential wage payment means any payment that: (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.\421\ Eligible differential wage payments are 
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 of the employer for the 91-
day period immediately preceding the period for which any 
differential wage payment is made.
---------------------------------------------------------------------------
    \421\ Sec. 3401(h)(2).
---------------------------------------------------------------------------
    No deduction may be taken for that portion of compensation 
that is equal to the credit.\422\ In addition, the amount of 
any other income tax credit otherwise allowable with respect to 
compensation paid to an employee must be reduced by the 
differential wage payment credit allowed with respect to the 
employee. The credit is not allowable against a taxpayer's 
alternative minimum tax liability. Certain rules applicable to 
the work opportunity tax credit in the case of tax-exempt 
organizations, estates and trusts, regulated investment 
companies, real estate investment trusts and certain 
cooperatives apply also to the differential wage payment 
credit.\423\
---------------------------------------------------------------------------
    \422\ Sec. 280C(a).
    \423\ Sec. 52(c), (d), (e).
---------------------------------------------------------------------------
    The credit is available with respect to amounts paid after 
June 17, 2008,\424\ and before January 1, 2015.
---------------------------------------------------------------------------
    \424\ The credit was originally provided by the Heroes Earnings 
Assistance and Relief Tax Act of 2008 (``HEART Act''), Pub. L. No. 110-
245, effective for amounts paid after June 17, 2008, the date of 
enactment of the HEART Act.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision reinstates the differential wage payment 
credit and makes it permanent. The provision also modifies the 
credit by making it available to an employer of any size, 
rather than only to eligible small business employers.

                             Effective Date

    The provision reinstating the credit and making it 
permanent applies to payments made after December 31, 2014.
    The provision making the credit available to employers of 
any size applies to taxable years beginning after December 31, 
2015.

14. Extension of 15-year straight-line cost recovery for qualified 
        leasehold improvements, qualified restaurant buildings and 
        improvements, and qualified retail improvements (sec. 123 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.\425\ 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 in which 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.
---------------------------------------------------------------------------
    \425\ Sec. 168.
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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, 2015. Qualified leasehold 
improvement property is any improvement to an interior portion 
of a building that is nonresidential real property, provided 
certain requirements are met.\426\ 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.\427\ 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.\428\ An exception to the rule applies in the case 
of death and certain transfers of property that qualify for 
non-recognition treatment.\429\
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    \426\ Sec. 168(e)(6).
    \427\ Sec. 168(e)(6) and (k)(3).
    \428\ Sec. 168(e)(6)(A).
    \429\ Sec. 168(e)(6)(B).
---------------------------------------------------------------------------
    Qualified leasehold improvement property is generally 
recovered using the straight-line method and a half-year 
convention.\430\ Qualified leasehold improvement property 
placed in service after December 31, 2014 is subject to the 
general rules described above.
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    \430\ Sec. 168(b)(3)(G) and (d). An additional first-year 
depreciation deduction (``bonus depreciation'') is allowed equal to 50 
percent of the adjusted basis of qualified property acquired and placed 
in service before January 1, 2015 (January 1, 2016 for certain longer-
lived and transportation property). See sec. 168(k). Qualified property 
eligible for bonus depreciation includes qualified leasehold 
improvement property. Sec. 168(k)(2)(A)(i)(IV).
---------------------------------------------------------------------------

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, 2015. 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.\431\ 
Qualified restaurant property is recovered using the straight-
line method and a half-year convention.\432\ Additionally, 
qualified restaurant property is not eligible for bonus 
depreciation unless it also satisfies the definition of 
qualified leasehold improvement property.\433\ Qualified 
restaurant property placed in service after December 31, 2014 
is subject to the general rules described above.
---------------------------------------------------------------------------
    \431\ Sec. 168(e)(7).
    \432\ Sec. 168(b)(3)(H) and (d).
    \433\ Sec. 168(e)(7)(B).
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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, 2015. 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 \434\ 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.\435\ 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.\436\ 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.\437\
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    \434\ 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.
    \435\ Sec. 168(e)(8).
    \436\ Sec. 168(e)(8)(C).
    \437\ Sec. 168(e)(8)(B). Rules similar to section 168(e)(6)(B) 
apply in the case of death and certain transfers of property that 
qualify for non-recognition treatment.
---------------------------------------------------------------------------
    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.\438\
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    \438\ Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in the 110th Congress (JCS-1-09), March 2009, p. 
402.
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    Qualified retail improvement property is recovered using 
the straight-line method and a half-year convention.\439\ 
Additionally, qualified retail improvement property is not 
eligible for bonus depreciation unless it also satisfies the 
definition of qualified leasehold improvement property.\440\ 
Qualified retail improvement property placed in service after 
December 31, 2014 is subject to the general rules described 
above.
---------------------------------------------------------------------------
    \439\ Sec. 168(b)(3)(I) and (d).
    \440\ Sec. 168(e)(8)(D).
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                        Explanation of Provision

    The provision makes permanent the present-law provisions 
for qualified leasehold improvement property, qualified 
restaurant property, and qualified retail improvement property.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

15. Extension and modification of increased expensing limitations and 
        treatment of certain real property as section 179 property 
        (sec. 124 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. For taxable years beginning in 2014, the maximum 
amount a taxpayer may expense is $500,000 of the cost of 
qualifying property placed in service for the taxable 
year.\441\ 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.\442\ The 
$500,000 and $2,000,000 amounts are not indexed for inflation. 
In general, qualifying property is defined as depreciable 
tangible personal property that is purchased for use in the 
active conduct of a trade or business.\443\ Qualifying property 
excludes investments in air conditioning and heating 
units.\444\ For taxable years beginning before 2015, qualifying 
property also includes off-the-shelf computer software and 
qualified real property (i.e., qualified leasehold improvement 
property, qualified restaurant property, and qualified retail 
improvement property).\445\ Of the $500,000 expense amount 
available under section 179, the maximum amount available with 
respect to qualified real property is $250,000 for each taxable 
year.\446\
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    \441\ For the years 2003 through 2006, the relevant dollar amount 
is $100,000 (indexed for inflation); in 2007, the dollar limitation is 
$125,000; for the 2008 and 2009 years, the relevant dollar amount is 
$250,000; and for the years 2010 through 2013, the relevant dollar 
limitation is $500,000. Sec. 179(b)(1).
    \442\ For the years 2003 through 2006, the relevant dollar amount 
is $400,000 (indexed for inflation); in 2007, the dollar limitation is 
$500,000; for the 2008 and 2009 years, the relevant dollar amount is 
$800,000; and for the years 2010 through 2013, the relevant dollar 
limitation is $2,000,000. Sec. 179(b)(2).
    \443\ Passenger automobiles subject to the section 280F limitation 
are eligible for section 179 expensing only to the extent of the dollar 
limitations in section 280F. For sport utility vehicles above the 6,000 
pound weight rating, which are not subject to the limitation under 
section 280F, the maximum cost that may be expensed for any taxable 
year under section 179 is $25,000. Sec. 179(b)(5).
    \444\ Sec. 179(d)(1) flush language.
    \445\ Sec. 179(d)(1)(A)(ii) and (f).
    \446\ Sec. 179(f)(3).
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    For taxable years beginning in 2015 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, qualified real property, or air 
conditioning and heating units) 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).\447\ 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.\448\ Thus, if a 
taxpayer's section 179 deduction for 2013 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 2014. Any such carryover amounts that are not used in 
2014 are treated as property placed in service in 2014 for 
purposes of computing depreciation. That is, the unused 
carryover amount from 2013 is considered placed in service on 
the first day of the 2014 taxable year.\449\
---------------------------------------------------------------------------
    \447\ Sec. 179(b)(3).
    \448\ Section 179(f)(4) details the special rules that apply to 
disallowed amounts with respect to qualified real property.
    \449\ For example, assume that during 2013, 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 2013, and has a taxable income 
limitation of $150,000. The maximum section 179 deduction the company 
can claim for 2013 is $150,000, which is allocated pro rata between the 
properties, such that the carryover to 2014 is allocated $100,000 to 
the qualified leasehold improvements and $50,000 to the equipment.
    Assume further that in 2014, the company had no asset purchases and 
had no taxable income. The $100,000 carryover from 2013 attributable to 
qualified leasehold improvements is treated as placed in service as of 
the first day of the company's 2014 taxable year under section 
179(f)(4)(C). The $50,000 carryover allocated to equipment is carried 
over to 2014 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.\450\ If a corporation makes an election under 
section 179 to deduct expenditures, the full amount of the 
deduction does not reduce earnings and profits. Rather, the 
expenditures that are deducted reduce corporate earnings and 
profits ratably over a five-year period.\451\
---------------------------------------------------------------------------
    \450\ Sec. 179(d)(9).
    \451\ Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
    An expensing election is made under rules prescribed by the 
Secretary.\452\  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 2015.\453\
---------------------------------------------------------------------------
    \452\ Sec. 179(c)(1).
    \453\ Sec. 179(c)(2).
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                        Explanation of Provision

    The provision provides that the maximum amount a taxpayer 
may expense, for taxable years beginning after 2014, 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. The $500,000 and $2,000,000 amounts are indexed for 
inflation for taxable years beginning after 2015.
    In addition, the provision makes permanent the treatment of 
off-the-shelf computer software as qualifying property. The 
provision also makes permanent the treatment of qualified real 
property as eligible section 179 property. For taxable years 
beginning in 2015, the provision extends the limitation on 
carryovers and the maximum amount available with respect to 
qualified real property of $250,000 for such taxable year. The 
provision removes the limitation related to the amount of 
section 179 property that may be attributable to qualified real 
property for taxable years beginning after 2015. Further, for 
taxable years beginning after 2015, the provision strikes the 
flush language in section 179(d)(1) that excludes air 
conditioning and heating units from the definition of 
qualifying property.
    The provision also makes permanent the permission granted 
to a taxpayer to revoke without the consent of the Commissioner 
any election, and any specification contained therein, made 
under section 179.

                             Effective Date

    The provision generally applies to taxable years beginning 
after December 31, 2014.
    The modifications apply to taxable years beginning after 
December 31, 2015.

16. Extension of treatment of certain dividends of regulated investment 
        companies (sec. 125 of the Act and sec. 871(k) of the Code)

                              Present Law

    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) and 881(a), 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 dividends it paid 
as derived from such interest income for purposes of the 
treatment of a foreign RIC shareholder. The consequence of that 
designation was that such dividends were not subject to 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, 
2014.\454\
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    \454\ Secs. 871(k), 881(e), 1441(a), 1441(c)(12), and 1442(a).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision reinstates and makes permanent the rules 
exempting from gross-basis tax and from withholding of such tax 
the interest-related dividends paid by and short-term capital 
gain dividends paid by a RIC to a foreign person.

                             Effective Date

    The provision applies to dividends paid with respect to any 
taxable year of a RIC beginning after December 31, 2014.

17. Extension of exclusion of 100 percent of gain on certain small 
        business stock (sec. 126 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.\455\ The 
amount of gain eligible for the exclusion by an individual with 
respect to the stock of any 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 small business, when the stock is 
issued, the aggregate gross assets (i.e., cash plus aggregate 
adjusted basis of other property) held by the corporation may 
not exceed $50 million. The corporation also must meet certain 
active trade or business requirements.
---------------------------------------------------------------------------
    \455\ Sec. 1202.
---------------------------------------------------------------------------
    The portion of the gain includible in taxable income is 
taxed at a maximum rate of 28 percent under the regular tax 
rates applicable to the net capital gain of individuals.\456\ 
Seven percent of the excluded gain is an alternative minimum 
tax preference.\457\
---------------------------------------------------------------------------
    \456\ Sec. 1(h).
    \457\ Sec. 57(a)(7).
---------------------------------------------------------------------------

Special rules for stock acquired after February 17, 2009, and before 
        January 1, 2015

    For qualified small business stock acquired after February 
17, 2009, and before September 28, 2010, the percent of gain 
which may be excluded is increased to 75 percent.
    For qualified small business stock acquired after September 
27, 2010, and before January 1, 2015, the percent of gain which 
may be excluded is increased to 100 percent and the minimum tax 
preference does not apply.

                        Explanation of Provision

    The provision makes the post-September 27, 2010, 100-
percent exclusion and the exception from minimum tax preference 
treatment permanent.

                             Effective Date

    The provision applies to stock acquired after December 31, 
2014.

18. Extension of reduction in S corporation recognition period for 
        built-in gains tax (sec. 127 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.\458\
---------------------------------------------------------------------------
    \458\ 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 \459\ 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.\460\ 
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 (e.g., 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.\461\ 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.\462\
---------------------------------------------------------------------------
    \459\ Certain built-in income items are treated as recognized 
built-in gain for this purpose. Sec. 1374(d)(5).
    \460\ Sec. 1374(d)(7)(A).
    \461\ Sec. 1374(d)(2)(B).
    \462\ Treas. Reg. sec. 1.1374-4(h).
---------------------------------------------------------------------------
    The built-in gains 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.\463\ 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.\464\
---------------------------------------------------------------------------
    \463\ Sec. 1374(d)(8)(A).
    \464\ Sec. 1374(d)(8)(B).
---------------------------------------------------------------------------
    The amount of the built-in gains tax under section 1374 is 
treated as a loss by each of the S corporation shareholders in 
computing its own income tax. The character of the loss is 
determined by allocating the loss proportionately among the 
gains giving rise to the tax.\465\
---------------------------------------------------------------------------
    \465\ Sec. 1366(f)(2). Shareholders continue to take into account 
all items of gain and loss of the S corporation 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.\466\ 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.
---------------------------------------------------------------------------
    \466\ Sec. 1374(d)(7)(B)(i).
---------------------------------------------------------------------------
    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.\467\ 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 
fifth taxable year that the S corporation election was in 
effect preceded the taxable year beginning in 2011.
---------------------------------------------------------------------------
    \467\ Sec. 1374(d)(7)(B)(ii).
---------------------------------------------------------------------------

Special rules for 2012, 2013, and 2014

    For taxable years beginning in 2012, 2013, and 2014, the 
term ``recognition period'' in section 1374, for purposes of 
determining the net recognized built-in gain, was applied by 
substituting a five-year period for the otherwise applicable 
10-year period.\468\ Thus, for such taxable years, the 
recognition period was 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 applied). If an S corporation with assets subject 
to section 1374 disposed of such assets in a taxable year 
beginning in 2012, 2013, or 2014 and the disposition occurred 
more than five years after the first day of the relevant 
recognition period, gain or loss on the disposition was not be 
taken into account in determining the net recognized built-in 
gain.
---------------------------------------------------------------------------
    \468\ Sec. 1374(d)(7)(C).
---------------------------------------------------------------------------
    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 applied only to gain recognized within the 
recognition period.
    If an S corporation subject to section 1374 sold a built-in 
gain asset and reported the income from the sale using the 
installment method under section 453, the treatment of all 
payments received was governed by the provisions of section 
1374(d)(7) applicable to the taxable year in which the sale was 
made.\469\
---------------------------------------------------------------------------
    \469\ Sec. 1374(d)(7)(E).
---------------------------------------------------------------------------

Application to regulated investment trusts and real estate investment 
        trusts

    Under Treasury regulations issued under section 337(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.\470\ The Treasury regulations 
include an express reference to the 10-year recognition period 
in section 1374.\471\
---------------------------------------------------------------------------
    \470\ Treas. Reg. sec. 1.337(d)-7(b)(1)(i) and (c)(1).
    \471\ Treas. Reg. sec. 1.337(d)-7(b)(1)(ii).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision makes the rules applicable to taxable years 
beginning in 2012, 2013, and 2014 permanent. Under current 
Treasury regulations, these rules, including the five-year 
recognition period, also would apply to REITs and RICs that do 
not elect ``deemed sale'' treatment.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

19. Extension of subpart F exception for active financing income (sec. 
        128 of the Act and secs. 953 and 954 of the Code)

                              Present Law

    Under the subpart F rules,\472\ 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).
---------------------------------------------------------------------------
    \472\ 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.\473\
---------------------------------------------------------------------------
    \473\ 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 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 as provided 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 or published 
guidance 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.
    The temporary exceptions apply for taxable years of foreign 
corporations beginning after December 31, 1998 and before 
January 1, 2015, and for taxable years of U.S. shareholders 
with or within which such taxable years of such foreign 
corporations end.

                        Explanation of Provision

    The provision makes permanent the 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, as a securities dealer, or in 
the conduct of an insurance business.

                             Effective Date

    The provision applies to taxable years of foreign 
corporations beginning after December 31, 2014, and to taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

             Part 4--Incentives for Real Estate Investment


20. Extension of temporary minimum low-income housing tax credit rate 
        for non-Federally subsidized buildings (sec. 131 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 January 1, 2015.

                        Explanation of Provision

    The provision makes permanent the minimum applicable 
percentage of 9 percent for newly constructed non-Federally 
subsidized buildings.

                             Effective Date

    The provision is effective on January 1, 2015.

21. Extension of military housing allowance exclusion for determining 
        whether a tenant in certain counties is low-income (sec. 132 of 
        the Act and secs. 42 and 142 of the Code)

                              Present Law


In general

    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, 2015

    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, 2015

    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 with respect 
to qualified buildings. A qualified building is defined as any 
building located in:
    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.\474\
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    \474\ For a list of qualified military installations, see Notice 
2008-79, 2008-40 I.R.B. 726, October 6, 2008, available at https://
www.irs.gov/irb/2008-40_IRB/ar10.htm.
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    The provision applies to income determinations: (1) made 
after July 30, 2008, and before January 1, 2015, 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, 2015, or qualified 
buildings placed in service after July 30, 2008, and before 
January 1, 2015, 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, 2015.

                        Explanation of Provision

    The provision makes permanent the special rule that the 
military basic housing allowance is not included in income for 
purposes of the low-income housing credit income eligibility 
rules for qualified buildings.

                             Effective Date

    The provision is effective as if included in the enactment 
of section 3005 of the Housing Assistance Tax Act of 2008.

22. Extension of RIC qualified investment entity treatment under FIRPTA 
        (sec. 133 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. In general, if any class of stock of a 
corporation is regularly traded on an established securities 
market, stock of such class shall be treated as a USRPI only in 
the case of a person who, at some time during the testing 
period, held more than 5 percent of such class of stock.\475\ A 
USRPI also 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 subject to tax under FIRPTA, however, 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 \476\ of that class of stock or beneficial interest 
within the one-year period ending on the date of 
distribution.\477\ Special rules apply to situations involving 
tiers of qualified investment entities.
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    \475\ Sec. 897(c)(3). See section 322 of the Act, described below 
in item 11 of Title III.B., which, in the case of REIT stock only, 
increases from five percent to 10 percent the maximum stock ownership a 
shareholder may have held, during the testing period, of a class of 
stock that is publicly traded, to avoid having that stock be treated as 
a USRPI on disposition.
    \476\ Sec. 897(h)(1). See section 322 of the Act, described below 
in item 11 of Title III.B., which increases from five percent to 10 
percent the percentage ownership threshold for publicly-traded REIT 
stock.
    \477\ 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).
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    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, 2014.\478\
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    \478\ Sec. 897(h).
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                        Explanation of Provision

    The provision makes permanent the inclusion of a RIC within 
the definition of a ``qualified investment entity'' under 
section 897 for those situations in which that inclusion would 
otherwise have expired after December 31, 2014.

                             Effective Date

    The provision is generally effective on January 1, 2015.
    The provision does not apply with respect to the 
withholding requirement under section 1445 for any payment made 
before the date of enactment (December 18, 2015), but a RIC 
that withheld and remitted tax under section 1445 on 
distributions made after December 31, 2014, and before the date 
of enactment is not liable to the distributee with respect to 
such withheld and remitted amounts.

                       B. Extensions Through 2019


1. Extension of new markets tax credit (sec. 141 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'').\479\ 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.\480\ 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.\481\ 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.\482\
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    \479\ Section 45D was enacted by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
    \480\ Sec. 45D(a)(2).
    \481\ Sec. 45D(a)(3).
    \482\ Sec. 45D(g).
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    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.\483\ 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.\484\ 
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.\485\
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    \483\ Sec. 45D(c).
    \484\ Sec. 45D(b).
    \485\ Sec. 45D(d).
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    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.\486\ 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.
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    \486\ Sec. 45D(e).
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    The Secretary is authorized to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit.\487\ 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 \488\ (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.\489\ 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.
---------------------------------------------------------------------------
    \487\ Sec. 45D(e)(2).
    \488\ Pub. L. No. 103-325.
    \489\ Pub. L. No. 103-325.
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    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.\490\
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    \490\ Sec. 45D(d)(2).
---------------------------------------------------------------------------
    The maximum annual amount of qualified equity investments 
was $3.5 million for calendar years 2010, 2011, 2012, 2013, and 
2014. The new markets tax credit expired on December 31, 2014. 
No amount of unused allocation limitation may be carried to any 
calendar year after 2019.

                        Explanation of Provision

    The provision extends the new markets tax credit for five 
years, through 2019, permitting up to $3.5 million in qualified 
equity investments for each of the 2015, 2016, 2017, 2018 and 
2019 calendar years. The provision also extends for five years, 
through 2024, the carryover period for unused new markets tax 
credits.

                             Effective Date

    The provision applies to calendar years beginning after 
December 31, 2014.

2. Extension and modification of work opportunity tax credit (sec. 142 
        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''),\491\ 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.\492\ 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.\493\
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    \491\ Pub. L. No. 112-56 (Nov. 21, 2011).
    \492\ 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.
    \493\ 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.
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    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) 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.

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 Secretary of the 
Treasury 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 Secretary of the Treasury 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

    The work opportunity tax credit is not available for 
individuals who begin work for an employer after December 31, 
2014.

                        Explanation of Provision

    The provision extends for five years the present-law 
employment credit provision (through taxable years beginning on 
or before December 31, 2019). Additionally, the provision 
expands the work opportunity tax credit to employers who hire 
individuals who are qualified long-term unemployment 
recipients. For purposes of the provision, such persons are 
individuals who have been certified by the designated local 
agency as being in a period of unemployment of 27 weeks or 
more, which includes a period in which the individual was 
receiving unemployment compensation under State or Federal law. 
With respect to wages paid to such individuals, employers would 
be eligible for a 40 percent credit on the first $6,000 of 
wages paid to such individual, for a maximum credit of $2,400 
per eligible employee.

                             Effective Date

    The provision generally applies to individuals who begin 
work for the employer after December 31, 2014.
    The provision relating to wages paid to qualified long-term 
unemployment recipients applies to individuals who begin work 
for the employer after December 31, 2015.

3. Extension and modification of bonus depreciation (sec. 143 of the 
        Act and sec. 168(k) of the Code)

                              Present Law


In general

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
acquired and placed in service before January 1, 2015 (January 
1, 2016 for certain longer-lived and transportation 
property).\494\
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    \494\ Sec. 168(k). The additional first-year depreciation deduction 
is subject to the general rules regarding whether an item must be 
capitalized under section 263A.
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    The additional first-year depreciation deduction is allowed 
for both the regular tax and the alternative minimum tax 
(``AMT''),\495\ but is not allowed in computing earnings and 
profits.\496\ 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.\497\ The amount of the additional 
first-year depreciation deduction is not affected by a short 
taxable year.\498\ The taxpayer may elect out of additional 
first-year depreciation for any class of property for any 
taxable year.\499\
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    \495\ Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
    \496\ Treas. Reg. sec. 1.168(k)-1(f)(7).
    \497\ Sec. 168(k)(1)(B).
    \498\ Ibid.
    \499\ Sec. 168(k)(2)(D)(iii). For the definition of a class of 
property, see Treas. Reg. sec. 1.168(k)-1(e)(2).
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    The interaction of the additional first-year depreciation 
allowance with the otherwise applicable depreciation allowance 
may be illustrated as follows. Assume that in 2014, a taxpayer 
purchased new depreciable property and placed it in 
service.\500\ The property's cost is $10,000, and it is five-
year property subject to the 200 percent declining balance 
method and half-year convention. The amount of additional 
first-year depreciation allowed is $5,000. The remaining $5,000 
of the cost of the property is depreciable under the rules 
applicable to five-year property. Thus, $1,000 also is allowed 
as a depreciation deduction in 2014.\501\ The total 
depreciation deduction with respect to the property for 2014 is 
$6,000. The remaining $4,000 adjusted basis of the property 
generally is recovered through otherwise applicable 
depreciation rules.
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    \500\ Assume that the cost of the property is not eligible for 
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
    \501\ $1,000 results from the application of the half-year 
convention and the 200 percent declining balance method to the 
remaining $5,000.
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    Property qualifying for the additional first-year 
depreciation deduction must meet all of the following 
requirements.\502\ First, the property must be: (1) property to 
which the modified accelerated cost recovery system (``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.\503\ Second, the original use \504\ of the property 
must commence with the taxpayer.\505\ 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, 2015. An extension of the placed-in-
service date of one year (i.e., before January 1, 2016) is 
provided for certain property with a recovery period of 10 
years or longer and certain transportation property.\506\
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    \502\ Requirements relating to actions taken before 2008 are not 
described herein since they have little (if any) remaining effect.
    \503\ 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. Sec. 168(k)(2)(D)(i).
    \504\ 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). Treas. Reg. sec. 1.168(k)-1(b)(3).
    \505\ 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. Sec. 168(k)(2)(E)(ii).
    \506\ Property qualifying for the extended placed-in-service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million. Transportation property generally is defined as 
tangible personal property used in the trade or business of 
transporting persons or property. Certain aircraft which is not 
transportation property, other than for agricultural or firefighting 
uses, also qualifies for the extended placed-in-service-date, if at the 
time of the contract for purchase, the purchaser made a nonrefundable 
deposit of the lesser of 10 percent of the cost or $100,000, and which 
has an estimated production period exceeding four months and a cost 
exceeding $200,000.
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    To qualify, property must be acquired (1) before January 1, 
2015, or (2) pursuant to a binding written contract which was 
entered before January 1, 2015. 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 before January 1, 
2015.\507\ 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.\508\ 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, 2015 (``progress 
expenditures'') is eligible for the additional first-year 
depreciation deduction.\509\
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    \507\ Sec. 168(k)(2)(E)(i).
    \508\ Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
    \509\ Sec. 168(k)(2)(B)(ii). For purposes of determining the amount 
of eligible progress expenditures, rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 apply.
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    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).\510\ 
While the underlying section 280F limitation is indexed for 
inflation,\511\ the additional $8,000 amount is not indexed for 
inflation.
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    \510\ Sec. 168(k)(2)(F).
    \511\ Sec. 280F(d)(7).
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Qualified leasehold improvement property

    Qualified leasehold improvement property is any improvement 
to an interior portion of a building that is nonresidential 
real property, provided certain requirements are met.\512\ 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. For 
these purposes, a binding commitment to enter into a lease is 
treated as a lease, and the parties to the commitment are 
treated as lessor and lessee. A lease between related persons 
is not considered a lease for this purpose.
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    \512\ Sec. 168(k)(3). The additional first-year depreciation 
deduction is not available for qualified New York Liberty Zone 
leasehold improvement property as defined in section 1400L(c)(2). Sec. 
168(k)(2)(D)(ii).
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Special rule for long-term contracts

    In general, in the case of a long-term contract, the 
taxable income from the contract is determined under the 
percentage-of-completion method.\513\ 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 seven 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 before January 
1, 2015 (January 1, 2016 in the case of certain longer-lived 
and transportation property).\514\
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    \513\ Sec. 460.
    \514\ Sec. 460(c)(6). Other dates involving prior years are not 
described herein.
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Election to accelerate AMT credits in lieu of bonus depreciation

    A corporation otherwise eligible for additional first-year 
depreciation may elect to claim additional AMT credits in lieu 
of claiming additional depreciation with respect to ``eligible 
qualified property.'' \515\ In the case of a corporation making 
this election, the straight line method is used for the regular 
tax and the AMT with respect to eligible qualified 
property.\516\
---------------------------------------------------------------------------
    \515\ Sec. 168(k)(4). Eligible qualified property means qualified 
property eligible for bonus depreciation with minor effective date 
differences having little (if any) remaining significance.
    \516\ Sec. 168(k)(4)(A).
---------------------------------------------------------------------------
    Generally, an election under this provision for a taxable 
year applies to subsequent taxable years. However, each time 
the provision has been extended, a corporation which has 
previously made an election has been allowed to elect not to 
claim additional minimum tax credits, or, if no election had 
previously been made, to make an election to claim additional 
credits with respect to property subject to the extension.\517\
---------------------------------------------------------------------------
    \517\ Sec. 168(k)(4)(H), (I), (J), and (K).
---------------------------------------------------------------------------
    A corporation making an election increases the tax 
liability limitation under section 53(c) on the use of minimum 
tax credits by the bonus depreciation amount.\518\ The 
aggregate increase in credits allowable by reason of the 
increased limitation is treated as refundable.\519\
---------------------------------------------------------------------------
    \518\ Sec. 168(k)(4)(B)(ii).
    \519\ Sec. 168(k)(4)(F).
---------------------------------------------------------------------------
    The bonus depreciation amount generally is equal to 20 
percent of bonus depreciation for eligible qualified property 
that could be claimed as a deduction absent an election under 
this provision.\520\ As originally enacted, the bonus 
depreciation amount for all taxable years was limited to the 
lesser of (1) $30 million, or (2) six percent of the minimum 
tax credits allocable to the adjusted net minimum tax imposed 
for taxable years beginning before January 1, 2006.\521\ 
However, extensions of this provision have provided that this 
limitation applies separately to property subject to each 
extension.
---------------------------------------------------------------------------
    \520\ For this purpose, bonus depreciation is the difference 
between (i) the aggregate amount of depreciation determined if section 
168(k)(1) applied to all eligible qualified property placed in service 
during the taxable year and (ii) the amount of depreciation that would 
be so determined if section 168(k)(1) did not so apply. This 
determination is made using the most accelerated depreciation method 
and the shortest life otherwise allowable for each property. Sec. 
168(k)(4)(C).
    \521\ Sec. 168(k)(4)(C)(iii).
---------------------------------------------------------------------------
    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.\522\
---------------------------------------------------------------------------
    \522\ Sec. 168(k)(4)(C)(iv).
---------------------------------------------------------------------------
    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, 
bonus depreciation does not apply to any eligible qualified 
property and the straight line method is used with respect to 
that property.\523\
---------------------------------------------------------------------------
    \523\ Sec. 168(k)(4)(G)(ii).
---------------------------------------------------------------------------

Preproductive period costs of orchards, groves, and vineyards

    An orchard, vineyard or grove generally produces annual 
crops of fruits (e.g., apples, avocadoes, or grapes) or nuts 
(e.g., pecans, pistachios, or walnuts). During the development 
period of plants, a farmer generally incurs costs to cultivate, 
spray, fertilize and irrigate the plants to their crop-
producing stage (i.e., preproductive period costs).\524\ 
Preproductive period costs may be deducted or capitalized, 
depending on the preproductive period of the plant,\525\ as 
well as whether the farmer elects to have section 263A not 
apply.\526\ After the plants start producing fruit or nuts, a 
farmer can depreciate the capitalized costs of the plants 
(i.e., the acquisition costs of the seeds, seedlings, or plants 
and their original planting which were capitalized when 
incurred, as well as the preproductive period costs if section 
263A applied).\527\ A 10-year recovery period is assigned to 
any tree or vine bearing fruits or nuts.\528\ A seven-year 
recovery period generally applies to other plants bearing 
fruits or nuts.\529\
---------------------------------------------------------------------------
    \524\ See section 263A(e)(3), which defines the ``preproductive 
period'' of a plant which will have more than one crop or yield as the 
period before the first marketable crop or yield from such plant.
    \525\ See section 263A(d)(1)(A)(ii). Section 263A generally 
requires certain direct and indirect costs allocable to real or 
tangible personal property produced by the taxpayer to be included in 
either inventory or capitalized into the basis of such property, as 
applicable.
    \526\ See section 263A(d)(3).
    \527\ In the case of any tree or vine bearing fruits or nuts, the 
placed in service date does not occur until the tree or vine first 
reaches an income-producing stage. Treas. Reg. sec. 1.46-3(d)(2). See 
also, Rev. Rul. 80-25, 1980-1 C.B. 65, 1980; and Rev. Rul. 69-249, 
1969-1 C.B. 31, 1969.
    \528\ Sec. 168(e)(3)(D)(ii).
    \529\ Sec. 168(e)(3)(C)(v).
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                        Explanation of Provision


Bonus depreciation

    The provision extends and modifies the additional first-
year depreciation deduction for five years, generally through 
2019 (through 2020 for certain longer-lived and transportation 
property (``LLTP'' \530\)).\531\ The 50-percent allowance is 
phased down for property placed in service in taxable years 
beginning after 2017 (after 2018 for LLTP). Under the 
provision, the bonus depreciation percentage rates are as 
follows:
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    \530\ LLTP means (i) certain longer-lived and transportation 
property described in section 168(k)(2)(B), and (ii) certain aircraft 
described in section 168(k)(2)(C).
    \531\ Due to the passage of time since the provision's original 
enactment, the provision eliminates the various acquisition date 
requirements as no longer relevant. The provision also repeals as 
deadwood the provision relating to property acquired during certain 
pre-2012 periods (or certain pre-2013 periods for LLTP).

------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
     Placed in Service Year          Qualified
                                    Property--in            LLTP
                                      General
------------------------------------------------------------------------
2015............................      50 percent             50 percent
2016............................      50 percent             50 percent
2017............................      50 percent             50 percent
2018............................      40 percent       50 percent \532\
2019............................      30 percent             40 percent
2020............................             n/a       30 percent \533\
------------------------------------------------------------------------

    The $8,000 increase amount in the limitation on the 
depreciation deductions allowed with respect to certain 
passenger automobiles is phased down from $8,000 by $1,600 per 
calendar year beginning in 2018. Thus, the section 280F 
increase amount for property placed in service in 2018 is 
$6,400, and for 2019 is $4,800. The increase does not apply to 
a taxpayer who elects to accelerate AMT credits in lieu of 
bonus depreciation for a taxable year.
---------------------------------------------------------------------------
    \532\ It is intended that for LLTP placed in service in 2018, 50 
percent applies to the entire adjusted basis. Similarly, for LLTP 
placed in service in 2019, 40 percent applies to the entire adjusted 
basis. A technical correction may be necessary with respect to LLTP 
placed in service in 2018 and 2019 so that the statute reflects this 
intent.
    \533\ Note that in the case of LLTP described in section 
168(k)(2)(B) and placed in service in 2020, 30 percent applies to the 
adjusted basis attributable to manufacture, construction, or production 
before January 1, 2020, and the remaining adjusted basis does not 
qualify for bonus depreciation. Thirty percent applies to the entire 
adjusted basis of certain aircraft described in section 168(k)(2)(C) 
and placed in service in 2020.
---------------------------------------------------------------------------
    After 2015, the provision allows additional first-year 
depreciation for qualified improvement property without regard 
to whether the improvements are property subject to a lease, 
and also removes the requirement that the improvement must be 
placed in service more than three years after the date the 
building was first placed in service.
    The provision also extends the special rule for the 
allocation of bonus depreciation to a long-term contract for 
five years to property placed in service before January 1, 2020 
(January 1, 2021, in the case of certain longer-lived and 
transportation property).

Expansion of election to accelerate AMT credits in lieu of bonus 
        depreciation

    The provision extends, with modifications, the election to 
increase the AMT credit limitation in lieu of bonus 
depreciation.
    For taxable years ending after December 31, 2014, and 
before January 1, 2016, a bonus depreciation amount, maximum 
amount, and maximum increase amount is computed separately with 
respect to property to which the extension of additional first-
year depreciation applies (``round 5 extension 
property'').\534\ A corporation that has an election in effect 
with respect to round 4 extension property claiming minimum tax 
credits in lieu of bonus depreciation is treated as having an 
election in effect for round 5 extension property, unless the 
corporation elects otherwise. The provision also allows a 
corporation that does not have an election in effect with 
respect to round 4 extension property to elect to claim minimum 
tax credits in lieu of bonus depreciation for round 5 extension 
property. A separate bonus depreciation amount, maximum amount, 
and maximum increase amount is computed and applied to round 5 
extension property.\535\
---------------------------------------------------------------------------
    \534\ An election with respect to round 5 extension property is 
binding for all property that is eligible qualified property solely by 
reason of the extension of the 50-percent additional first-year 
depreciation deduction.
    \535\ In computing the maximum amount, the maximum increase amount 
for round 5 extension property is reduced by bonus depreciation amounts 
for preceding taxable years only with respect to round 5 extension 
property.
---------------------------------------------------------------------------
    For taxable years ending after December 31, 2015, the bonus 
depreciation amount for a taxable year (as defined under 
present law with respect to all qualified property) is limited 
to the lesser of (1) 50 percent of the minimum tax credit for 
the first taxable year ending after December 31, 2015 
(determined before the application of any tax liability 
limitation), or (2) the minimum tax credit for the taxable year 
allocable to the adjusted net minimum tax imposed for taxable 
years ending before January 1, 2016 (determined before the 
application of any tax liability limitation and determined on a 
first-in, first-out basis).
    The provision also provides that in the case of a 
partnership having a single corporate partner owning (directly 
or indirectly) more than 50 percent of the capital and profits 
interests in the partnership, each partner takes into account 
its distributive share of partnership depreciation in 
determining its bonus depreciation amount.

Special rules for certain plants

    The provision provides an election for certain plants 
bearing fruits and nuts. Under the election, the applicable 
percentage of the adjusted basis of a specified plant which is 
planted or grafted after December 31, 2015 and before January 
1, 2020, is deductible for regular tax and AMT purposes in the 
year planted or grafted by the taxpayer, and the adjusted basis 
is reduced by the amount of the deduction.\536\ The percentage 
is 50 percent for 2016, and then is phased down by 10 percent 
per calendar year beginning in 2018. Thus, the percentage for 
2018 is 40 percent, and for 2019 is 30 percent. A specified 
plant is any tree or vine that bears fruits or nuts, and any 
other plant that will have more than one yield of fruits or 
nuts and generally has a preproductive period of more than two 
years from planting or grafting to the time it begins bearing 
fruits or nuts.\537\ The election is revocable only with the 
consent of the Secretary, and if the election is made with 
respect to any specified plant, such plant is not treated as 
qualified property eligible for bonus depreciation in the 
subsequent taxable year in which it is placed in service.
---------------------------------------------------------------------------
    \536\ Any amount deducted under this election is not subject to 
capitalization under section 263A.
    \537\ A specified plant does not include any property that is 
planted or grafted outside of the United States.
---------------------------------------------------------------------------

                             Effective Date

    The provision generally applies to property placed in 
service after December 31, 2014, in taxable years ending after 
such date.
    The modifications relating to bonus depreciation apply to 
property placed in service after December 31, 2015, in taxable 
years ending after such date.
    The modifications relating to the election to accelerate 
AMT credits in lieu of claiming bonus depreciation generally 
applies to taxable years ending after December 31, 2015. For a 
taxable year beginning before January 1, 2016, and ending after 
December 31, 2015, a transitional rule applies for purposes of 
determining the amount eligible for the election to claim 
additional AMT credits. The transitional rule applies the 
present-law limitations to property placed in service in 2015 
and the revised limitations to property placed in service in 
2016.
    The provision relating to certain plants bearing fruits and 
nuts applies to specified plants planted or grafted after 
December 31, 2015.

4. Extension of look-through treatment of payments between related 
        controlled foreign corporations under foreign personal holding 
        company rules (sec. 144 of the Act and sec. 954(c)(6) of the 
        Code)

                              Present Law

    In general The rules of subpart F \538\ 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.
---------------------------------------------------------------------------
    \538\ 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-through rule''

    Under the ``look-through 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-through 
rule, including such regulations as are necessary or 
appropriate to prevent the abuse of the purposes of such rule.
    The look-through rule applies to taxable years of foreign 
corporations beginning after December 31, 2005 and before 
January 1, 2015, and to taxable years of U.S. shareholders with 
or within which such taxable years of foreign corporations end.

                        Explanation of Provision

    The provision extends for five years the application of the 
look-through rule, to taxable years of foreign corporations 
beginning before January 1, 2020, and to taxable years of U.S. 
shareholders with or within which such taxable years of foreign 
corporations end.

                             Effective Date

    The provision applies to taxable years of foreign 
corporations beginning after December 31, 2014, and to taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.

                       C. Extensions Through 2016


            Part 1--Tax Relief for Families and Individuals


1. Extension and modification of exclusion from gross income of 
        discharges of acquisition indebtedness on principal residences 
        (sec. 151 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).\539\ 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.
---------------------------------------------------------------------------
    \539\ 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.
    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, 2015.

                        Explanation of Provision

    The provision extends for two additional years (through 
December 31, 2016) the exclusion from gross income for 
discharges of qualified principal residence indebtedness. The 
provision also provides for an exclusion from gross income in 
the case of those taxpayers' whose qualified principal 
residence indebtedness was discharged on or after January 1, 
2017, if the discharge was subject to a written arrangement 
entered into prior to January 1, 2017.

                             Effective Date

    The provision generally applies to discharges of 
indebtedness after December 31, 2014.
    The provision relating to discharges pursuant to a written 
arrangement applies to discharges of indebtedness after 
December 31, 2015.

2. Extension of mortgage insurance premiums treated as qualified 
        residence interest (sec. 152 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.\540\
---------------------------------------------------------------------------
    \540\ 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.

Qualified 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 
(or fraction thereof) 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 $109,000 ($54,000 in the case of married 
individual filing a separate return).
    For this purpose, qualified mortgage insurance means 
mortgage insurance provided by the Department of Veterans 
Affairs, the Federal Housing Administration, or the Rural 
Housing Service, 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).
    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, 
2014, or properly allocable to any period after that date.
    Reporting rules apply under the provision.

                        Explanation of Provision

    The provision extends the deduction for private mortgage 
insurance premiums for two years (with respect to contracts 
entered into after December 31, 2006). Thus, the provision 
applies to amounts paid or accrued in 2015 and 2016 (and not 
properly allocable to any period after 2016).

                             Effective Date

    The provision applies to amounts paid or accrued after 
December 31, 2014.

3. Extension of above-the-line deduction for qualified tuition and 
        related expenses (sec. 153 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.\541\ 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.\542\ The expenses must be in connection with 
enrollment at an institution of higher education during the 
taxable year, or with an academic period beginning during the 
taxable year or during the first three months of the next 
taxable year. The deduction is not available for tuition and 
related expenses paid for elementary or secondary education.
---------------------------------------------------------------------------
    \541\ Sec. 222.
    \542\ The deduction generally is not available for expenses with 
respect to a course or education involving sports, games, or hobbies, 
and is not available for student activity fees, athletic fees, 
insurance expenses, or other expenses unrelated to an individual's 
academic course of instruction.
---------------------------------------------------------------------------
    The maximum deduction is $4,000 for an individual whose 
adjusted gross income for the taxable year does not exceed 
$65,000 ($130,000 in the case of a joint return), or $2,000 for 
other individuals whose adjusted gross income does not exceed 
$80,000 ($160,000 in the case of a joint return). No deduction 
is allowed for an individual whose adjusted gross income 
exceeds the relevant adjusted gross income limitations, for a 
married individual who does not file a joint return, or for an 
individual with respect to whom a personal exemption deduction 
may be claimed by another taxpayer for the taxable year. The 
deduction is not available for taxable years beginning after 
December 31, 2014.
    The amount of qualified tuition and related expenses must 
be reduced by certain scholarships, educational assistance 
allowances, and other amounts paid for the benefit of such 
individual,\543\ and by the amount of such expenses taken into 
account for purposes of determining any exclusion from gross 
income of: (1) income from certain U.S. savings bonds used to 
pay higher education tuition and fees; and (2) income from a 
Coverdell education savings account.\544\ Additionally, such 
expenses must be reduced by the earnings portion (but not the 
return of principal) of distributions from a qualified tuition 
program if an exclusion under section 529 is claimed with 
respect to expenses eligible for the qualified tuition 
deduction. No deduction is allowed for any expense for which a 
deduction is otherwise allowed or with respect to an individual 
for whom a Hope or Lifetime Learning credit is elected for such 
taxable year.
---------------------------------------------------------------------------
    \543\ Secs. 222(d)(1) and 25A(g)(2).
    \544\ Sec. 222(c). These reductions are the same as those that 
apply to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the qualified tuition deduction for 
two years, through 2016.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

    Part 2--Incentives for Growth, Jobs, Investment, and Innovation


4. Extension of Indian employment tax credit (sec. 161 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.\545\ 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.
---------------------------------------------------------------------------
    \545\ 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 \546\ or section 4(10) of the Indian Child Welfare 
Act of 1978.\547\ 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).
---------------------------------------------------------------------------
    \546\ Pub. L. No. 93-262.
    \547\ 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 adjustment for inflation is 
$45,000 for 2014).\548\ 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.
---------------------------------------------------------------------------
    \548\ See Instructions for Form 8845, Indian Employment Credit 
(2014).
---------------------------------------------------------------------------
    The wage credit is available for wages paid or incurred in 
taxable years beginning on or before December 31, 2014.

                        Explanation of Provision

    The provision extends for two years the present-law Indian 
employment credit (through taxable years beginning on or before 
December 31, 2016).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

5. Extension and modification of railroad track maintenance credit 
        (sec. 162 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, 2015.\549\ 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.\550\ 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.\551\ Basis of the 
railroad track must be reduced (but not below zero) by an 
amount equal to 100 percent of the taxpayer's qualified 
railroad track maintenance tax credit determined for the 
taxable year.\552\
---------------------------------------------------------------------------
    \549\ Sec. 45G(a) and (f).
    \550\ Sec. 45G(b)(1).
    \551\ Sec. 38(c)(4).
    \552\ Sec. 45G(e)(3).
---------------------------------------------------------------------------
    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).\553\
---------------------------------------------------------------------------
    \553\ 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.\554\
---------------------------------------------------------------------------
    \554\ Sec. 45G(c).
---------------------------------------------------------------------------
    The terms Class II or Class III railroad have the meanings 
given by the Surface Transportation Board.\555\
---------------------------------------------------------------------------
    \555\ Sec. 45G(e)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present law credit for two years, 
for qualified railroad track maintenance expenditures paid or 
incurred in taxable years beginning after December 31, 2014, 
and before January 1, 2017.
    The provision also provides that qualified railroad track 
maintenance expenditures paid or incurred in taxable years 
beginning after December 31, 2015, 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, 2015, 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).

                             Effective Date

    The provision generally applies to expenditures paid or 
incurred in taxable years beginning after December 31, 2014.
    The modification to the definition of qualified railroad 
track maintenance expenditures applies to expenditures paid or 
incurred in taxable years beginning after December 31, 2015.

6. Extension of mine rescue team training credit (sec. 163 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.\556\ 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.\557\
---------------------------------------------------------------------------
    \556\ Sec. 45N(a).
    \557\ Sec. 45N(b).
---------------------------------------------------------------------------
    An eligible employer is any taxpayer which employs 
individuals as miners in underground mines in the United 
States.\558\ The term ``wages'' has the meaning given to such 
term by section 3306(b) \559\ (determined without regard to any 
dollar limitation contained in that section).\560\
---------------------------------------------------------------------------
    \558\ Sec. 45N(c).
    \559\ Section 3306(b) defines wages for purposes of Federal 
Unemployment Tax.
    \560\ Sec. 45N(d).
---------------------------------------------------------------------------
    No deduction is allowed for the portion of the expenses 
otherwise deductible that is equal to the amount of the 
credit.\561\ The credit does not apply to taxable years 
beginning after December 31, 2014.\562\ Additionally, the 
credit is not allowable for purposes of computing the 
alternative minimum tax.\563\
---------------------------------------------------------------------------
    \561\ Sec. 280C(e).
    \562\ Sec. 45N(e).
    \563\ Sec. 38(c).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the credit for two years through 
taxable years beginning on or before December 31, 2016.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

7. Extension of qualified zone academy bonds (sec. 164 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.\564\ 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.\565\ 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.
---------------------------------------------------------------------------
    \564\ Sec. 103.
    \565\ Sec. 149(e).
---------------------------------------------------------------------------
    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\566\ 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.\567\ 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.
---------------------------------------------------------------------------
    \566\ Sec. 103(a) and (b)(2).
    \567\ Sec. 148.
---------------------------------------------------------------------------

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, State 
and local governments were given the authority to issue 
``qualified zone academy bonds.'' \568\ 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, 2012, 2013 and 2014. 
Each calendar year's bond limitation is allocated to the States 
according to their respective populations of individuals below 
the poverty line. Each State, in turn, allocates the bond 
authority to qualified zone academies within such State.
---------------------------------------------------------------------------
    \568\ 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.\569\ 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.\570\ 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.
---------------------------------------------------------------------------
    \569\ Sec. 54A.
    \570\ 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, 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 (``direct-pay bonds''). 
Section 6431 is not available for qualified zone academy bond 
allocations from the national limitation for years after 2010 
or any carry forward of those allocations.

                        Explanation of Provision

    The provision extends the qualified zone academy bond 
program for two years. The provision authorizes issuance of up 
to $400 million of qualified zone academy bonds for 2015 and 
$400 million for 2016. The option to issue direct-pay bonds is 
not available.

                             Effective Date

    The provision applies to obligations issued after December 
31, 2014.

8. Extension of classification of certain race horses as three-year 
        property (sec. 165 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.\571\ Tangible property generally is depreciated 
under the modified accelerated cost recovery system 
(``MACRS''), which determines depreciation by applying specific 
recovery periods,\572\ placed-in-service conventions, and 
depreciation methods to the cost of various types of 
depreciable property.\573\ In particular, the statute assigns a 
three-year recovery period for any race horse (1) that is 
placed in service after December 31, 2008 and before January 1, 
2015 \574\ and (2) that is placed in service after December 31, 
2014 and that is more than two years old at such time it is 
placed in service by the purchaser.\575\ A seven-year recovery 
period is assigned to any race horse that is placed in service 
after December 31, 2014 and that is two years old or younger at 
the time it is placed in service.\576\
---------------------------------------------------------------------------
    \571\ See secs. 263(a) and 167.
    \572\ The applicable recovery period for an asset is determined in 
part by statute and in part by historical Treasury guidance. Exercising 
authority granted by Congress, the Secretary issued Revenue Procedure 
87-56 (1987-2 C.B. 674), laying out the framework of recovery periods 
for enumerated classes of assets. The Secretary clarified and modified 
the list of asset classes in Revenue Procedure 88-22 (1988-1 C.B. 785). 
In November 1988, Congress revoked the Secretary's authority to modify 
the class lives of depreciable property. Revenue Procedure 87-56, as 
modified, remains in effect except to the extent that the Congress has, 
since 1988, statutorily modified the recovery period for certain 
depreciable assets, effectively superseding any administrative guidance 
with regard to such property.
    \573\ Sec. 168.
    \574\ Sec. 168(e)(3)(A)(i)(I), as in effect after amendment by the 
Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, sec. 
15344(b).
    \575\ Sec. 168(e)(3)(A)(i)(II). A horse is more than two years old 
after the day that is 24 months after its actual birthdate. Rev. Proc. 
87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22, 
1988-1 C.B. 785.
    \576\ Rev. Proc. 87-56, 1987-2 C.B. 674, asset class 01.225.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present-law three-year recovery 
period for race horses for two years to apply to any race horse 
(regardless of age when placed in service) which is placed in 
service before January 1, 2017. Subsequently, the three-year 
recovery period for race horses will only apply to those which 
are more than two years old when placed in service by the 
purchaser after December 31, 2016.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

9. Extension of seven-year recovery period for motorsports 
        entertainment complexes (sec. 166 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.\577\ Tangible property generally is depreciated 
under the modified accelerated cost recovery system 
(``MACRS''), which determines depreciation by applying specific 
recovery periods,\578\ placed-in-service conventions, and 
depreciation methods to the cost of various types of 
depreciable property.\579\ The cost of nonresidential real 
property is recovered using the straight-line method of 
depreciation and a recovery period of 39 years.\580\ 
Nonresidential real property is subject to the mid-month 
convention, which treats all property placed in service during 
any month (or disposed of during any month) as placed in 
service (or disposed of) on the mid-point of such month.\581\ 
All other property generally is subject to the half-year 
convention, which treats all property placed in service during 
any taxable year (or disposed of during any taxable year) as 
placed in service (or disposed of) on the mid-point of such 
taxable year.\582\ Land improvements (such as roads and fences) 
are recovered using the 150-percent declining balance method 
and a recovery period of 15 years.\583\ An exception exists for 
the theme and amusement park industry, whose assets are 
assigned a recovery period of seven years.\584\ Additionally, a 
motorsports entertainment complex placed in service on or 
before December 31, 2014 is assigned a recovery period of seven 
years.\585\ 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.\586\ 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).
---------------------------------------------------------------------------
    \577\ See secs. 263(a) and 167.
    \578\ The applicable recovery period for an asset is determined in 
part by statute and in part by historical Treasury guidance. Exercising 
authority granted by Congress, the Secretary issued Revenue Procedure 
87-56 (1987-2 C.B. 674), laying out the framework of recovery periods 
for enumerated classes of assets. The Secretary clarified and modified 
the list of asset classes in Revenue Procedure 88-22 (1988-1 C.B. 785). 
In November 1988, Congress revoked the Secretary's authority to modify 
the class lives of depreciable property. Revenue Procedure 87-56, as 
modified, remains in effect except to the extent that the Congress has, 
since 1988, statutorily modified the recovery period for certain 
depreciable assets, effectively superseding any administrative guidance 
with regard to such property.
    \579\ Sec. 168.
    \580\ Sec. 168(b)(3)(A) and (c).
    \581\ Sec. 168(d)(2)(A) and (d)(4)(B).
    \582\ Sec. 168(d)(1) and (d)(4)(A). However, if substantial 
property is placed in service during the last three months of a taxable 
year, a special rule requires use of the mid-quarter convention, which 
treats all property placed in service (or disposed of) during any 
quarter as placed in service (or disposed of) on the mid-point of such 
quarter. Sec. 168(d)(3) and (d)(4)(C).
    \583\ Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56, 
1987-2 C.B. 674. Under the 150-percent declining balance method, the 
depreciation rate is determined by dividing 150 percent by the 
appropriate recovery period, switching to the straight-line method for 
the first taxable year where using the straight-line method with 
respect to the adjusted basis as of the beginning of that year will 
yield a larger depreciation allowance. Sec. 168(b)(2) and (b)(1)(B).
    \584\ Asset class 80.0 of Rev. Proc. 87-56, 1987-2 C.B. 674.
    \585\ Sec. 168(e)(3)(C)(ii).
    \586\ Sec. 168(i)(15).
---------------------------------------------------------------------------

                        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 on or before December 31, 
2016.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

10. Extension and modification of accelerated depreciation for business 
        property on an Indian reservation (sec. 167 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 \587\
------------------------------------------------------------------------

    ``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; 
\588\ and (4) is not property placed in service for purposes of 
conducting gaming activities.\589\ 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).\590\
---------------------------------------------------------------------------
    \587\ Section 168(j)(2) does not provide shorter recovery periods 
for water utility property, residential rental property, or railroad 
grading and tunnel bores.
    \588\ For these purposes, the term ``related persons'' is defined 
in section 465(b)(3)(C).
    \589\ Sec. 168(j)(4)(A).
    \590\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
    An ``Indian reservation'' means a reservation as defined in 
section 3(d) of the Indian Financing Act of 1974 (25 U.S.C. 
1452(d)) \591\ or section 4(10) of the Indian Child Welfare Act 
of 1978 (25 U.S.C. 1903(10)).\592\ 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).\593\
---------------------------------------------------------------------------
    \591\ Pub. L. No. 93-262.
    \592\ Pub. L. No. 95-608.
    \593\ Sec. 168(j)(6).
---------------------------------------------------------------------------
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum 
tax.\594\ The accelerated depreciation for qualified Indian 
reservation property is available with respect to property 
placed in service on or before December 31, 2014.\595\
---------------------------------------------------------------------------
    \594\ Sec. 168(j)(3).
    \595\ Sec. 168(j)(8).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends for two years the present-law 
accelerated depreciation for qualified Indian reservation 
property to apply to property placed in service on or before 
December 31, 2016.
    The provision also provides that a taxpayer may annually 
make an irrevocable election out of section 168(j) on a class-
by-class basis for qualified Indian reservation property placed 
in service in taxable years beginning after December 31, 2015.

                             Effective Date

    The provision generally applies to property placed in 
service after December 31, 2014.
    The modification providing an election out of section 
168(j) applies to taxable years beginning after December 31, 
2015.

11. Extension of election to expense mine safety equipment (sec. 168 of 
        the Act and sec. 179E of the Code)

                              Present Law

    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.\596\ ``Qualified advanced mine safety equipment 
property'' means any advanced mine safety equipment property 
for use in any underground mine located in the United States 
the original use of which commences with the taxpayer and which 
is placed in service after December 20, 2006, and before 
January 1, 2015.\597\
---------------------------------------------------------------------------
    \596\ Sec. 179E(a).
    \597\ Sec. 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.\598\
---------------------------------------------------------------------------
    \598\ Sec. 179E(d).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends for two years (through December 31, 
2016) the present-law placed-in-service date allowing a 
taxpayer to expense 50 percent of the cost of any qualified 
advanced mine safety equipment property.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

12. Extension of special expensing rules for certain film and 
        television productions; special expensing for live theatrical 
        productions (sec. 169 of the Act and sec. 181 of the Code)

                              Present Law

    Under section 181, a taxpayer may elect \599\ to deduct the 
cost of any qualifying film and television production, 
commencing prior to January 1, 2015, in the year the 
expenditure is incurred in lieu of capitalizing the cost and 
recovering it through depreciation allowances.\600\ A taxpayer 
may elect to deduct up to $15 million of the aggregate cost of 
the film or television production under this section.\601\ 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.\602\
---------------------------------------------------------------------------
    \599\ See Treas. Reg. section 1.181-2 for rules on making an 
election under this section.
    \600\ For this purpose, a production is treated as commencing on 
the first date of principal photography.
    \601\ Sec. 181(a)(2)(A).
    \602\ 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.\603\ The term 
``compensation'' does not include participations and residuals 
(as defined in section 167(g)(7)(B)).\604\ Each episode of a 
television series is treated as a separate production, and only 
the first 44 episodes of a particular series qualify under the 
provision.\605\ Qualified productions do not include sexually 
explicit productions as referenced by section 2257 of title 18 
of the U.S. Code.\606\
---------------------------------------------------------------------------
    \603\ Sec. 181(d)(3)(A).
    \604\ Sec. 181(d)(3)(B).
    \605\ Sec. 181(d)(2)(B).
    \606\ 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.\607\
---------------------------------------------------------------------------
    \607\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the special treatment for film and 
television productions under section 181 for two years to 
qualified film and television productions commencing prior to 
January 1, 2017.
    The provision also expands section 181 to include any 
qualified live theatrical production commencing after December 
31, 2015. A qualified live theatrical production is defined as 
a live staged production of a play (with or without music) 
which is derived from a written book or script and is produced 
or presented by a commercial entity in any venue which has an 
audience capacity of not more than 3,000, or a series of venues 
the majority of which have an audience capacity of not more 
than 3,000. In addition, qualified live theatrical productions 
include any live staged production which is produced or 
presented by a taxable entity no more than 10 weeks annually in 
any venue which has an audience capacity of not more than 
6,500. In general, in the case of multiple live-staged 
productions, each such live-staged production is treated as a 
separate production. Similar to the exclusion for sexually 
explicit productions from the present-law definition of 
qualified productions, qualified live theatrical productions do 
not include stage performances that would be excluded by 
section 2257(h)(1) of title 18 of the U.S. Code, if such 
provision were extended to live stage performances.

                             Effective Date

    The provision generally applies to productions commencing 
after December 31, 2014.
    The modifications for live theatrical productions apply to 
productions commencing after December 31, 2015. For purposes of 
this provision, the date on which a qualified live theatrical 
production commences is the date of the first public 
performance of such production for a paying audience.

13. Extension of deduction allowable with respect to income 
        attributable to domestic production activities in Puerto Rico 
        (sec. 170 of the Act and sec. 199 of the Code)

                              Present Law


General

    Present law generally 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 \608\ 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 \609\ 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.
---------------------------------------------------------------------------
    \608\ Qualifying production property generally includes any 
tangible personal property, computer software, and sound recordings.
    \609\ 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.\610\ 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.\611\
---------------------------------------------------------------------------
    \610\ 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.
    \611\ 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.\612\ 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.\613\ 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.\614\
---------------------------------------------------------------------------
    \612\ Sec. 7701(a)(9).
    \613\ Sec. 199(d)(8)(A).
    \614\ Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
    The special rules for Puerto Rico apply only with respect 
to the first nine taxable years of a taxpayer beginning after 
December 31, 2005 and before January 1, 2015.

                        Explanation of Provision

    The provision extends the special domestic production 
activities rules for Puerto Rico to apply for the first eleven 
taxable years of a taxpayer beginning after December 31, 2005 
and before January 1, 2017.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

14. Extension and modification of empowerment zone tax incentives (sec. 
        171 of the Act and secs. 1391 and 1394 of the Code)

                              Present Law

    The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'') 
\615\ authorized the designation of nine empowerment zones 
(``Round I empowerment zones'') to provide tax incentives for 
businesses to locate within certain targeted areas \616\ 
designated by the Secretaries of the Department of Housing and 
Urban Development (``HUD'') and the U.S. Department of 
Agriculture (``USDA''). The first empowerment zones were 
established in large rural areas and large cities. OBRA 93 also 
authorized the designation of 95 enterprise communities, which 
were located in smaller rural areas and cities. For tax 
purposes, the areas designated as enterprise communities 
continued as such for the ten-year period starting in the 
beginning of 1995 and ending at the end of 2004.
---------------------------------------------------------------------------
    \615\ Pub. L. No. 103-66.
    \616\ 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.
---------------------------------------------------------------------------
    The Taxpayer Relief Act of 1997 \617\ 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'') \618\ authorized a total of 10 new 
empowerment zones (``Round III empowerment zones''), bringing 
the total number of authorized empowerment zones to 40.\619\ 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. 
Subsequent legislation extended the empowerment zone incentives 
through December 31, 2014.\620\
---------------------------------------------------------------------------
    \617\ Pub. L. No. 105-34.
    \618\ Pub. L. No. 106-554.
    \619\ The urban part of the program is administered by 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.
    \620\ Pub. L. No. 111-312, sec. 753 (2010), Pub. L. No. 112-240, 
sec. 327(a) (2013), Pub. L. No. 113-295, sec. 139 (2014).
---------------------------------------------------------------------------
    The tax incentives available within the designated 
empowerment zones include a Federal income tax credit for 
employers who hire qualifying employees (the ``wage credit''), 
increased expensing of qualifying depreciable property, tax-
exempt bond financing, deferral of capital gains tax on the 
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 empowerment zone 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.\621\
---------------------------------------------------------------------------
    \621\ 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, 2015. 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.''\622\
---------------------------------------------------------------------------
    \622\ 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, 
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.\623\ 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.\624\ 
In addition, the $15,000 cap is reduced by any wages taken into 
account in computing the work opportunity tax credit.\625\ The 
wage credit may be used to offset up to 25 percent of the 
employer's alternative minimum tax liability.\626\
---------------------------------------------------------------------------
    \623\ Sec. 280C(a).
    \624\ Sec. 1396(c)(3)(A).
    \625\ Secs. 1396(c)(3)(B).
    \626\ Sec. 38(c)(2).
---------------------------------------------------------------------------

Increased section 179 expensing limitation

    An enterprise zone business is allowed up to an additional 
$35,000 of section 179 expensing for qualified zone property 
placed in service before January 1, 2015.\627\ For taxable 
years beginning in 2014, the total amount that may be expensed 
is $535,000 (assuming at least $35,000 of qualified zone 
property is placed in service during the taxable year).\628\ 
The section 179 expensing allowed to a taxpayer is phased out 
by the amount by which the cost of qualifying property placed 
in service during the taxable year exceeds a specified dollar 
amount.\629\ However, only 50 percent of the cost of qualified 
zone property placed in service during the year by the taxpayer 
is taken into account in determining the phase out of the 
limitation amount.\630\
---------------------------------------------------------------------------
    \627\ Secs. 1397A.
    \628\ See sec. 179(b)(1).
    \629\ For taxable years beginning in 2014, the dollar amount is 
$2,000,000. Sec. 179(b)(2). Section 124 of the Act permanently extends 
the section 179 dollar amounts of $500,000 and $2,000,000 for taxable 
years beginning after 2014.
    \630\ Secs. 1397A(a)(2).
---------------------------------------------------------------------------
    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.\631\ Special rules are 
provided in the case of property that is substantially 
renovated by the taxpayer.
---------------------------------------------------------------------------
    \631\ Sec. 1397D. Note, however, that to be eligible for the 
increased section 179 expensing, the qualified zone property has to 
also meet the definition of section 179 property (e.g., building 
property would only qualify if it constitutes qualified real property 
under section 179(f)).
---------------------------------------------------------------------------
    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.\632\
---------------------------------------------------------------------------
    \632\ 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.\633\
---------------------------------------------------------------------------
    \633\ 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.\634\ 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.
---------------------------------------------------------------------------
    \634\ 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.\635\ 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.
---------------------------------------------------------------------------
    \635\ 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).\636\
---------------------------------------------------------------------------
    \636\ 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 rollover 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 held for more than 
one year and replaced within 60 days by another qualified 
empowerment zone asset in the same zone.\637\ A qualified 
empowerment zone asset generally means stock or a partnership 
interest acquired at original issue for cash in an enterprise 
zone business, or tangible property originally used in an 
enterprise zone business by the taxpayer. 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.
---------------------------------------------------------------------------
    \637\ Sec. 1397B.
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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.\638\ For stock 
acquired prior to February 18, 2009, or after December 31, 
2014, the percentage is generally 50 percent, except that for 
empowerment zone stock the percentage is 60 percent for gain 
attributable to periods before January 1, 2019. For stock 
acquired after February 17, 2009, and before January 1, 2015, a 
higher percentage (either 75-percent or 100-percent) applies to 
all small business stock with no additional percentage for 
empowerment zone stock.\639\
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    \638\ Sec. 1202.
    \639\ Section 126 of the Act permanently extends the 100-percent 
exclusion to small business stock for stock acquired after 2014.
---------------------------------------------------------------------------

Other tax incentives

    Other incentives not specific to empowerment zones but 
beneficial to these areas include the work opportunity tax 
credit for employers based on the first year of employment of 
certain targeted groups, including empowerment zone residents 
(up to $2,400 per employee), and qualified zone academy bonds 
for certain public schools located in an empowerment zone or 
expected (as of the date of bond issuance) to have at least 35 
percent of its students receiving free or reduced lunches.

                        Explanation of Provision


Extension

    The provision extends for two years, through December 31, 
2016, 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 property, tax-exempt bond 
financing, and deferral of capital gains tax on the sale of 
qualified assets replaced with other qualified assets. In the 
case of a designation of an empowerment zone the nomination for 
which included a termination date which is December 31, 2016, 
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.

Modification of enterprise zone facility bond employment requirement

    The provision also amends the requirements for tax-exempt 
enterprise zone facility bonds to treat an employee as a 
resident of an empowerment zone for purposes of the 35 percent 
in-zone employment requirement if they are a resident of an 
empowerment zone, an enterprise community, or a qualified low-
income community within an applicable nominating jurisdiction. 
The applicable nominating jurisdiction means, with respect to 
any empowerment zone or enterprise community, any local 
government that nominated such community for designation under 
section 1391. The definition of a qualified low-income 
community is similar to the definition of a low income 
community provided in section 45D(e) (concerning eligibility 
for the new markets tax credit). A ``qualified 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. For this purpose, a high migration rural county 
is any county that, during the 20-year period ending with the 
year in which the most recent census was conducted, has a net 
out-migration of inhabitants from the county of at least 10 
percent of the population of the county at the beginning of 
such period.
    The Secretary is authorized to designate ``targeted 
populations'' as qualified low-income communities. 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 (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 (a) 80 percent of the area median family income, 
or (b) 80 percent of the statewide non-metropolitan area median 
family income.

                             Effective Date

    The provision generally applies to taxable years beginning 
after December 31, 2014. The provision regarding the special 
rule for the employee residence test in the context of tax-
exempt enterprise zone facility bonds applies to bonds issued 
after December 31, 2015.

15. Extension of temporary increase in limit on cover over of rum 
        excise taxes to Puerto Rico and the Virgin Islands (sec. 172 of 
        the Act and sec. 7652(f) of the Code)

                              Present Law

    A $13.50 per proof gallon \640\ excise tax is imposed on 
distilled spirits produced in or imported into the United 
States.\641\ 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).\642\
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    \640\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10) and (11).
    \641\ Sec. 5001(a)(1).
    \642\ Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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    The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.\643\ 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, 2015).
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    \643\ 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.\644\ 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.\645\ All of the amounts covered over are subject to 
the limitation.
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    \644\ Sec. 7652(e)(2).
    \645\ Secs. 7652(a)(3), (b)(3), and (e)(1).
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                        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, 2014 and before January 1, 2017. After December 
31, 2016, the cover over amount reverts to $10.50 per proof 
gallon.

                             Effective Date

    The provision applies to articles brought into the United 
States after December 31, 2014.

16. Extension of American Samoa economic development credit (sec. 173 
        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 nine taxable years of a corporation that begin after 
December 31, 2005, and before January 1, 2015.
    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 \646\ in an election in effect for 
its taxable year that included October 13, 1995. A corporation 
that added a substantial new line of business (other than in a 
qualifying acquisition of all the assets of a trade or business 
of an existing credit claimant) ceased to be an existing credit 
claimant as of the close of the taxable year ending before the 
date on which that new line of business was added.
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    \646\ 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) and 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.
---------------------------------------------------------------------------
    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.\647\
---------------------------------------------------------------------------
    \647\ Sec. 306.
---------------------------------------------------------------------------
    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.
    For taxable years beginning after December 31, 2011 the 
credit rules are modified in two ways. First, domestic 
corporations with operations in American Samoa are allowed 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).
    In the case of a corporation that is 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, the credit applies to the first nine 
taxable years of the corporation which begin after December 31, 
2005, and before January 1, 2015. For any other corporation, 
the credit applies to the first three taxable years of that 
corporation which begin after December 31, 2011 and before 
January 1, 2015.

                        Explanation of Provision

    The provision extends the credit for two years to apply (a) 
in the case of a corporation that is 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, to the first eleven taxable years of 
the corporation which begin after December 31, 2005, and before 
January 1, 2017, and (b) in the case of any other corporation, 
to the first five taxable years of the corporation which begin 
after December 31, 2011 and before January 1, 2017.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

17. Suspension of medical device excise tax (sec. 174 of the Act and 
        sec. 4191 of the Code)

                              Present Law

    Effective for sales after December 31, 2012, a tax equal to 
2.3 percent of the sale price is imposed on the sale of any 
taxable medical device by the manufacturer, producer, or 
importer of such device.\648\ A taxable medical device is any 
device, as defined in section 201(h) of the Federal Food, Drug, 
and Cosmetic Act,\649\ intended for humans. Regulations further 
define a medical device as one that is listed by the Food and 
Drug Administration (``FDA'') under section 510(j) of the 
Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, 
pursuant to FDA requirements.\650\
---------------------------------------------------------------------------
    \648\ Sec. 4191.
    \649\ 21 U.S.C. sec. 321. Section 201(h) defines device as ``an 
instrument, apparatus, implement, machine, contrivance, implant, in 
vitro reagent, or other similar or related article, including any 
component, part, or accessory, which is (1) recognized in the official 
National Formulary, or the United States Pharmacopeia, or any 
supplement to them, (2) intended for use in the diagnosis of disease or 
other conditions, or in the cure, mitigation, treatment, or prevention 
of disease, in man or other animals, or (3) intended to affect the 
structure or any function of the body of man or other animals, and 
which does not achieve its primary intended purposes through chemical 
action within or on the body of man or other animals and which is not 
dependent upon being metabolized for the achievement of its primary 
intended purposes.''
    \650\ Treas. Reg. sec. 48.4191-2(a). The regulations also include 
as devices items that should have been listed as a device with the FDA 
as of the date the FDA notifies the manufacturer or importer that 
corrective action with respect to listing is required.
---------------------------------------------------------------------------
    The excise tax does not apply to eyeglasses, contact 
lenses, hearing aids, or any other medical device determined by 
the Secretary to be of a type that is generally purchased by 
the general public at retail for individual use (``retail 
exemption''). Regulations provide guidance on the types of 
devices that are exempt under the retail exemption. A device is 
exempt under these provisions if: (1) it is regularly available 
for purchase and use by individual consumers who are not 
medical professionals; and (2) the design of the device 
demonstrates that it is not primarily intended for use in a 
medical institution or office or by a medical 
professional.\651\ Additionally, the regulations provide 
certain safe harbors for devices eligible for the retail 
exemption.\652\
---------------------------------------------------------------------------
    \651\ Treas. Reg. sec. 48.4191-2(b)(2).
    \652\ Treas. Reg. sec. 48.4191-2(b)(2)(iii). The safe harbors 
include devices that are described as over-the-counter devices in 
relevant FDA classification headings as well as certain FDA device 
classifications listed in the regulations.
---------------------------------------------------------------------------
    The medical device excise tax is generally subject to the 
rules applicable to other manufacturers excise taxes. These 
rules include certain general manufacturers excise tax 
exemptions including the exemption for sales for use by the 
purchaser for further manufacture (or for resale to a second 
purchaser in further manufacture) or for export (or for resale 
to a second purchaser for export).\653\ If a medical device is 
sold free of tax for resale to a second purchaser for further 
manufacture or for export, the exemption does not apply unless, 
within the six-month period beginning on the date of sale by 
the manufacturer, the manufacturer receives proof that the 
medical device has been exported or resold for use in further 
manufacturing.\654\ In general, the exemption does not apply 
unless the manufacturer, the first purchaser, and the second 
purchaser are registered with the Secretary of the Treasury. 
Foreign purchasers of articles sold or resold for export are 
exempt from the registration requirement.
---------------------------------------------------------------------------
    \653\ Sec. 4221(a). Other general manufacturers excise tax 
exemptions (i.e., the exemption for sales to purchasers for use as 
supplies for vessels or aircraft, to a State or local government, to a 
nonprofit educational organization, or to a qualified blood collector 
organization) do not apply to the medical device excise tax.
    \654\ Sec. 4221(b).
---------------------------------------------------------------------------
    The lease of a medical device is generally considered to be 
a sale of such device.\655\ Special rules apply for the 
imposition of tax to each lease payment. The use of a medical 
device subject to tax by manufacturers, producers, or importers 
of such device, is treated as a sale for the purpose of 
imposition of excise taxes.\656\
---------------------------------------------------------------------------
    \655\ Sec. 4217(a).
    \656\ Sec. 4218.
---------------------------------------------------------------------------
    There are also rules for determining the price of a medical 
device on which the excise tax is imposed.\657\ These rules 
provide for (1) the inclusion of containers, packaging, and 
certain transportation charges in the price, (2) determining a 
constructive sales price if a medical device is sold for less 
than the fair market price, and (3) determining the tax due in 
the case of partial payments or installment sales.
---------------------------------------------------------------------------
    \657\ Sec. 4216.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision suspends the medical device excise tax for a 
period of two years, for sales on or after January 1, 2016 and 
before January 1, 2018.

                             Effective Date

    The provision applies to sales after December 31, 2015.

       Part 3--Incentives for Energy Production and Conservation


18. Extension and modification of credit for nonbusiness energy 
        property (sec. 181 of the Act and sec. 25C of the Code)

                              Present Law

    Present law provides a 10-percent credit for the purchase 
of qualified energy efficiency improvements to existing 
homes.\658\ 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 \659\ (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.
---------------------------------------------------------------------------
    \658\ Sec. 25C.
    \659\ Pub. L. No. 111-5, February 17, 2009.
---------------------------------------------------------------------------
    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; \660\ (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.
---------------------------------------------------------------------------
    \660\ Ibid.
---------------------------------------------------------------------------
    Additionally, present law provides 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,\661\ (3) a central air conditioner 
which achieves the highest efficiency tier established by the 
Consortium for Energy Efficiency as in effect on January 1, 
2009,\662\ (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.
---------------------------------------------------------------------------
    \661\ 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.
    \662\ 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, 2015. 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.

                        Explanation of Provision

    The provision extends the credit for two years, through 
December 31, 2016. Additionally, the provision modifies the 
efficiency standard to require that windows, skylights, and 
doors meet Energy Star 6.0 standards.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.
    The modification to the credit applies to property placed 
in service after December 31, 2015.

19. Extension of credit for alternative fuel vehicle refueling property 
        (sec. 182 of the Act and section 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.\663\ 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.
---------------------------------------------------------------------------
    \663\ 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 
before January 1, 2015.

                        Explanation of Provision

    The provision extends for two years the 30-percent credit 
for alternative fuel refueling property, through December 31, 
2016.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

20. Extension of credit for electric motorcycles (sec. 183 of the Act 
        and sec. 30D of the Code)

                              Present Law

    For vehicles acquired before 2014, a 10-percent credit was 
available for qualifying plug-in electric motorcycles and 
three-wheeled vehicles.\664\ Qualifying two- or three-wheeled 
vehicles needed to have a battery capacity of at least 2.5 
kilowatt-hours, be manufactured primarily for use on public 
streets, roads, and highways, and be capable of achieving 
speeds of at least 45 miles per hours. The maximum credit for 
any qualifying vehicle was $2,500.
---------------------------------------------------------------------------
    \664\ Sec. 30D(g).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision reauthorizes the credit for electric 
motorcycles acquired in 2015 and 2016 (but not 2014). The 
credit for electric three-wheeled vehicles is not extended.

                             Effective Date

    The provision applies to vehicles acquired after December 
31, 2014.

21. Extension of second generation biofuel producer credit (sec. 184 of 
        the Act and sec. 40(b)(6) of the Code)

                              Present Law

    The second generation biofuel producer credit is a 
nonrefundable income tax credit for each gallon of qualified 
second generation biofuel fuel production of the producer for 
the taxable year. The amount of the credit per gallon is $1.01. 
The provision does not apply to qualified second generation 
biofuel production after December 31, 2014.
    ``Qualified second generation biofuel production'' is any 
second generation biofuel which is produced by the taxpayer and 
which, during the taxable year, is: (1) sold by the taxpayer to 
another person (a) for use by such other person in the 
production of a qualified second generation 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 second generation 
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).\665\ Special rules apply for fuel derived from algae.
---------------------------------------------------------------------------
    \665\ In addition, for fuels derived from algae, cyanobacterial or 
lemna, a special rule provides that qualified second generation biofuel 
includes fuel 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.
---------------------------------------------------------------------------
    ``Second generation biofuel'' means any liquid fuel that 
(1) is produced in the United States and used as fuel in the 
United States, (2) is derived by or from qualified feedstocks 
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. ``Qualified 
feedstock'' means any lignocellulosic or hemicellulosic matter 
that is available on a renewable or recurring basis, and any 
cultivated algae, cyanobacteria or lemna. Second generation 
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''). It also does not 
include any alcohol with a proof of less than 150.
    The second generation biofuel producer credit cannot be 
claimed unless the taxpayer is registered by the Internal 
Revenue Service (``IRS'') as a producer of second generation 
biofuel. Second generation 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.
    Because it is a credit under section 40(a), the second 
generation 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.

                        Explanation of Provision

    The provision extends the credit two years, through 
December 31, 2016.

                             Effective Date

    The provision applies to qualified second generation 
biofuel production after December 31, 2014.

22. Extension of biodiesel and renewable diesel incentives (sec. 185 of 
        the Act and sec. 40A of the Code)

                              Present Law


Biodiesel

    Present law provides an income tax credit for biodiesel 
fuels (the ``biodiesel fuels credit''). 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, 2014.
    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. Thus, a 
qualified biodiesel mixture can contain 99.9 percent biodiesel 
and 0.1 percent diesel fuel.

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. 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.
    The credit is not available for any sale or use for any 
period after December 31, 2014. 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. 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, 2014.

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. The incentive for renewable diesel is $1.00 per 
gallon. There is no small producer credit for renewable diesel. 
The incentives for renewable diesel expired after December 31, 
2014.

                        Explanation of Provision

    The provision extends the present law income tax credit, 
excise tax credit and payment provisions for biodiesel and 
renewable diesel through December 31, 2016. As it relates to 
fuel sold or used in 2015, the provision creates a special rule 
to address claims regarding excise tax credits and claims for 
payment for the period beginning on January 1, 2015 and ending 
on December 31, 2015. In particular the provision directs the 
Secretary to issue guidance within 30 days of the date of 
enactment. Such guidance is to provide for a one-time 
submission of claims covering periods occurring during 2015. 
The guidance is to provide for a 180-day period for the 
submission of such claims (in such manner as prescribed by the 
Secretary) to begin no later than 30 days after such guidance 
is issued. Such claims shall be paid by the Secretary of the 
Treasury not later than 60 days after receipt. If the claim is 
not paid within 60 days of the date of the filing, the claim 
shall be paid with interest from such date determined by using 
the overpayment rate and method under section 6621 of the Code.

                             Effective Date

    The extension of present law applies to fuel sold or used 
after December 31, 2014.

23. Extension of credit for the production of Indian coal facilities 
        (sec. 186 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 nine-year period beginning January 1, 2006, and ending 
December 31, 2014. The amount of the credit is $2.00 per ton 
(adjusted for inflation; $2.317 for 2014). 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,\666\ allowing excess credits to be carried back one 
year and forward up to 20 years. The credit is not permitted 
against the alternative minimum tax.
---------------------------------------------------------------------------
    \666\ Sec. 38(b)(8).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the credit for the production of 
Indian coal for two years (through December 31, 2016). The 
provision also removes the placed-in-service limitation for 
Indian coal facilities (thus permitting facilities placed in 
service after December 31, 2008, to qualify). The provision 
also modifies the third party sale requirement to permit 
related party sales to qualify so long as the Indian coal is 
subsequently sold to an unrelated third person. Finally, the 
provision exempts the Indian coal credit from the alternative 
minimum tax.

                             Effective Date

    The extension of the credit applies to Indian coal produced 
after December 31, 2014.
    The removal of the placed-in-service limitation and the 
modification to the third party sale requirement apply to coal 
produced and sold after December 31, 2015.
    The provision exempting the credit from the alternative 
minimum tax applies to credits determined for taxable years 
beginning after December 31, 2015.

24. Extension of credits with respect to facilities producing energy 
        from certain renewable resources (sec. 187 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'').\667\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
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.
---------------------------------------------------------------------------
    \667\ 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    2015 \1\ (cents      Expiration \2\
       activity (sec. 45)        per kilowatt-hour)
------------------------------------------------------------------------
Wind...........................                2.3   December 31, 2014
Closed-loop biomass............                2.3   December 31, 2014
Open-loop biomass (including                   1.2   December 31, 2014
 agricultural livestock waste
 nutrient facilities).
Geothermal.....................                2.3   December 31, 2014
Municipal solid waste                          1.2   December 31, 2014
 (including landfill
 gasfacilities and trash
 combustion facilities).
Qualified hydropower...........                1.2   December 31, 2014
Marine and hydrokinetic........                1.2   December 31, 2014
------------------------------------------------------------------------
\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 the construction of which begins after this
  date.

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.

                        Explanation of Provision

    Except for wind facilities, the provision extends for two 
years the renewable electricity production credit and the 
election to claim the energy credit in lieu of the electricity 
production credit (through December 31, 2016).

                             Effective Date

    The provision is effective on January 1, 2015.

25. Extension of credit for energy-efficient new homes (sec. 188 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 2006 International Energy Conservation Code as 
in effect (including supplements) on January 1, 2006, 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 2006 
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, 2015. The credit is part of the general business 
credit.

                        Explanation of Provision

    The provision extends the credit to homes that are acquired 
prior to January 1, 2017.

                             Effective Date

    The provision applies to homes acquired after December 31, 
2014.

26. Extension of special allowance for second generation biofuel plant 
        property (sec. 189 of the Act and sec. 168(l) of the Code)

                              Present Law

    Present law \668\ allows an additional first-year 
depreciation deduction equal to 50 percent of the adjusted 
basis of qualified second generation biofuel plant property. In 
order to qualify, the property generally must be placed in 
service before January 1, 2015.\669\
---------------------------------------------------------------------------
    \668\ Sec. 168(l).
    \669\ Sec. 168(l)(2)(D).
---------------------------------------------------------------------------
    Qualified second generation biofuel plant property means 
depreciable property used in the U.S. solely to produce any 
liquid fuel that (1) is derived from qualified feedstocks, and 
(2) meets the registration requirements for fuels and fuel 
additives established by the Environmental Protection Agency 
(``EPA'') under section 211 of the Clean Air Act.\670\ 
Qualified feedstocks means any lignocellulosic or 
hemicellulosic matter that is available on a renewable or 
recurring basis \671\ and any cultivated algae, cyanobacteria, 
or lemna.\672\ Second generation biofuel does not include any 
alcohol with a proof of less than 150 or certain unprocessed 
fuel.\673\ Unprocessed fuels are 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.\674\
---------------------------------------------------------------------------
    \670\ Secs. 168(l)(2)(A) and 40(b)(6)(E).
    \671\ For example, lignocellulosic or hemicellulosic matter that is 
available on a renewable or recurring basis includes bagasse (from 
sugar cane), corn stalks, and switchgrass.
    \672\ Sec. 40(b)(6)(F).
    \673\ Sec. 40(b)(6)(E)(ii) and (iii).
    \674\ Sec. 40(b)(6)(E)(iii).
---------------------------------------------------------------------------
    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.\675\ The additional first-year depreciation deduction 
is subject to the general rules regarding whether an item is 
subject to capitalization under 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.\676\ 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.\677\ A taxpayer is allowed to elect out of 
the additional first-year depreciation for any class of 
property for any taxable year.\678\
---------------------------------------------------------------------------
    \675\ Sec. 168(l)(5).
    \676\ Sec. 168(l)(1)(B).
    \677\ Sec. 168(l)(5) and (k)(2)(G).
    \678\ Sec. 168(l)(3)(D).
---------------------------------------------------------------------------
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following 
requirements: (1) the original use of the property must 
commence with the taxpayer; and (2) the property must be (i) 
acquired by purchase (as defined under section 179(d)) by the 
taxpayer, and (ii) placed in service before January 1, 
2015.\679\ 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 before January 1, 2015 (and all 
other requirements are met).\680\ 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.
---------------------------------------------------------------------------
    \679\ Sec. 168(l)(2). Requirements relating to actions taken before 
2007 are not described herein since they have little (if any) remaining 
effect.
    \680\ Sec. 168(l)(4) and (k)(2)(E).
---------------------------------------------------------------------------
    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.\681\ 
Recapture rules apply if the property ceases to be qualified 
second generation biofuel plant property.\682\
---------------------------------------------------------------------------
    \681\ Sec. 168(l)(3)(C).
    \682\ Sec. 168(l)(6).
---------------------------------------------------------------------------
    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.\683\
---------------------------------------------------------------------------
    \683\ Sec. 168(l)(7).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present law special depreciation 
allowance for two years, to qualified second generation biofuel 
plant property placed in service prior to January 1, 2017.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

27. Extension of energy efficient commercial buildings deduction (sec. 
        190 of the Act and sec. 179D of the Code)

                              Present Law


In general

    Code section 179D provides an election under which a 
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the 
taxpayer. Energy-efficient commercial building property is 
defined as property (1) which is installed on or in any 
building located in the United States that is within the scope 
of Standard 90.1-2001 of the American Society of Heating, 
Refrigerating, and Air Conditioning Engineers and the 
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior 
lighting systems, (ii) the heating, cooling, ventilation, and 
hot water systems, or (iii) the building envelope, and (3) 
which is certified as being installed as part of a plan 
designed to reduce the total annual energy and power costs with 
respect to the interior lighting systems, heating, cooling, 
ventilation, and hot water systems of the building by 50 
percent or more in comparison to a reference building which 
meets the minimum requirements of Standard 90.1-2001 (as in 
effect on April 2, 2003). The deduction is limited to an amount 
equal to $1.80 per square foot of the property for which such 
expenditures are made. The deduction is allowed in the year in 
which the property is placed in service.
    Certain certification requirements must be met in order to 
qualify for the deduction. The Secretary, in consultation with 
the Secretary of Energy, will promulgate regulations that 
describe methods of calculating and verifying energy and power 
costs using qualified computer software based on the provisions 
of the 2005 California Nonresidential Alternative Calculation 
Method Approval Manual or, in the case of residential property, 
the 2005 California Residential Alternative Calculation Method 
Approval Manual.
    The Secretary is granted authority to prescribe procedures 
for the inspection and testing for compliance of buildings that 
are comparable, given the difference between commercial and 
residential buildings, to the requirements in the Mortgage 
Industry National Accreditation Procedures for Home Energy 
Rating Systems.\684\ Individuals qualified to determine 
compliance shall only be those recognized by one or more 
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
    \684\ See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS 
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
---------------------------------------------------------------------------
    For energy-efficient commercial building property 
expenditures made by a public entity, such as public schools, 
the deduction may be allocated to the person primarily 
responsible for designing the property in lieu of the public 
entity.
    If a deduction is allowed under this section, the basis of 
the property is reduced by the amount of the deduction.
    The deduction applies to property placed in service prior 
to January 1, 2015.

Partial allowance of deduction

            System-specific deductions
    In the case of a building that does not meet the overall 
building requirement of 50-percent energy savings, a partial 
deduction is allowed with respect to each separate building 
system that comprises energy efficient property and which is 
certified by a qualified professional as meeting or exceeding 
the applicable system-specific savings targets established by 
the Secretary. The applicable system-specific savings targets 
to be established by the Secretary are those that would result 
in a total annual energy savings with respect to the whole 
building of 50 percent, if each of the separate systems met the 
system specific target. The separate building systems are (1) 
the interior lighting system, (2) the heating, cooling, 
ventilation and hot water systems, and (3) the building 
envelope. The maximum allowable deduction is $0.60 per square 
foot for each separate system.
            Interim rules for lighting systems
    In general, in the case of system-specific partial 
deductions, no deduction is allowed until the Secretary 
establishes system-specific targets.\685\ However, in the case 
of lighting system retrofits, until such time as the Secretary 
issues final regulations, the system-specific energy savings 
target for the lighting system is deemed to be met by a 
reduction in lighting power density of 40 percent (50 percent 
in the case of a warehouse) of the minimum requirements in 
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2001. Also, in the case of a lighting system that reduces 
lighting power density by 25 percent, a partial deduction of 30 
cents per square foot is allowed. A pro-rated partial deduction 
is allowed in the case of a lighting system that reduces 
lighting power density between 25 percent and 40 percent. 
Certain lighting level and lighting control requirements must 
also be met in order to qualify for the partial lighting 
deductions under the interim rule.
---------------------------------------------------------------------------
    \685\ IRS Notice 2008-40, Supra, set a target of a 10-percent 
reduction in total energy and power costs with respect to the building 
envelope, and 20 percent each with respect to the interior lighting 
system and the heating, cooling, ventilation and hot water systems. IRS 
Notice 2012-26 (2012-17 I.R.B. 847 April 23, 2012) established new 
targets of 10-percent reduction in total energy and power costs with 
respect to the building envelope, 25 percent with respect to the 
interior lighting system and 15 percent with respect to the heating, 
cooling, ventilation and hot water systems, effective beginning March 
12, 2012. The targets from Notice 2008-40 may be used until December 
31, 2013, but the targets of Notice 2012-26 apply thereafter.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the deduction for two years, through 
December 31, 2016.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2014.

28. Extension of special rule for sales or dispositions to implement 
        FERC or State electric restructuring policy for qualified 
        electric utilities (sec. 191 of the Act and sec. 451(i) of the 
        Code)

                              Present Law

    A taxpayer selling property generally realizes gain to the 
extent the sales price (and any other consideration received) 
exceeds the taxpayer's basis in the property.\686\ The realized 
gain is subject to current income tax \687\ unless the 
recognition of the gain is deferred or excluded from income 
under a special tax provision.\688\
---------------------------------------------------------------------------
    \686\ See sec. 1001.
    \687\ See secs. 61 and 451.
    \688\ See, e.g., secs. 453, 1031 and 1033.
---------------------------------------------------------------------------
    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 
\689\ (the ``reinvestment property'').\690\ 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.
---------------------------------------------------------------------------
    \689\ The applicable period for a taxpayer to reinvest the proceeds 
is four years after the close of the taxable year in which the 
qualifying electric transmission transaction occurs.
    \690\ 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, 2015.\691\ 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 \692\) with respect to the transmission 
facilities to which the election applies, and (2) an electric 
utility (as defined in the Federal Power Act \693\).\694\
---------------------------------------------------------------------------
    \691\ Sec. 451(i)(3).
    \692\ Sec. 3(23), 16 U.S.C. sec. 796, defines ``transmitting 
utility'' as any electric utility, qualifying cogeneration facility, 
qualifying small power production facility, or Federal power marketing 
agency that owns or operates electric power transmission facilities 
that are used for the sale of electric energy at wholesale.
    \693\ Sec. 3(22), 16 U.S.C. sec. 796, defines ``electric utility'' 
as any person or State agency (including any municipality) that sells 
electric energy; such term includes the Tennessee Valley Authority, but 
does not include any Federal power marketing agency.
    \694\ Sec. 451(i)(6).
---------------------------------------------------------------------------
    In general, an independent transmission company is defined 
as: (1) an independent transmission provider \695\ approved by 
the Federal Energy Regulatory Commission (``FERC''); (2) a 
person (i) who the FERC determines under section 203 of the 
Federal Power Act \696\ (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).\697\
---------------------------------------------------------------------------
    \695\ For example, a regional transmission organization, an 
independent system operator, or an independent transmission company.
    \696\ 16 U.S.C. sec. 824b.
    \697\ Sec. 451(i)(4).
---------------------------------------------------------------------------
    Exempt utility property is defined as: (1) property used in 
the trade or business of (i) generating, transmitting, 
distributing, or selling electricity or (ii) 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).\698\ 
Exempt utility property does not include any property that is 
located outside of the United States.\699\
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    \698\ Sec. 451(i)(5).
    \699\ Sec. 451(i)(5)(C).
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    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).\700\
---------------------------------------------------------------------------
    \700\ Sec. 451(i)(7).
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                        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, 2017.

                             Effective Date

    The provision applies to dispositions after December 31, 
2014.

29. Extension of excise tax credits and payment provisions relating to 
        alternative fuel (sec. 192 of the Act and secs. 6426 and 6427 
        of the Code)

                              Present Law


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 \701\ 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.
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    \701\ ``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).
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    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 expired after December 31, 2014.
    A person may file a claim for payment equal to the amount 
of the alternative fuel credit (but not the alternative fuel 
mixture credit). The alternative fuel 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, 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.

                        Explanation of Provision

    The provision extends the alternative fuel credit and 
related payment provisions, and the alternative fuel mixture 
credit through December 31, 2016.\702\
---------------------------------------------------------------------------
    \702\ See section 342 of the Act with respect to additional 
provisions related to liquefied petroleum gas and liquefied natural 
gas.
---------------------------------------------------------------------------
    In light of the retroactive nature of the provision, as it 
relates to alternative fuel sold or used in 2015, the provision 
creates a special rule to address claims regarding excise 
credits and claims for payment for the period beginning January 
1, 2015 and ending on December 31, 2015. In particular, the 
provision directs the Secretary to issue guidance within 30 
days of the date of enactment. Such guidance is to provide for 
a one-time submission of claims covering periods occurring 
during 2015. The guidance is to provide for a 180-day period 
for the submission of such claims (in such manner as prescribed 
by the Secretary) to begin no later than 30 days after such 
guidance is issued.\703\ Such claims shall be paid by the 
Secretary of the Treasury not later than 60 days after receipt. 
If the claim is not paid within 60 days of the date of the 
filing, the claim shall be paid with interest from such date 
determined by using the overpayment rate and method under 
section 6621 of such Code.
---------------------------------------------------------------------------
    \703\ This guidance is provided by Notice 2015-3, 2015-6 I.R.B 583.
---------------------------------------------------------------------------

                             Effective Date

    The provision generally applies to fuel sold or used after 
December 31, 2014.

30. Extension of credit for fuel cell vehicles (sec. 193 of the Act and 
        sec. 30B of the Code)

                              Present Law

    A credit is available through 2014 for vehicles propelled 
by chemically combining oxygen with hydrogen and creating 
electricity (fuel cell vehicles). The base credit is $4,000 for 
vehicles weighing 8,500 pounds or less. Heavier vehicles can 
get up to a $40,000 credit, depending on their weight. An 
additional $1,000 to $4,000 credit is available to cars and 
light trucks to the extent their fuel economy exceeds the 2002 
base fuel economy set forth in the Code.

                        Explanation of Provision

    The provision extends the credit for fuel cell vehicles for 
two years, through December 31, 2016.

                             Effective Date

    The provision applies to property purchased after December 
31, 2014.

                      TITLE II--PROGRAM INTEGRITY


1. Modification of filing dates of returns and statements relating to 
        employee wage information and nonemployee compensation to 
        improve compliance (sec. 201 of the Act and secs. 6071 and 6402 
        of the Code)

                              Present Law


Information returns concerning certain payments

    Present law requires persons to file an information return 
concerning certain transactions with other persons.\704\ These 
returns are intended to assist taxpayers in preparing their 
income tax returns and to help the IRS determine whether such 
income tax returns are correct and complete.
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    \704\ Secs. 6041-6050W.
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    One of the primary provisions requires every person engaged 
in a trade or business who makes payments aggregating $600 or 
more in any taxable year to a single payee in the course of the 
payor's trade or business to file a return reporting these 
payments.\705\ Payments subject to this reporting requirement 
include fixed or determinable income or compensation, but do 
not include payments for goods or certain enumerated types of 
payments that are subject to other specific reporting 
requirements. Other reporting requirements are provided for 
various types of investment income, including interest, 
dividends, and gross proceeds from brokered transactions (such 
as a sale of stock) paid to U.S. persons.\706\
---------------------------------------------------------------------------
    \705\ Sec. 6041(a). The information return generally is submitted 
electronically as a Form 1099 (e.g., Form 1099-MISC, Miscellaneous 
Income) or Form 1096, Annual Summary and Transmittal of U.S. 
Information Returns, although certain payments to beneficiaries or 
employees may require use of Forms W-3 or W-2, respectively. Treas. 
Reg. sec. 1.6041-1(a)(2).
    \706\ Secs. 6042 dividends), 6045 (broker reporting) and 6049 
(interest) and the Treasury regulations thereunder.
---------------------------------------------------------------------------
    The person filing an information return with respect to 
payments described above is required to provide the recipient 
of the payment with a written payee statement showing the 
aggregate payments made and contact information for the 
payor.\707\ The statement must be supplied to payees by the 
payors by January 31 of the following calendar year.\708\ 
Payors generally must file the information return with the IRS 
by February 28 of the year following the calendar year for 
which the return must be filed.\709\ However, the due date for 
most information returns that are filed electronically is March 
31.\710\
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    \707\ Sec. 6041(d).
    \708\ Sec. 6041(d).
    \709\ Treas. Reg. sec. 31.6071(a)-1(a)(3)(i).
    \710\ Sections 6011(e) and 6071(b) apply to ``returns made under 
subparts B and C of part III of this subchapter''; Treas. Reg. sec. 
301.6011-2(b) mandates use of magnetic media by persons filing 
information returns identified in the regulation or subsequent or 
contemporaneous revenue procedures and permits use of magnetic media 
for all others.
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Information returns regarding wages paid employees

    Payors must report wage amounts paid to employees on 
information returns and provide the employee with an annual 
statement showing the aggregate wages paid, taxes withheld, and 
contact information for the payor by January 31 of the 
following calendar year, using Form W-2, Wage and Tax 
Statement.\711\ For wages paid to employees, and taxes withheld 
from employee wages, the payors must file an information return 
with the Social Security Administration (``SSA'') on or before 
the last day of February of the year following the calendar 
year for which the return must be filed, using Form W-3, 
Transmittal of Wage and Tax Statements.\712\ The due date for 
these information returns that are filed electronically is 
March 31.
---------------------------------------------------------------------------
    \711\ Sec. 6051(a).
    \712\ Treas. Reg. sec. 31.6051-2; IRS, ``Filing Information Returns 
Electronically,'' Pub. 3609 (Rev. 12-2011); Treas. Reg. sec. 
31.6071(a)-1(a)(3)(i).
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    Under the combined annual wage reporting (``CAWR'') system, 
the SSA and the IRS have an agreement, in the form of a 
Memorandum of Understanding, to share wage data and to resolve, 
or reconcile, the differences in the wages reported to them. 
Employers submit Forms W-2, (listing Social Security wages 
earned by individual employees), and W-3, (providing an 
aggregate summary of wages paid and taxes withheld) directly to 
SSA.\713\ After it records the wage information from Forms W-2 
and W-3 in its individual Social Security wage account records, 
SSA forwards the information to IRS.\714\
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    \713\ Pub. L. No. 94-202, sec. 232, 89 Stat. 1135 (1976) (effective 
with respect to statements reporting income received after 1977).
    \714\ Employers submit quarterly reports to IRS on Form 941, 
Employer's Quarterly Federal Tax Return, regarding aggregate quarterly 
totals of wages paid and taxes due. IRS then compares the W-3 wage 
totals to the Form 941 wage totals.
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            Rules relating to refunds and certain refundable credits
    A refund is due to a taxpayer with respect to a taxable 
year if the taxpayer has made an overpayment of Federal income 
taxes,\715\ to the extent that such overpayment is not required 
to be applied to offset other liabilities.\716\
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    \715\ Sec. 6402(a).
    \716\ Such liabilities include past-due support payments (sec. 
6402(c)), debts owed to other Federal agencies (sec. 6402(d)), certain 
State income tax debts (sec. 6402(e)), or unemployment compensation 
debts (sec. 6402(f)).
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    An individual may reduce his or her tax liability by any 
available tax credits. In some instances, a permissible credit 
is ``refundable,'' i.e., it may result in a refund in excess of 
any credits for withheld taxes or estimated tax payments 
available to the individual. Two such credits are the child tax 
credit and the earned income tax credit (``EITC'').
    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. 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. To the extent the child 
credit exceeds the taxpayer's tax liability, the taxpayer is 
eligible for a refundable credit \717\ (the additional child 
tax credit) equal to 15 percent of earned income in excess of 
$3,000.\718\
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    \717\ The refundable credit may not exceed the maximum credit per 
child of $1,000.
    \718\ Families with three or more children may determine the 
additional child tax credit using an 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 EITC.
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    The EITC is available to low-income workers who satisfy 
certain requirements. The amount of the EITC varies depending 
upon the taxpayer's earned income and whether the taxpayer has 
one, two, more than two, or no qualifying children. In 2015, 
the maximum EITC is $6,242 for taxpayers with more than two 
qualifying children, $5,548 for taxpayers with two qualifying 
children, $3,359 for taxpayers with one qualifying child, and 
$503 for taxpayers with no qualifying children. The credit 
amount begins to phaseout at an income level of $23,630 for 
joint-filers with children, $18,110 for other taxpayers with 
children, $13,750 for joint-filers with no children and $8,240 
for other taxpayers with no qualifying children. The phaseout 
percentages are 15.98 for taxpayers with one qualifying child, 
21.06 for two or more qualifying children and 7.65 for no 
qualifying children.
    For purposes of computing a taxpayer's overpayment of tax, 
the amount of refundable credits in excess of income tax 
liability is considered to be an overpayment of tax.\719\ Thus, 
the Internal Revenue Service pays the value of these credits, 
to the extent they are in excess of a taxpayer's income tax 
liability, and not applied to offset other liabilities, to the 
taxpayer as a refund of tax.
---------------------------------------------------------------------------
    \719\ Sec. 6401(b).
---------------------------------------------------------------------------
    At the time that the taxpayer files a return claiming a 
refundable credit, the Internal Revenue Service is generally 
not in possession of information needed to confirm the 
taxpayer's eligibility for such credit, even though payors must 
report wage amounts paid to employees on information returns 
and provide the employee with an annual statement showing the 
aggregate payments made and contact information for the payor 
by January 31 of the following calendar year.\720\
---------------------------------------------------------------------------
    \720\ Sec. 6051(a).
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                        Explanation of Provision

    The provision requires that certain information returns be 
filed by January 31, generally the same date as the due date 
for employee and payee statements, and that such returns are no 
longer eligible for the extended filing date for electronically 
filed returns under section 6071(b). Specifically, the 
provision accelerates the filing of information on wages 
reportable on Form W-2 and nonemployee compensation. The due 
date for employee and payee statements remains the same. 
Nonemployee compensation generally includes fees for 
professional services, commissions, awards, travel expense 
reimbursements, or other forms of payments for services 
performed for the payor's trade or business by someone other 
than in the capacity of an employee.
    Additionally, the provision requires that no credit or 
refund for an overpayment for a taxable year shall be made to a 
taxpayer before the 15th day of the second month following the 
close of that taxable year, if the taxpayer claimed the EITC or 
additional child tax credit on the tax return. Individual 
taxpayers are generally calendar year taxpayers, thus, for most 
taxpayers who claim the EITC or additional child tax credit 
this rule would apply such that a refund of tax would not be 
made to such taxpayer prior to February 15th of the year 
following the calendar year to which the taxes relate.

                             Effective Date

    The provision is effective for returns and statements 
relating to calendar years beginning after the date of 
enactment (December 18, 2015). The provision pertaining to the 
payment of certain refunds shall apply to credits or refunds 
made after December 31, 2016.

2. Safe harbor for de minimis errors on information returns, payee 
        statements, and withholding (sec. 202 of the Act and secs. 6721 
        and 6722 of the Code)

                              Present Law

    Failure to comply with the information reporting 
requirements results in penalties, which may include a penalty 
for failure to file the information return,\721\ to furnish 
payee statements,\722\ or to comply with other various 
reporting requirements.\723\ No penalty is imposed if the 
failure is due to reasonable cause.\724\
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    \721\ Sec. 6721.
    \722\ Sec. 6722.
    \723\ Sec. 6723. The penalty for failure to comply timely with a 
specified information reporting requirement is $50 per failure, not to 
exceed $100,000 per calendar year.
    \724\ Sec. 6724.
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    Any person who is required to file an information return, 
or furnish a payee statement, but who fails to do so on or 
before the prescribed due date, is subject to a penalty that 
varies based on when, if at all, the information return is 
filed. Both the failure to file and failure to furnish 
penalties are adjusted annually to account for inflation. In 
the Trade Preferences Extension Act of 2015,\725\ the penalties 
were increased for information returns or payee statements due 
after December 31, 2015. The penalty amounts, whether they are 
limited to a maximum amount in a calendar year, and the changes 
enacted in the Trade Preferences Extension Act, are described 
below.
---------------------------------------------------------------------------
    \725\ Trade Preferences Extension Act of 2015, Pub. L. No. 114-27, 
sec. 806 (June 29, 2015).
---------------------------------------------------------------------------
            Penalties with respect to returns or statement due before 
                    January 1, 2016.
    If a person files an information return after the 
prescribed filing date but on or before the date that is 30 
days after the prescribed filing date, the amount of the 
penalty is $30 per return (``first-tier penalty''), with a 
maximum penalty of $250,000 per calendar year. If a person 
files an information return after the date that is 30 days 
after the prescribed filing date but on or before August 1, the 
amount of the penalty is $60 per return (``second-tier 
penalty''), with a maximum penalty of $500,000 per calendar 
year. If an information return is not filed on or before August 
1 of any year, the amount of the penalty is $100 per return 
(``third-tier penalty''), with a maximum penalty of $1,500,000 
per calendar year. If a failure to file is due to intentional 
disregard of a filing requirement, the minimum penalty for each 
failure is $250, with no calendar year limit.
    Lower maximum levels for this failure to file correct 
information return penalty apply to small businesses. Small 
businesses are defined as firms having average annual gross 
receipts for the most recent three taxable years that do not 
exceed $5 million. The maximum penalties for small businesses 
are: $75,000 (instead of $250,000) if the failures are 
corrected on or before 30 days after the prescribed filing 
date; $200,000 (instead of $500,000) if the failures are 
corrected on or before August 1; and $500,000 (instead of 
$1,500,000) if the failures are not corrected on or before 
August 1.
    Any person who is required to furnish a payee statement who 
fails to do so on or before the prescribed filing date is 
subject to a penalty that varies based on when, if at all, the 
payee statement is furnished, similar to the penalty for filing 
an information return discussed above. A first-tier penalty is 
$30, subject to a maximum of $250,000, a second-tier penalty is 
$60 per statement, up to $500,000, and a third-tier penalty is 
$100, up to a maximum of $1,500,000. Lower maximum levels for 
this failure to furnish correct payee statement penalty apply 
to small businesses. Small businesses are defined as firms 
having average annual gross receipts for the most recent three 
taxable years that do not exceed $5 million. The maximum 
penalties for small businesses are: $75,000 (instead of 
$250,000) if the failures are corrected on or before 30 days 
after the prescribed filing date; $200,000 (instead of 
$500,000) if the failures are corrected on or before August 1; 
and $500,000 (instead of $1,500,000) if the failures are not 
corrected on or before August 1.
    In cases in which the failure to file an information return 
or to furnish the correct payee statement is due to intentional 
disregard, the minimum penalty for each failure is $250, with 
no calendar year limit. No distinction is made between small 
businesses and other persons required to report.
            Penalties with respect to returns or statements due after 
                    December 31, 2015
    The Trade Preferences Extension Act of 2015 increased the 
penalties to the following amounts for information returns or 
payee statements due after December 31, 2015. The first-tier 
penalty is $50 per return, with a maximum penalty of $500,000 
per calendar year. The second-tier penalty increases to $100 
per return, with a maximum penalty of $1,500,000 per calendar 
year. The third-tier penalty increases to $250 per return, with 
a maximum penalty of $3,000,000 per calendar year.
    The lower maximum levels applicable to small businesses 
also were increased, as follows. The maximum penalties for 
small businesses are: $175,000 if the failures are corrected on 
or before 30 days after the prescribed filing date; $500,000 if 
the failures are corrected on or before August 1; and 
$1,000,000 if the failures are not corrected on or before 
August 1.
    For failures or misstatements due to intentional disregard, 
the penalty per return or statement increased to $500, with no 
calendar year limit. No distinction between small businesses 
and other persons required to report is made in such cases.

                        Explanation of Provision

    The provision creates a safe harbor from the application of 
the penalty for failure to file a correct information return 
and the penalty for failure to furnish a correct payee 
statement in circumstances in which the information return or 
payee statement is otherwise correctly filed but includes a de 
minimis error of the amount required to be reported on such 
return or statement. In general, a de minimis error of an 
amount on the information return or statement need not be 
corrected if the error for any single amount does not exceed 
$100. A lower threshold of $25 is established for errors with 
respect to the reporting of an amount of withholding or backup 
withholding. The provision requires broker reporting to be 
consistent with amounts reported on uncorrected returns which 
are eligible for the safe harbor. If any person receiving payee 
statements requests a corrected statement, the penalty for 
failure to file a correct information return and the penalty 
for failure to furnish a correct payee statement would continue 
to apply in the case of a de minimis error.

                             Effective Date

    The provision applies to information returns required to be 
filed and payee statements required to be furnished after 
December 31, 2016.

3. Requirements for the issuance of ITINs (sec. 203 of the Act and sec. 
        6109 of the Code)

                              Present Law

    Any individual filing a U.S. tax return is required to 
state his or her taxpayer identification number on such return. 
Generally, a taxpayer identification number is the individual's 
Social Security number (``SSN'').\726\ However, in the case of 
individuals who are not eligible to be issued an SSN, but who 
still have a tax filing obligation, the IRS issues IRS 
individual taxpayer identification numbers (``ITIN'') for use 
in connection with the individual's tax filing 
requirements.\727\ An individual who is eligible to receive an 
SSN may not obtain an ITIN for purposes of his or her tax 
filing obligations.\728\ An ITIN does not provide eligibility 
to work in the United States or claim Social Security benefits.
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    \726\ Sec. 6109(a).
    \727\ Treas. Reg. Sec. 301.6109-1(d)(3)(i).
    \728\ Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
---------------------------------------------------------------------------
    Examples of individuals who potentially need an ITIN in 
order to file a U.S. return include nonresident aliens filing a 
claim for a reduced withholding rate under treaty benefits, a 
nonresident alien required to file a U.S. tax return, a U.S. 
resident alien filing a U.S. tax return, a dependent or spouse 
of a U.S. citizen or resident alien, or a dependent or spouse 
of a nonresident alien visa holder.
    Taxpayers applying for an ITIN must complete a Form W-7, 
``Application For IRS Individual Taxpayer Identification 
Number.'' For identification purposes, the Form W-7 requires 
that taxpayers include original documentation such as passports 
and birth certificates, or certified copies of these documents 
by the issuing agency. Notarized or apostilized copies of such 
documentation are insufficient.\729\ Supporting documentation 
to establish a taxpayer's identity includes: passport, USCIS 
photo identification, visa issued by U.S. Department of State, 
U.S. driver's license, U.S. military identification card, 
foreign driver's license, foreign military identification card, 
national identification card (must be current and contain name, 
photograph, address, DOB, and expiration date), U.S. state 
identification card, foreign voter registration card, civil 
birth certificate, medical records (valid only for dependents 
under age 6), and school records (valid only for dependents 
under age 14).
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    \729\ See Instructions for Form W-7 (Rev. December, 2014), 
available at https://www.irs.gov/pub/irs-pdf/iw7.pdf.
---------------------------------------------------------------------------
    The Form W-7, and accompanying original documentation, may 
be submitted by mail.\730\ Additionally, a taxpayer may file 
for an ITIN by bringing completed documentation and forms to an 
IRS Taxpayer Assistance Center in the United States (which can 
authenticate passports or national identification cards, and 
forward the application on for processing) or an IRS office 
abroad. Taxpayers may also visit an acceptance agent, an 
individual who may submit a W-7 application on behalf of the 
taxpayer along with documentary evidence, or, in the case of a 
certifying acceptance agent, who is authorized by the IRS to 
verify identifying documents in addition to submitting the Form 
W-7. Applications submitted with the use of a certifying 
acceptance agent must be accompanied by a certificate of 
accuracy, attached to the Form W-7.
---------------------------------------------------------------------------
    \730\ Ibid.
---------------------------------------------------------------------------
    Under a policy announced in November 2012 for ITINs issued 
on or after January 1, 2013, ITINs would automatically expire 
after five years of the issuance date.\731\ That is, a taxpayer 
would be required to reapply for a new ITIN after five years if 
he or she still needed the ITIN for tax filing purposes. On 
June 30, 2014, the IRS announced that it was revising this 
policy. Under the revised policy, ITINs would be deactivated 
only if the ITIN was not used during any tax year for a period 
of five consecutive years.\732\
---------------------------------------------------------------------------
    \731\ IR-2012-98 (Nov. 29, 2012), available at https://www.irs.gov/
uac/Newsroom/IRS-Strengthens-Integrity-of-ITIN-System;-Revised-
Application-Procedures-in-Effect-for-Upcoming-Filing-Season.
    \732\ IR-2014-76 (June 30, 2014), available at https://www.irs.gov/
uac/Newsroom/Unused-ITINS-to-Expire-After-Five-Years%3B-New-Uniform-
Policy-Eases-Burden-on-Taxpayers,-Protects-ITIN-Integrity.
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                        Explanation of Provision

    The provision modifies certain rules related to ITIN 
application procedures, and adds rules regarding the term of 
existing and new ITINs.

ITIN application procedures

    Under the provision, the Secretary is authorized to issue 
ITINs to individuals either in person or via mail. In-person 
applications may be submitted to either: (1) an employee of the 
Internal Revenue Service or (2) a community-based certified 
acceptance agent approved by the Secretary.\733\ In the case of 
individuals residing outside of the United States, in-person 
applications may be submitted to an employee of the Internal 
Revenue Service or a designee of the Secretary at a United 
States diplomatic mission or consular post. The provision 
authorizes the Secretary to establish procedures to accept ITIN 
applications via mail.
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    \733\ The community-based certified acceptance agent program is 
intended to expand the existing IRS acceptance agent program. See Rev. 
Proc. 2006-10, 2006-1 C.B. 293 (December 16, 2005).
---------------------------------------------------------------------------
    The provision directs the Secretary to maintain a program 
for certifying and training community-based acceptance agents. 
Persons eligible to be acceptance agents may include financial 
institutions, colleges and universities, Federal agencies, 
State and local governments, including State agencies 
responsible for vital records, persons that provide assistance 
to taxpayers in the preparation of their tax returns, and other 
persons or categories of persons as authorized by regulations 
or in other guidance by the Secretary.
    The provision allows the Secretary to determine what 
documents are acceptable for purposes of proving an 
individual's identity, foreign status and residency. However, 
only original documentation or certified copies meeting the 
requirements set forth by the Secretary will be acceptable. 
Additionally, the provision requires the Secretary to develop 
procedures that distinguish ITINs used by individuals solely 
for the purpose of obtaining treaty benefits, so as to ensure 
that such numbers are used only to claim treaty benefits.

Term of ITINs

            General rule
    Under the provision, any ITIN issued after December 31, 
2012 shall expire if not used on a Federal income tax return 
for a period of three consecutive taxable years (expiring on 
December 31 of such third consecutive year). The IRS is 
provided with math error authority related to returns filed 
with an ITIN that has expired, been revoked by the Secretary, 
or that is otherwise invalid.
            Special rule in the case of ITINs issued prior to 2013
    Under the provision, ITINs issued prior to 2013, while 
remaining subject to the general rule described above,\734\ 
will, regardless of whether such ITIN has been used on Federal 
income tax returns, no longer be valid as of the applicable 
date, as follows:
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    \734\ In the case of ITINs that, including taxable year 2015, have 
been unused on Federal income tax returns for three (or more) 
consecutive taxable years, such ITINs shall expire on December 31, 
2015.

 
------------------------------------------------------------------------
                Year ITIN Issued                     Applicable Date
------------------------------------------------------------------------
Pre-2008.......................................          January 1, 2017
2008...........................................          January 1, 2018
2009 or 2010...................................          January 1, 2019
2011 or 2012...................................          January 1, 2020
------------------------------------------------------------------------

    The provision also requires that the Treasury Office of 
Inspector General conduct an audit two years after the date of 
enactment (and every two years after) of the ITIN application 
process. Additionally, the provision requires the Secretary to 
conduct a study on the effectiveness of the application process 
for ITINs prior to the implementation of the amendments made by 
this provision, the effects of such amendments, the comparative 
effectiveness of an in-person review process versus other 
methods of reducing fraud in the ITIN program and improper 
payments to ITIN holders as a result, and possible 
administrative and legislative recommendations to improve such 
process.

                             Effective Date

    The provision relating to ITIN application procedures is 
effective for applications for ITINs made after the date of 
enactment (December 18, 2015). The provision relating to the 
term of ITINs is effective on the date of enactment.

4. Prevention of retroactive claims of earned income credit, child tax 
        credit, and American Opportunity Tax Credit (secs. 204, 205, 
        and 206 of the Act and secs. 24, 25A and 32 of the Code)

                              Present Law


Refundable credits

    An individual may reduce his or her tax liability by any 
available tax credits. In some instances, a permissible credit 
is ``refundable,'' i.e., it may result in a refund in excess of 
any credits for withheld taxes or estimated tax payments 
available to the individual. Three major credits are the child 
tax credit, the earned income tax credit (``EITC'') and the 
American opportunity tax credit.
    An individual may claim a tax credit for each qualifying 
child under the age of 17. The amount of the credit per child 
is $1,000. 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. To the extent the child 
credit exceeds the taxpayer's tax liability, the taxpayer is 
eligible for a refundable credit \735\ (the additional child 
tax credit) equal to 15 percent of earned income in excess of 
$3,000.\736\
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    \735\ The refundable credit may not exceed the maximum credit per 
child of $1,000.
    \736\ Families with three or more children may determine the 
additional child tax credit using an 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.
---------------------------------------------------------------------------
    The EITC is available to low-income workers who satisfy 
certain requirements. The amount of the EITC varies depending 
upon the taxpayer's earned income and whether the taxpayer has 
one, two, more than two, or no qualifying children. In 2015, 
the maximum EITC is $6,242 for taxpayers with more than two 
qualifying children, $5,548 for taxpayers with two qualifying 
children, $3,359 for taxpayers with one qualifying child, and 
$503 for taxpayers with no qualifying children. The credit 
amount begins to phaseout at an income level of $23,630 for 
joint-filers with children, $18,110 for other taxpayers with 
children, $13,750 for joint-filers with no children and $8,240 
for other taxpayers with no qualifying children. The phaseout 
percentages are 15.98 for taxpayers with one qualifying child, 
21.06 for two or more qualifying children and 7.65 for no 
qualifying children.
    Certain individual taxpayers are allowed to claim a 
nonrefundable credit, the Hope credit, against Federal income 
taxes for qualified tuition and related expenses paid for the 
first two years of the student's post-secondary education in a 
degree or certificate program. The American Opportunity tax 
credit, refers to modifications to the Hope credit that apply 
for taxable years beginning in 2009 and extended through 
2017.\737\ 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. Forty 
percent of a taxpayer's otherwise allowable American 
opportunity tax credit is refundable.
---------------------------------------------------------------------------
    \737\ These modifications are made permanent by section 102 of the 
Act. See Part Thirteen, Division Q, Title II, item 10, supra.
---------------------------------------------------------------------------

Identification requirements with respect to refundable credits

    In order to claim the earned income credit, a taxpayer must 
include his or her taxpayer identification number (and if the 
taxpayer is married filing a joint return, the taxpayer 
identification number of the taxpayer's spouse) on the tax 
return.\738\ For these purposes, a taxpayer identification 
number must be a Social Security number (``SSN'') issued by the 
Social Security Administration.\739\ Similarly, any child 
claimed by a taxpayer for purposes of determining the earned 
income credit must also be affiliated with a taxpayer 
identification number on the tax return.\740\ Again, for these 
purposes, such number must be an SSN issued by the Social 
Security Administration.\741\
---------------------------------------------------------------------------
    \738\ Sec. 32(c)(1)(E)(i) and (ii).
    \739\ Sec. 32(m).
    \740\ Sec. 32(c)(3)(D).
    \741\ Sec. 32(m).
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    The child credit may not be claimed with respect to any 
qualifying child unless the taxpayer includes the name and 
taxpayer identification number of such qualifying child on the 
tax return for the taxable year.\742\ For these purposes, 
taxpayer identification number is not limited to an SSN, as is 
the case for the earned income credit. Thus, a taxpayer may 
claim a child using an IRS individual taxpayer identification 
number (``ITIN''), issued by the IRS for those who are not 
eligible to be issued an SSN but who still have tax filing 
obligations. Additionally, a child may be identified on the 
return using an adoption taxpayer identification number 
(``ATIN''). There are no specific rules regarding the 
identifying number affiliated with the taxpayer claiming the 
child credit. Thus, the general rules applicable to all 
taxpayers, requiring that an identifying number accompany the 
return, are applicable.\743\
---------------------------------------------------------------------------
    \742\ Sec. 24(e).
    \743\ Sec. 6109.
---------------------------------------------------------------------------
    For the American opportunity credit (in addition to the 
other credits with respect to amounts paid for educational 
expenses), no credit may be claimed by a taxpayer with respect 
to the qualifying tuition and related expenses of an 
individual, unless that individual's taxpayer identification 
number is included on the tax return.\744\ As with the child 
credit, for these purposes a taxpayer identification number is 
not limited to a Social Security number. Thus, a taxpayer may 
claim the credit with the use of an ITIN (either the taxpayer's 
own ITIN, if they are filing as a non-dependent and claiming 
tuition expenses incurred on their own behalf, or the ITIN of a 
dependent to whom the credit relates).
---------------------------------------------------------------------------
    \744\ Sec. 25A(g)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision denies to any taxpayer the EITC, child 
credit, and American opportunity tax credit, with respect to 
any taxable year for which such taxpayer has a taxpayer 
identification number that has been issued after the due date 
(or extended due date) for filing the return for such taxable 
year. Similarly, a qualifying child (in the case of the EITC 
and child credit) or a student (in the case of the American 
opportunity credit) is not taken into account with respect to 
any taxable year for which such child or student is associated 
with a taxpayer identification number that has been issued 
after the due date (or extended due date) for filing the return 
for such taxable year.

                             Effective Date

    The provision generally applies to any return of tax, and 
any amendment or supplement to any return of tax, which is 
filed after the date of the enactment. However, the provision 
shall not apply to any return of tax (other than an amendment 
or supplement to any return of tax) for any taxable year which 
includes the date of the enactment, if such return is filed on 
or before the due date for such return of tax.

5. Procedures to reduce improper claims (sec. 207 of the Act and secs. 
        24, 25A, 32, and 6695 of the Code)

                              Present Law


Eligibility requirements for certain credits

    Two credits available to individuals use both income level 
and the presence and number of qualifying children as factors 
in determining eligibility for the credit: the child tax credit 
\745\ and the earned income tax credit (``EITC'').\746\ 
Additionally, the Hope credit, the Lifetime Learning credit, 
and the American opportunity tax credit (``AOTC'') are 
available to taxpayers who meet adjusted gross income 
requirements as well as specific requirements regarding the 
payment of tuition and related expenses for secondary-
education.
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    \745\ Sec. 24.
    \746\ Sec. 32. Additionally, the child and dependent care credit is 
determined in part with respect to income and the presence of 
qualifying children, but this credit is not implicated by the 
provision.
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            EITC eligibility
    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 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 $3,400 (for 2015). 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).
    No credit is allowed unless the taxpayer includes the 
Social Security number of the taxpayer and such taxpayer's 
spouse, on the tax return. Additionally, a qualifying child is 
not taken into account for purposes of the EITC unless the 
child's Social Security number is listed on the tax return.
            Child credit eligibility
    An individual may claim a child tax credit of $1,000 for 
each qualifying child under the age of 17,\747\ provided that 
the child is a citizen, national, or resident of the United 
States.\748\ 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.\749\ If 
the resulting child credit exceeds the tax liability of the 
taxpayer, the taxpayer is eligible for a refundable credit 
(known as the additional child tax credit) \750\ equal to 15 
percent of earned income in excess of a threshold dollar amount 
(the ``earned income'' formula). Prior to 2009, the threshold 
dollar amount was $10,000 and was indexed for inflation. For 
taxable years beginning after 2009 and before January 1, 2018, 
the threshold amount is $3,000, and is not indexed for 
inflation. The $3,000 threshold is currently scheduled to 
expire for taxable years beginning after December 31, 2017, 
after which the threshold reverts to the indexed $10,000 
amount.\751\
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    \747\ Sec. 24(a).
    \748\ Sec. 24(c).
    \749\ Sec. 24(b).
    \750\ Sec. 24(d).
    \751\ An earlier provision of this Act makes the $3,000 threshold 
permanent. See the description of sec. 101 of the Act.
---------------------------------------------------------------------------
    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 EIC.
            Hope credit, Lifetime Learning credit, and AOTC eligibility
    The Hope credit, the Lifetime learning credit, and the AOTC 
are available to certain taxpayers who incur tuition and 
related expenses on secondary education.\752\ The AOTC is a 
modification of the Hope credit, and applies only for taxable 
years from 2009-2017.\753\ In the case of the Hope and Lifetime 
Learning credits, the credit that a taxpayer may otherwise 
claim is phased out ratably for taxpayers with modified 
adjusted gross income between $55,000 and $65,000 ($110,000 and 
$130,000 for married taxpayers filing a joint return). The AOTC 
is phased out ratably for taxpayers with modified adjusted 
gross income between $80,000 and $90,000 ($160,000 and $180,000 
for married taxpayers filing a joint return), and may be 
claimed against a taxpayer's AMT liability. 40 percent of a 
taxpayer's otherwise allowable AOTC is refundable.
---------------------------------------------------------------------------
    \752\ Sec. 25A. The Hope credit rate is 100 percent on the first 
$1,300 of qualified tuition and related expenses, and 50 percent on the 
next $1,300 of qualified tuition and related expenses (estimated for 
2015). For the AOTC, the maximum 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 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 the 
Lifetime Learning credit, 20 percent of up to $10,000 of qualified 
tuition and related expenses per taxpayer return is eligible for the 
credit (i.e., the maximum credit per taxpayer return is $2,000).
    \753\ An earlier provision of this Act makes the modifications to 
the Hope credit known as the AOTC permanent. See the description of 
sec. 102 of the Act.
---------------------------------------------------------------------------
    The credits vary in availability: The Hope credit is 
available with respect to an individual student for two years, 
the AOTC is available for four years, while the Lifetime 
Learning credit has no limit on availability. For all credits, 
qualified tuition and related expenses must be incurred on 
behalf of the taxpayer, the taxpayer's spouse, or a dependent 
of the taxpayer. The credits are available in the taxable year 
the tuition and related 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 credits, but repayment of a loan 
itself is not a qualified tuition or related expense.
    A taxpayer may claim the Hope credit, Lifetime Learning 
credit, or AOTC 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 any of the 
credits for education expenses 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.
    An eligible student for purposes of the Hope credit and 
AOTC 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.
    Unlike the Hope credit and AOTC, the Lifetime Learning 
credit is available to students who are enrolled on a part-time 
basis. To be eligible for the Hope credit and the AOTC, a 
student must not have been convicted of a Federal or State 
felony for the possession or distribution of a controlled 
substance. The Lifetime Learning credit does not contain this 
requirement.

Diligence required by preparers returns for EITC claimants

    Under Section 6695(g) of the Code, a penalty of $500 may be 
imposed on a person who, as a tax return preparer,\754\ 
prepares a tax return for a taxpayer claiming the EITC, unless 
the tax return preparer exercises due diligence with respect to 
that claim. The due diligence requirements extend to both the 
determination of eligibility for the credit and the amount of 
the credit, as prescribed by regulations, which also detail how 
to document one's compliance with those requirements.\755\ The 
position taken with respect to the EITC must be based on 
current and reasonable information that the paid preparer 
develops, either directly from the taxpayer or by other 
reasonable means. The preparer may not ignore implications of 
information provided by taxpayers, and is expected to make 
reasonable inquiries about incorrect, inconsistent or 
incomplete information.
---------------------------------------------------------------------------
    \754\ Sec. 7701(a)(36) provides a general definition of tax return 
preparer to include persons who are compensated to prepare all or a 
substantial portion of a return or claim for refund, with certain 
exceptions.
    \755\ Treas. Reg. sec. 1.6695-2(b).
---------------------------------------------------------------------------
    The conclusions about eligibility and computation, as well 
as the steps taken to develop those conclusions, must be 
documented, using Form 8867, ``Paid Preparer's Earned Income 
Credit Checklist,'' which is filed with the return.\756\ The 
basis for the computation of the credit must also be 
documented, either on a Computation Worksheet, or in an 
alternative record containing the requisite information. The 
preparer is required to maintain that documentation for three 
years.
---------------------------------------------------------------------------
    \756\ If the return preparer electronically files the return or 
claim for the taxpayer, the Form 8867 is filed electronically with the 
return. If the prepared return or claim is given to the taxpayer to 
file, the Form 8867 is provided to the taxpayer at the same time, to 
submit with the return or claim for refund.
---------------------------------------------------------------------------
    The penalty may be waived with respect to a particular 
return or claim for refund on the basis of all facts and 
circumstances. The preparer must establish that he routinely 
follows reasonable office procedures to ensure compliance. The 
failure to comply with the requirements must be isolated and 
inadvertent.\757\ The enhanced duties of due diligence required 
with respect to the EITC do not extend to other refundable 
credits.
---------------------------------------------------------------------------
    \757\ Treas. Reg. sec. 1.6695-2(d).
---------------------------------------------------------------------------
    There are no separately stated due diligence requirements 
for paid tax return preparers who prepare Federal income tax 
returns on which a child tax credit or the AOTC is claimed.

                        Explanation of Provision

    The provision requires paid tax return preparers who 
prepare Federal income tax returns on which a child (or 
additional child) tax credit is claimed and on which the AOTC 
is claimed to meet due diligence requirements similar to those 
applicable to returns claiming an earned income tax credit.
    The provision also requires the Secretary to conduct a 
study evaluating the effectiveness of tax return preparer due 
diligence requirements for the EITC, child tax credit and AOTC. 
The study with respect to the EITC shall be completed one year 
from the date of enactment (December 18, 2015), and the study 
regarding the child credit and the AOTC shall be due two years 
from the date of enactment.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

6. Restrictions on taxpayers who improperly claimed credits in prior 
        year (sec. 208 of the Act and secs. 24, 25A and 6213 of the 
        Code)

                              Present Law


Refundable credits

    An individual may reduce his or her tax liability by any 
available tax credits. In some instances, a permissible credit 
is ``refundable,'' i.e., it may result in a refund in excess of 
any credits for withheld taxes or estimated tax payments 
available to the individual. Three major credits are the child 
tax credit, the earned income credit and the American 
opportunity tax credit.
    An individual may claim a tax credit for each qualifying 
child under the age of 17. The amount of the credit per child 
is $1,000. 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. To the extent the child 
credit exceeds the taxpayer's tax liability, the taxpayer is 
eligible for a refundable credit \758\ (the additional child 
tax credit) equal to 15 percent of earned income in excess of 
$3,000.\759\
---------------------------------------------------------------------------
    \758\ The refundable credit may not exceed the maximum credit per 
child of $1,000.
    \759\ The $3,000 threshold was a temporary number that is made 
permanent by section 101 of the Act. Families with three or more 
children may determine the additional child tax credit using an 
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.
---------------------------------------------------------------------------
    A refundable earned income tax credit (``EITC'') is 
available to low-income workers who satisfy certain 
requirements. The amount of the EITC varies depending upon the 
taxpayer's earned income and whether the taxpayer has one, two, 
more than two, or no qualifying children. In 2015, the maximum 
EITC is $6,242 for taxpayers with more than two qualifying 
children, $5,548 for taxpayers with two qualifying children, 
$3,359 for taxpayers with one qualifying child, and $503 for 
taxpayers with no qualifying children. The credit amount begins 
to phaseout at an income level of $23,630 for joint-filers with 
children, $18,110 for other taxpayers with children, $13,750 
for joint-filers with no children and $8,240 for other 
taxpayers with no qualifying children. The phaseout percentages 
are 15.98 for taxpayers with one qualifying child, 21.06 for 
two or more qualifying children and 7.65 for no qualifying 
children.
    Certain individual taxpayers are allowed to claim a 
nonrefundable credit, the Hope credit, against Federal income 
taxes for qualified tuition and related expenses paid for the 
first two years of the student's post-secondary education in a 
degree or certificate program. The American Opportunity tax 
credit, refers to modifications to the Hope credit that apply 
for taxable years beginning in 2009 and extended through 
2017.\760\ 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. 40 
percent of a taxpayer's otherwise allowable American 
opportunity tax credit is refundable.
---------------------------------------------------------------------------
    \760\ The modifications to the Hope credit, known as the American 
opportunity credit, are made permanent by section 102 of the Act.
---------------------------------------------------------------------------

Disallowance period with respect to the earned income credit

    A taxpayer who was previously disallowed the EITC may not 
claim the EITC for a period of ten taxable years after the most 
recent taxable year for which there was a final determination 
that the taxpayer's claim of credit was due to fraud. Such 
disallowance period is two years in the case of a taxpayer for 
which there was a final determination that the taxpayer's EITC 
claim was due to reckless or intentional disregard of rules and 
regulations (but not to fraud).
    Additionally, in the case of a taxpayer who was previously 
denied the EITC for any taxable year as a result of IRS 
deficiency procedures, the taxpayer may not claim an EITC in 
subsequent years unless the taxpayer provides a Form 8862 with 
the tax return, so as to demonstrate eligibility for the EITC 
in that taxable year.

Math error authority

    The Federal income tax system relies upon self-reporting 
and assessment. A taxpayer is expected to prepare a report of 
his liability \761\ and submit it to the Internal Revenue 
Service (``IRS'') with any payment due. The Code provides 
general authority for the IRS to assess all taxes shown on 
returns,\762\ other than certain Federal unemployment tax and 
estimated income taxes.\763\ The assessment is required to be 
made by recording the liability in the ``office of the 
Secretary'' in a manner determined under regulations.\764\ If 
the IRS determines that the assessment was materially 
incorrect, additional tax must be assessed within the 
limitations period.\765\
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    \761\ Secs. 6011 and 6012.
    \762\ See sec. 6201(a), which authorizes assessment of tax computed 
by the taxpayer as well as amounts computed by the IRS at the election 
of the taxpayer, under section 6014.
    \763\ Sec. 6201(b).
    \764\ Sec. 6203.
    \765\ Secs. 6204.
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    The authority to assess the additional tax may be subject 
to certain restrictions on assessment known as the deficiency 
procedures.\766\ A deficiency of tax occurs if the amount of 
certain taxes \767\ assessed for a period, after reduction for 
any rebates of tax, is less than the liability determined under 
the Code. Generally, in the case of income taxes, if the IRS 
questions whether the correct tax liability has been self-
assessed by a taxpayer, the IRS generally first informs the 
taxpayer by letter. Most discrepancies in income tax liability 
identified by the IRS are resolved through such 
``correspondence audits.'' In other cases, an examining agent 
reviews the return and determines whether an adjustment in 
income tax reported on the return is required. The 
determination by the examining agent that an adjustment to the 
return is required results in a notice to the taxpayer that 
provides an opportunity for the taxpayer to invoke rights to an 
administrative appeal or to agree to the adjustments within 30 
days. If the taxpayer responds timely and disputes the 
adjustments, the case is referred to an independent 
administrative appeals officer for review. In most cases, the 
taxpayer and the IRS agree on the merit or lack of merit of the 
adjustments proposed, and the cases are closed without issuance 
of a notice of deficiency. If the parties do not reach 
agreement administratively, the IRS must issue a formal notice 
of deficiency to a taxpayer,\768\ which begins a period within 
which a taxpayer may petition the U.S. Tax Court. During that 
period, as well as during the pendency of any proceeding in Tax 
Court, assessment of the deficiency is not permitted.\769\
---------------------------------------------------------------------------
    \766\ Secs. 6211 through 6215.
    \767\ The taxes to which deficiency procedures apply are income, 
estate and gift and excise taxes arising under chapters 41, 42, or 44. 
Secs. 6211 and 6213.
    \768\ Sec. 6212.
    \769\ Sec. 6213(a). If a taxpayer wishes to contest the merits in a 
different court, the taxpayer may agree to assessment of the tax, 
reserving his or her rights to contest the merits, pay the disputed 
amount, and pursue a claim for refund reviewable in a suit in Federal 
district court or Court of Federal Claims.
---------------------------------------------------------------------------
    There are several exceptions to the restrictions on 
assessment of taxes that are generally subject to the 
deficiency procedures.\770\ One of the principal exceptions is 
the authority to assess without issuance of a notice of 
deficiency if the error is a result of a mathematical or 
clerical error, generally referred to as math error authority. 
If the mistake on the return is of a type that is within the 
meaning of mathematical or clerical error, the IRS assesses the 
tax and sends notice of the math error to the taxpayer. Purely 
mathematical or clerical issues are often identified early in 
the processing of a return, prior to issuance of any refund; 
they are not typically identified as a result of an examination 
of a return.\771\ Although most math errors identified by the 
IRS resulted in the assessment of additional tax, over 2.6 
million of the 6.6 million math errors identified in FY2011 
\772\ involved adjustments in taxpayers' favor for credits to 
which taxpayers were entitled but had failed to claim, mostly 
commonly the ``Making Work Pay Credit'' for taxable year 2010.
---------------------------------------------------------------------------
    \770\ Section 6213 provides that a taxpayer may waive the 
restrictions on assessment, permits immediate assessment to reflect 
payments of tax remitted to the IRS and to correct amounts credited or 
applied as a result of claims for carrybacks under section 1341(b), and 
requires assessment of amounts ordered as criminal restitution. 
Assessment is also permitted in certain circumstances in which 
collection of the tax would be in jeopardy. Sections 6851, 6852 or 
6861.
    \771\ See, Treasury Inspector General for Tax Administration, Some 
Taxpayer Responses to Math Error Adjustments Were Not Worked Timely and 
Accurately (TIGTA No. 2011-40-059), July 11, 2011.
    \772\ 2011 IRS Data Book, Table 15.
---------------------------------------------------------------------------
    Since 1976, the issuance of a notice of math error begins a 
60 day period within which a taxpayer may submit a request for 
abatement of the math error adjustment, which then requires the 
IRS to abate the assessment and refer the unresolved issue for 
examination.\773\ The IRS Data Books do not report the number 
of abatements of math error assessments.
---------------------------------------------------------------------------
    \773\ Although the exception to restrictions on assessment to 
correct mathematical errors had long been in the Code, the requirement 
to abate upon timely request was added in 1976 when the authority was 
expanded to include correction of clerical errors. Sec. 6213(b)(2)(A); 
Tax Reform Act of 1976, Pub. L. 94-55, Sec. 1206(a). In order to 
reassess the amount abated, the IRS must comply with the deficiency 
procedures.
---------------------------------------------------------------------------
    The scope of IRS math error authority now encompasses 
numerous issues, many of which concern rules regarding 
refundable credits.\774\ The summary assessment is used to deny 
a claimed credit or deduction, either during initial processing 
of a return on which the credit is claimed or in an examination 
of the return after the refund has been issued. For example, in 
2009, the authority was expanded to cover several grounds on 
which a homebuyer credit could be disallowed.\775\ These 
grounds include (1) an omission of any increase in tax required 
by the recapture provisions of the credit; (2) information from 
the person issuing the taxpayer identification number of the 
taxpayer that indicates that the taxpayer does not meet the age 
requirement of the credit; (3) information provided to the 
Secretary by the taxpayer on an income tax return for at least 
one of the two preceding taxable years that is inconsistent 
with eligibility for such credit; or (4) failure to attach to 
the return a properly executed copy of the settlement statement 
used to complete the purchase.
---------------------------------------------------------------------------
    \774\ Math error authority currently applies to certain errors 
related to the earned income tax credit and the child tax credit. Sec. 
6213(g)(2)(F), (G), (I), (K), (L), and (M).
    \775\ Sec. 6213(g)(2)(O) and (P).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision expands the disallowance rules that apply to 
the EITC to the child tax credit and the American opportunity 
tax credit. Thus, if an individual claims the child tax credit 
or the American opportunity credit in a taxable year, that 
individual is denied the credit, and such claim for credit was 
determined to be due to fraud, or reckless or intentional 
disregard of the rules, that individual may not claim the 
credit for the next ten or two years, respectively.
    Additionally, the provision requires that taxpayers who 
were previously denied the child tax credit or the American 
opportunity tax credit in any taxable year as a result of IRS 
deficiency procedures to provide additional information 
demonstrating eligibility for such credit, as required by the 
Secretary.
    The provision would add the following items to the list of 
circumstances in which the IRS has authority to make an 
assessment as a math error: (1) a taxpayer claimed the 
EITC,\776\ child tax credit, or the AOTC during the period in 
which a taxpayer is not permitted to claim such credit as a 
consequence of having made a prior fraudulent or reckless 
claim; and (2) there was an omission of information required by 
the Secretary relating to a taxpayer making improper prior 
claims of the child tax credit or the AOTC.
---------------------------------------------------------------------------
    \776\ Sec. 32(k)(1).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

7. Treatment of credits for purposes of certain penalties (sec. 209 of 
        the Act and secs. 6664 and 6676 of the Code)

                              Present Law


Underpayment penalties

    Under present law, an accuracy-related penalty or a fraud 
penalty may be imposed on certain underpayments of tax.\777\ 
The Code imposes a 20-percent penalty on the portion of an 
underpayment attributable to: negligence or disregard of rules 
or regulations, a substantial understatement, a substantial 
valuation overstatement, a substantial overstatement of pension 
liabilities, a substantial estate or gift tax valuation 
understatements, any disallowance of tax benefits by reason of 
lacking economic substance, or any undisclosed foreign 
financial asset understatement.\778\ A penalty of 75 percent of 
an underpayment is imposed in the case of fraud. An exception 
to these penalties for reasonable cause generally applies.\779\ 
An underpayment, for this purpose, means the excess of the 
amount of tax imposed over the amount of tax shown on the 
return.\780\
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    \777\ Secs. 6662 and 6663. Present law also imposes a separate 
accuracy-related 20-percent penalty on portions of an underpayment 
attributable to a listed or reportable transaction. Sec. 6662A(a). The 
penalty increases to 30 percent if the transaction is not adequately 
disclosed. Secs. 6662A(c) and 6664(d)(2)(A).
    \778\ The 20-percent penalty is increased to 40 percent when there 
is a gross valuation misstatement involving a substantial valuation 
overstatement, a substantial overstatement of pension liabilities, a 
substantial estate or gift tax valuation understatement, or when a 
transaction lacking economic substance is not properly disclosed. Secs. 
6662(h) and 6662(i).
    \779\ Sec. 6664(c). There is no reasonable cause exception for tax 
benefits disallowed by reason of a transaction lacking economic 
substance and certain valuation overstatements related to charitable 
deduction property.
    \780\ Sec. 6664(a). Previous assessments and rebates may also be 
taken into account.
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    These penalties are assessed in the same manner as 
taxes.\781\ In the case of income taxes, a taxpayer may contest 
any deficiency in tax determined by the IRS in the Tax Court 
before an assessment of the tax may be made.\782\ Generally a 
deficiency in tax is the excess of the amount of tax imposed 
over the amount of tax shown on the return.\783\
---------------------------------------------------------------------------
    \781\ Sec. 6665(a).
    \782\ Sec. 6211-6215.
    \783\ Sec. 6211. Previous assessments and rebates may also be taken 
into account.
---------------------------------------------------------------------------
    The Code allows certain credits against the income 
tax.\784\ Most of the credits may not exceed the taxpayer's 
income tax. However certain credits (``refundable credits'') 
may exceed the tax and the amount of these credits in excess of 
the tax imposed (reduced by the other credits) is an 
overpayment which creates a refund or credit.\785\ Refundable 
credits include a portion of the child credit, the American 
opportunity tax credit, and the earned income credit.\786\
---------------------------------------------------------------------------
    \784\ Secs. 21-54AA.
    \785\ Sec. 6401(b).
    \786\ Refundable credits include credits for withholding of taxes. 
Treas. Reg. secs. 1-6664-2(b) and (c) provide special rules for the 
withholding credits.
---------------------------------------------------------------------------
    In determining a deficiency in tax, the refundable credits 
in excess of tax are treated as negative amounts of tax.\787\ 
Thus, the amounts of tax imposed and the tax shown on the 
return may be negative amounts. The Code does not provide a 
similar rule for the determination of an underpayment for 
purposes of the penalties.\788\
---------------------------------------------------------------------------
    \787\ Sec. 6211(b)(4).
    \788\ The Improved Penalty Administration and Compliance Tax Act 
(the ``Act''), Pub. L. No. 101-239, sec. 7721(c), revised the penalties 
to provide a single accuracy-related penalty for various types of 
misconduct. The definition of underpayment for purposes of similar 
penalties prior to that Act was defined by reference to the definition 
of a deficiency. See sec. 6653(c)(1) prior to its repeal by the Act.
---------------------------------------------------------------------------
    The Tax Court ruled that for purposes of determining the 
amount of an underpayment for purposes of the penalty 
provisions, the tax shown on the return may not be less than 
zero.\789\ Thus, no accuracy-related penalty or fraud penalty 
may be imposed to the extent the refundable credits reduce the 
tax imposed below zero.
---------------------------------------------------------------------------
    \789\ Rand v. Commissioner, 141 T.C. No. 12 (November 18, 2013).
---------------------------------------------------------------------------

Erroneous claims

    Present law imposes a penalty of 20 percent on the amount 
by which a claim for refund or credit exceeds the amount 
allowable unless it is shown that the claim has a reasonable 
basis.\790\ The penalty does not apply to claims relating to 
the earned income credit. The penalty does not apply to the 
portion of any claim to which the accuracy-related and fraud 
penalties apply. The deficiency procedures do not apply to this 
penalty.
---------------------------------------------------------------------------
    \790\ Sec. 6676.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends the definition of underpayment 
applicable to the determination of accuracy-related and fraud 
penalties by incorporating in the definition the rule that in 
determining the tax imposed and the amount of tax shown on the 
return, the excess of the refundable credits over the tax is 
taken into account as negative amount of tax. Thus, if a 
taxpayer files an income tax return erroneously claiming 
refundable credits in excess of tax, there is an underpayment 
on which an accuracy-related or fraud penalty may be imposed.
    The provision also repeals the exception from the erroneous 
claims penalty for the earned income credit and changes the 
standard for penalty relief from reasonable basis to reasonable 
cause.

                             Effective Date

    The provision amending the definition of underpayment is 
effective for returns filed after the date of enactment 
(December 18, 2015) and for returns filed on or before the date 
of enactment if the statute of limitations period for 
assessment has not expired.
    The provision repealing the exception from the erroneous 
claim penalty is effective for claims filed after the date of 
enactment.
    The provision relating to reasonable cause is effective for 
claims filed after the date of enactment.\791\
---------------------------------------------------------------------------
    \791\ A technical correction is needed to provide the effective 
date.
---------------------------------------------------------------------------

8. Increase the penalty applicable to paid tax preparers who engage in 
        willful or reckless conduct (sec. 210 of the Act and sec. 6694 
        of the Code)

                              Present Law

    Tax return preparers are subject to a penalty for 
preparation of a return or refund claim with respect to which 
an understatement of tax liability results. If the 
understatement is due to an ``unreasonable position,'' the 
penalty is the greater of $1,000 or 50 percent of the income 
derived (or to be derived) by the return preparer with respect 
to that return.\792\ Any position that a return preparer does 
not reasonably believe is more likely than not to be sustained 
on its merits is an ``unreasonable position'' unless the 
position is disclosed on the return or there is ``substantial 
authority'' for the position.\793\ There is a substantial 
authority for a position if the weight of the authorities 
supporting the treatment is substantial in relation to the 
weight of authorities supporting contrary treatment. If the 
position taken meets the definition of a tax shelter (as 
defined in section 6662(d)(2)(B)(ii)(I)) or a listed or 
reportable transaction (as referenced in 6662A), the preparer 
must have a reasonable belief that the position would more 
likely than not be sustained on its merits. If the 
understatement is due to willful or reckless conduct, the 
penalty increases to the greater of $5,000 or 50 percent of the 
income derived (or to be derived) by the return preparer with 
respect to that return.\794\
---------------------------------------------------------------------------
    \792\ Sec. 6694(a)(1).
    \793\ Sec. 6694(a)(2).
    \794\ Sec. 6694(b).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision increases the penalty rate on paid tax return 
preparers for understatements due to willful or reckless 
conduct to the greater of $5,000 or 75 percent of the income 
derived (or to be derived) by the preparer with respect to the 
return or claim for refund.

                             Effective Date

    The provision is effective for returns prepared for taxable 
years ending after the date of enactment (December 18, 2015).

9. Employer identification number required for American opportunity tax 
        credit (sec. 211 of the Act and secs. 25A and 6050S of the 
        Code)

    Certain individual taxpayers are allowed to claim a 
nonrefundable credit, the Hope credit, against Federal income 
taxes for qualified tuition and related expenses paid for the 
first two years of the student's post-secondary education in a 
degree or certificate program. The American Opportunity tax 
credit, refers to modifications to the Hope credit that apply 
for taxable years beginning in 2009 and extended through 
2017.\795\ 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. 40 
percent of a taxpayer's otherwise allowable American 
opportunity tax credit is refundable.
---------------------------------------------------------------------------
    \795\ The American opportunity credit was made permanent in another 
section of this Act. See the description of sec. 102 of this Act.
---------------------------------------------------------------------------
    For the American opportunity credit (in addition to the 
other credits with respect to amounts paid for educational 
expenses), no credit may be claimed by a taxpayer with respect 
to the qualifying tuition and related expenses of an 
individual, unless that individual's taxpayer identification 
number is included on the tax return.\796\ The Code imposes no 
reporting requirement with respect to the identity of the 
educational institution attended by the individual.
---------------------------------------------------------------------------
    \796\ Sec. 25A(g)(1).
---------------------------------------------------------------------------
    Section 6050S of the Code imposes reporting requirements, 
related to higher education tax benefits, on eligible 
educational institutions and certain other persons.\797\ 
Eligible educational institutions are subject to the reporting 
requirements if the institution enrolls any individual for any 
academic period. The information return must include the name, 
address, and taxpayer identification number of any individual 
(a) who is or has been enrolled at an eligible education 
institution and with respect to whom certain transactions are 
made or (b) with respect to whom certain payments were made or 
received. Additionally, eligible educational institutions are 
required to provide the following information: (a) the 
aggregate amount of payments received or the aggregate amount 
billed for qualified tuition and related expenses during the 
calendar year; (b) the aggregate amount of grants received by 
the individual for payment of costs of attendance that are 
administered and processed by the institution during the 
calendar year; and (c) the amount of any adjustments to the 
aggregate amounts reported under (a) or (b) with respect to the 
individual for a prior calendar year.
---------------------------------------------------------------------------
    \797\ In addition to eligible educational institutions, the 
relevant reporting requirements discussed herein are imposed on persons 
who are engaged in a trade or business of making payments to any 
individual under an insurance arrangements as reimbursements or refunds 
(or similar amounts) of qualified tuition and related expenses.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision requires that taxpayers claiming the American 
opportunity tax credit provide the employer identification 
number of the educational institution attended by the 
individual to whom the credit relates.
    The provision modifies the reporting requirements under 
section 6050S of the Code to require an educational institution 
to provide its employer identification number on the Form 1098-
T.\798\
---------------------------------------------------------------------------
    \798\ This is already required under Treasury regulations. See 
Treas. Reg. secs. 1.6050S-1(b)(2)(ii)(A) and 1.6050S-1(b)(3)(ii)(A).
---------------------------------------------------------------------------

                             Effective Date

    The provision requiring the employer identification number 
is effective for taxable years beginning after December 31, 
2015.
    The provision modifying the information reporting 
requirements is effective for expenses paid after December 31, 
2015, for education furnished in academic periods beginning 
after such date.

10. Higher education information reporting only to include qualified 
        tuition and related expenses actually paid (sec. 212 of the Act 
        and sec. 6050S of the Code)

                              Present Law

    Section 6050S of the Code imposes reporting requirements, 
related to higher education tax benefits, on eligible 
educational institutions and certain other persons.\799\ 
Eligible educational institutions are subject to the reporting 
requirements if the institution enrolls any individual for any 
academic period. The information return must include the name, 
address, and taxpayer identification number of any individual 
(a) who is or has been enrolled at an eligible education 
institution and with respect to whom certain transactions are 
made or (b) with respect to whom certain payments were made or 
received. Additionally, eligible educational institutions are 
required to provide the following information: (a) the 
aggregate amount of payments received or the aggregate amount 
billed for qualified tuition and related expenses during the 
calendar year; (b) the aggregate amount of grants received by 
the individual for payment of costs of attendance that are 
administered and processed by the institution during the 
calendar year; and (c) the amount of any adjustments to the 
aggregate amounts reported under (a) or (b) with respect to the 
individual for a prior calendar year.
---------------------------------------------------------------------------
    \799\ In addition to eligible educational institutions, the 
relevant reporting requirements discussed herein are imposed on persons 
who are engaged in a trade or business of making payments to any 
individual under an insurance arrangements as reimbursements or refunds 
(or similar amounts) of qualified tuition and related expenses.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision requires eligible educational institutions 
that have a reporting obligation to report the aggregate amount 
of payments of qualified tuition and related expenses received 
during the calendar year.

                             Effective Date

    The provision is effective for expenses paid after December 
31, 2015, for education furnished in academic periods beginning 
after such date.

                  TITLE III--MISCELLANEOUS PROVISIONS


                          A. Family Tax Relief


1. Exclusion for amounts received under the work colleges program (sec. 
        301 of the Act and sec. 117 of the Code) \800\
---------------------------------------------------------------------------

    \800\ The Senate Committee on Finance reported S. 912 on April 14, 
2015 (S. Rep. No. 114-22).
---------------------------------------------------------------------------

                              Present Law

    Under present law, an individual who is a candidate for a 
degree at a qualifying educational organization may exclude 
amounts received as a qualified scholarship from gross income 
and wages. In addition, present law provides an exclusion from 
gross income and wages for qualified tuition reductions for 
certain education provided to employees of certain educational 
organizations. The exclusions for qualified scholarships and 
qualified tuition reductions do 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. 
Payments for such services are includible in gross income and 
wages. An exception to this rule applies in the case of the 
National Health Services Corps Scholarship Program and the F. 
Edward Herbert Armed Forces Health Professions Scholarship and 
Financial Assistance Program.

                        Explanation of Provision

    The provision exempts from gross income any payments from a 
comprehensive student work-learning-service program (as defined 
in section 448(e) of the Higher Education Act of 1965) operated 
by a work college (as defined in such section). Specifically, a 
work college must require resident students to participate in a 
work-learning-service program that is an integral and stated 
part of the institution's educational philosophy and program.

                             Effective Date

    The provision is effective for amounts received in taxable 
years beginning after the date of enactment (December 18, 
2015).

2. Modification of rules relating to section 529 programs (sec. 302 of 
        the Act and sec. 529 of the Code) \801\
---------------------------------------------------------------------------

    \801\ The House Committee on Ways and Means reported H.R. 529 on 
February 20, 2015 (H.R. Rep. No. 114-25). The House passed the bill on 
February 25, 2015. The Senate Committee on Finance reported S. 335 on 
May 21, 2015 (S. Rep. No. 114-56).
---------------------------------------------------------------------------

                              Present Law


Section 529 qualified tuition programs

            In general
    A qualified tuition program is a program established and 
maintained by a State or agency or instrumentality thereof, or 
by one or more eligible educational institutions, which 
satisfies certain requirements and under which a person may 
purchase tuition credits or certificates on behalf of a 
designated beneficiary that entitle the beneficiary to the 
waiver or payment of qualified higher education expenses of the 
beneficiary (a ``prepaid tuition program''). Section 529 
provides specified income tax and transfer tax rules for the 
treatment of accounts and contracts established under qualified 
tuition programs.\802\ In the case of a program established and 
maintained by a State or agency or instrumentality thereof, a 
qualified tuition program also includes a program under which a 
person may make contributions to an account that is established 
for the purpose of satisfying the qualified higher education 
expenses of the designated beneficiary of the account, provided 
it satisfies certain specified requirements (a ``savings 
account program''). Under both types of qualified tuition 
programs, a contributor establishes an account for the benefit 
of a particular designated beneficiary to provide for that 
beneficiary's higher education expenses.
---------------------------------------------------------------------------
    \802\ For purposes of this description, the term ``account'' is 
used interchangeably to refer to a prepaid tuition benefit contract or 
a tuition savings account established pursuant to a qualified tuition 
program.
---------------------------------------------------------------------------
    In general, prepaid tuition contracts and tuition savings 
accounts established under a qualified tuition program involve 
prepayments or contributions made by one or more individuals 
for the benefit of a designated beneficiary. Decisions with 
respect to the contract or account are typically made by an 
individual who is not the designated beneficiary. Qualified 
tuition accounts or contracts generally require the designation 
of a person (generally referred to as an ``account owner'') 
\803\ whom the program administrator (oftentimes a third party 
administrator retained by the State or by the educational 
institution that established the program) may look to for 
decisions, recordkeeping, and reporting with respect to the 
account established for a designated beneficiary. The person or 
persons who make the contributions to the account need not be 
the same person who is regarded as the account owner for 
purposes of administering the account. Under many qualified 
tuition programs, the account owner generally has control over 
the account or contract, including the ability to change 
designated beneficiaries and to withdraw funds at any time and 
for any purpose. Thus, in practice, qualified tuition accounts 
or contracts generally involve a contributor, a designated 
beneficiary, an account owner (who oftentimes is not the 
contributor or the designated beneficiary), and an 
administrator of the account or contract.
---------------------------------------------------------------------------
    \803\ Section 529 refers to contributors and designated 
beneficiaries, but does not define or otherwise refer to the term 
``account owner,'' which is a commonly used term among qualified 
tuition programs.
---------------------------------------------------------------------------
            Qualified higher education expenses
    For purposes of receiving a distribution from a qualified 
tuition program that qualifies for favorable tax treatment 
under the Code, qualified higher education expenses means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of a designated beneficiary at an 
eligible educational institution, and expenses for special 
needs services in the case of a special needs beneficiary that 
are incurred in connection with such enrollment or attendance. 
Qualified higher education expenses generally also include room 
and board for students who are enrolled at least half-time. For 
taxable years 2009 and 2010 only, qualified higher education 
expenses included the purchase of any computer technology or 
equipment, or Internet access or related services, if such 
technology or services were to be used by the beneficiary or 
the beneficiary's family during any of the years a beneficiary 
was enrolled at an eligible institution.
            Contributions to qualified tuition programs
    Contributions to a qualified tuition program must be made 
in cash. Section 529 does not impose a specific dollar limit on 
the amount of contributions, account balances, or prepaid 
tuition benefits relating to a qualified tuition account; 
however, the program is required to have adequate safeguards to 
prevent contributions in excess of amounts necessary to provide 
for the beneficiary's qualified higher education expenses. 
Contributions generally are treated as a completed gift 
eligible for the gift tax annual exclusion. Contributions are 
not tax deductible for Federal income tax purposes, although 
they may be deductible for State income tax purposes. Amounts 
in the account accumulate on a tax-free basis (i.e., income on 
accounts in the plan is not subject to current income tax).
    A qualified tuition program may not permit any contributor 
to, or designated beneficiary under, the program to direct 
(directly or indirectly) the investment of any contributions 
(or earnings thereon) more than two times in any calendar year, 
and must provide separate accounting for each designated 
beneficiary. A qualified tuition program may not allow any 
interest in an account or contract (or any portion thereof) to 
be used as security for a loan.
            Distributions from qualified tuition programs
    Distributions from a qualified tuition program are 
excludable from the distributee's gross income to the extent 
that the total distribution does not exceed the qualified 
higher education expenses incurred for the beneficiary.\804\
---------------------------------------------------------------------------
    \804\ Sec. 529(c)(3)(B)(i) and (ii)(I).
---------------------------------------------------------------------------
    If a distribution from a qualified tuition program exceeds 
the qualified higher education expenses incurred for the 
beneficiary, the amount includible in gross income is 
determined, first, by applying the annuity rules of section 72 
\805\ to determine the amount which would be includible in 
gross income if none of the amount distributed was for 
qualified higher education expenses and, then, reducing that 
amount by an amount which bears the same ratio to that amount 
as the qualified higher education expenses bear to the amount 
of the distribution.\806\
---------------------------------------------------------------------------
    \805\ Under section 72, a distribution is includible in income to 
the extent that the distribution represents earnings on the 
contribution to the program, determined on a pro rata basis.
    \806\ Sec. 529(c)(3)(A) and (B)(ii).
---------------------------------------------------------------------------
    For example, assume a taxpayer had $5,000 in a qualified 
tuition program account, $4,000 of which was the amount 
contributed. Also assume the taxpayer withdraws $1,000 from the 
account and $500 is used for qualified higher education 
expenses. First, the taxpayer applies the annuity rules of 
section 72 which results in $200 being included in income under 
section 72 assuming none of the distribution is used for 
qualified higher education expenses. Then the taxpayer reduces 
the $200 by one-half because 50 percent of the distribution was 
used for qualified higher education expenses. Thus, $100 is 
includible in gross income. This amount is subject to an 
additional 10-percent tax (unless an exception applies).
    The Code provides that, except as provided by the Secretary 
of the Treasury (``Secretary''), for purposes of this 
calculation, the taxpayer's account value, income, and 
investment amount, are generally measured as of December 31st 
of the taxable year in which the distribution was made. The 
Secretary has issued guidance providing that the earnings 
portion of a distribution is to be computed on the date of each 
distribution.\807\
---------------------------------------------------------------------------
    \807\ Notice 2001-81, 2001-2 C.B. 617, December 10, 2001.
---------------------------------------------------------------------------
    In the case of an individual who is the designated 
beneficiary for more than one qualified tuition program, all 
such accounts are aggregated for purposes of calculating the 
earnings in the account under section 72. The Secretary has 
provided in guidance that this aggregation is required only in 
the case of accounts contained within the same 529 program, 
having the same account owner and the same designated 
beneficiary.\808\
---------------------------------------------------------------------------
    \808\ Ibid.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision makes three modifications to section 529.
    First, the provision provides that qualified higher 
education expenses include the purchase of computer or 
peripheral equipment (as defined in section 168(i)(2)(B)), 
computer software (as defined in section 197(e)(3)(B)), or 
Internet access and related services if the equipment, 
software, or services are to be used primarily by the 
beneficiary during any of the years the beneficiary is enrolled 
at an eligible education institution.
    Second, the provision repeals the rules providing that 
section 529 accounts must be aggregated for purposes of 
calculating the amount of a distribution that is included in a 
taxpayer's income. Thus, in the case of a designated 
beneficiary who has received multiple distributions from a 
qualified tuition program in the taxable year, the portion of a 
distribution that represents earnings is now to be computed on 
a distribution-by-distribution basis, rather than an aggregate 
basis, such that the computation applies to each distribution 
from an account. The following example illustrates the 
operation of this provision: Assume that two designated savings 
accounts \809\ have been established by the same account owner 
within the same qualified tuition program for the same 
designated beneficiary. Account A contains $20,000, all of 
which consists of contributed amounts (i.e., it has no 
earnings). Account B contains $30,000, $20,000 of which 
constitutes an investment in the account, and $10,000 
attributable to earnings on that investment. Assume a taxpayer 
were to receive a $10,000 distribution from Account A, with 
none of the proceeds being spent on qualified higher education 
expenses. Under present law, both of the designated 
beneficiary's accounts would be aggregated for purposes of 
computing earnings. Thus, $2,000 of the $10,000 distribution 
from Account A ($10,000 * $10,000/$50,000) would be included in 
the designated beneficiary's income. Under the provision, the 
accounts would not be aggregated for purposes of determining 
earnings on the account. Thus, because Account A has no 
earnings, no amount of the distribution would be included in 
the designated beneficiary's income for the taxable year.
---------------------------------------------------------------------------
    \809\ As used in this example, the term `account' refers to a sum 
of money set aside in a qualified tuition program, and does not refer 
to the allocation of such money into differing investment options 
offered by such program.
---------------------------------------------------------------------------
    Third, the provision creates a new rule that provides, in 
the case of a designated beneficiary who receives a refund of 
any higher education expenses, any distribution that was used 
to pay the refunded expenses shall not be subject to tax if the 
designated beneficiary recontributes the refunded amount to the 
qualified tuition program within 60 days of receiving the 
refund, only to the extent that such recontribution is not in 
excess of the refund. A transition rule allows for 
recontributions of amounts refunded after December 31, 2014, 
and before the date of enactment (December 18, 2015) to be made 
not later than 60 days after the enactment of this provision.

                             Effective Date

    The provision allowing computer technology to be considered 
a higher education expense is effective for taxable years 
beginning after December 31, 2014. The provision removing the 
aggregation requirement in the case of multiple distributions 
is effective for distributions made after December 31, 2014. 
The provision allowing a recontribution of refunded tuition 
amounts is effective for tuition refunded after December 31, 
2014.

3. Modification to qualified ABLE programs (sec. 303 of the Act and 
        sec. 529A of the Code)

                              Present Law


In general

    The Code provides for a tax-favored savings program 
intended to benefit disabled individuals, known as qualified 
ABLE programs.\810\ A qualified ABLE program is a program 
established and maintained by a State or agency or 
instrumentality thereof. A qualified ABLE program must meet the 
following conditions: (1) under the provisions of the program, 
contributions may be made to an account (an ``ABLE account''), 
established for the purpose of meeting the qualified disability 
expenses of the designated beneficiary of the account; (2) the 
program must limit a designated beneficiary to one ABLE 
account; (3) the program must allow for the establishment of 
ABLE accounts only for a designated beneficiary who is either a 
resident of the State maintaining such ABLE program or a 
resident of a State that has not established an ABLE program (a 
``contracting State'') which has entered into a contract with 
such State to provide the contracting State's residents with 
access to the State's ABLE program; and (4) the program must 
meet certain other requirements discussed below. A qualified 
ABLE program is generally exempt from income tax, but is 
otherwise subject to the taxes imposed on the unrelated 
business income of tax-exempt organizations.
---------------------------------------------------------------------------
    \810\ Sec. 529A.
---------------------------------------------------------------------------
    A designated beneficiary of an ABLE account is the owner of 
the ABLE account. A designated beneficiary must be an eligible 
individual (defined below) who established the ABLE account and 
who is designated at the commencement of participation in the 
qualified ABLE program as the beneficiary of amounts paid (or 
to be paid) into and from the program.
    Contributions to an ABLE account must be made in cash and 
are not deductible for Federal income tax purposes. Except in 
the case of a rollover contribution from another ABLE account, 
an ABLE account must provide that it may not receive aggregate 
contributions during a taxable year in excess of the amount 
under section 2503(b) of the Code (the annual gift tax 
exemption). For 2015, this is $14,000.\811\ Additionally, a 
qualified ABLE program must provide adequate safeguards to 
ensure that ABLE account contributions do not exceed the limit 
imposed on accounts under the qualified tuition program of the 
State maintaining the qualified ABLE program. Amounts in the 
account accumulate on a tax-deferred basis (i.e., income on 
accounts under the program is not subject to current income 
tax).
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    \811\ This amount is indexed for inflation. In the case that 
contributions to an ABLE account exceed the annual limit, an excise tax 
in the amount of six percent of the excess contribution to such account 
is imposed on the designated beneficiary. Such tax does not apply in 
the event that the trustee of such account makes a corrective 
distribution of such excess amounts by the due date (including 
extensions) of the individual's tax return for the year within the 
taxable year.
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    A qualified ABLE program may permit a designated 
beneficiary to direct (directly or indirectly) the investment 
of any contributions (or earnings thereon) no more than two 
times in any calendar year and must provide separate accounting 
for each designated beneficiary. A qualified ABLE program may 
not allow any interest in the program (or any portion thereof) 
to be used as security for a loan.
    Distributions from an ABLE account are generally includible 
in the distributee's income to the extent consisting of 
earnings on the account.\812\ Distributions from an ABLE 
account are excludable from income to the extent that the total 
distribution does not exceed the qualified disability expenses 
of the designated beneficiary during the taxable year. If a 
distribution from an ABLE account exceeds the qualified 
disability expenses of the designated beneficiary, a pro rata 
portion of the distribution is excludable from income. The 
portion of any distribution that is includible in income is 
subject to an additional 10-percent tax unless the distribution 
is made after the death of the beneficiary. Amounts in an ABLE 
account may be rolled over without income tax liability to 
another ABLE account for the same beneficiary \813\ or another 
ABLE account for the designated beneficiary's brother, sister, 
stepbrother or stepsister who is also an eligible individual.
---------------------------------------------------------------------------
    \812\ The rules of section 72 apply in determining the portion of a 
distribution that consists of earnings.
    \813\ For instance, if a designated beneficiary were to relocate to 
a different State.
---------------------------------------------------------------------------
    Except in the case of an ABLE account established in a 
different ABLE program for purposes of transferring ABLE 
accounts,\814\ no more than one ABLE account may be established 
by a designated beneficiary. Thus, once an ABLE account has 
been established by a designated beneficiary, no account 
subsequently established by such beneficiary shall be treated 
as an ABLE account.
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    \814\ In which case the contributor ABLE account must be closed 60 
days after the transfer to the new ABLE account is made.
---------------------------------------------------------------------------
    A contribution to an ABLE account is treated as a completed 
gift of a present interest to the designated beneficiary of the 
account. Such contributions qualify for the per-donee annual 
gift tax exclusion ($14,000 for 2015) and, to the extent of 
such exclusion, are exempt from the generation skipping 
transfer (``GST'') tax. A distribution from an ABLE account 
generally is not subject to gift tax or GST tax.

Eligible individuals

    As described above, a qualified ABLE program may provide 
for the establishment of ABLE accounts only if those accounts 
are established and owned by an eligible individual, such owner 
referred to as a designated beneficiary. For these purposes, an 
eligible individual is an individual either (1) for whom a 
disability certification has been filed with the Secretary for 
the taxable year, or (2) who is entitled to Social Security 
Disability Insurance benefits or SSI benefits \815\ based on 
blindness or disability, and such blindness or disability 
occurred before the individual attained age 26.
---------------------------------------------------------------------------
    \815\ These are benefits, respectively, under Title II or Title XVI 
of the Social Security Act.
---------------------------------------------------------------------------
    A disability certification means a certification to the 
satisfaction of the Secretary, made by the eligible individual 
or the parent or guardian of the eligible individual, that the 
individual has a medically determinable physical or mental 
impairment, which results in marked and severe functional 
limitations, and which can be expected to result in death or 
which has lasted or can be expected to last for a continuous 
period of not less than 12 months, or is blind (within the 
meaning of section 1614(a)(2) of the Social Security Act). Such 
blindness or disability must have occurred before the date the 
individual attained age 26. Such certification must include a 
copy of the diagnosis of the individual's impairment and be 
signed by a licensed physician.\816\
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    \816\ No inference may be drawn from a disability certification for 
purposes of eligibility for Social Security, SSI or Medicaid benefits.
---------------------------------------------------------------------------

Qualified disability expenses

    As described above, the earnings on distributions from an 
ABLE account are excluded from income only to the extent total 
distributions do not exceed the qualified disability expenses 
of the designated beneficiary. For this purpose, qualified 
disability expenses are any expenses related to the eligible 
individual's blindness or disability which are made for the 
benefit of the designated beneficiary. Such expenses include 
the following expenses: education, housing, transportation, 
employment training and support, assistive technology and 
personal support services, health, prevention and wellness, 
financial management and administrative services, legal fees, 
expenses for oversight and monitoring, funeral and burial 
expenses, and other expenses, which are approved by the 
Secretary under regulations and consistent with the purposes of 
section 529A.

Transfer to State

    In the event that the designated beneficiary dies, subject 
to any outstanding payments due for qualified disability 
expenses incurred by the designated beneficiary, all amounts 
remaining in the deceased designated beneficiary's ABLE account 
not in excess of the amount equal to the total medical 
assistance paid such individual under any State Medicaid plan 
established under title XIX of the Social Security Act shall be 
distributed to such State upon filing of a claim for payment by 
such State. Such repaid amounts shall be net of any premiums 
paid from the account or by or on behalf of the beneficiary to 
the State's Medicaid Buy-In program.

Treatment of ABLE accounts under Federal programs

    Any amounts in an ABLE account, and any distribution for 
qualified disability expenses, shall be disregarded for 
purposes of determining eligibility to receive, or the amount 
of, any assistance or benefit authorized by any Federal means-
tested program. However, in the case of the SSI program, a 
distribution for housing expenses is not disregarded, nor are 
amounts in an ABLE account in excess of $100,000. In the case 
that an individual's ABLE account balance exceeds $100,000, 
such individual's SSI benefits shall not be terminated, but 
instead shall be suspended until such time as the individual's 
resources fall below $100,000. However, such suspension shall 
not apply for purposes of Medicaid eligibility.

Treatment of ABLE accounts in bankruptcy

    Property of a bankruptcy estate may not include certain 
amounts contributed to an ABLE account, if the designated 
beneficiary of such account was a child, stepchild, grandchild 
or stepgrandchild of the debtor during the taxable year in 
which funds were placed in the account. Such funds shall be 
excluded from the bankruptcy estate only to the extent that 
they were contributed to an ABLE account at least 365 days 
prior to the filing of the title 11 petition, are not pledged 
or promised to any entity in connection with any extension of 
credit, and are not excess contributions as defined in new 
section 4973(h). In the case of funds contributed to an ABLE 
account that are contributed not earlier than 720 days (and not 
later than 365 days) prior to the filing of the petition, only 
up to $6,225 may be excluded.

                        Explanation of Provision

    The provision eliminates the requirement that ABLE accounts 
may be established only in the State of residence of the ABLE 
account owner.\817\
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    \817\ The Joint Committee staff's technical explanation of the PATH 
Act of 2015 incorrectly stated that the provision allowed for rollovers 
to ABLE accounts from qualified tuition programs (also known as 529 
accounts). See Joint Committee on Taxation, Technical Explanation of 
the Revenue Provisions of the Protecting Americans from Tax Hikes Act 
of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules 
Committee Print 114-40), (JCX-144-15), December 17, 2015, p. 151. The 
provision does not change the rules relating to rollovers to ABLE 
accounts.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2014.

4. Exclusion from gross income of certain amounts received by wrongly 
        incarcerated individuals (sec. 304 of the Act and new sec. 139F 
        of the Code)

                              Present Law

    The taxability of damages, i.e., the amounts received as a 
result of a claim or legal action for compensation for injury, 
depends upon the nature of the underlying claim. If a direct 
payment on the underlying claim would be includible as income 
under section 61, and no specific exemption for that type of 
income is otherwise provided in the Code, then damages intended 
to compensate for loss of that includible income are themselves 
includible income.\818\ Section 104 of the Code specifically 
excludes from gross income most compensation for physical 
injuries or physical sickness. Damages for non-physical 
injuries, such as mental anguish, damage to reputation, 
discrimination, or lost income, are not within the purview of 
the section 104 exclusion. Compensation related to wrongful 
incarceration but not physical injuries or physical sickness is 
not specifically addressed by the Code.
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    \818\ For example, a claim for lost wages results in taxable 
damages, because the wages themselves would have been taxable, but an 
award for damage to property may not result in includible income if the 
award does not exceed the recipient's basis in the property.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, with respect to any wrongfully 
incarcerated individual, gross income shall not include any 
civil damages, restitution, or other monetary award (including 
compensatory or statutory damages and restitution imposed in a 
criminal matter) relating to the incarceration of such 
individual for the covered offense for which such individual 
was convicted.
    A wrongfully incarcerated individual means an individual:
          (1) who was convicted of a covered offense;
          (2) who served all or part of a sentence of 
        imprisonment relating to that covered offense; and
          (3)(i) was pardoned, granted clemency, or granted 
        amnesty for such offense because the individual was 
        innocent, or
                (ii) for whom the judgment of conviction for 
                the offense was reversed or vacated, and whom 
                the indictment, information, or other 
                accusatory instrument for that covered offense 
                was dismissed or who was found not guilty at a 
                new trial after the judgment of conviction for 
                that covered offense was reversed or vacated.
    For these purposes, a covered offense is any criminal 
offense under Federal or State law, and includes any criminal 
offense arising from the same course of conduct as that 
criminal offense.
    The provision contains a special rule allowing individuals 
to make a claim for credit or refund of any overpayment of tax 
resulting from the exclusion, even if such claim would be 
disallowed under the Code or by operation of any law or rule of 
law (including res judicata), if the claim for credit or refund 
is filed before the close of the one-year period beginning on 
the date of enactment (December 18, 2015).

                             Effective Date

    The provision is effective for taxable years beginning 
before, on, or after the date of enactment (December 18, 2015).

5. Clarification of special rule for certain governmental plans (sec. 
        305 of the Act and sec. 105(j) of the Code) \819\
---------------------------------------------------------------------------

    \819\ The Senate Committee on Finance reported S.910 on April 14, 
2015 (S. Rep. No. 114-21).
---------------------------------------------------------------------------

                              Present Law

    Reimbursements under an employer-provided accident or 
health plan for medical care expenses for employees, their 
spouses, their dependents, and adult children under age 27 are 
excludible from gross income.\820\ However, in order for these 
reimbursements to be excluded from income, the plan may 
reimburse expenses of only the employee and the employee's 
spouse, dependents, and children under age 27. In the case of a 
deceased employee, the plan generally may reimburse medical 
expenses of only the employee's surviving spouse, dependents 
and children under age 27. If a plan reimburses expenses of any 
other beneficiary, all expense reimbursements under the plan 
are included in income, including reimbursements of expenses of 
the employee and the employee's spouse, dependents and children 
under age 27 (or the employee's surviving spouse, dependents 
and children under age 27).\821\
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    \820\ Sec. 105(b).
    \821\ Rev. Rul. 2006-36, 2006-2 C.B. 353. The ruling is effective 
for plan years beginning after December 31, 2008, in the case of plans 
including certain reimbursement provisions on or before August 14, 
2006.
---------------------------------------------------------------------------
    Under a limited exception, reimbursements under a plan do 
not fail to be excluded from income solely because the plan 
provides for reimbursements of medical expenses of a deceased 
employee's beneficiary, without regard to whether the 
beneficiary is the employee's surviving spouse, dependent, or 
child under age 27.\822\ In order for the exception to apply, 
the plan must have provided, on or before January 1, 2008, for 
reimbursement of the medical expenses of a deceased employee's 
beneficiary. In addition, the plan must be funded by a medical 
trust (1) that is established in connection with a public 
retirement system, and (2) that either has been authorized by a 
State legislature, or has received a favorable ruling from the 
IRS that the trust's income is not includible in gross income 
by reason of the exclusion for income of a State or political 
subdivision.\823\ This exception preserves the exclusion for 
reimbursements of expenses of the employee and the employee's 
spouse, dependents, and children under age 27 (or the 
employee's surviving spouse, dependents, and children under age 
27). Reimbursements of expenses of other beneficiaries are 
included in income.
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    \822\ Sec. 105(j).
    \823\ This exclusion is provided under section 115.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision expands the exception to apply to additional 
plans. As expanded, the exception applies to a plan funded by a 
medical trust (1) that is either established in connection with 
a public retirement system or established by or on behalf of a 
State or political subdivision thereof, and (2) that either has 
been authorized by a State legislature or has received a 
favorable ruling from the IRS that the trust's income is not 
includible in gross income by reason of either the exclusion 
for income of a State or political subdivision or the exemption 
from income tax for a voluntary employees' beneficiary 
association (``VEBA'').\824\ As under present law, the plan is 
still required to have provided, on or before January 1, 2008, 
for reimbursement of the medical expenses of a deceased 
employee's beneficiary, without regard to whether the 
beneficiary is the employee's surviving spouse, dependent, or 
child under age 27.
---------------------------------------------------------------------------
    \824\ Tax-exempt status for a VEBA is provided under Code section 
501(c)(9).
---------------------------------------------------------------------------
    The provision also clarifies that this exception preserves 
the exclusion for reimbursements of expenses of the employee 
and the employee's spouse, dependents, and children under age 
27, or the employee's surviving spouse, dependents, and 
children under age 27 (referred to under the provision as 
``qualified taxpayers'') and that, as under present law, 
reimbursements of expenses of other beneficiaries are included 
in income.

                             Effective Date

    The provision is effective with respect to payments after 
the date of enactment (December 18, 2015).

6. Rollovers permitted from other retirement plans into SIMPLE 
        retirement accounts (sec. 306 of the Act and sec. 408(p)(1)(B) 
        of the Code)

                              Present Law

    Certain small businesses can establish a simplified 
retirement plan called the savings incentive match plan for 
employees (``SIMPLE'') retirement plan. SIMPLE plans can be 
adopted by employers: (1) that employ 100 or fewer employees 
who received at least $5,000 in compensation during the 
preceding year; and (2) that do not maintain another employer-
sponsored retirement plan.\825\ A SIMPLE plan can be either an 
individual retirement arrangement (an ``IRA'') for each 
employee \826\ or part of a qualified cash or deferred 
arrangement (a ``section 401(k) plan'').\827\ The rules 
applicable to SIMPLE IRAs and SIMPLE section 401(k) plans are 
similar, but not identical.
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    \825\ Sec. 408(p)(2)(C)(i). There is a two-year grace period for an 
employer that establishes and maintains a SIMPLE IRA for one or more 
years and satisfies the 100 employee limit but fails to meet the 100 
employer limit in a subsequent year, provided that the reason for the 
failure is not due to an acquisition, disposition, or similar 
transaction involving the employer.
    \826\ Sec. 408(p). A SIMPLE IRA may not be in the form of a Roth 
IRA.
    \827\ Sec. 401(k)(11).
---------------------------------------------------------------------------
    Distributions from employer-sponsored retirement plans and 
IRAs (including SIMPLE plans) are generally includible in gross 
income, except to the extent the amount distributed represents 
a return of after-tax contributions (that is, basis). The 
portion of a distribution made before age 59\1/2\, death, or 
disability that is includible in gross income is generally 
subject to an additional 10-percent income tax.\828\ Early 
withdrawals from a SIMPLE plan generally are subject to the 
additional 10-percent tax. However, in the case of a SIMPLE 
IRA, early withdrawals during the two-year period beginning on 
the date the employee first participated in the SIMPLE IRA are 
subject to an additional 25 percent tax.\829\
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    \828\ Sec. 72(t). There are other exceptions to the 10-percent 
additional income tax, besides attainment of age 59\1/2\, death, or 
disability.
    \829\ Sec. 72(t)(6).
---------------------------------------------------------------------------
    If certain requirements are met, distributions from 
employer-sponsored retirement plans and IRAs generally may 
generally be rolled over on a nontaxable basis to another 
employer-sponsored retirement plan or IRA. However, a 
distribution from a SIMPLE IRA during the two-year period 
beginning on the date the employee first participated in the 
SIMPLE IRA may be rolled over only to another SIMPLE IRA. In 
addition, because the only contributions that may be made to a 
SIMPLE IRA are contributions under a SIMPLE plan, distributions 
from other employer-sponsored retirement plans and IRAs cannot 
be rolled over to a SIMPLE IRA, even after this two-year 
period.

                        Explanation of Provision

    The provision permits rollovers of distributions from 
employer-sponsored retirement plans and traditional IRAs (that 
are not SIMPLE IRAs) into a SIMPLE IRA after the expiration of 
the two-year period following the date the employee first 
participated in the SIMPLE IRA (the two-year period during 
which the additional income tax on distributions from a SIMPLE 
IRA is 25 percent instead of 10 percent).

                             Effective Date

    The provision applies to contributions to SIMPLE IRAs made 
after the date of enactment (December 18, 2015).

7. Technical amendment relating to rollover of certain airline payment 
        amounts (sec. 307 of the Act and sec. 1106 of the FAA 
        Modernization and Reform Act of 2012)

                              Present Law


Individual retirement arrangements

    The Code provides for two types of individual retirement 
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\830\
---------------------------------------------------------------------------
    \830\ Traditional IRAs are described in section 408, and Roth IRAs 
are described in section 408A.
---------------------------------------------------------------------------
    Contributions to a traditional IRA may be deductible from 
gross income, or nondeductible contributions may be made, which 
result in ``basis.'' Distributions from a traditional IRA are 
includible in gross income to the extent not treated as a 
return of basis (that is, if attributable to deductible 
contributions or earnings).
    Contributions to a Roth IRA are not deductible (and result 
in basis), 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 not treated as a return of basis (that is, 
if attributable to earnings). In general, a qualified 
distribution from a Roth IRA 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.
    The total amount that an individual may contribute to one 
or more IRAs for a year (other than a rollover contribution, 
discussed below) is generally limited to the lesser of: (1) a 
dollar amount ($5,500 for 2015, plus $1,000 if the individual 
is age 50 or older); or (2) the amount of the individual's 
compensation that is includible in gross income for the year. 
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.
    Subject to certain requirements, an individual may roll a 
distribution from an IRA over to an IRA of the same type on a 
nontaxable basis (that is, without income inclusion). In 
addition, an individual generally may convert a traditional IRA 
to a Roth IRA. In that case, the amount converted is includible 
in income as if a distribution from the traditional IRA had 
been made.

Rollover of airline payments to traditional IRAs

    Under the FAA Modernization and Reform Act of 2012 (``2012 
FAA Act''), if a qualified airline employee contributes any 
portion of an airline payment amount to a traditional IRA 
within 180 days of receipt of the amount (or, if later, within 
180 days of February 14, 2012, the date of enactment of the 
2012 FAA Act), the amount contributed is treated as a rollover 
contribution to the IRA.\831\ A qualified airline employee 
making such a rollover contribution may exclude the contributed 
amount from gross income for the taxable year in which the 
airline payment amount was paid to the qualified airline 
employee.
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    \831\ Sec. 1106 of Pub. L. No. 112-95. Under section 125 of the 
Worker, Retiree, and Employer Recovery Act of 2008 (``WRERA''), Pub. L. 
No. 110-458, a qualified airline employee is permitted to 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 December 
23, 2008, the date of enactment of WRERA), and the amount contributed 
is treated as a rollover contribution to the Roth IRA. The 2012 FAA Act 
permitted an employee who had previously made a rollover contribution 
of an airline payment amount to a Roth IRA to recharacterize all or a 
portion of the rollover contribution as a rollover contribution to a 
traditional IRA and to exclude the recharacterized amount from income.
---------------------------------------------------------------------------
    For this purpose, a qualified airline employee is an 
employee or former employee of a commercial passenger airline 
carrier who was a participant in a qualified defined benefit 
plan maintained by the carrier that was terminated or that 
became subject to the benefit accrual and other restrictions 
applicable to certain plans under the Pension Protection Act of 
2006 (``PPA'').\832\ If a qualified airline employee dies after 
receiving an airline payment amount, or if an airline payment 
amount is paid to a surviving spouse of a qualified airline 
employee, the surviving spouse may receive the same rollover 
contribution treatment (and the related exclusion from income) 
as the employee could have received.
---------------------------------------------------------------------------
    \832\ Pub. L. No. 109-280. Section 402 of PPA provides funding 
relief with respect to certain defined benefit plans maintained by 
commercial passenger airlines, subject to meeting the benefit accrual 
and other restrictions under PPA section 402(b)(2) and (3).
---------------------------------------------------------------------------
    An airline payment amount is any payment of any money or 
other property payable by a commercial passenger airline to a 
qualified airline employee: (1) under the approval of an order 
of a Federal bankruptcy court in a case filed after September 
11, 2001, and before January 1, 2007, and (2) in respect of the 
qualified airline employee's interest in a bankruptcy claim 
against the airline carrier, any note of the carrier (or amount 
paid in lieu of a note being issued), or any other fixed 
obligation of the carrier to pay a lump sum amount. An airline 
payment amount does not include any amount payable on the basis 
of the carrier's future earnings or profits. The amount of any 
airline payment amount is determined without regard to the 
withholding of the employee's share of taxes under the Federal 
Insurance Contributions Act (``FICA'') or income tax.\833\ 
Thus, for purposes of the rollover provision and the related 
exclusion from income, the gross amount of the airline payment 
amount (before withholding) applies.
---------------------------------------------------------------------------
    \833\ Secs. 3102 and 3402. An airline payment amount that is 
excluded from income under the 2012 FAA Act continues to be wages for 
FICA and Social Security earnings purposes.
---------------------------------------------------------------------------
    The ability to contribute airline payment amounts to a 
traditional IRA as a rollover contribution (and the related 
exclusion from income) is subject to limitations. First, a 
qualified airline employee is not permitted to contribute 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,'' that is, 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.\834\ Second, in the case of a qualified airline 
employee who was not at any time a covered employee, the amount 
that may be contributed to 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 contributed to a traditional IRA (and excluded from 
income) for all preceding taxable years (``90 percent 
limitation'').
---------------------------------------------------------------------------
    \834\ 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).
---------------------------------------------------------------------------
    Under the 2012 FAA Act, a qualified airline employee who 
excludes from income an airline payment amount contributed to a 
traditional IRA may file a claim for a refund until the later 
of: (1) the usual period of limitation (generally, three years 
from the time the return was filed or two years from the time 
the tax was paid, whichever period expires later),\835\ or (2) 
April 15, 2013.
---------------------------------------------------------------------------
    \835\ Sec. 6511(a).
---------------------------------------------------------------------------
    The definition of qualified airline employee under the 2012 
FAA Act was amended in 2014 to include an employee or former 
employee of a commercial passenger airline carrier who was a 
participant in a qualified defined benefit plan maintained by 
the carrier that was frozen (that is, under which all benefit 
accruals ceased) as of November 1, 2012 (``2014 
amendments'').\836\ The 2014 amendments also amended the 
definition of airline payment amount under the 2012 FAA Act to 
include any payment of any money or other property payable by a 
commercial passenger airline (but not any amount payable on the 
basis of the carrier's future earnings or profits) to a 
qualified airline employee: (1) under the approval of an order 
of a Federal bankruptcy court in a case filed on November 29, 
2011, 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. Thus, as a result of the 2014 amendments, if a 
qualified airline employee (other than a covered employee as 
described above) under a qualified defined benefit plan that 
was frozen as of November 1, 2012, receives an airline payment 
amount under a Federal bankruptcy order in a case filed on 
November 29, 2011, and, subject to the 90 percent limitation 
described above, contributes any portion of the airline payment 
amount to a traditional IRA within 180 days of receipt of the 
amount, the amount contributed is treated as a rollover 
contribution to the traditional IRA and may be excluded from 
gross income for the taxable year in which the airline payment 
amount was paid to the qualified airline employee.\837\
---------------------------------------------------------------------------
    \836\ An act to amend certain provisions of the FAA Modernization 
and Reform Act of 2012, Pub. L. No. 113-243, enacted December 18, 2014. 
The 2014 amendments allow a qualified airline employee who excludes 
from income an airline payment amount contributed to a traditional IRA 
to file a claim for a refund until the later of (1) the usual period of 
limitation (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, 2015.
    \837\ As permitted under present law, after the contribution, an 
individual may convert the traditional IRA to a Roth IRA.
---------------------------------------------------------------------------
    Unlike the 2012 FAA Act, the 2014 amendments did not 
contain a provision to allow previously made payments that came 
within the definition of airline payment amounts as a result of 
the amendments to be rolled over within 180 days after 
enactment.\838\
---------------------------------------------------------------------------
    \838\ As described above, the WRERA provision enacted in 2008 also 
contained a provision allowing rollovers within 180 days of receipt of 
an airline payment amount or, if later, within 180 days of the date of 
enactment of WRERA.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows any amount that comes within the 
definition of an airline payment amount as a result of the 2014 
amendments to be rolled over within 180 days of receipt or, if 
later, within the period beginning on December 18, 2014, and 
ending 180 days after enactment of the provision.

                             Effective Date

    The provision is effective as if included in the 2014 
amendments.

8. Treatment of early retirement distributions for nuclear materials 
        couriers, United States Capitol Police, Supreme Court Police, 
        and diplomatic security special agents (sec. 308 of the Act and 
        sec. 72(t) of the Code)

                              Present Law

    An individual who receives a distribution from a qualified 
retirement plan before age 59\1/2\, death, or disability is 
subject to a 10-percent early withdrawal tax on the amount 
includible in income unless an exception to the tax 
applies.\839\ Among other exceptions, the early distribution 
tax does not apply to distributions made to an employee who 
separates from service after age 55 (the ``separation from 
service'' exception), or to distributions that are part of a 
series of substantially equal periodic payments made for the 
life, or life expectancy, of the employee or the joint lives, 
or life expectancies, of the employee and his or her 
beneficiary (the ``equal periodic payments'' exception).\840\
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    \839\ Sec. 72(t).
    \840\ Sec. 72(t)(2)(iv) and (v). Section 72(t)(4) provides a 
recapture rule under which, in general, if the series of payments 
eligible for the equal periodic payments exception is modified within 
five years of the first payment or before age 59\1/2\, an additional 
tax applies equal to the early withdrawal tax that would have applied 
in the absence of the exception.
---------------------------------------------------------------------------
    Under a special rule for qualified public safety employees, 
the separation from service exception applies to distributions 
from a governmental defined benefit pension plan if the 
employee separates from service after age 50 (rather than age 
55). A qualified public safety employee is an employee of a 
State or political subdivision of a State if the employee 
provides police protection, firefighting services, or emergency 
medical services for any area within the jurisdiction of such 
State or political subdivision.
    The special rule for applying the separation from service 
exception to qualified public safety employees was revised by 
the Defending Public Safety Employees' Retirement Act, 
effective for distributions after December 31, 2015.\841\ 
First, the definition of qualified public safety employee was 
expanded to include Federal law enforcement officers, Federal 
customs and border protection officers, Federal firefighters, 
and air traffic controllers.\842\ In addition, the special rule 
was extended to distributions from governmental defined 
contribution plans (rather than just governmental defined 
benefit plans).\843\
---------------------------------------------------------------------------
    \841\ Sec. 2 of Pub. L. No. 114-26, enacted June 29, 2015, 
discussed in Part Five. This provision also allows a qualified public 
safety employee to modify a series of payments to which the equal 
periodic payments exception has applied without being subject to the 
recapture rule described above.
    \842\ These positions are defined by reference to the provisions of 
the Civil Service Retirement System (CSRS) and the Federal Employees 
Retirement System (FERS).
    \843\ Under section 7701(j), the Federal Thrift Savings Plan is 
treated as a qualified defined contribution plan.
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                        Explanation of Provision

    The provision amends the definition of qualified public 
safety employee to include nuclear materials couriers,\844\ 
members of the United States Capitol Police, members of the 
Supreme Court police, and diplomatic security special agents of 
the United States Department of State.
---------------------------------------------------------------------------
    \844\ These positions are defined by reference to the provisions of 
CSRS and FERS.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to distributions after December 31, 
2015.

9. Prevention of extension of tax collection period for members of the 
        Armed Forces who are hospitalized as a result of combat zone 
        injuries (sec. 309 of the Act and secs. 6502 and 7508(e) of the 
        Code) \845\
---------------------------------------------------------------------------

    \845\ The Senate Committee on Finance reported S. 907 on April 14, 
2015 (S. Rep. No. 114-18).
---------------------------------------------------------------------------

                              Present Law

    The Code provides active duty military and civilians in 
designated combat zones additional time in which to file tax 
returns, pay tax liabilities and take other actions required in 
order to comply with their tax obligations.\846\ A commensurate 
amount of time is provided for the IRS to complete actions 
required with respect to assessment and collection of the 
obligations of such active duty military and civilian 
taxpayers. The additional time provided equals the actual time 
in duty status, which includes hospitalization resulting from 
service, plus 180 days. In other words, in determining how much 
time remains in which to perform a task required by the Code, 
both the taxpayer and the IRS may disregard the period of 
active duty.
---------------------------------------------------------------------------
    \846\ Sec. 7508.
---------------------------------------------------------------------------
    The Code provides that collection activities generally may 
only occur within ten years after assessment.\847\ The effect 
of the provisions described above is to extend the 10-year 
collection period for combat zone taxpayers.
---------------------------------------------------------------------------
    \847\ Sec. 6502.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the collection period for taxpayers 
hospitalized for combat zone injuries shall not be suspended by 
reason of any period of continuous hospitalization or the 180 
days after hospitalization. Accordingly, the collection period 
expires 10 years after assessment, plus the actual time spent 
in a combat zone, regardless of the length of the postponement 
period available for hospitalized taxpayers to comply with 
their tax obligations.

                             Effective Date

    The provision applies to taxes assessed before, on, or 
after the date of the enactment (December 18, 2015).

                    B. Real Estate Investment Trusts


                                Overview


In general

    A real estate investment trust (``REIT'') is an entity that 
otherwise would be taxed as a U.S. corporation but elects to be 
taxed under a special REIT tax regime. To qualify as a REIT, an 
entity must meet a number of requirements. At least 90 percent 
of REIT income (other than net capital gain) must be 
distributed annually;\848\ the REIT must derive most of its 
income from passive, generally real estate-related, 
investments; and REIT assets must be primarily real estate-
related. In addition, a REIT must have transferable interests 
and at least 100 shareholders, and no more than 50 percent of 
the REIT interests may be owned by five or fewer individual 
shareholders (as determined using specified attribution rules). 
Other requirements also apply.\849\
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    \848\ Even if a REIT meets the 90-percent income distribution 
requirement for REIT qualification, more stringent distribution 
requirements must be met in order to avoid an excise tax under section 
4981.
    \849\ Secs. 856 and 857.
---------------------------------------------------------------------------
    If an electing entity meets the requirements for REIT 
status, the portion of its income that is distributed to its 
shareholders as a dividend or qualifying liquidating 
distribution each year is deductible by the REIT (whereas a 
regular subchapter C corporation cannot deduct such 
distributions).\850\ As a result, the distributed income of the 
REIT is not taxed at the entity level; instead, it is taxed 
only at the investor level. Although a REIT is not required to 
distribute more than the 90 percent of its income described 
above to retain REIT status, it is taxed at ordinary corporate 
rates on amounts not distributed or treated as 
distributed.\851\
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    \850\ Liquidating distributions are covered to the extent of 
earnings and profits, and are defined to include redemptions of stock 
that are treated by shareholders as a sale of stock under section 302. 
Secs. 857(b)(2)(B), 561, and 562(b).
    \851\ An additional four-percent excise tax is imposed to the 
extent a REIT does not distribute at least 85 percent of REIT ordinary 
income and 95 percent of REIT capital gain net income within a calendar 
year period. In addition, to the extent a REIT distributes less than 
100 percent of its ordinary income and capital gain net income in a 
year, the difference between the amount actually distributed and 100 
percent is added to the distribution otherwise required in a subsequent 
year to avoid the excise tax. Sec. 4981.
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    A REIT may designate a capital gain distribution to its 
shareholders, who treat the designated amount as long-term 
capital gain when distributed. A REIT also may retain net 
capital gain and pay corporate income tax on the amount 
retained, while the shareholders include the undistributed 
capital gain in income, obtain a credit for the corporate tax 
paid, and step up the basis of their REIT stock for the amount 
included in income.\852\ In this manner, capital gain also is 
taxed only once, whether or not distributed, rather than at 
both the entity and investor levels.
---------------------------------------------------------------------------
    \852\ Sec. 857(b)(3).
---------------------------------------------------------------------------

Income tests

    A REIT is restricted to earning certain types of generally 
passive income. Among other requirements, at least 75 percent 
of the gross income of a REIT in each taxable year must consist 
of real estate-related income. Such income includes: rents from 
real property; gain from the sale or other disposition of real 
property (including interests in real property) that is not 
stock in trade of the taxpayer, inventory, or other property 
held by the taxpayer primarily for sale to customers in the 
ordinary course of its trade or business; interest on mortgages 
secured by real property or interests in real property; and 
certain income from foreclosure property (the ``75-percent 
income test'').\853\ Qualifying rents from real property 
include rents from interests in real property and charges for 
services customarily furnished or rendered in connection with 
the rental of real property,\854\ but do not include 
impermissible tenant service income.\855\ Impermissible tenant 
service income includes amounts for services furnished by the 
REIT to tenants or for managing or operating the property, 
other than amounts attributable to services that are provided 
by an independent contractor or taxable REIT subsidiary, or 
services that certain tax exempt organizations could perform 
under the section 512(b)(3) rental exception from unrelated 
business taxable income.\856\ Qualifying rents from real 
property include rent attributable to personal property which 
is leased under, or in connection with, a lease of real 
property, but only if the rent attributable to such personal 
property for the taxable year does not exceed 15 percent of the 
total rent for the taxable year attributable to both the real 
and personal property leased under, or in connection with, the 
lease.\857\
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    \853\ Secs. 856(c)(3) and 1221(a)(1). Income from sales that are 
not prohibited transactions solely by virtue of section 857(b)(6) also 
is qualified REIT income.
    \854\ Sec. 856(d)(1)(A) and (B).
    \855\ Sec. 856(d)(2)(C).
    \856\ Sec. 856(d)(7)(A) and (C). If impermissible tenant service 
income with respect to any real or personal property is more than one 
percent of all amounts received or accrued during the taxable year 
directly or indirectly with respect to such property, then the 
impermissible tenant service income with respect to such property 
includes all such amounts. Sec. 856(d)(7)(B). The amount treated as 
received for any service (or management or operation) shall not be less 
than 150 percent of the direct cost of the trust in furnishing or 
rendering the service (or providing the management or operation). Sec. 
856(d)(7)(D). For purposes of the 75-percent and 95-percent income 
tests, impermissible tenant service income is included in gross income 
of the REIT. Sec. 856(d)(7)(E).
    \857\ Sec. 856(d)(1)(C).
---------------------------------------------------------------------------
    In addition, rents received from any entity in which the 
REIT owns more than 10 percent of the vote or value generally 
are not qualifying income.\858\ However, there is an exception 
for certain rents received from taxable REIT subsidiaries 
(described further below), in which a REIT may own more than 10 
percent of the vote or value.
---------------------------------------------------------------------------
    \858\ Sec. 856(d)(2)(B).
---------------------------------------------------------------------------
    In addition, 95 percent of the gross income of a REIT for 
each taxable year must be from the 75-percent income sources 
and a second permitted category of other, generally passive 
sources such as dividends and interest (the ``95-percent income 
test'').\859\
---------------------------------------------------------------------------
    \859\ Sec. 856(c)(2).
---------------------------------------------------------------------------
    A REIT must be a U.S. domestic entity, but it is permitted 
to hold foreign real estate or other foreign assets, provided 
the 75-percent and 95-percent income tests and the other 
requirements for REIT qualification are met.\860\
---------------------------------------------------------------------------
    \860\ See Rev. Rul. 74-191, 1974-1 C.B. 170.
---------------------------------------------------------------------------

Asset tests

    At least 75 percent of the value of a REIT's assets must be 
real estate assets, cash and cash items (including 
receivables), and Government securities \861\ (the ``75-percent 
asset test'').\862\ Real estate assets are real property 
(including interests in real property and interests in 
mortgages on real property) and shares (or transferable 
certificates of beneficial interest) in other REITs.\863\ No 
more than 25 percent of a REIT's assets may be securities other 
than such real estate assets.\864\
---------------------------------------------------------------------------
    \861\ Government securities are defined for this purpose under 
section 856(c)(5)(F), by reference to the Investment Company Act of 
1940. The term includes securities issued or guaranteed by the United 
States or persons controlled or supervised by and acting as an 
instrumentality thereof, but does not include securities issued or 
guaranteed by a foreign, state, or local government entity or 
instrumentality.
    \862\ Sec. 856(c)(4)(A).
    \863\ Temporary investments in certain stock or debt instruments 
also can qualify if they are temporary investments of new capital, but 
only for the one-year period beginning on the date the REIT receives 
such capital. Sec. 856(c)(5)(B).
    \864\ Sec. 856(c)(4)(B)(i).
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    Except with respect to securities of a taxable REIT 
subsidiary, not more than five percent of the value of a REIT's 
assets may be securities of any one issuer, and the REIT may 
not possess securities representing more than 10 percent of the 
outstanding value or voting power of any one issuer.\865\ In 
addition, not more than 25 percent of the value of a REIT's 
assets may be securities of one or more taxable REIT 
subsidiaries.\866\
---------------------------------------------------------------------------
    \865\ Sec. 856(c)(4)(B)(iii).
    \866\ Sec. 856(c)(4)(B)(ii).
---------------------------------------------------------------------------
    The asset tests must be met as of the close of each quarter 
of a REIT's taxable year. However, a REIT that has met the 
asset tests as of the close of any quarter does not lose its 
REIT status solely because of a discrepancy during a subsequent 
quarter between the value of the REIT's investments and such 
requirements, unless such discrepancy exists immediately after 
the acquisition of any security or other property and is wholly 
or partly the result of such acquisition.\867\
---------------------------------------------------------------------------
    \867\ Sec. 856(c)(4). In the case of such an acquisition, the REIT 
also has a grace period of 30 days after the close of the quarter to 
eliminate the discrepancy.
---------------------------------------------------------------------------

Taxable REIT subsidiaries

    A REIT generally cannot own more than 10 percent of the 
vote or value of a single entity. However, there is an 
exception for ownership of a taxable REIT subsidiary (``TRS'') 
that is taxed as a corporation, provided that securities of one 
or more TRSs do not represent more than 25 percent of the value 
of REIT assets.
    A TRS generally can engage in any kind of business activity 
except that it is not permitted directly or indirectly to 
operate either a lodging facility or a health care facility, or 
to provide to any other person (under a franchise, license, or 
otherwise) rights to any brand name under which any lodging 
facility or health care facility is operated.\868\
---------------------------------------------------------------------------
    \868\ The latter restriction does not apply to rights provided to 
an independent contractor to operate or manage a lodging or health care 
facility if such rights are held by the corporation as a franchisee, 
licensee, or in similar capacity and such lodging facility or health 
care facility is either owned by such corporation or is leased by such 
corporation from the REIT. Sec. 856(l)(3).
---------------------------------------------------------------------------
    However, a TRS may rent a lodging facility or health care 
facility from its parent REIT and is permitted to hire an 
independent contractor \869\ to operate such facility. Rent 
paid to the parent REIT by the TRS with respect to hotel, 
motel, or other transient lodging facility operated by an 
independent contractor is qualified rent for purposes of the 
REIT's 75-percent and 95-percent income tests.\870\ This 
lodging facility rental rule is an exception to the general 
rule that rent paid to a REIT by any corporation (including a 
TRS) in which the REIT owns 10 percent or more of the vote or 
value is not qualified rental income for purposes of the 75-
percent or 95-percent REIT income tests.\871\ There is also an 
exception to the general rule in the case of a TRS that rents 
space in a building owned by its parent REIT if at least 90 
percent of the space in the building is rented to unrelated 
parties and the rent paid by the TRS to the REIT is comparable 
to the rent paid by the unrelated parties.\872\
---------------------------------------------------------------------------
    \869\ An independent contractor will not fail to be treated as such 
for this purpose because the TRS bears the expenses of operation of the 
facility under the contract, or because the TRS receives the revenues 
from the operation of the facility, net of expenses for such operation 
and fees payable to the operator pursuant to the contract, or both. 
Sec. 856(d)(9)(B).
    \870\ Sec. 856(d)(8)(B).
    \871\ Sec. 856(d)(2)(B).
    \872\ Sec. 856(d)(8)(A).
---------------------------------------------------------------------------
    REITs are subject to a tax equal to 100 percent of 
redetermined rents, redetermined deductions, and excess 
interest. These are defined generally as the amounts of 
specified REIT transactions with a TRS of the REIT, to the 
extent such amounts differ from an arm's length amount.\873\
---------------------------------------------------------------------------
    \873\ Sec. 857(b)(7).
---------------------------------------------------------------------------

Prohibited transactions tax

    REITs are subject to a prohibited transaction tax (``PTT'') 
of 100 percent of the net income derived from prohibited 
transactions. For this purpose, a prohibited transaction is a 
sale or other disposition of property by the REIT that is 
``stock in trade of a taxpayer or other property which would 
properly be included in the inventory of the taxpayer if on 
hand at the close of the taxable year, or property held for 
sale to customers by the taxpayer in the ordinary course of his 
trade or business'' \874\ and is not foreclosure property. The 
PTT for a REIT does not apply to a sale if the REIT satisfies 
certain safe harbor requirements in section 857(b)(6)(C) or 
(D), including an asset holding period of at least two 
years.\875\ If the conditions are met, a REIT may either (1) 
make no more than seven sales within a taxable year (other than 
sales of foreclosure property or involuntary conversions under 
section 1033), or (2) sell either no more than 10 percent of 
the aggregate bases, or no more than 10 percent of the 
aggregate fair market value, of all its assets as of the 
beginning of the taxable year (computed without regard to sales 
of foreclosure property or involuntary conversions under 
section 1033), without being subject to the PTT tax.\876\
---------------------------------------------------------------------------
    \874\ This definition is the same as the definition of certain 
property the sale or other disposition of which would produce ordinary 
income rather than capital gain under section 1221(a)(1).
    \875\ Additional requirements for the safe harbor limit the amount 
of expenditures the REIT can make during the two-year period prior to 
the sale that are includible in the adjusted basis of the property, 
require marketing to be done by an independent contractor, and forbid a 
sales price that is based on the income or profits of any person.
    \876\ Sec. 857(b)(6).
---------------------------------------------------------------------------

REIT shareholder tax treatment

    Although a REIT typically does not pay corporate level tax 
due to the deductible distribution of its income, and thus is 
sometimes compared to a partnership or S corporation, REIT 
equity holders are not treated as being engaged in the 
underlying activities of the REIT as are partners or S 
corporation shareholders, and the activities at the REIT level 
that characterize its income do not generally flow through to 
equity owners to characterize the tax treatment of REIT 
distributions to them. A distribution to REIT shareholders out 
of REIT earnings and profits is generally treated as an 
ordinary income REIT dividend and is treated as ordinary income 
taxed at the shareholder's normal rates on such income.\877\ 
However, a REIT is permitted to designate a ``capital gain 
dividend'' to the extent a distribution is made out of its net 
capital gain.\878\ Such a dividend is treated as long-term 
capital gain to the shareholders.\879\
---------------------------------------------------------------------------
    \877\ Because a REIT dividend is generally paid out of income that 
was not taxed to the distributing entity, the dividend is not eligible 
for the dividends received deductions to a corporate shareholder. Sec. 
243(d)(3). A REIT dividend is not eligible for the 20 percent qualified 
dividend rate to an individual shareholder, except to the extent such 
dividend is attributable to REIT income from nondeductible C 
corporation dividends, or to certain income of the REIT that was 
subject to corporate level tax. Sec. 857(c).
    \878\ Sec. 857(b)(3)(C). 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 taxable year. Sec. 1222.
    \879\ A REIT may also retain its net capital gain without 
distribution, while designating a capital gain dividend for inclusion 
in shareholder income. In this case, the REIT pays corporate-level tax 
on the capital gain, but the shareholder includes the undistributed 
capital gain in income, receives a credit for the corporate level tax 
paid, and steps up the basis of the REIT stock for the amount included 
in income, with the result that the net tax paid is the shareholder-
level capital gain tax. Sec. 857(b)(3)(D).
---------------------------------------------------------------------------
    REIT shareholders are not taxed on REIT income unless the 
income is distributed to them (except in the case of REIT net 
capital gain retained by the REIT and designated for inclusion 
in the shareholder's income as explained in the preceding 
footnote). However, since a REIT must distribute 90 percent of 
its ordinary income annually, and typically will distribute or 
designate its income as capital gain dividends to avoid a tax 
at the REIT level, REIT income generally is taxed in full at 
the shareholder level annually.
    REIT shareholders are not entitled to any share of REIT 
losses to offset against other shareholder income. However, if 
the REIT itself has income, its losses offset its income in 
determining how much it is required to distribute to meet the 
distribution requirements. Also, REIT losses that reduce 
earnings and profits can cause a distribution that exceeds the 
REIT's earnings and profits to be treated as a nontaxable 
return of capital to its shareholders.
            Tax exempt shareholders
    A tax exempt shareholder is exempt from tax on REIT 
dividends, and is not treated as engaging in any of the 
activities of the REIT. As one example, if the REIT borrowed 
money and its income at the REIT level were debt-financed, a 
tax exempt shareholder would not have debt-financed unrelated 
business income from the REIT dividend.
            Foreign shareholders
    Except as provided by the Foreign Investment in Real 
Property Tax Act of 1980 (``FIRPTA''),\880\ a REIT shareholder 
that is a foreign corporation or a nonresident alien individual 
normally treats its dividends as fixed and determinable annual 
and periodic income that is subject to withholding under 
section 1441 but not treated as active business income that is 
effectively connected with the conduct of a U.S. trade or 
business, regardless of the level of real estate activity of 
the REIT in the United States.\881\ A number of treaties permit 
a lower rate of withholding on REIT dividends than the Code 
would otherwise require.
---------------------------------------------------------------------------
    \880\ Pub. L. No. 96-499. FIRPTA treats income of a foreign 
investor from the sale or disposition of U.S. real property interests 
as effectively connected with the operation of a trade or business in 
the United States. Such income is taxed at regular U.S. rates and 
withholding obligations are imposed on payors of the income. Secs. 897 
and 1445.
    \881\ As noted above, REITs are not permitted to receive income 
from property that is inventory or that is held for sale to customers 
in the ordinary course of the REIT's business. However, REITs may 
engage in certain activities, including acquisition, development, 
lease, and sale of real property, and may provide ``customary 
services'' to tenants.
---------------------------------------------------------------------------
    Although FIRPTA applies in many cases to foreign investment 
in U.S. real property through a REIT, REITs offer foreign 
investors some ability to invest in U.S real property interests 
without subjecting gain on the sale of REIT stock to FIRPTA 
(for example, if the REIT is domestically controlled).\882\ In 
general, if any class of stock of a corporation is regularly 
traded on an established securities market, stock of such class 
is subject to FIRPTA only in the case of a person who, at some 
time during the testing period, held more than 5 percent of 
such class of stock.\883\ Also, if the REIT stock is publicly 
traded and the foreign investor does not own more than five 
percent of such stock, the investor can receive distributions 
from the sale by the REIT of U.S. real property interests 
without such distributions being subject to FIRPTA.\884\
---------------------------------------------------------------------------
    \882\ Sec. 897(h)(2).
    \883\ Sec. 897(c)(3).
    \884\ Sec. 897(h)(1).
---------------------------------------------------------------------------

1. Restriction on tax-free spinoffs involving REITs (sec. 311 of the 
        Act and secs. 355 and 856 of the Code)

                              Present Law

    A corporation generally is required to recognize gain on 
the distribution of property (including stock of a subsidiary) 
to its shareholders as if the corporation had sold such 
property for its fair market value.\885\ In addition, the 
shareholders receiving the distributed property are ordinarily 
treated as receiving a dividend equal to the value of the 
distribution (to the extent of the distributing corporation's 
earnings and profits),\886\ or capital gain in the case of an 
acquisition of its stock that significantly reduces the 
shareholder's interest in the parent corporation.\887\
---------------------------------------------------------------------------
    \885\ Sec. 311(b).
    \886\ Sec. 301(b)(1) and (c)(1).
    \887\ Sec. 302(a) and (b)(2).
---------------------------------------------------------------------------
    An exception to these rules applies if the distribution of 
the stock of a controlled corporation satisfies the 
requirements of section 355. If all the requirements are 
satisfied, there is no tax to the distributing corporation or 
to the shareholders on the distribution.
    One requirement to qualify for tax-free treatment under 
section 355 is that both the distributing corporation and the 
controlled corporation must be engaged immediately after the 
distribution in the active conduct of a trade or business that 
has been conducted for at least five years and was not acquired 
in a taxable transaction during that period (the ``active 
business test'').\888\
---------------------------------------------------------------------------
    \888\ Sec. 355(b).
---------------------------------------------------------------------------
    For this purpose, the active business test is satisfied 
only if (1) immediately after the distribution, the corporation 
is engaged in the active conduct of a trade or business, or (2) 
immediately before the distribution, the corporation had no 
assets other than stock or securities in the controlled 
corporations and each of the controlled corporations is engaged 
immediately after the distribution in the active conduct of a 
trade or business.\889\ For this purpose, the active business 
test is applied by reference to the relevant affiliated group 
rather than on a single corporation basis. For the parent 
distributing corporation, the relevant affiliated group 
consists of the distributing corporation as the common parent 
and all corporations affiliated with the distributing 
corporation through stock ownership described in section 
1504(a)(1) (regardless of whether the corporations are 
otherwise includible corporations under section 1504(b)),\890\ 
immediately after the distribution. The relevant affiliated 
group for a controlled distributed subsidiary corporation is 
determined in a similar manner (with the controlled corporation 
as the common parent).
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    \889\ Sec. 355(b)(1).
    \890\ Sec. 355(b)(3).
---------------------------------------------------------------------------
    In determining whether a corporation is directly engaged in 
an active trade or business that satisfies the requirement, IRS 
ruling practice formerly required that the value of the gross 
assets of the trade or business being relied on must ordinarily 
constitute at least five percent of the total fair market value 
of the gross assets of the corporation directly conducting the 
trade or business.\891\ The IRS suspended this specific rule in 
connection with its general administrative practice of moving 
IRS resources away from advance rulings on factual aspects of 
section 355 transactions in general.\892\
---------------------------------------------------------------------------
    \891\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
    \892\ Rev. Proc. 2003-48, 2003-29 I.R.B. 86. Since then, the IRS 
discontinued private rulings on whether a transaction generally 
qualifies for nonrecognition treatment under section 355. Nonetheless, 
the IRS may still rule on certain significant issues. See Rev. Proc. 
2016-1, 2016-1 I.R.B. 1; Rev. Proc. 2016-3, 2016-1 I.R.B. 126. 
Recently, the IRS announced that it will not rule in certain situations 
in which property owned by any distributing or controlled corporation 
becomes the property of a RIC or a REIT; however, the IRS stated that 
the policy did not extend to situations in which, immediately after the 
date of the distribution, both the distributing and controlled 
corporation will be RICs, or both of such corporations will be REITs, 
and there is no plan or intention on the date of the distribution for 
either the distributing or the controlled corporation to cease to be a 
RIC or a REIT. See Rev. Proc. 2015-43, 2015-40 I.R.B. 467.
---------------------------------------------------------------------------
    Section 355 does not apply to an otherwise qualifying 
distribution if, immediately after the distribution, either the 
distributing or the controlled corporation is a disqualified 
investment corporation and any person owns a 50 percent 
interest in such corporation and did not own such an interest 
before the distribution. A disqualified investment corporation 
is a corporation of which two-thirds or more of its asset value 
is comprised of certain passive investment assets. Real estate 
is not included as such an asset.\893\
---------------------------------------------------------------------------
    \893\ Sec. 355(g).
---------------------------------------------------------------------------
    The IRS has ruled that a REIT may satisfy the active 
business requirement through its rental activities.\894\ More 
recently, the IRS has issued a private ruling indicating that a 
REIT that has a TRS can satisfy the active business requirement 
by virtue of the active business of its TRS.\895\ Thus, a C 
corporation that owns REIT-qualified assets may create a REIT 
to hold such assets and spin off that REIT without tax 
consequences to it or its shareholders (if the newly-formed 
REIT satisfies the active business requirement through its 
rental activities or the activities of a TRS). Following the 
spin-off, income from the assets held in the REIT is no longer 
subject to corporate level tax (unless there is a disposition 
of such assets that incurs tax under the built in gain rules).
---------------------------------------------------------------------------
    \894\ Rev. Rul. 2001-29, 2001-1 C.B. 1348.
    \895\ Priv. Ltr. Rul. 201337007. A private ruling may be relied 
upon only by the taxpayer to which it is issued. However, private 
rulings provide some indication of administrative practice.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision makes a REIT generally ineligible to 
participate in a tax-free spin-off as either a distributing or 
controlled corporation under section 355. There are two 
exceptions, however. First, the general rule does not apply if, 
immediately after the distribution, both the distributing and 
the controlled corporations are REITs.\896\ Second, a REIT may 
spin off a TRS if (1) the distributing corporation has been a 
REIT at all times during the 3-year period ending on the date 
of the distribution, (2) the controlled corporation has been a 
TRS of the REIT at all times during such period, and (3) the 
REIT has had control (as defined in section 368(c) \897\ 
applied by taking into account stock owned directly or 
indirectly, including through one or more partnerships, by the 
REIT) of the TRS at all times during such period. For this 
purpose, control of a partnership means ownership of at least 
80 percent of the profits interest and at least 80 percent of 
the capital interests.
---------------------------------------------------------------------------
    \896\ As long as a REIT election for each corporation is effective 
immediately after the distribution, the elections may be made after 
that time.
    \897\ Under section 368(c), the term ``control'' means the 
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.
---------------------------------------------------------------------------
    A controlled corporation will be treated as meeting the 
control requirements if the stock of such corporation was 
distributed by a TRS in a transaction to which section 355 (or 
so much of section 356 as relates to section 355) applies and 
the assets of such corporation consist solely of the stock or 
assets held by one or more TRSs of the distributing corporation 
meeting the control requirements noted above.
    If a corporation that is not a REIT was a distributing or 
controlled corporation with respect to any distribution to 
which section 355 applied, such corporation (and any successor 
corporation) shall not be eligible to make a REIT election for 
any taxable year beginning before the end of the 10-year period 
beginning on the date of such distribution.

                             Effective Date

    The provision generally applies to distributions on or 
after December 7, 2015,\898\ but does not apply to any 
distribution pursuant to a transaction described in a ruling 
request initially submitted to the Internal Revenue Service on 
or before such date, which request has not been withdrawn and 
with respect to which a ruling has not been issued or denied in 
its entirety as of such date.
---------------------------------------------------------------------------
    \898\ The provision does not apply to distributions by a 
corporation pursuant to a plan under which stock constituting control 
(within the meaning of section 368(c)) of the controlled corporation 
was distributed before December 7, 2015.
---------------------------------------------------------------------------

2. Reduction in percentage limitation on assets of REIT which may be 
        taxable REIT subsidiaries (sec. 312 of the Act and sec. 856 of 
        the Code)

                              Present Law

    A REIT generally is not permitted to own securities 
representing more than 10 percent of the vote or value of any 
entity, nor is it permitted to own securities of a single 
issuer comprising more than 5 percent of REIT value.\899\ In 
addition, rents received by a REIT from a corporation of which 
the REIT directly or indirectly owns more than 10 percent of 
the vote or value generally are not qualified rents for 
purposes of the 75-percent and 95-percent income tests.\900\
---------------------------------------------------------------------------
    \899\ Sec. 856(c)(4)(B)(iii).
    \900\ Sec. 856(d)(2)(B).
---------------------------------------------------------------------------
    There is an exception from these rules in the case of a 
TRS.\901\ No more than 25 percent of the value of total REIT 
assets may consist of securities of one or more TRSs.\902\
---------------------------------------------------------------------------
    \901\ Sec. 856(d)(8).
    \902\ Sec. 856(c)(4)(B)(ii).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision reduces to 20 percent the permitted 
percentage of total REIT assets that may be securities of one 
or more TRSs.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2017.

3. Prohibited transaction safe harbors (sec. 313 of the Act and sec. 
        857 of the Code)

                              Present Law

    REITs are subject to a prohibited transaction tax (``PTT'') 
of 100 percent of the net income derived from prohibited 
transactions. For this purpose, a prohibited transaction is a 
sale or other disposition of property by the REIT that is 
``stock in trade of a taxpayer or other property which would 
properly be included in the inventory of the taxpayer if on 
hand at the close of the taxable year, or property held for 
sale to customers by the taxpayer in the ordinary course of his 
trade or business'' \903\ and is not foreclosure property. The 
PTT for a REIT does not apply to a sale if the REIT satisfies 
certain safe harbor requirements in section 857(b)(6)(C) or 
(D), including an asset holding period of at least two 
years.\904\ If the conditions are met, a REIT may either (1) 
make no more than seven sales within a taxable year (other than 
sales of foreclosure property or involuntary conversions under 
section 1033), or (2) sell either no more than 10 percent of 
the aggregate bases, or no more than 10 percent of the 
aggregate fair market value, of all its assets as of the 
beginning of the taxable year (computed without regard to sales 
of foreclosure property or involuntary conversions under 
section 1033), without being subject to the PTT tax.\905\
---------------------------------------------------------------------------
    \903\ This definition is the same as the definition of certain 
property the sale or other disposition of which would produce ordinary 
income rather than capital gain under section 1221(a)(1).
    \904\ Additional requirements for the safe harbor limit the amount 
of expenditures the REIT can make during the two-year period prior to 
the sale that are includible in the adjusted basis of the property, 
require marketing to be done by an independent contractor, and forbid a 
sales price that is based on the income or profits of any person.
    \905\ Sec. 857(b)(6).
---------------------------------------------------------------------------
    The additional requirements for the safe harbor limit the 
amount of expenditures the REIT or a partner of the REIT can 
make during the two-year period prior to the sale that are 
includible in the adjusted basis of the property. Also, if more 
than seven sales are made during the taxable year, 
substantially all marketing and development expenditures with 
respect to the property must have been made through an 
independent contractor from whom the REIT itself does not 
derive or receive any income.

                        Explanation of Provision

    The provision expands the amount of property that a REIT 
may sell in a taxable year within the safe harbor provisions, 
from 10 percent of the aggregate basis or fair market value, to 
20 percent of the aggregate basis or fair market value. 
However, in any taxable year, the aggregate adjusted bases and 
the fair market value of property (other than sales of 
foreclosure property or sales to which section 1033 applies) 
sold during the three taxable year period ending with such 
taxable year may not exceed 10 percent of the sum of the 
aggregate adjusted bases or the sum of the fair market value of 
all of the assets of the REIT as of the beginning of each of 
the 3 taxable years that are part of the period.
    The provision clarifies that the determination of whether 
property is described in section 1221(a)(1) is made without 
regard to whether or not such property qualifies for the safe 
harbor from the prohibited transactions rules.

                             Effective Date

    The provision generally applies to taxable years beginning 
after the date of enactment (December 18, 2015). However, the 
provision clarifying the determination of whether property is 
described in section 1221(a)(1) has retroactive effect, but 
does not apply to any sale of property to which section 
857(b)(6)(G) applies.

4. Repeal of preferential dividend rule for publicly offered REITs; 
        authority for alternative remedies to address certain REIT 
        distribution failures (secs. 314 and 315 of the Act and sec. 
        562 of the Code)

                              Present Law

    A REIT is allowed a deduction for dividends paid to its 
shareholders.\906\ In order to qualify for the deduction, a 
dividend must not be a ``preferential dividend.'' \907\ For 
this purpose, a dividend is preferential unless it is 
distributed pro rata to shareholders, with no preference to any 
share of stock compared with other shares of the same class, 
and with no preference to one class as compared with another 
except to the extent the class is entitled to a preference.
---------------------------------------------------------------------------
    \906\ Sec. 857(b)(2)(B).
    \907\ Sec. 562(c).
---------------------------------------------------------------------------
    Similar rules apply to regulated investment companies 
(``RICs'').\908\ However, the preferential dividend rule does 
not apply to a publicly offered RIC (as defined in section 
67(c)(2)(B)).\909\
---------------------------------------------------------------------------
    \908\ Sec. 852(b)(2)(D).
    \909\ Sec. 562(c).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision repeals the preferential dividend rule for 
publicly offered REITs. For this purpose, a REIT is publicly 
offered if it is required to file annual and periodic reports 
with the Securities and Exchange Commission under the 
Securities Exchange Act of 1934.
    For other REITs, the provision provides the Secretary of 
the Treasury with authority to provide an appropriate remedy to 
cure the failure of the REIT to comply with the preferential 
dividend requirements in lieu of not considering the 
distribution to be a dividend for purposes of computing the 
dividends-paid deduction where the Secretary determines the 
failure to comply is inadvertent or is due to reasonable cause 
and not due to willful neglect, or the failure is a type of 
failure identified by the Secretary as being so described.

                             Effective Date

    The provision to repeal the preferential dividend rule for 
publicly offered REITs applies to distributions in taxable 
years beginning after December 31, 2014.
    The provision granting authority to the Secretary of the 
Treasury to provide alternative remedies addressing certain 
REIT distribution failures applies to distributions in taxable 
years beginning after December 31, 2015.

5. Limitations on designation of dividends by REITs (sec. 316 of the 
        Act and sec. 857 of the Code)

                              Present Law

    A REIT that has a net capital gain for a taxable year may 
designate dividends that it pays or is treated as paying during 
the year as capital gain dividends.\910\ A capital gain 
dividend is treated by the shareholder as gain from the sale or 
exchange of a capital asset held more than one year.\911\ The 
amount that may be designated as capital gain dividends for any 
taxable year may not exceed the REIT's net capital gain for the 
year.
---------------------------------------------------------------------------
    \910\ Sec. 857(b)(3)(C).
    \911\ Sec. 857(b)(3)(B).
---------------------------------------------------------------------------
    A REIT may designate dividends that it pays or is treated 
as paying during the year as qualified dividend income.\912\ 
Qualified dividend income is taxed to individuals at the same 
tax rate as net capital gain, under rules enacted by the 
Taxpayer Relief Act of 1997.\913\ The amount that may be 
designated as qualified dividend income for any taxable year is 
limited to qualified dividend income received by the REIT plus 
some amounts subject to corporate taxation at the REIT level.
---------------------------------------------------------------------------
    \912\ Sec. 857(c)(2).
    \913\ Sec. 1(h)(11) enacted in Pub. L. No. 105-34.
---------------------------------------------------------------------------
    The IRS has ruled that a RIC may designate the maximum 
amount permitted under each of the provisions allowing a RIC to 
designate dividends even if the aggregate of all the designated 
amounts exceeds the total amount of the RIC's dividends 
distributions.\914\
---------------------------------------------------------------------------
    \914\ Rev. Rul. 2005-31, 2005-1 C.B.1084.
---------------------------------------------------------------------------
    The IRS also has ruled that if a RIC has two or more 
classes of stock and it designates the dividends that it pays 
on one class as consisting of more than that class's 
proportionate share of a particular type of income, the 
designations are not effective for federal tax purposes to the 
extent that they exceed the class's proportionate share of that 
type of income.\915\ The Internal Revenue Service announced 
that it would provide guidance that RICs and REITs must use in 
applying the capital gain provision enacted by the Taxpayer 
Relief Act of 1997.\916\ The announcement referred to the 
designation limitations of Revenue Ruling 89-91.
---------------------------------------------------------------------------
    \915\ Rev. Rul. 89-81, 1989-1 C.B. 226.
    \916\ Notice 97-64, 1997-2 C.B. 323. Recently, the IRS modified 
Notice 97-64 and provided certain new rules for RICs; the designation 
limitations in Revenue Ruling 89-81, however, continue to apply. Notice 
2015-41, 2015-24 I.R.B. 1058.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision limits the aggregate amount of dividends 
designated by a REIT for a taxable year under all of the 
designation provisions to the amount of dividends paid with 
respect to the taxable year (including dividends described in 
section 858 that are paid after the end of the REIT taxable 
year but treated as paid by the REIT with respect to the 
taxable year).
    The provision provides the Secretary of the Treasury 
authority to prescribe regulations or other guidance requiring 
the proportionality of the designation for particular types of 
dividends (for example, capital gain dividends) among shares or 
beneficial interests in a REIT.

                             Effective Date

    The provision applies to distributions in taxable years 
beginning after December 31, 2015.

6. Debt instruments of publicly offered REITs and mortgages treated as 
        real estate assets (sec. 317 of the Act and sec. 856 of the 
        Code)

                              Present Law

    At least 75 percent of the value of a REIT's assets must be 
real estate assets, cash and cash items (including 
receivables), and Government securities (the ``75-percent asset 
test'').\917\ Real estate assets are real property (including 
interests in real property and mortgages on real property) and 
shares (or transferable certificates of beneficial interest) in 
other REITs.\918\ No more than 25 percent of a REIT's assets 
may be securities other than such real estate assets.\919\
---------------------------------------------------------------------------
    \917\ Sec. 856(c)(4)(A).
    \918\ Such term also includes any property (not otherwise a real 
estate asset) attributable to the temporary investment of new capital, 
but only if such property is stock or a debt instrument, and only for 
the one-year period beginning on the date the REIT receives such 
capital. Sec. 856(c)(5)(B).
    \919\ Sec. 856(c)(4)(B)(i).
---------------------------------------------------------------------------
    Except with respect to a TRS, not more than five percent of 
the value of a REIT's assets may be securities of any one 
issuer, and the REIT may not possess securities representing 
more than 10 percent of the outstanding value or voting power 
of any one issuer.\920\ No more than 25 percent of the value of 
a REIT's assets may be securities of one or more TRSs.\921\
---------------------------------------------------------------------------
    \920\ Sec. 856(c)(4)(B)(iii).
    \921\ Sec. 856(c)(4)(B)(ii).
---------------------------------------------------------------------------
    The asset tests must be met as of the close of each quarter 
of a REIT's taxable year.\922\
---------------------------------------------------------------------------
    \922\ Sec. 856(c)(4). However, a REIT that has met the asset tests 
as of the close of any quarter does not lose its REIT status solely 
because of a discrepancy during a subsequent quarter between the value 
of the REIT's investments and such requirements, unless such 
discrepancy exists immediately after the acquisition of any security or 
other property and is wholly or partly the result of such acquisition. 
Sec. 856(c)(4).
---------------------------------------------------------------------------
    At least 75 percent of a REIT's gross income must be from 
certain real estate related and other items. In addition, at 
least 95 percent of a REIT's gross income must be from 
specified sources that include the 75 percent items and also 
include interest, dividends, and gain from the sale or other 
disposition of securities (whether or not real estate-related).

                        Explanation of Provision

    Under the provision, debt instruments issued by publicly 
offered REITs are treated as real estate assets, as are 
interests in mortgages on interests in real property (for 
example, an interest in a mortgage on a leasehold interest in 
real property). Such assets therefore are qualified assets for 
purposes of meeting the 75-percent asset test, but are subject 
to special limitations described below.
    As under present law, income from debt instruments issued 
by publicly offered REITs that is interest income or gain from 
the sale or other disposition of a security is treated as 
qualified income for purposes of the 95-percent gross income 
test. Income from debt instruments issued by publicly offered 
REITs that would not have been treated as real estate assets 
but for the new provision, however, is not qualified income for 
purposes of the 75-percent income test, and not more than 25 
percent of the value of a REIT's total assets is permitted to 
be represented by such debt instruments.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

7. Asset and income test clarification regarding ancillary personal 
        property (sec. 318 of the Act and sec. 856 of the Code)

                              Present Law


75-percent income test

    Among other requirements, at least 75 percent of the gross 
income of a REIT in each taxable year must consist of real 
estate-related income. Such income includes: rents from real 
property; income from the sale or exchange of real property 
(including interests in real property) that is not stock in 
trade, inventory, or held by the taxpayer primarily for sale to 
customers in the ordinary course of its trade or business; 
interest on mortgages secured by real property or interests in 
real property; and certain income from foreclosure property 
(the ``75-percent income test''). Amounts attributable to most 
types of services provided to tenants (other than certain 
``customary services''), or to more than specified amounts of 
personal property, are not qualifying rents.
    The Code definition of rents from real property includes 
rent attributable to personal property which is leased under, 
or in connection with, a lease of real property, but only if 
the rent attributable to such property for the taxable year 
does not exceed 15 percent of the total rent for the taxable 
year attributable to both the real and personal property leased 
under, or in connection with, such lease.\923\
---------------------------------------------------------------------------
    \923\ Sec. 856(d)(1)(C).
---------------------------------------------------------------------------
    For purposes of determining whether interest income is from 
a mortgage secured by real property, Treasury regulations 
provide that where a mortgage covers both real property and 
other property, an apportionment of the interest must be made. 
If the loan value of the real property is equal to or exceeds 
the amount of the loan, then the entire interest income is 
apportioned to the real property. However, if the amount of the 
loan exceeds the loan value of the real property, then the 
interest income apportioned to the real property is an amount 
equal to the interest income multiplied by a fraction, the 
numerator of which is the loan value of the real property and 
the denominator of which is the amount of the loan.\924\ The 
remainder of the interest income is apportioned to the other 
property.
---------------------------------------------------------------------------
    \924\ Treas. Reg. sec. 1.856-5(c)(1). The amount of the loan for 
this purpose is defined as the hightest principal amount of the loan 
outstanding during the taxable year. Treas. Reg. sec. 1.856-5(c)(3).
---------------------------------------------------------------------------
    The loan value of real property is defined as the fair 
market value of the property determined as of the date on which 
the commitment by the REIT to make the loan becomes binding on 
the REIT. In the case of a loan purchased by a REIT, the loan 
value of the real property is the fair market value of the real 
property determined as of the date on which the commitment of 
the REIT to purchase the loan becomes binding.\925\
---------------------------------------------------------------------------
    \925\ Special rules apply to construction loans. Treas. Reg. sec. 
1.856-5(c)(2).
---------------------------------------------------------------------------

75-percent asset test

    At the close of each quarter of the taxable year, at least 
75 percent of the value of a REIT's total assets must be 
represented by real estate assets, cash and cash items, and 
Government securities.
    Real estate assets generally mean real property (including 
interests in real property and interests in mortgages on real 
property) and shares (or transferable certificates of 
beneficial interest) in other REITs.
    Neither the Code nor regulations address the allocation of 
value in cases where real property and personal property may 
both be present.

                        Explanation of Provision

    The provision allows certain ancillary personal property 
leased with real property to be treated as real property for 
purposes of the 75-percent asset test, applying the same 
threshold that applies under present law for purposes of 
determining rents from real property under section 856(d)(l)(C) 
for purposes of the 75-percent income test.
    The provision also modifies the present-law rules for 
determining when an obligation secured by a mortgage is 
considered secured by a mortgage on real property if the 
security includes personal property as well. Under the 
provision, in the case of an obligation secured by a mortgage 
on both real property and personal property, if the fair market 
value of such personal property does not exceed 15 percent of 
the total fair market value of all such property, such personal 
property is treated as real property for purposes of the 75-
percent income and 75-percent asset test computations.\926\ In 
making this determination, the fair market value of all 
property (both personal and real) is determined at the same 
time and in the same manner as the fair market value of real 
property is determined for purposes of apportioning interest 
income between real property and personal property under the 
rules for determining whether interest income is from a 
mortgage secured by real property.
---------------------------------------------------------------------------
    \926\ Sec. 856(c)(3)(B) and (4)(A).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

8. Hedging provisions (sec. 319 of the Act and sec. 857 of the Code)

                              Present Law

    Except as provided by Treasury regulations, income from 
certain REIT hedging transactions that are clearly identified, 
including gain from the sale or disposition of such a 
transaction, is not included as gross income under either the 
95-percent income or 75-percent income test. Transactions 
eligible for this exclusion include transactions that hedge 
indebtedness incurred or to be incurred by the REIT to acquire 
or carry real estate assets and transactions entered primarily 
to manage risk of currency fluctuations with respect to items 
of income or gain described in section 856(c)(2) or (3).\927\
---------------------------------------------------------------------------
    \927\ Sec. 856(c)(5)(G).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision expands the scope of the present-law 
exception of certain hedging income from gross income for 
purposes of the income tests, under section 856(c)(5)(G). Under 
the provision, if (1) a REIT enters into one or more positions 
described in clause (i) of section 856(c)(5)(G) with respect to 
indebtedness described therein or one or more positions 
described in clause (ii) of section 856(c)(5)(G) with respect 
to property that generates income or gain described in section 
856(c)(2) or (3); (2) any portion of such indebtedness is 
extinguished or any portion of such property is disposed of; 
and (3) in connection with such extinguishment or disposition, 
such REIT enters into one or more transactions which would be 
hedging transactions described in subparagraph (B) or (C) of 
section 1221(b)(2) with respect to any position referred to in 
(1) above, if such position were ordinary property,\928\ then 
any income of such REIT from any position referred to in (1) 
and from any transaction referred to in (3) (including gain 
from the termination of any such position or transaction) shall 
not constitute gross income for purposes of the 75-percent or 
95-percent gross income tests, to the extent that such 
transaction hedges such position.
---------------------------------------------------------------------------
    \928\ Such definition of a hedging transaction is applied for 
purposes of this provision without regard to whether or not the 
position referred to is ordinary property.
---------------------------------------------------------------------------
    The provision is intended to extend the current treatment 
of income from certain REIT hedging transactions as income that 
is disregarded for purposes of the 75-percent and 95-percent 
income tests to income from positions that primarily manage 
risk with respect to a prior hedge that a REIT enters in 
connection with the extinguishment or disposal (in whole or in 
part) of the liability or asset (respectively) related to such 
prior hedge, to the extent the new position qualifies as a 
section 1221 hedge or would so qualify if the hedged position 
were ordinary property.
    The provision also clarifies that the identification 
requirement that applies to all hedges under the hedge gross 
income rules is the requirement described in section 
1221(a)(7), determined after taking account of any curative 
provisions provided under the regulations referred to therein.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

9. Modification of REIT earnings and profits calculation to avoid 
        duplicate taxation (sec. 320 of the Act and secs. 562 and 857 
        of the Code)

                              Present Law

    For purposes of computing earnings and profits of a 
corporation, the alternative depreciation system, which 
generally is less accelerated than the system used in 
determining taxable income, is used in the case of the 
depreciation of tangible property. Also, certain amounts 
treated as currently deductible for purposes of computing 
taxable income are allowed as a deduction ratably over a period 
of five years for computing earnings and profits. Finally, the 
installment method is not allowed in computing earnings and 
profits from the installment sale of property.\929\
---------------------------------------------------------------------------
    \929\ Sec. 312(k)(3) and (n)(5).
---------------------------------------------------------------------------
    In the case of a REIT, the current earnings and profits of 
a REIT are not reduced by any amount which is not allowable as 
a deduction in computing its taxable income for the taxable 
year.\930\ In addition, for purposes of computing the deduction 
for dividends paid by a REIT for a taxable year, earnings and 
profits are increased by the total amount of gain on the sale 
or exchange of real property by the trust during the year.\931\
---------------------------------------------------------------------------
    \930\ Sec. 857(d)(1). This provision applies to a REIT without 
regard to whether it meets the requirements of section 857(a) for the 
taxable year.
    \931\ Sec. 562(e).
---------------------------------------------------------------------------
    These rules can by illustrated by the following example:
    Example.--Assume that a REIT had $100 of taxable income and 
earnings and profits in each of five consecutive taxable years 
(determined without regard to any energy efficient commercial 
building deduction \932\ and without regard to any deduction 
for dividends paid). Assume that in the first of the five 
years, the REIT had an energy efficient commercial building 
deduction in computing its taxable income of $10, reducing its 
pre-dividend taxable income to $90. Assume further that the 
deduction is allowable at a rate of $2 per year over the five-
year period beginning with the first year in computing its 
earnings and profits.
---------------------------------------------------------------------------
    \932\ Sec. 179D.
---------------------------------------------------------------------------
    Under present law, the REIT's earnings and profits in the 
first year are $98 ($100 less $2). In each of the next four 
years, the REIT's current earnings and profits are $100 ($98 as 
computed for the first year plus an additional $2 under section 
857(d)(1) for the $2 not deductible in computing taxable income 
for the year).
    Assume the REIT distributes $100 to its shareholders at the 
close of each of the five years. Under present law, the 
shareholders have $98 dividend income in the first year and a 
$2 return of capital and $100 dividend income in each of the 
following four years, for a total of $498 dividend income, 
notwithstanding that the REIT had only $490 pre-dividend 
taxable income over the period. The dividends paid by the REIT 
reduce its taxable income to zero in each of the taxable years.

                        Explanation of Provision

    Under the provision, the current earnings and profits of a 
REIT for a taxable year are not reduced by any amount that (1) 
is not allowable as a deduction in computing its taxable income 
for the current taxable year and (2) was not so allowable for 
any prior taxable year. Thus, under the provision, if an amount 
is allowable as a deduction in computing taxable income in year 
one and is allowable in computing earnings and profits in year 
two (determined without regard to present-law section 
857(d)(1)), section 857(d)(1) no longer applies and the 
deduction in computing the year two earnings and profits of the 
REIT is allowable. Thus, a lesser maximum amount will be a 
dividend to shareholders in that year. This provision does not 
change the present-law determination of current earnings and 
profits for purposes of computing a REIT's deduction for 
dividends paid.
    In addition, the provision provides that the current 
earnings and profits of a REIT for a taxable year for purposes 
of computing the deduction for dividends paid are increased by 
any amount of gain on the sale or exchange of real property 
taken into account in determining the taxable income of the 
REIT for the taxable year (to the extent the gain is not 
otherwise so taken into account). Thus, in the case of an 
installment sale of real property, current earnings and profits 
for purposes of the REIT's deduction for dividends paid for a 
taxable year are increased by the amount of gain taken into 
account in computing its taxable income for the year and not 
otherwise taken into account in computing the current earnings 
and profits.
    The following illustrates the application of the provision:
    Example.--Assume the same facts as in the above example. 
Under the provision, as under present law, in the first taxable 
year, the earnings and profits of the REIT were $98 and the 
shareholders take into account $98 dividend income and $2 is a 
return of capital. Under the provision, in each of the next 
four years, the earnings and profits are $98 (i.e., section 
857(d)(1) does not apply) so that the shareholders take into 
account $98 of dividend income in each year and $2 is a return 
of capital each year.
    For purposes of the REIT's deduction for dividends paid, 
present law remains unchanged so that the REIT's taxable income 
will be reduced to zero in each of the taxable years.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

10. Treatment of certain services provided by taxable REIT subsidiaries 
        (sec. 321 of the Act and sec. 857 of the Code)

                              Present Law


Taxable REIT subsidiaries

    A TRS generally can engage in any kind of business activity 
except that it is not permitted directly or indirectly to 
operate either a lodging facility or a health care facility, or 
to provide to any other person (under a franchise, license, or 
otherwise) rights to any brand name under which any lodging 
facility or health care facility is operated.
    REITs are subject to a tax equal to 100 percent of 
redetermined rents, redetermined deductions, and excess 
interest. These are defined generally as the amounts of 
specified REIT transactions with a TRS of the REIT, to the 
extent such amounts differ from an arm's length amount.

Prohibited transactions tax

    REITs are subject to a prohibited transaction tax (``PTT'') 
of 100 percent of the net income derived from prohibited 
transactions.\933\ For this purpose, a prohibited transaction 
is a sale or other disposition of property by the REIT that is 
stock in trade of a taxpayer or other property that would 
properly be included in the inventory of the taxpayer if on 
hand at the close of the taxable year, or property held for 
sale to customers by the taxpayer in the ordinary course of his 
trade or business and is not foreclosure property. The PTT for 
a REIT does not apply to a sale of property which is a real 
estate asset if the REIT satisfies certain criteria in section 
857(b)(6)(C) or (D).
---------------------------------------------------------------------------
    \933\ Sec. 857(b)(6).
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    Section 857(b)(6)(C) provides that a prohibited transaction 
does not include a sale of property which is a real estate 
asset (as defined in section 856(c)(5)(B)) and which is 
described in section 1221(a)(1) if (1) the REIT has held the 
property for not less than two years; (2) aggregate 
expenditures made by the REIT, or any partner of the REIT, 
during the two year period preceding the date of sale which are 
includible in the basis of the property do not exceed 30 
percent of the net selling price of the property; (3) either: 
(A) the REIT does not make more than seven sales of property 
\934\ during the taxable year, or (B) the aggregate adjusted 
bases (as determined for purposes of computing earnings and 
profits) of property \935\ sold during the taxable year does 
not exceed 10 percent of the aggregate bases (as so determined) 
of all of the assets of the REIT as of the beginning of the 
taxable year, or (C) the fair market value of property \936\ 
sold during the taxable year does not exceed 10 percent of the 
aggregate fair market value of all the assets of the REIT as of 
the beginning of the taxable year; (4) in the case of land or 
improvements, not acquired through foreclosure (or deed in lieu 
of foreclosure), or lease termination, the REIT has held the 
property for not less than two years for production of rental 
income; and (5) if the requirement of (3)(A) above is not 
satisfied, substantially all of the marketing and development 
expenditures with respect to the property were made through an 
independent contractor (as defined in section 856(d)(3)) from 
whom the REIT does not derive or receive any income.
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    \934\ Sales of foreclosure property or sales to which section 1033 
applies are excluded.
    \935\ Sales of foreclosure property or sales to which section 1033 
applies are excluded.
    \936\ Sales of foreclosure property or sales to which section 1033 
applies are excluded.
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    Section 857(b)(6)(D) provides that a prohibited transaction 
does not include a sale of property which is a real estate 
asset (as defined in section 856(c)(5)(B)) and which is 
described in section 1221(a)(1) if (1) the REIT has held the 
property for not less than two years in connection with the 
trade or business of producing timber; (2) the aggregate 
expenditures made by the REIT, or any partner of the REIT, 
during the two year period preceding the date of sale which (A) 
are includible in the basis of the property (other than 
timberland acquisition expenditures), and (B) are directly 
related to operation of the property for the production of 
timber or for the preservation of the property for use as a 
timberland, do not exceed 30 percent of the net selling price 
of the property; (3) the aggregate expenditures made by the 
REIT, or a partner of the REIT, during the two year period 
preceding the date of sale which (A) are includible in the 
basis of the property (other than timberland acquisition 
expenditures), and (B) are not directly related to operation of 
the property for the production of timber or for the 
preservation of the property for use as a timberland, do not 
exceed five percent of the net selling price of the property; 
(4) either: (A) the REIT does not make more than seven sales of 
property \937\ during the taxable year, or (B) the aggregate 
adjusted bases (as determined for purposes of computing 
earnings and profits) of property \938\ sold during the taxable 
year does not exceed 10 percent of the aggregate bases (as so 
determined) of all of the assets of the REIT as of the 
beginning of the taxable year, or (C) the fair market value of 
property \939\ sold during the taxable year does not exceed 10 
percent of the aggregate fair market value of all the assets of 
the REIT as of the beginning of the taxable year; (5) if the 
requirement of (4)(A) above is not satisfied, substantially all 
of the marketing expenditures with respect to the property were 
made through an independent contractor (as defined in section 
856(d)(3)) from whom the REIT does not derive or receive any 
income, or, in the case of a sale on or before the termination 
date, a TRS; and (6) the sales price of the property sold by 
the trust is not based in whole or in part on income or profits 
derived from the sale or operation of such property.
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    \937\ Sales of foreclosure property or sales to which section 1033 
applies are excluded.
    \938\ Sales of foreclosure property or sales to which section 1033 
applies are excluded.
    \939\ Sales of foreclosure property or sales to which section 1033 
applies are excluded.
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Foreclosure property

    Under current law, certain income and gain derived from 
foreclosure property satisfies the 95-percent and 75-percent 
REIT income tests.\940\ Property will cease to be foreclosure 
property, however, if used in a trade or business conducted by 
the REIT, other than through an independent contractor from 
which the REIT itself does not derive or receive any income, 
more than 90 days after the day on which the REIT acquired such 
property.\941\
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    \940\ Sec. 856(c)(2)(F) and (3)(F).
    \941\ Sec. 856(e)(4)(C).
---------------------------------------------------------------------------

                        Explanation of Provision

    For purposes of the exclusion from the prohibited 
transactions excise tax, the provision modifies the requirement 
of section 857(b)(6)(C)(v), that substantially all of the 
development expenditures with respect to the property were made 
through an independent contractor from whom the REIT itself 
does not derive or receive any income, to allow a TRS to have 
developed the property.\942\
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    \942\ The requirement limiting the amount of expenditures added to 
basis that the REIT, or a partner of the REIT, may make within two 
years prior to the sale, as well as other requirements for the 
exclusion, are retained.
---------------------------------------------------------------------------
    The provision also allows a TRS to make marketing 
expenditures with respect to property under section 
857(b)(6)(C)(v) or 857(b)(6)(D)(v) without causing property 
that is otherwise eligible for the prohibited transaction 
exclusion to lose such qualification.
    The provision allows a TRS to operate foreclosure property 
without causing loss of foreclosure property status, under 
section 856(e)(4)(C).
    The items subject to the 100-percent excise tax on certain 
non-arm's-length transactions between a TRS and a REIT are 
expanded to include ``redetermined TRS service income.'' Such 
income is defined as gross income of a TRS of a REIT 
attributable to services provided to, or on behalf of, such 
REIT (less the deductions properly allocable thereto) to the 
extent the amount of such income (less such deductions) would 
be increased on distribution, apportionment, or allocation 
under section 482 (but for the exception from section 482 if 
the 100-percent excise tax applies). The term does not include 
gross income attributable to services furnished or rendered to 
a tenant of the REIT (or deductions properly attributable 
thereto), since that income is already subject to a separate 
provision of the 100-percent excise tax rules.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2015.

11. Exception from FIRPTA for certain stock of REITs; exception for 
        interests held by foreign retirement and pension funds (secs. 
        322 and 323 of the Act and secs. 897 and 1445 of the Code) 
        \943\
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    \943\ The Senate Committee on Finance reported S.915 on April 14, 
2015 (S. Rep. No. 114-25). Section 2 of that bill contained a provision 
similar to section 322 of the Protecting Americans from Tax Hikes Act 
of 2015 (Division Q of Pub. L. No. 114-113).
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                              Present Law


General rules relating to FIRPTA

    A foreign person that is not engaged in the conduct of a 
trade or business in the United States generally is not subject 
to any U.S. tax on capital gain from U.S. sources, including 
capital gain from the sale of stock or other capital 
assets.\944\
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    \944\ Secs. 871(b) and 882(a). Property is treated as held by a 
person for use in connection with the conduct of a trade or business in 
the United States, even if not so held at the time of sale, if it was 
so held within 10 years prior to the sale. Sec. 864(c)(7). Also, all 
gain from an installment sale is treated as from the sale of property 
held in connection with the conduct of such a trade or business if the 
property was so held during the year in which the installment sale was 
made, even if the recipient of the payments is no longer engaged in the 
conduct of such trade or business when the payments are received. Sec. 
864(c)(6).
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    However, the Foreign Investment in Real Property Tax Act of 
1980 (``FIRPTA'') \945\ generally treats a foreign person's 
gain or loss from the disposition of a U.S. real property 
interest (``USRPI'') as income that is effectively connected 
with the conduct of a U.S. trade or business, and thus taxable 
at the income tax rates applicable to U.S. persons, including 
the rates for net capital gain.\946\ With certain exceptions, 
if a foreign corporation distributes a USRPI, gain is 
recognized on the distribution (including a distribution in 
redemption or liquidation) of a USRPI, in an amount equal to 
the excess of the fair market value of the USRPI (as of the 
time of distribution) over its adjusted basis.\947\ A foreign 
person subject to tax on FIRPTA gain is required to file a U.S. 
tax return under the normal rules relating to receipt of income 
effectively connected with a U.S. trade or business.\948\
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    \945\ Pub. L. No. 96-499. The rules governing the imposition and 
collection of tax under FIRPTA are contained in a series of provisions 
enacted in 1980 and subsequently amended. See secs. 897, 1445, 6039C, 
and 6652(f).
    \946\ Sec. 897(a).
    \947\ Sec. 897(d). In addition, such gain may also be subject to 
the branch profits tax at a 30-percent rate (or lower treaty rate).
    \948\ In addition, section 6039C authorizes regulations that would 
require a return reporting foreign direct investments in U.S. real 
property interests. No such regulations have been issued, however.
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    The payor of amounts that FIRPTA treats as effectively 
connected with a U.S. trade or business (``FIRPTA income'') to 
a foreign person generally is required to withhold U.S. tax 
from the payment.\949\ Withholding generally is 10 percent of 
the sales price, in the case of a direct sale by the foreign 
person of a USRPI (but withholding is not required in certain 
cases, including on any sale of stock that is regularly traded 
on an established securities market \950\), and 10 percent of 
the amount realized by the foreign shareholder in the case of 
certain distributions by a corporation that is or has been a 
U.S. real property holding corporation (``USRPHC'') during the 
applicable testing period.\951\ The withholding is generally 35 
percent of the amount of a distribution to a foreign person of 
net proceeds attributable to the sale of a USRPI from an entity 
such as a partnership, REIT, or RIC.\952\ The foreign person 
can request a refund with its U.S. tax return, if appropriate, 
based on that person's total U.S. effectively connected income 
and deductions (if any) for the taxable year.
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    \949\ Sec. 1445(a).
    \950\ Sec. 1445(b)(6).
    \951\ Sec. 1445(e)(3). Withholding at 10 percent of a gross amount 
may also apply in certain other circumstances under regulations. See 
sec. 1445(e)(4) and (5).
    \952\ Sec. 1445(e)(6) and Treasury regulations thereunder. The 
Treasury Department is authorized to issue regulations that would 
reduce the 35 percent withholding on distributions to 20 percent during 
the time that the maximum income tax rate on dividends and capital 
gains of U.S. persons is 20 percent.
---------------------------------------------------------------------------
            USRPHCs and five-percent public shareholder exception
    USRPIs include not only interests in real property located 
in the United States or the U.S. Virgin Islands, but also stock 
of a USRPHC, generally defined as any domestic corporation, 
unless the taxpayer establishes that the fair market value of 
the corporation's USRPIs was less than 50 percent of the 
combined fair market value of all its real property interests 
(U.S. and worldwide) and all its assets used or held for use in 
a trade or business, at all times during a ``testing period,'' 
which is the shorter of the duration of the taxpayer's 
ownership of the stock after June 18, 1980, or the five-year 
period ending on the date of disposition of the stock.\953\
---------------------------------------------------------------------------
    \953\ Sec. 897(c)(1) and (2).
---------------------------------------------------------------------------
    Under an exception, even if a corporation is a USRPHC, a 
shareholder's shares of a class of stock that is regularly 
traded on an established securities market are not treated as 
USRPIs if the shareholder holds (applying attribution rules) no 
more than five percent of that class of stock at any time 
during the testing period.\954\ Among other things, the 
relevant attribution rules require attribution between a 
corporation and a shareholder that owns five percent or more in 
value of the stock of such corporation.\955\ The attribution 
rules also attribute stock ownership between spouses and 
between children, grandchildren, parents, and grandparents.
---------------------------------------------------------------------------
    \954\ Sec. 897(c)(3). The constructive ownership attribution rules 
are specified in section 897(c)(6)(C).
    \955\ If a person owns, directly or indirectly, five percent or 
more in value of the stock in a corporation, such person is considered 
as owning the stock owned directly or indirectly by or for such 
corporation, in that proportion which the value of the stock such 
person so owns bears to the value of all the stock in such corporation. 
Sec. 318(c)(2)(C) as modified by section 897(c)(6)(C). Also, if five 
percent or more in value of the stock in a corporation is owned 
directly or indirectly, by or for any person, such corporation shall be 
considered as owning the stock owned, directly or indirectly, by or for 
such person. Sec. 318(c)(3)(C) as modified by section 897(c)(6)(C).
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FIRPTA rules for foreign investment through REITs and RICs

    Special FIRPTA rules apply to foreign investment through a 
``qualified investment entity,'' which includes any REIT and 
certain RICs that invest largely in USRPIs (including stock of 
one or more REITs).\956\
---------------------------------------------------------------------------
    \956\ Sec. 897(h)(4)(A)(i). The provision including certain RICs in 
the definition of qualified investment entity previously expired 
December 31, 2014. Section 133 of the Protecting Americans from Tax 
Hikes Act of 2015 (Division Q of Pub. L. No. 114-113) reinstated the 
provision and made it permanent as of January 1, 2015, as described 
above in item 22 of Title I.A.
---------------------------------------------------------------------------
            Stock of domestically controlled qualified investment 
                    entities not a USRPI
    If a qualified investment entity is ``domestically 
controlled'' (defined to mean that less than 50 percent in 
value of the qualified investment entity has been owned 
(directly or indirectly) by foreign persons during the relevant 
testing period \957\), stock of such entity is not a USRPI and 
a foreign shareholder can sell the stock of such entity without 
being subject to tax under FIRPTA, even if the stock would 
otherwise be stock of a USRPHC. Treasury regulations provide 
that for purposes of determining whether a REIT is domestically 
controlled, the actual owner of REIT shares is the ``person who 
is required to include in his return the dividends received on 
the stock.'' \958\ The IRS has issued a private letter ruling 
concluding that the term ``directly or indirectly'' for this 
purpose does not require looking through corporate entities 
that, in the facts of the ruling, were represented to be fully 
taxable domestic corporations for U.S. federal income tax 
purposes ``and not otherwise a REIT, RIC, hybrid entity, 
conduit, disregarded entity, or other flow-through or look-
through entity.'' \959\
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    \957\ The testing period for this purpose if the shorter of (i) the 
period beginning on June 19, 1980, and ending on the date of 
disposition or distribution, as the case may be, (ii) the five-year 
period ending on the date of the disposition or distribution, as the 
case may be, or (iii) the period during which the qualified investment 
entity was in existence. Sec. 897(h)(4)(D).
    \958\ Treas. Reg. sec. 1.897-1(c)(2)(i) and -8(b).
    \959\ PLR 200923001. A private letter ruling may be relied upon 
only by the taxpayer to which it is issued. However, private letter 
rulings provide some indication of administrative practice.
---------------------------------------------------------------------------
            FIRPTA applies to qualified investment entity (REIT and 
                    certain RIC) distributions attributable to gain 
                    from sale or exchange of USRPIs, except for 
                    distributions to certain five-percent or smaller 
                    shareholders
    A distribution by a REIT or other qualified investment 
entity, to the extent attributable to gain from the entity's 
sale or exchange of USRPIs, is treated as FIRPTA income.\960\ 
The FIRPTA character is retained if the distribution occurs 
from one qualified investment entity to another, through a tier 
of REITs or RICs.\961\ An IRS notice (Notice 2007-55) states 
that this rule retaining the FIRPTA income character of 
distributions attributable to the sale of USRPIs applies to any 
distributions under sections 301, 302, 331, and 332 (i.e., to 
dividend distributions, distributions treated as sales or 
exchanges of stock by the investor, and both nonliquidating and 
liquidating distributions) and that the IRS will issue 
regulations to that effect.\962\
---------------------------------------------------------------------------
    \960\ Sec. 897(h)(1).
    \961\ In 2006, the Tax Increase Prevention and Reconciliation Act 
of 2005 (``TIPRA''), Pub. L. No. 109-222, sec. 505, specified the 
retention of this FIRPTA character on a distribution to an upper-tier 
qualified investment entity, and added statutory withholding 
requirements.
    \962\ Notice 2007-55, 2007-2 C.B.13. The Notice also states that in 
the case of a foreign government investor, because FIRPTA income is 
treated as effectively connected with the conduct of a U.S. trade or 
business, proceeds distributed by a qualified investment entity from 
the sale of USRPIs are not exempt from tax under section 892. The 
Notice cites and compares existing temporary regulations and indicates 
that Treasury will apply those regulations as well to certain 
distributions. See Temp. Treas. Reg. secs. 1.892-3T, 1.897-9T(e), and 
1.1445-10T(b).
---------------------------------------------------------------------------
    There is an exception to this rule in the case of 
distributions to certain public shareholders. If an investor 
has owned no more than five percent of a class of stock of a 
REIT or other qualified investment entity that is regularly 
traded on an established securities market located in the 
United States during the one-year period ending on the date of 
the distribution, then amounts attributable to gain from entity 
sales or exchanges of USRPIs can be distributed to such a 
shareholder without being subject to FIRPTA tax.\963\ Such 
distributions that are dividends are treated as dividends from 
the qualified investment entity,\964\ and thus generally would 
be subject to U.S. dividend withholding tax (as reduced under 
any applicable treaty), but are not treated as income 
effectively connected with the conduct of a U.S. trade or 
business. An IRS Chief Counsel advice memorandum concludes that 
such distributions which are made in complete liquidation of a 
REIT are not treated as dividends from the qualified investment 
entity and thus generally would not be subject to U.S. dividend 
withholding tax (in addition to not being treated as income 
effectively connected with the conduct of a U.S. trade or 
business).\965\
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    \963\ Sec. 897(h)(1), second sentence.
    \964\ Secs. 852(b)(3)(E) and 857(b)(3)(F).
    \965\ AM 2008-003, February 15, 2008.
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                        Explanation of Provision


Exception from FIRPTA for certain REIT stock

    In the case of REIT stock only, the provision increases 
from five percent to 10 percent the maximum stock ownership a 
shareholder may have held, during the testing period, of a 
class of stock that is publicly traded, to avoid having that 
stock be treated as a USRPI on disposition.
    The provision likewise increases from five percent to 10 
percent the percentage ownership threshold that, if not 
exceeded, results in treating a distribution to holders of 
publicly traded REIT stock, attributable to gain from sales of 
exchanges of USRPIs, as a dividend, rather than as FIRPTA gain.
    The attribution rules of section 897(c)(6)(C) retain the 
present-law rule that requires attribution between a 
shareholder and a corporation if the shareholder owns more than 
five percent of a class of stock of the corporation. The 
attribution rules now apply, however, to the determination of 
whether a person holds more than 10 percent of a class of 
publicly traded REIT stock.
    The provision also provides that REIT stock held by a 
qualified shareholder, including stock held indirectly through 
one or more partnerships, is not a U.S real property interest 
in the hands of such qualified shareholder, except to the 
extent that an investor in the qualified shareholder (other 
than an investor that is a qualified shareholder) holds more 
than 10 percent of that class of stock of the REIT (determined 
by application of the constructive ownership rules of section 
897(c)(6)(C)). Thus, so long as the ``more than 10 percent'' 
rule is not exceeded, a qualified shareholder may own and 
dispose of any amount of stock of a REIT (including stock of a 
privately-held, non-domestically controlled REIT that is owned 
by such qualified shareholder) without the application of 
FIRPTA.
    If an investor in the qualified shareholder (other than an 
investor that is a qualified shareholder) directly, indirectly, 
or constructively holds more than 10 percent of such class of 
REIT stock (an ``applicable investor''), then a percentage of 
the REIT stock held by the qualified shareholder equal to the 
applicable investor's percentage ownership of the qualified 
shareholder is treated as a USRPI in the hands of the qualified 
shareholder and is subject to FIRPTA. In that case, an amount 
equal to such percentage multiplied by the disposition proceeds 
and REIT distribution proceeds attributable to underlying USRPI 
gain is treated as FIRPTA gain in the hands of the qualified 
shareholder.
    The provision is intended to override in certain cases one 
of the conclusions reached in AM 2008-003. Specifically, the 
provision contains special rules with respect to certain 
distributions that are treated as a sale or exchange of REIT 
stock under section 301(c)(3), 302, or 331 with respect to a 
qualified shareholder. Any such amounts attributable to an 
applicable investor are ineligible for the FIRPTA exception for 
qualified shareholders, and thus are subject to FIRPTA. Any 
such amounts attributable to other investors are treated as a 
dividend received from a REIT for purposes of U.S. dividend 
withholding tax and the application of income tax treaties, 
notwithstanding their general treatment under the Code.
    A qualified shareholder is defined as a foreign person that 
(i) either is eligible for the benefits of a comprehensive 
income tax treaty which includes an exchange of information 
program and whose principal class of interests is listed and 
regularly traded on one or more recognized stock exchanges (as 
defined in such comprehensive income tax treaty), or is a 
foreign partnership that is created or organized under foreign 
law as a limited partnership in a jurisdiction that has an 
agreement for the exchange of information with respect to taxes 
with the United States and has a class of limited partnership 
units representing greater than 50 percent of the value of all 
the partnership units that is regularly traded on the NYSE or 
NASDAQ markets, (ii) is a qualified collective investment 
vehicle (as defined below), and (iii) maintains records on the 
identity of each person who, at any time during the foreign 
person's taxable year, is the direct owner of 5 percent or more 
of the class of interests or units (as applicable) described in 
(i), above.
    A qualified collective investment vehicle is defined as a 
foreign person that (i) would be eligible for a reduced rate of 
withholding under the comprehensive income tax treaty described 
above, even if such entity holds more than 10 percent of the 
stock of such REIT,\966\ (ii) is publicly traded, is treated as 
a partnership under the Code, is a withholding foreign 
partnership, and would be treated as a USRPHC if it were a 
domestic corporation, or (iii) is designated as such by the 
Secretary of the Treasury and is either (a) fiscally 
transparent within the meaning of section 894, or (b) required 
to include dividends in its gross income, but is entitled to a 
deduction for distributions to its investors.
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    \966\ The qualified collective investment vehicle must be eligible 
for a reduced rate of withholding under a provision in the dividends 
article of the relevant treaty dealing specifically with dividends paid 
by REITs. For example, the U.S. income tax treaties with Australia and 
the Netherlands provide such a reduced rate of withholding under 
certain circumstances.
---------------------------------------------------------------------------
    The provision also contains rules with respect to 
partnership allocations of USRPI gains to applicable investors. 
If an applicable investor's proportionate share of USRPI gain 
for the taxable year exceeds such partner's distributive share 
of USRPI gain for the taxable year then such partner's 
distributive share of non-USRPI income or gain is 
recharacterized as USRPI gain for the taxable year in the 
amount that the distributive share of USRPI gain exceeds the 
proportionate share of USRPI gain. For purposes of these 
partnership allocation rules, USRPI gain is defined to comprise 
the net of gain recognized on disposition of a USRPI, 
distributions from a REIT that are treated as USRPI gain, and 
loss from the disposition of USRPIs. An investor's 
proportionate share of USRPI gain is determined based on the 
applicable investor's largest proportionate share of income or 
gain for the taxable year, and if such proportionate amount may 
vary during the existence of the partnership, such share is the 
highest share the applicable investor may receive.

Domestically controlled qualified investment entity

    The provision redefines the term ``domestically controlled 
qualified investment entity'' to provide a number of new rules 
and presumptions relating to whether a qualified investment 
entity is domestically controlled. First, a qualified 
investment entity shall be permitted to presume that holders of 
less than five percent of a class of stock regularly traded on 
an established securities market in the United States are U.S. 
persons throughout the testing period, except to the extent 
that the qualified investment entity has actual knowledge that 
such persons are not U.S. persons. Second, any stock in the 
qualified investment entity held by another qualified 
investment entity (I) which has issued any class of stock that 
is regularly traded on an established stock exchange, or (II) 
which is a RIC that issues redeemable securities (within the 
meaning of section 2 of the Investment Company Act of 1940) 
shall be treated as held by a foreign person unless such other 
qualified investment entity is domestically controlled (as 
determined under the new rules) in which case such stock shall 
be treated as held by a U.S. person. Finally, any stock in a 
qualified investment entity held by any other qualified 
investment entity not described in (I) or (II) of the preceding 
sentence shall only be treated as held by a U.S. person to the 
extent that the stock of such other qualified investment entity 
is (or is treated under the new provision as) held by a U.S. 
person.

Exception for interests held by foreign retirement and pension funds

    The provision exempts from the rules of section 897 any 
USRPI held directly (or indirectly through one or more 
partnerships) by, or to any distribution received from a real 
estate investment trust by, a qualified foreign pension fund or 
by a foreign entity wholly-owned by a qualified foreign pension 
fund. A qualified foreign pension fund means any trust, 
corporation, or other organization or arrangement \967\ (A) 
which is created or organized under the law of a country other 
than the United States, (B) which is established to provide 
retirement or pension benefits to participants or beneficiaries 
that are current or former employees (or persons designated by 
such employees) of one or more employers in consideration for 
services rendered,\968\ (C) which does not have a single 
participant or beneficiary with a right to more than five 
percent of its assets or income, (D) which is subject to 
government regulation and provides annual information reporting 
about its beneficiaries to the relevant tax authorities in the 
country in which it is established or operates, and (E) with 
respect to which, under the laws of the country in which it is 
established or operates, (i) contributions to such organization 
or arrangement that would otherwise be subject to tax under 
such laws are deductible or excluded from the gross income of 
such entity or taxed at a reduced rate, or (ii) taxation of any 
investment income of such organization or arrangement is 
deferred or such income is taxed at a reduced rate.
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    \967\ Foreign pension funds may be structured in a variety of ways, 
and may comprise one or more separate entities. The word 
``arrangement'' encompasses such alternative structures.
    \968\ Multi-employer and government-sponsored public pension funds 
that provide pension and pension-related benefits may satisfy this 
prong of the definition. For example, such pension funds may be 
established for one or more companies or professions, or for the 
general working public of a foreign country.
---------------------------------------------------------------------------
    The provision also makes conforming changes to section 1445 
to eliminate withholding on sales by qualified foreign pension 
funds (and their wholly-owned foreign subsidiaries) of USRPIs.
    The Secretary of the Treasury may provide such regulations 
as are necessary to carry out the purposes of the provision.

                             Effective Date

    The provision to extend exceptions from FIRPTA for certain 
REIT stock applies to dispositions and distributions on or 
after the date of enactment (December 18, 2015).
    The provision to modify the definition of a domestically 
controlled qualified investment entity is effective on the date 
of enactment (December 18, 2015).
    The exception for interests held by foreign retirement and 
pension funds generally applies to dispositions and 
distributions after the date of enactment (December 18, 2015).

12. Increase in rate of withholding of tax on dispositions of United 
        States real property interests (sec. 324 of the Act and sec. 
        1445 of the Code) \969\
---------------------------------------------------------------------------

    \969\ The Senate Committee on Finance reported S.915 on April 14, 
2015 (S. Rep. No. 114-25). Section 3 of that bill contained an 
identical provision.
---------------------------------------------------------------------------

                              Present Law

    A purchaser of a USRPI from any person is obligated to 
withhold 10 percent of gross purchase price unless certain 
exceptions apply.\970\ The obligation does not apply if the 
transferor furnishes an affidavit that the transferor is not a 
foreign person. Even absent such an affidavit, the obligation 
does not apply to the purchase of publicly traded stock.\971\ 
Also, the obligation does not apply to the purchase of stock of 
a nonpublicly traded domestic corporation, if the corporation 
furnishes the transferee with an affidavit stating the 
corporation is not and has not been a USRPHC during the 
applicable period (unless the transferee has actual knowledge 
or receives a notification that the affidavit is false).\972\
---------------------------------------------------------------------------
    \970\ Sec. 1445.
    \971\ Sec. 1445(b)(6).
    \972\ Sec. 1445(b)(3). Other exceptions also apply. Sec. 1445(b).
---------------------------------------------------------------------------
    Treasury regulations \973\ generally provide that a 
domestic corporation must, within a reasonable period after 
receipt of a request from a foreign person holding an interest 
in it, inform that person whether the interest constitutes a 
USRPI.\974\ No particular form is required. The statement must 
be dated and signed by a responsible corporate officer who must 
verify under penalties of perjury that the statement is correct 
to his knowledge and belief. If a foreign investor requests 
such a statement, then the corporation must provide a notice to 
the IRS that includes the name and taxpayer identification 
number of the corporation as well as the investor, and 
indicates whether the interest in question is a USRPI. However, 
these requirements do not apply to a domestically controlled 
REIT or to a corporation that has issued any class of stock 
which is regularly traded on an established securities market 
at any time during the calendar year. In such cases a 
corporation may voluntarily choose to comply with the notice 
requirements that would otherwise have applied.\975\
---------------------------------------------------------------------------
    \973\ Treas. Reg. Sec. 1.897-2(h).
    \974\ As described previously, stock of a U.S. corporation is not 
generally a USRPI unless it is stock of a USRPHC. However, all U.S. 
corporate stock is deemed to be such stock, unless it is shown that the 
corporation's U.S. real property interests do not amount to the 
relevant 50 percent or more of the corporation's relevant assets. Also, 
even if a REIT is a USRPHC, if it is domestically controlled its stock 
is not a USRPI.
    \975\ Treas. Reg. sec. 1.897-2(h)(3).
---------------------------------------------------------------------------
    In addition to these exceptions that might be determined at 
the entity level, even if a corporation is a USRPHC, its stock 
is not a USRPI in the hands of the seller if the stock is of a 
class that is publicly traded and the foreign shareholder 
disposing of the stock has not owned (applying attribution 
rules) more than five percent of such class of stock during the 
relevant period.

                        Explanation of Provision

    The provision generally increases the rate of withholding 
of tax on dispositions and certain distributions of URSPIs, 
from 10 percent to 15 percent. There is an exception to this 
higher rate of withholding (retaining the 10 percent 
withholding tax rate under present law) for sales of residences 
intended for personal use by the acquirer, with respect to 
which the purchase price does not exceed $1,000,000. Thus, if 
the present law exception for personal residences (where the 
purchase price does not exceed $300,000) does not apply, the 10 
percent withholding rate is retained so long as the purchase 
price does not exceed $1,000,000.

                             Effective Date

    The provision applies to dispositions after the date which 
is 60 days after the date of enactment (December 18, 2015).

13. Interests in RICs and REITs not excluded from definition of United 
        States real property interests (sec. 325 of the Act and sec. 
        897 of the Code) \976\
---------------------------------------------------------------------------

    \976\ The Senate Committee on Finance reported S.915 on April 14, 
2015 (S. Rep. No. 114-25). Section 6 of that bill contained an 
identical provision.
---------------------------------------------------------------------------

                              Present Law

    An interest in a corporation is not a USRPI if (1) as of 
the date of disposition of such interest, such corporation did 
not hold any USRPIs and (2) all of the USRPIs held by such 
corporation during the shorter of (i) the period of time after 
June 18, 1980, during which the taxpayer held such interest, or 
(ii) the five-year period ending on the date of disposition of 
such interest, were either disposed of in transactions in which 
the full amount of the gain (if any) was recognized, or ceased 
to be USRPIs by reason of the application of this rule to one 
or more other corporations (the so-called ``cleansing 
rule'').\977\
---------------------------------------------------------------------------
    \977\ Sec. 897(c)(1)(B).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the cleansing rule applies to stock of 
a corporation only if neither such corporation nor any 
predecessor of such corporation was a RIC or a REIT at any time 
during the shorter of the period after June 18, 1980 during 
which the taxpayer held such stock, or the five-year period 
ending on the date of the disposition of such stock.

                             Effective Date

    The provision applies to dispositions on or after the date 
of enactment (December 18, 2015).

14. Dividends derived from RICs and REITs ineligible for deduction for 
        United States source portion of dividends from certain foreign 
        corporations (sec. 326 of the Act and sec. 245 of the Code) 
        \978\
---------------------------------------------------------------------------

    \978\ The Senate Committee on Finance reported S.915 on April 14, 
2015 (S. Rep. No. 114-25). Section 7 of that bill contained an 
identical provision.
---------------------------------------------------------------------------

                              Present Law

    A corporation is generally allowed to deduct a portion of 
the dividends it receives from another corporation. The 
deductible amount is a percentage of the dividends received. 
The percentage depends on the level of ownership that the 
corporate shareholder has in the corporation paying the 
dividend. The dividends-received deduction is 70 percent of the 
dividend if the recipient owns less than 20 percent of the 
stock of the payor corporation, 80 percent if the recipient 
owns at least 20 percent but less than 80 percent of the stock 
of the payor corporation, and 100 percent if the recipient owns 
80 percent or more of the stock of the payor corporation.\979\
---------------------------------------------------------------------------
    \979\ Sec. 243.
---------------------------------------------------------------------------
    Dividends from REITs are not eligible for the corporate 
dividends received deduction.\980\ Dividends from a RIC are 
eligible only to the extent attributable to dividends received 
by the RIC from certain other corporations, and are treated as 
dividends from a corporation that is not 20-percent owned.\981\
---------------------------------------------------------------------------
    \980\ Secs. 243(d)(3) and 857(c)(1).
    \981\ Secs. 243(d)(2) and 854(b)(1)(A) and (C).
---------------------------------------------------------------------------
    Dividends received from a foreign corporation are not 
generally eligible for the dividends-received deduction. 
However, section 245 provides that if a U.S. corporation is a 
10-percent shareholder of a foreign corporation, the U.S. 
corporation is generally entitled to a dividends-received 
deduction for the portion of dividends received that are 
attributable to the post-1986 undistributed U.S. earnings of 
the foreign corporation. The post-1986 undistributed U.S. 
earnings are measured by reference to earnings of the foreign 
corporation effectively connected with the conduct of a trade 
or business within the United States, or received by the 
foreign corporation from an 80-percent-owned U.S. 
corporation.\982\ A 2013 IRS chief counsel advice memorandum 
advised that dividends received by a 10-percent U.S. corporate 
shareholder from a foreign corporation controlled by the 
shareholder are not eligible for the dividends-received 
deduction if the dividends were attributable to interest income 
of an 80-percent owned RIC.\983\ Treasury regulations section 
1.246-1 states that the deductions provided in sections ``243 . 
. . 244 . . . and 245 (relating to dividends received from 
certain foreign corporations)'' are not allowable with respect 
to any dividend received from certain entities, one of which is 
a REIT.
---------------------------------------------------------------------------
    \982\ Sec. 245
    \983\ IRS CCA 201320014. The situation addressed in the memorandum 
involved a controlled foreign corporation that had terminated its 
``CFC'' status before year end, through a transfer of stock to a 
partnership. The advice was internal IRS advice to the Large Business 
and International Division. Such advice is not to be relied upon or 
cited as precedent by taxpayers, but may offer some indication of 
administrative practice.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, for purposes of determining whether 
dividends from a foreign corporation (attributable to dividends 
from an 80-percent owned domestic corporation) are eligible for 
a dividends-received deduction under section 245, dividends 
from RICs and REITs are not treated as dividends from domestic 
corporations.

                             Effective Date

    The provision applies to dividends received from RICs and 
REITs on or after the date of enactment (December 18, 2015). No 
inference is intended with respect to the proper treatment 
under section 245 of dividends received from RICs or REITs 
before such date.

                        C. Additional Provisions


1. Provide special rules concerning charitable contributions to, and 
        public charity status of, agricultural research organizations 
        (sec. 331 of the Act and secs. 170(b) and 501(h) of the Code) 
        \984\
---------------------------------------------------------------------------

    \984\ The Senate Committee on Finance reported S. 906 on April 14, 
2015 (S. Rep. No. 114-19).
---------------------------------------------------------------------------

                              Present Law


Public charities and private foundations

    An organization qualifying for tax-exempt status under 
section 501(c)(3) of the Internal Revenue Code of 1986, as 
amended (the ``Code'') is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\985\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations (including medical 
research organizations), certain organizations providing 
assistance to colleges and universities, and governmental 
units.\986\ Other organizations qualify as public charities 
because they are broadly publicly supported or support specific 
public charities. First, a charity may qualify as publicly 
supported if at least one-third of its total support is from 
gifts, grants or other contributions from governmental units or 
the general public.\987\ Alternatively, it may qualify as 
publicly supported if it receives more than one-third of its 
total support from a combination of gifts, grants, and 
contributions from governmental units and the public plus 
revenue arising from activities related to its exempt purposes 
(e.g., fee for service income). In addition, this category of 
public charity must not rely excessively on endowment income as 
a source of support.\988\ A supporting organization, i.e., an 
organization that provides support to another section 501(c)(3) 
entity that is not a private foundation and meets certain other 
requirements of the Code, also is classified as a public 
charity.\989\
---------------------------------------------------------------------------
    \985\ The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \986\ Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \987\ Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances" test. Treas. Reg. sec. 1.170A-9(f)(3).
    \988\ To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its support in each taxable year from the sum of 
(1) gross investment income and (2) the excess of unrelated business 
taxable income as determined under section 512 over the amount of 
unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \989\ Sec. 509(a)(3). Organizations organized and operated 
exclusively for testing for public safety also are classified as public 
charities. Sec. 509(a)(4). Such organizations, however, are not 
eligible to receive deductible charitable contributions under section 
170.
---------------------------------------------------------------------------
    A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
    The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. For 
example, an individual taxpayer who makes a cash charitable 
contribution may deduct the contribution up to 50 percent of 
her contribution base (generally, adjusted gross income, with 
modifications) if the contribution is made to a public charity, 
but only up to 30 percent of her contribution base if the 
contribution is made to a non-operating private 
foundation.\990\
---------------------------------------------------------------------------
    \990\ Secs. 170(b)(1)(A) and (B).
---------------------------------------------------------------------------
    In addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities, as well as a tax on their net investment 
income.\991\
---------------------------------------------------------------------------
    \991\ Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
jeopardizing investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
---------------------------------------------------------------------------

Medical research organizations

    A medical research organization is treated as a public 
charity per se, regardless of its sources of financial support, 
and charitable contributions to a medical research organization 
may qualify for the more preferential 50-percent 
limitation.\992\
---------------------------------------------------------------------------
    \992\ Secs. 170(b)(1)(A)(iii) and 509(a)(1).
---------------------------------------------------------------------------
    To qualify as a medical research organization, an 
organization's principal purpose or functions must be medical 
research, and it must be directly engaged in the continuous 
active conduct of medical research in conjunction with a 
hospital.\993\ For a contribution to a medical research 
organization to qualify for the more preferential 50-percent 
limitation of section 170(b)(1)(A), during the calendar year in 
which the contribution is made, the organization must be 
committed to spend such contribution for the active conduct of 
medical research before January 1 of the fifth calendar year 
beginning after the date such contribution is made.\994\
---------------------------------------------------------------------------
    \993\ Treas. Reg. sec. 1.170A-9(d)(2)(i).
    \994\ Ibid.
---------------------------------------------------------------------------

Lobbying activities of section 501(c)(3) organizations

    Charitable organizations face limits on the amount of 
permissible lobbying activity. An organization does not qualify 
for tax-exempt status as a charitable organization unless ``no 
substantial part'' of its activities constitutes ``carrying on 
propaganda, or otherwise attempting, to influence legislation'' 
(commonly referred to as ``lobbying'').\995\ Public charities 
may engage in limited lobbying activities, provided that such 
activities are not substantial, without losing their tax-exempt 
status and generally without being subject to tax. In contrast, 
private foundations are subject to a restriction that lobbying 
activities, even if insubstantial, may result in the foundation 
being subject to penalty excise taxes.\996\
---------------------------------------------------------------------------
    \995\ Sec. 501(c)(3).
    \996\ Sec. 4945(d)(1).
---------------------------------------------------------------------------
    For purposes of determining whether lobbying activities are 
a substantial part of a public charity's overall functions, a 
public charity may choose between two standards, the 
``substantial part'' test or the ``expenditure'' test.\997\ The 
substantial part test derives from the statutory language 
quoted above and uses a facts and circumstances approach to 
measure the permissible level of lobbying activities. The 
expenditure test sets specific dollar limits, calculated as a 
percentage of a charity's total exempt purpose expenditures, on 
the amount a charity may spend to influence legislation.\998\
---------------------------------------------------------------------------
    \997\ Secs. 501(c)(3), 501(h), and 4911. Churches and certain 
church-related entities may not choose the expenditure test. Sec. 
501(h)(5).
    \998\ Secs. 501(h) and 4911.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends section 170(b)(1)(A) to provide 
special treatment for certain agricultural research 
organizations, consistent with the present-law treatment for 
medical research organizations. The effect of the proposed 
amendment, therefore, is to: (1) allow certain charitable 
contributions to qualifying agricultural research organizations 
to qualify for the 50-percent limitation; and (2) treat 
qualifying agricultural research organizations as public 
charities (i.e., non-private foundations) per se, regardless of 
their sources of financial support.
    To qualify, an agricultural research organization must be 
engaged in the continuous active conduct of agricultural 
research (as defined in section 1404 of the Agricultural 
Research, Extension, and Teaching Policy Act of 1977) in 
conjunction with a land-grant college or university (as defined 
in such section) or a non-land grant college of agriculture (as 
defined in such section). In addition, for a contribution to an 
agricultural research organization to qualify for the 50-
percent limitation, during the calendar year in which a 
contribution is made to the organization, the organization must 
be committed to spend the contribution for such research before 
January 1 of the fifth calendar year which begins after the 
date of the contribution. It is intended that the provision be 
interpreted in like manner to and consistent with the rules 
applicable to medical research organizations.
    An agricultural research organization is permitted to use 
the expenditure test of section 501(h) for purposes of 
determining whether a substantial part of its activities 
consist of carrying on propaganda, or otherwise attempting, to 
influence legislation (i.e., lobbying).

                             Effective Date

    The provision is effective for contributions made on or 
after the date of enactment (December 18, 2015).

2. Remove bonding requirements for certain taxpayers subject to Federal 
        excise taxes on distilled spirits, wine, and beer (sec. 332 of 
        the Act and secs. 5061(d), 5173(a), 5351, 5401 and 5551 of the 
        Code)

                              Present Law

    An excise tax is imposed on all distilled spirits, wine, 
and beer produced in, or imported into, the United States.\999\ 
The tax liability legally comes into existence the moment the 
alcohol is produced or imported but payment of the tax is not 
required until a subsequent withdrawal or removal from the 
distillery, winery, brewery, or, in the case of an imported 
product, from customs custody or bond.\1000\ The excise tax is 
paid on the basis of a return \1001\ and is paid at the time of 
removal unless the taxpayer has a withdrawal bond in place. In 
that case, the taxes are paid with semi-monthly returns, the 
periods for which run from the 1st to the 15th of the month and 
from the 16th to the last day of the month, with the returns 
and payments due not later than 14 days after the close of the 
respective return period.\1002\ For example, payments of taxes 
with respect to removals occurring from the 1st to the 15th of 
the month are due with the applicable return on the 29th. 
Taxpayers who expect to be liable for not more than $50,000 in 
excise taxes for the calendar year may pay quarterly.\1003\ 
Under regulations, wineries with less than $1,000 in annual 
excise taxes may file and pay on an annual basis.\1004\ 
Taxpayers who were liable for a gross amount of taxes of 
$5,000,000 or more for the preceding calendar year must make 
deposits of tax for the current calendar year by electronic 
funds transfer.\1005\
---------------------------------------------------------------------------
    \999\ Secs. 5001, 5041, and 5051.
    \1000\ Secs. 5006, 5043, and 5054. In general, proprietors of 
distilled spirit plants, proprietors of bonded wine cellars, brewers, 
and importers are liable for the tax. Secs. 5005, 5043, and 5054. 
Customs and Border Protection (CBP) collects the excise tax on imported 
products.
    \1001\ Sec. 5061.
    \1002\ Under a special rule, September has three return periods. 
Sec. 5061.
    \1003\ Sec. 5061.
    \1004\ 27 CFR sec. 24.273.
    \1005\ Sec. 5061.
---------------------------------------------------------------------------
    Certain removals or transfers are exempt from tax. For 
example, distilled spirits, wine, and beer may be removed 
either free of tax or without immediate payment of tax for 
certain uses,\1006\ such as for export or an industrial use. 
Bulk distilled spirits, as well as wine and beer, may be 
transferred without payment of the tax between bonded premises 
under certain conditions specified in the regulations; \1007\ 
such bulk products, if imported, may be transferred without 
payment of the tax to domestic bonded premises under certain 
conditions.\1008\ The tax liability accompanies such a product 
that is transferred in bond.
---------------------------------------------------------------------------
    \1006\ Such uses are specified in sections 5053, 5214, 5362, and 
5414.
    \1007\ See, e.g., sec. 5212. Domestic bottled distilled spirits 
cannot be transferred in bond between distilleries. See 27 CFR sec. 
19.402.
    \1008\ Secs. 5005, 5232, 5364, and 5418. Imported bottled distilled 
spirits, wine, and beer cannot be transferred in bond from customs 
custody to a distillery, winery, or brewery. See sec. 5061(d)(2)(B).
---------------------------------------------------------------------------
    Before commencing operations, a distiller must register, a 
winery must qualify, and a brewery must file a notice with the 
Alcohol and Tobacco Tax and Trade Bureau (TTB) and receive 
approval to operate.\1009\ Various types of bonds (including 
operations bonds and tax deferral or withdrawal bonds) are 
required for any person operating a distilled spirits plant, 
winery, or brewery.\1010\ The bond amounts are generally set by 
regulations and determined based on the underlying excise tax 
liability.\1011\
---------------------------------------------------------------------------
    \1009\ Secs. 5171, 5351-53, and 5401; 27 CFR sec. 19.72(b) 
(distilled spirits plant), 27 CFR sec. 24.106 (wine producer), 27 CFR 
sec. 25.61(a) (brewer).
    \1010\ Secs. 5173, 5354, 5401, and 5551; 27 CFR parts 19 (Distilled 
Spirits), 24 (Wine), and 25 (Beer).
    \1011\ See, e.g., 27 CFR sec. 19.166(c) requiring a withdrawal bond 
for distilled spirits in the amount of excise tax that has not been 
paid (up to a maximum of $1 million); 27 CFR sec. 24.148(a)(2) 
requiring a wine bond to cover the amount of tax deferred (up to a 
maximum of $250,000); 27 CFR sec. 25.93(a) requiring a bond equal to 10 
percent of the maximum excise tax for which the brewer will be liable 
to pay during a calendar year for brewers required to file tax returns 
and remit excise taxes semimonthly and a bond equal to $1,000 for 
brewers who were liable for not more than $50,000 in excise taxes with 
respect to beer in the previous year and who reasonably expect to be 
liable for not more than $50,000 in such taxes during the current year.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows any distilled spirits, wine, or beer 
taxpayer who reasonably expects to be liable for not more than 
$50,000 per year in alcohol excise taxes (and who was liable 
for not more than $50,000 in such taxes in the preceding 
calendar year) to file and pay such taxes quarterly, rather 
than semi-monthly. The provision also creates an exemption from 
the bond requirement in the Code for these taxpayers. The 
provision includes conforming changes to the other sections of 
the Code describing bond requirements.
    Additionally, the provision allows any distilled spirits, 
wine, or beer taxpayer with a reasonably expected alcohol 
excise tax liability of not more than $1,000 per year to file 
and pay such taxes annually rather than on a quarterly basis.

                             Effective Date

    The provision is effective for calendar quarters beginning 
more than one year after the date of enactment (December 18, 
2015).

3. Modification to alternative tax for certain small insurance 
        companies (sec. 333 of the Act and sec. 831(b) of the Code) 
        \1012\
---------------------------------------------------------------------------

    \1012\ The Senate Committee on Finance reported S. 905 on April 14, 
2015 (S. Rep. No. 114-16).
---------------------------------------------------------------------------

                              Present Law

    Under present law, the taxable income of a property and 
casualty insurance company is the sum of the amount earned from 
underwriting income and from investment income (as well as 
gains and other income items), reduced by allowable deductions. 
For this purpose, underwriting income and investment income are 
computed on the basis of the underwriting and investment 
exhibit of the annual statement approved by the National 
Association of Insurance Commissioners. Insurance companies are 
subject to tax at regular corporate income tax rates.
    In lieu of the tax otherwise applicable, certain property 
and casualty insurance companies may elect to be taxed only on 
taxable investment income under section 831(b). The election is 
available to mutual and stock companies with net written 
premiums or direct written premiums (whichever is greater) that 
do not exceed $1,200,000.
    For purposes of determining whether a company meets this 
dollar limit, the company is treated as receiving during the 
taxable year amounts of net or direct written premiums that are 
received during that year by all other companies that are 
members of the same controlled group as the company. A 
controlled group means any controlled group of corporations as 
defined in section 1563(a), but applying a ``more than 50 
percent'' threshold in lieu of the ``at least 80 percent'' 
threshold in the requirement that one of the corporations own 
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 share of all classes of stock of each of the 
corporations; without treating insurance companies as a 
separate controlled group; and without treating life insurance 
companies as excluded members.\1013\
---------------------------------------------------------------------------
    \1013\ Sec. 1563(a)(1) and (4), and (b)(2)(D), as modified by sec. 
831(b)(2)(B).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the section 831(b) eligibility rules 
for a property and casualty insurance company to elect to be 
taxed only on taxable investment income.

Increase and indexing of dollar limits

    The provision increases the amount of the limit on net 
written premiums or direct written premiums (whichever is 
greater) from $1,200,000 to $2,200,000 and indexes this amount 
for inflation starting in 2016. The base year for calculating 
the inflation adjustment is 2013. If the amount, as adjusted, 
is not a multiple of $50,000, it is rounded to the next lowest 
multiple of $50,000.

Diversification requirements

    The provision adds diversification requirements to the 
eligibility rules. A company can meet these in one of two ways.
            Risk diversification test
    An insurance company meets the diversification requirement 
if no more than 20 percent of the net written premiums (or, if 
greater, direct written premiums) of the company for the 
taxable year is attributable to any one policyholder. In 
determining the attribution of premiums to any policyholder, 
all policyholders that are related \1014\ or are members of the 
same controlled group \1015\ are treated as one policyholder.
---------------------------------------------------------------------------
    \1014\ For this purpose, persons are related within the meaning of 
section 267(b) or 707(b).
    \1015\ Members of the same controlled group are determined as under 
present law for purposes determining whether a company meets the dollar 
limit applicable to net written premiums (or, if greater, direct 
written premiums). The provision relocates the controlled group 
definition, as modified for purposes of section 831, in section 
831(b)(2)(C).
---------------------------------------------------------------------------
            Relatedness test
    If the company does not meet this 20-percent requirement, 
an alternative diversification requirement applies for the 
company to be eligible to elect 831(b) treatment.\1016\ Under 
this requirement, no person who holds (directly or indirectly) 
an interest in the company is a specified holder who holds 
(directly or indirectly) aggregate interests in the company 
that constitute a percentage of the entire interests in the 
company that is more than a de minimis percentage higher than 
the percentage of interests in the specified assets with 
respect to the company held (directly or indirectly) by the 
specified holder. Except as otherwise provided in regulations 
or other guidance, two percentage points or less is treated as 
de minimis. An indirect interest for this purpose includes any 
interest held through a trust, estate, partnership, or 
corporation.
---------------------------------------------------------------------------
    \1016\ These added eligibility rules reflect the concern expressed 
by the Senate Committee on Finance upon reporting out S. 905, ``An Act 
to Amend the Internal Revenue Code of 1986 to Increase the Limitation 
on Eligibility for the Alternative Tax for Certain Small Insurance 
Companies,'' when the Committee stated, ``The Committee notes that the 
provision does not include a related proposal that would narrow 
eligibility to elect the alternative tax in a manner intended to 
address abuse potential, but that may cause problems for certain 
States. The Committee therefore wants the Treasury Department to study 
the abuse of captive insurance companies for estate planning purposes, 
so Congress can better understand the scope of this problem and whether 
legislation is necessary to address it.'' S. Rep. 114-16, April 14, 
2015, page 2.
---------------------------------------------------------------------------
    A specified holder means, with respect to an insurance 
company, any individual who holds (directly or indirectly) an 
interest in the insurance company and who is a spouse or lineal 
descendant (including by adoption) of an individual who holds 
an interest (directly or indirectly) in the specified assets 
with respect to the insurance company.
    The specified assets with respect to an insurance company 
mean the trades or businesses, rights, or assets with respect 
to which the net written premiums (or direct written premiums) 
of the company are paid.
    For example, assume that in 2017, a captive insurance 
company does not meet the requirement that no more than 20 
percent of its net (or direct) written premiums is attributable 
to any one policyholder. The captive has one policyholder, 
Business, certain of whose property and liability risks the 
captive covers (the specified assets), and Business pays the 
captive $2 million in premiums in 2017. Business is owned 70 
percent by Father and 30 percent by Son. The captive is owned 
100 percent by Son (whether directly, or through a trust, 
estate, partnership, or corporation). Son is Father's lineal 
descendant. Son, a specified holder, has a non-de minimis 
percentage greater interest in the captive (100 percent) than 
in the specified assets with respect to the captive (30 
percent). Therefore, the captive is not eligible to elect 
section 831(b) treatment.
    If, by contrast, all the facts were the same except that 
Son owned 30 percent and Father owned 70 percent of the 
captive, Son would not have a non-de minimis percentage greater 
interest in the captive (30 percent) than in the specified 
assets with respect to the captive (30 percent). The captive 
would meet the diversification requirement for eligibility to 
elect section 831(b) treatment. The same result would occur if 
Son owned less than 30 percent of the captive (and Father more 
than 70 percent), and the other facts remained unchanged.
    Any insurance company for which an 831(b) election is in 
effect for a taxable year must report information required by 
the Secretary relating to the diversification requirements 
imposed under the provision.
    The provision also makes a technical amendment striking an 
unnecessary redundant parenthetical reference to interinsurers 
and reciprocal underwriters.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2016.

4. Treatment of timber gain (sec. 334 of the Act and sec. 1201 of the 
        Code)

                              Present Law


Treatment of certain timber gain

    Under present law, if a taxpayer cuts standing timber, the 
taxpayer may elect to treat the cutting as a sale or exchange 
eligible for capital gains treatment (sec. 631(a)). The fair 
market value of the timber on the first day of the taxable year 
in which the timber is cut is used to determine the gain 
attributable to such cutting. Such fair market value is 
thereafter considered the taxpayer's cost of the cut timber for 
all purposes, such as to determine the taxpayer's income from 
later sales of the timber or timber products. Also, if a 
taxpayer disposes of the timber with a retained economic 
interest or makes an outright sale of the timber, the gain is 
eligible for capital gain treatment (sec. 631(b)). This 
treatment under either section 631(a) or (b) requires that the 
taxpayer has owned the timber or held the contract right for a 
period of more than one year.
    The maximum regular rate of tax on the net capital gain of 
an individual is 20 percent.\1017\ Certain gains are subject to 
an additional 3.8-percent tax.\1018\
---------------------------------------------------------------------------
    \1017\ Sec. 1(h).
    \1018\ Sec. 1411.
---------------------------------------------------------------------------
    The net capital gain of a corporation is taxed at the same 
rates as ordinary income, up to a maximum rate of 35 
percent.\1019\
---------------------------------------------------------------------------
    \1019\ Secs. 11 and 1201.
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act provides a 23.8-percent alternative tax rate for 
corporations on the portion of a corporation's taxable income 
that consists of qualified timber gain (or, if less, the net 
capital gain) for a taxable year.
    Qualified timber gain means the net gain described in 
section 631(a) and (b) for the taxable year, determined by 
taking into account only trees held more than 15 years.

                             Effective Date

    The provision applies to taxable years beginning in 2016.

5. Modification of definition of hard cider (sec. 335 of the Act and 
        sec. 5041 of the Code) \1020\
---------------------------------------------------------------------------

    \1020\ The Senate Committee on Finance reported S.906 on April 14, 
2015 (S. Rep. No. 114-17).
---------------------------------------------------------------------------

                              Present Law

    An excise tax is imposed on all distilled spirits, wine, 
and beer produced in, or imported into, the United 
States.\1021\ The tax liability legally comes into existence 
the moment the alcohol is produced or imported but payment of 
the tax is not required until a subsequent withdrawal or 
removal from the distillery, winery, brewery, or, in the case 
of an imported product, from customs custody or bond.\1022\
---------------------------------------------------------------------------
    \1021\ Secs. 5001 (distilled spirits), 5041 (wines), and 5051 
(beer).
    \1022\ Secs. 5006, 5043, and 5054. In general, proprietors of 
distilled spirit plants, proprietors of bonded wine cellars, brewers, 
and importers are liable for the tax.
---------------------------------------------------------------------------
    Distilled spirits, wine, and beer produced or imported into 
the United States are taxed at the following rates per 
specified volumetric measure:
---------------------------------------------------------------------------
    \1023\ A ``proof gallon'' is a U.S. liquid gallon of proof spirits, 
or the alcoholic equivalent thereof. Generally a proof gallon is a U.S. 
liquid gallon consisting of 50 percent alcohol. On lesser quantities, 
the tax is paid proportionately. Credits are allowed for wine content 
and flavors content of distilled spirits. Sec. 5010.
    \1024\ Small domestic wine producers (i.e., those producing not 
more than 250,000 wine gallons in a calendar year) are allowed a credit 
of $0.90 per wine gallon ($0.056 per wine gallon in the case of hard 
cider) on the first 100,000 wine gallons (other than champagne and 
other sparkling wines) removed. The credit is reduced by one percent 
for each 1,000 wine gallons produced in excess of 150,000 wine gallons 
per calendar year.
    \1025\ A ``wine gallon'' is a U.S. gallon of liquid measure 
equivalent to the volume of 231 cubic inches. On lesser quantities, the 
tax is paid proportionately.
    \1026\ Sec. 5001(a)(4).
    \1027\ A small domestic brewer (one who produces not more than 2 
million barrels in a calendar year) is subject to a per barrel rate of 
$7.00 on the first 60,000 barrels produced in that year.
    \1028\ A ``barrel'' contains not more than 31 gallons, each gallon 
equivalent to the volume of 231 cubic inches. On lesser quantities, the 
tax is paid proportionately.

------------------------------------------------------------------------
                   Item                           Current Tax Rate
------------------------------------------------------------------------
Distilled Spirits.........................      $13.50 per proof gallon
                                                 \1023\
Wine \1024\
    Still Wines:
        Not more than 14 percent alcohol..       $1.07 per wine gallon
                                                \1025\
        More than 14 percent but not more     $1.57 per wine gallon
         than 21 percent alcohol.
        More than 21 percent but not more     $3.15 per wine gallon
         than 24 percent alcohol.
        More than 24 percent alcohol......        Taxed as distilled
                                                 spirits \1026\
                                               ($13.50 per proof gallon)
    Hard cider............................      $0.226 per wine gallon
    Sparkling Wines--
        Champagne and other naturally         $3.40 per wine gallon
         sparkling wines.
        Artificially carbonated wines.....    $3.30 per wine gallon
Beer \1027\...............................    $18.00 per barrel \1028\
------------------------------------------------------------------------

    Hard cider is a still wine derived primarily from apples or 
apple concentrate and water, containing no other fruit product, 
and containing at least one-half of one percent and less than 
seven percent alcohol by volume.\1029\ Still wines are wines 
containing not more than 0.392 grams of carbon dioxide per 
hundred milliliters of wine.
---------------------------------------------------------------------------
    \1029\ Sec. 5041(b)(6).
---------------------------------------------------------------------------
    Other wines made from apples, apple concentrate or other 
fruit products are taxed at the rates applicable in accordance 
with the alcohol and carbon dioxide content of the wine.

                        Explanation of Provision

    The provision would amend the definition of hard cider to 
mean a wine with a carbonation level that does not exceed 0.64 
grams of carbon dioxide per hundred milliliters of wine. 
Additionally, the provision would expand the hard cider 
definition to include pears, or pear juice concentrate and 
water, in addition to apples and apple juice concentrate and 
water. Under the provision, the Secretary may, by regulation, 
prescribe tolerance to the limitation as may be reasonably 
necessary in good commercial practice. The provision would 
change the allowable alcohol content of cider to at least one-
half of one percent and less than 8.5 percent alcohol by 
volume.

                             Effective Date

    The provision applies to hard cider removed during calendar 
years beginning after December 31, 2016.

6. Church plan clarification (sec. 336 of the Act and sec. 414 of the 
        Code)

                              Present Law


Tax-favored retirement plans

    Tax-favored employer-sponsored retirement plans include 
qualified retirement plans and section 403(b) plans.\1030\ A 
qualified retirement plan may be maintained by any type of 
employer. Section 403(b) plans may be maintained only by (1) 
certain tax-exempt organizations,\1031\ and (2) educational 
institutions of State or local governments (i.e., public 
schools, including colleges and universities).
---------------------------------------------------------------------------
    \1030\ Secs. 401(a) and 403(b).
    \1031\ These are organizations exempt from tax under section 
501(c)(3).
---------------------------------------------------------------------------
    Qualified retirement plans and section 403(b) plans are 
subject to various requirements to receive tax-favored 
treatment, such as nondiscrimination requirements, vesting 
requirements, and limits on contributions and benefits, 
discussed below. In the case of plans subject to the Employee 
Retirement Income Security Act of 1974 (``ERISA''), 
requirements similar to some of the requirements under the 
Code, such as vesting requirements, apply also under ERISA.
    Under the Code, these plans generally are prohibited from 
discriminating in favor of highly compensated employees \1032\ 
with respect to contributions and benefits under the plan 
(``general nondiscrimination rule'') and with respect to the 
group of employees eligible to participate in a plan (``minimum 
coverage rule'').\1033\
---------------------------------------------------------------------------
    \1032\ Under section 414(q), an employee generally is treated as 
highly compensated if the employee (1) was a five-percent owner of the 
employer at any time during the year or the preceding year, or (2) had 
compensation for the preceding year in excess of $120,000 (for 2015).
    \1033\ Sections 401(a)(3) and 410(b) deal with the minimum coverage 
requirement; section 401(a)(4) deals with the general nondiscrimination 
requirements, with related rules in section 401(a)(5). In addition to 
the minimum coverage and general nondiscrimination requirements, under 
section 401(a)(26), the group of employees who accrue benefits under a 
defined benefit plan for a year must consist of at least 50 employees, 
or, if less, 40 percent of the workforce, subject to a minimum of two 
employees accruing benefits. Special tests apply to elective deferrals 
under section 401(k) and employer matching contributions and after-tax 
employee contributions under section 401(m). Detailed regulations 
implement these statutory requirements. The nondiscrimination rules, 
with some modifications, apply to a section 403(b) plan by cross-
reference in section 403(b)(12).
---------------------------------------------------------------------------

Special rules for plans maintained by churches or church-related 
        organizations

    Special rules apply with respect to qualified retirement 
plans that are church plans and to section 403(b) plans that 
are maintained by churches or qualified church-controlled 
organizations.
    A qualified retirement plan that is a church plan is 
excepted from various requirements applicable to qualified 
plans generally under the Code unless an election is made for 
the plan to be subject to these requirements.\1034\ A church 
plan with respect to which this election is not made is 
generally referred to as a ``nonelecting church plan.'' \1035\ 
A nonelecting church plan is also exempt from ERISA.\1036\
---------------------------------------------------------------------------
    \1034\ Secs. 401(a), last sentence, 410 (c) and (d), and 411(e). 
The requirements from which a church plan is exempt include the minimum 
participation, vesting, anti-alienation, and qualified joint and 
survivor requirements. With respect to the nondiscrimination 
requirements applicable to qualified retirement plans, Notice 2001-46, 
2001-2 C.B. 122, provides that, until further notice, nonelecting 
church plans may be operated in accordance with a reasonable, good 
faith interpretation of the statutory requirements, rather than having 
to comply with the requirements in the nondiscrimination regulations.
    \1035\ Under section 411(e)(2), a nonelecting church plan is 
subject to the vesting, participation, and nondiscriminatory vesting 
requirements in effect before the enactment of ERISA (the pre-ERISA 
vesting requirements). Under the pre-ERISA vesting requirements, a 
participant's accrued benefit is not required to become nonforfeitable 
(or vested) until the participant attains normal retirement age under 
the plan, rather than in accordance with a prescribed schedule as is 
generally required for qualified retirement plans. In addition, the 
pattern of vesting under the plan may not have the effect of 
discriminating in favor of a prohibited group of officers, 
shareholders, supervisors, and highly compensated employees.
    \1036\ ERISA sec. 4(b)(2).
---------------------------------------------------------------------------
    For this purpose, a church plan generally is a plan 
established and maintained for its employees (or their 
beneficiaries) by a church or by a convention or association of 
churches that is tax-exempt.\1037\ For this purpose, employees 
of a tax-exempt organization that is controlled by or 
associated with a church or a convention or association of 
churches are treated as employed by a church or convention or 
association of churches. Associated with a church or a 
convention or association of churches for this purpose means 
sharing common religious bonds and convictions. Finally, a 
church plan also includes a plan maintained by an organization 
that is controlled by or associated with a church or convention 
or association of churches and has as its principal purpose or 
function the administration or funding of a plan or program for 
providing retirement or welfare benefits, or both, for the 
employees of the church or convention or association of 
churches (a ``church plan organization'').
---------------------------------------------------------------------------
    \1037\ Secs. 414(e) and 501. A similar definition applies under 
ERISA section 3(33). The definition of church plan is not limited to 
retirement plans. For example, a health plan may be a church plan.
---------------------------------------------------------------------------
    A section 403(b) plan maintained by a church or qualified 
church-controlled organization is not subject to the 
nondiscrimination requirements otherwise applicable to section 
403(b) plans.\1038\ For this purpose, church means a church, a 
convention or association of churches, or an elementary or 
secondary school that is controlled, operated, or principally 
supported by a church or by a convention or association of 
churches and includes a qualified church-controlled 
organization.\1039\ A qualified church-controlled organization 
is any church-controlled tax-exempt organization \1040\ other 
than an organization that (1) offers goods, services, or 
facilities for sale, other than on an incidental basis, to the 
general public, other than goods, services, or facilities that 
are sold at a nominal charge substantially less than the cost 
of providing the goods, services, or facilities; and (2) 
normally receives more than 25 percent of its support from 
either governmental sources, or receipts from admissions, sales 
of merchandise, performance of services, or furnishing of 
facilities, in activities that are not unrelated trades or 
businesses, or from both. Church controlled organizations that 
are not qualified church-controlled organizations are generally 
referred to as ``nonqualified church-controlled 
organizations.''
---------------------------------------------------------------------------
    \1038\ Sec. 403(b)(1)(D).
    \1039\ Sec. 403(b)(12)(B), which incorporates by reference the 
definitions in section 3121(w)(3)(A) and (B).
    \1040\ For this purpose, exempt status under section 501(c)(3) is 
required.
---------------------------------------------------------------------------

Aggregation rules for groups under common control

            General rule
    In general, in applying the requirements for tax-favored 
treatment, employees of employers (including corporations and 
other entities) that are members of a group under common 
control are treated as employed by a single employer (referred 
to as aggregation rules).\1041\ For example, in applying the 
nondiscrimination requirements, the employees of all the 
members of a group, and the benefits provided under plans 
maintained by any member of the group, are generally taken into 
account. In the case of taxable entities, common control is 
generally based on the percentage of equity ownership with a 
general threshold of 80 percent ownership. Other tests apply 
for entities that do not involve ownership.
---------------------------------------------------------------------------
    \1041\ Sec. 414(c) and the regulations thereunder provide for 
aggregation of groups under common control. Section 414 (b), (m) and 
(o) also provide aggregation rules for a controlled group of 
corporations and affiliated service groups. Under section 414(t), the 
aggregation rules apply also for purposes of various benefits other 
than retirement benefits. In addition, other provisions incorporate the 
aggregation rules by reference, such as section 4980H, requiring 
certain employers to offer health coverage to full-time employees.
---------------------------------------------------------------------------
            Rules for tax-exempt organizations (other than churches)
    Treasury regulations provide rules for determining whether 
tax-exempt organizations are under common control.\1042\
---------------------------------------------------------------------------
    \1042\ Treas. Reg. sec. 1.414(c)-5.
---------------------------------------------------------------------------
    Under one rule, common control exists between an exempt 
organization and another organization if at least 80 percent of 
the directors or trustees of one organization are either 
representatives of, or directly or indirectly controlled by, 
the other organization. A trustee or director is treated as a 
representative of another exempt organization if he or she also 
is a trustee, director, agent, or employee of the other exempt 
organization. A trustee or director is controlled by another 
organization if the other organization has the general power to 
remove the trustee or director and designate a new trustee or 
director. Whether a person has the power to remove or designate 
a trustee or director is based on facts and circumstances.
    Under a permissive aggregation rule, exempt organizations 
that maintain a plan that covers one or more employees from 
each organization may treat themselves as under common control 
(and, thus, as a single employer) if each of the organizations 
regularly coordinates their day-to-day exempt activities.\1043\ 
The regulations also permit the IRS, in published guidance, to 
permit other types of combinations of entities that include 
exempt organizations to elect to be treated as under common 
control for one or more specified purposes if (1) there are 
substantial business reasons for maintaining each entity in a 
separate trust, corporation, or other form, and (2) the 
treatment would be consistent with the anti-abuse standards 
described below.
---------------------------------------------------------------------------
    \1043\ The regulations give as an example an entity that provides a 
type of emergency relief within one geographic region and another that 
provides that type of emergency relief within another geographic region 
and indicates that the two organizations may treat themselves as under 
common control if they have a single plan covering employees of both 
entities and regularly coordinate their day-to-day exempt activities. 
Similarly, a hospital that is an exempt organization and another exempt 
organization with which it coordinates the delivery of medical services 
or medical research may treat themselves as under common control if 
there is a single plan covering employees of the hospital and employees 
of the other exempt organization and the coordination is a regular part 
of their day-to-day exempt activities.
---------------------------------------------------------------------------
    The regulations provide an anti-abuse rule under which the 
IRS may treat an entity as under common control with an exempt 
organization in certain cases. These include any case in which 
the IRS determines that the structure of one or more exempt 
organizations (which may include an exempt organization and a 
taxable entity) or the positions taken by the organizations 
have the effect of avoiding or evading any requirements for 
tax-favored retirement plans (or any other requirement for 
purposes of which the common control rules apply).\1044\
---------------------------------------------------------------------------
    \1044\ Treas. Reg. sec. 1.414(c)-5(f).
---------------------------------------------------------------------------
            Rules for churches and qualified church-controlled 
                    organizations
    The regulations for determining common control of tax-
exempt organizations generally do not apply to churches or 
qualified church-controlled organizations, as defined for 
purposes of the exception to the section 403(b) 
nondiscrimination rules.\1045\ The regulations do, however, 
provide a rule for permissive disaggregation between churches 
and qualified church-controlled organizations and other 
entities. In the case of a church plan (as defined above) to 
which contributions are made by two or more entities that are 
common law employers, any employer may apply the general 
aggregation rules for tax-exempt entities (as described above) 
to entities that are not a church or qualified church-
controlled organization separately from entities that are 
churches or qualified church-controlled organizations. For 
example, in the case of a group of entities consisting of a 
church, a secondary school (which is a qualified church-
controlled organization), and several nursing homes each of 
which receives more than 25 percent of its support from fees 
paid by residents (so that none of them is a qualified church-
controlled organization), the nursing homes may treat 
themselves as being under common control with each other, but 
not as being under common control with the church and the 
school, even though the nursing homes would be under common 
control with the school and the church under the general 
aggregation rules for tax-exempt entities.
---------------------------------------------------------------------------
    \1045\ Under Treas. Reg. sec. 1.414(c)-5(e), the rules for churches 
and qualified church-controlled organizations are reserved.
---------------------------------------------------------------------------
    The preamble to the Treasury regulations also indicates 
that churches and qualified church-controlled organizations 
maintaining section 403(b) plans can continue to rely on 
previous guidance \1046\ that provides a safe harbor standard 
for determining the members of a controlled group.\1047\ Under 
this safe harbor, a controlled group includes each entity of 
which at least 80 percent of the directors, trustees or other 
individual members of the entity's governing body are either 
representatives of or directly or indirectly control, or are 
controlled by, the contributing employer. In addition, under 
the safe harbor, an entity is included in the same controlled 
group as the contributing employer if the entity provides 
directly or indirectly at least 80 percent of the contributing 
employer's operating funds and there is a degree of common 
management or supervision between the entities. A degree of 
common management or supervision exists if the entity providing 
the funds has the power to appoint or nominate officers, senior 
management or members of the board of directors (or other 
governing board) of the entity receiving the funds. A degree of 
common management or supervision also exists if the entity 
providing the funds is involved in the day-to-day operations of 
the entity.
---------------------------------------------------------------------------
    \1046\ Notice 89-23, 1989-1 C.B. 654, Part V.B.2.a.
    \1047\ 72 Fed. Reg. 41128, 41138 (July 26, 2007).
---------------------------------------------------------------------------

Limits on contributions and benefits

    Contributions or benefits under a qualified retirement plan 
are subject to limits. The limit that applies is generally 
based on whether the plan is a defined contribution plan or a 
defined benefit plan.\1048\
---------------------------------------------------------------------------
    \1048\ Sec. 415(a)(1).
---------------------------------------------------------------------------
    Total contributions to a defined contribution plan on 
behalf of an employee (other than catch-up contributions for an 
employee age 50 or older) for a year cannot exceed the lesser 
of $53,000 (for 2015) and the employee's compensation.\1049\ 
Contributions made by an employer to more than one plan are 
aggregated for purposes of this limit, and employee 
contributions to a defined benefit plan, if any, are also taken 
into account in applying the limit.
---------------------------------------------------------------------------
    \1049\ Sec. 415(c).
---------------------------------------------------------------------------
    An employee's annual benefit under all defined benefit 
plans of an employer generally must be limited to the lesser of 
$210,000 (for 2015) and the employee's average compensation for 
the three years resulting in the highest average.\1050\ The 
dollar limit applies to benefits commencing between age 62 and 
age 65 in the form of a straight life annuity for the life of 
the employee. If benefits under a plan are paid in a form other 
than a straight life annuity commencing between age 62 and age 
65, the benefits payable under the other form (including any 
benefit subsidies) generally cannot exceed the dollar limit 
when actuarially converted to a straight life annuity 
commencing at age 62.\1051\
---------------------------------------------------------------------------
    \1050\ Sec. 415(b). In general, the dollar limit is prorated in the 
case of a participant with fewer than 10 years of participation in a 
plan, and the compensation limit is prorated in the case of a 
participant with fewer than 10 years of service with the employer.
    \1051\ Specified interest and, in some cases, mortality assumptions 
apply in doing this conversion.
---------------------------------------------------------------------------
    Section 403(b) plans are generally defined contribution 
plans and are subject to the limits on contributions to defined 
contribution plans.\1052\ However, under the Tax Equity and 
Fiscal Responsibility Act of 1982, certain defined benefit 
arrangements established by church-related organizations and in 
effect on September 3, 1982, are treated as section 403(b) 
plans (``section 403(b) defined benefit plans'').\1053\ Under 
Treasury regulations, the present value of an employee's annual 
accrual under a section 403(b) defined benefit plan is subject 
to the limit on contributions to a defined contribution plan, 
and the benefits under the plan are subject to the limit on 
benefits under a defined benefit plan.\1054\ Thus, the plan is 
subject to both limits.
---------------------------------------------------------------------------
    \1052\ Secs. 403(b)(1), first sentence, and 415(k)(4). However, 
section 415(a)(2), last sentence, suggests that a section 403(b) plan 
could be subject instead to the limit on benefits under a defined 
benefit plan.
    \1053\ Sec. 251(e)(5) of Pub. L. No. 97-248.
    \1054\ Treas. Reg. secs. 1.403(b)-10(f) and 1.415-1(b)(2) and (3).
---------------------------------------------------------------------------

Automatic enrollment

    Qualified defined contribution plans and section 403(b) 
plans may include a feature under which an employee may elect 
between the receipt of cash compensation and plan 
contributions, referred to as elective deferrals.\1055\ Plans 
are commonly designed so that an employee will receive cash 
compensation unless the employee affirmatively elects to make 
elective deferrals. Alternatively, some plans provide for 
automatic enrollment, a design under which elective deferrals 
are made at a specified rate for an employee, instead of cash 
compensation, unless the employee elects not to make deferrals 
or to make deferrals at a different rate. The Code provides 
various rules to accommodate automatic enrollment 
arrangements.\1056\
---------------------------------------------------------------------------
    \1055\ Secs. 401(k) and 403(b)(1) and (12). The amount of elective 
deferrals an employee may make is subject to limits.
    \1056\ See, for example, secs. 401(k)(13) and (m)(12), 414(w), and 
4979(f)(1). For a discussion of automatic enrollment, see Joint 
Committee on Taxation, Present Law and Background Relating to Tax-
Favored Retirement Savings (JCX-98-14), September 15, 2014, pages 36-
38, available at www.jct.gov.
---------------------------------------------------------------------------
    In the case of a plan subject to ERISA, ERISA generally 
preempts State laws relating to employee benefit plans.\1057\ 
ERISA also expressly exempts any State laws that would impede a 
plan from providing an automatic enrollment arrangement, as 
described in the ERISA preemption provision.\1058\ However, 
ERISA preemption does not apply with respect to plans that are 
exempt from ERISA, including nonelecting church plans.
---------------------------------------------------------------------------
    \1057\ ERISA sec. 514(a).
    \1058\ ERISA sec. 514(e).
---------------------------------------------------------------------------

Vesting requirements and transfers between plans

    In general, employer-provided benefits under a qualified 
retirement plan are subject to minimum vesting requirements, 
which depend on whether the plan is a defined contribution plan 
or a defined benefit plan.\1059\ In addition, under either type 
of plan, a participant must be fully vested at all times in 
benefits attributable to his or her own contributions. However, 
a nonelecting church plan is exempt from these vesting 
requirements. In contrast, contributions to a section 403(b) 
plan, including a section 403(b) that is a church plan, must be 
fully vested at all times.\1060\
---------------------------------------------------------------------------
    \1059\ Sec. 411(a) and ERISA sec. 203. Under a defined contribution 
plan, a participant must vest in benefits attributable to employer 
contributions under one of two vesting schedules: 100 percent vesting 
after three years of service or graduated vesting over two to six years 
of service. With respect to employer-provided benefits under a defined 
benefit plan, a participant generally must vest under one of two 
vesting schedules: 100 percent vesting after five years of service, or 
graduated vesting over three to seven years of service. Under certain 
defined benefit plans, full vesting must occur after three years of 
service.
    \1060\ Sec. 403(b)(1)(C).
---------------------------------------------------------------------------
    A distribution to a participant from a qualified retirement 
plan or a section 403(b) plan generally may be rolled over to 
the other type of plan, including by a direct transfer to the 
recipient plan. In addition, in some cases, benefits and assets 
from one type of plan may be transferred to another plan of the 
same type or two plans of the same type may be merged into a 
single plan. However, transfers of benefits and assets between 
a qualified retirement plan and a section 403(b) plan are not 
permitted through a trustee-to-trustee transfer (other than a 
rollover of a distribution) or through a merger of two 
plans.\1061\
---------------------------------------------------------------------------
    \1061\ Treas. Reg. sec. 1.403(b)-10(b)(1).
---------------------------------------------------------------------------

Group trusts

    Assets of a tax-favored retirement plan generally must be 
set aside in a trust or other fund and used for the exclusive 
benefit of participants and beneficiaries. IRS guidance allows 
the assets of different qualified retirement plans, including 
plans maintained by unrelated employers, to be pooled and held 
by a ``group trust,'' thus enabling employers of various sizes 
to benefit from economies of scale for administrative and 
investment purposes.\1062\ In addition to qualified retirement 
plan assets, a group trust may also hold assets associated with 
certain other tax-favored retirement arrangements, including 
section 403(b) plans. However, a group trust may not hold other 
assets, such as the assets of employers sponsoring the plans.
---------------------------------------------------------------------------
    \1062\ Rev. Rul. 81-100, 1981-1 C.B. 326, most recently modified by 
Rev. Rul. 2014-24, 2014-2 C.B. 529.
---------------------------------------------------------------------------
    The assets of a section 403(b) plan generally must be 
invested in annuity contracts or stock of regulated investment 
companies (that is, mutual funds).\1063\ Under a special rule, 
certain defined contribution arrangements, referred to as 
retirement income accounts, established or maintained by a 
church, or a convention or association of churches, including a 
church plan organization (as described above), are treated as 
annuity contracts and thus are treated as section 403(b) plans, 
the assets of which may be invested in a group trust.\1064\ The 
assets of retirement income accounts may also be commingled in 
a common fund with assets of a church itself (that is, assets 
that are not retirement plan assets) that are devoted 
exclusively to church purposes.\1065\ However, unless permitted 
by the IRS, the assets of a church plan sponsor may not be 
combined with other types of retirement plan assets, such as in 
a group trust.\1066\
---------------------------------------------------------------------------
    \1063\ Sec. 403(b)(1)(A) and (7).
    \1064\ Sec. 403(b)(9); Treas. Reg. sec. 1.403(b)-8(f).
    \1065\ Treas. Reg. sec. 1.403(b)-9(a)(6).
    \1066\ Ibid.
---------------------------------------------------------------------------

                        Explanation of Provision


Application of controlled group rules to church plans

            General rule
    For purposes of applying the controlled group rules with 
respect to employers that are organizations eligible to 
maintain church plans, the general rule under the provision is 
that one organization is not aggregated with another 
organization and treated as a single employer unless two 
conditions are satisfied. First, one of the organizations 
provides directly or indirectly at least 80 percent of the 
operating funds for the other organization during the preceding 
taxable year of the recipient organization, and, second, there 
is a degree of common management or supervision between the 
organizations, such that the organization providing the 
operating funds is directly involved in the day-to-day 
operations of the other organization.
            Nonqualified church-controlled organizations
    Notwithstanding the general rule, an organization that is a 
nonqualified church-controlled organization (``first 
organization'') is aggregated with one or more other 
nonqualified church-controlled organizations or an organization 
that is not a tax-exempt organization (``other organization'') 
and thus treated as a single employer if at least 80 percent of 
the directors or trustees of the other organization or 
organizations are either representatives of, or directly or 
indirectly controlled by, the first organization.
            Permissive aggregation among church-related organizations
    With respect to organizations associated with a church or 
convention or association of churches and eligible to maintain 
a church plan, an election may be made to treat the 
organizations as a single employer even if they would not 
otherwise be aggregated. The election must be made by the 
church or convention or association of churches with which such 
organizations are associated, or by an organization designated 
by the church or convention or association of churches. The 
election, once made, applies to all succeeding plan years 
unless revoked with notice provided to the Secretary of the 
Treasury (``Secretary'') in such manner as the Secretary 
prescribes.
            Permissive disaggregation of church-related organizations
    For purposes of applying the general rule above, in the 
case of a church plan, an employer may elect to treat entities 
that are churches or qualified church-controlled organizations 
separately from other entities, regardless of whether the 
entities maintain separate church plans. The election, once 
made, applies to all succeeding plan years unless revoked with 
notice provided to the Secretary in such manner as the 
Secretary prescribes.
            Anti-abuse rule
    Under the provision, the anti-abuse rule in the regulations 
continues to apply for purposes of the rules for determining 
whether entities are under common control.

Contribution and benefit limits for section 403(b) defined benefit 
        plans

    Under the provision, a section 403(b) defined benefit plan 
is subject to the limit on benefits under a defined benefit 
plan and is not subject to the limit on contributions to a 
defined contribution plan.

Automatic enrollment by church plans

    The provision preempts any State law relating to wage, 
salary or payroll payment, collection, deduction, garnishment, 
assignment, or withholding that would directly or indirectly 
prohibit or restrict the inclusion of an automatic contribution 
arrangement in a church plan. For this purpose, an automatic 
contribution arrangement is an arrangement under which a plan 
participant (1) may elect to have the plan sponsor or the 
employer make payments as contributions under the plan on 
behalf of the participant, or to the participant directly in 
cash, and (2) is treated as having elected to have the plan 
sponsor or the employer make contributions equal to a uniform 
percentage of compensation provided under the plan until the 
participant specifically elects not to have contributions made 
or to have contributions made at a different percentage.
    Within a reasonable period before the first day of each 
plan year, the plan sponsor, plan administrator or employer 
maintaining the arrangement must provide each participant with 
notice of the participant's rights and obligations under the 
arrangement. The notice must include an explanation of (1) the 
participant's right under the arrangement not to have 
contributions made on the participant's behalf (or to elect to 
have contributions made at a different percentage) and (2) how 
contributions made under the arrangement will be invested in 
the absence of any investment election by the participant. The 
notice must be sufficiently accurate and comprehensive to 
apprise the participant of such rights and obligations and must 
be written in a manner calculated to be understood by the 
average participant to whom the arrangement applies.
    The participant must have a reasonable period of time, 
after receipt of the explanation described above and before the 
first contribution is made, to make an election not to have 
contributions made or to have contributions made at a different 
percentage. If a participant has not made an affirmative 
investment election, contributions made under the arrangement 
must be invested in a default investment selected with the 
care, skill, prudence, and diligence that a prudent person 
selecting an investment option would use.

Allow certain plan transfers and mergers

    Under the provision, if a qualified retirement plan that is 
a church plan and a section 403(b) plan are both maintained by 
the same church or convention or association of churches, and 
two requirements are satisfied, a transfer of all or a portion 
of a participant's or beneficiary's accrued benefit from one 
plan to the other, or a merger of the two plans, is permitted. 
The two requirements are that (1) the total accrued benefit of 
each participant or beneficiary immediately after the transfer 
or merger be equal to or greater than the participant's or 
beneficiary's total accrued benefit immediately before the 
transfer or merger, and (2) the total accrued benefit be 
nonforfeitable (i.e., 100 percent vested) after the transfer or 
merger and at all times thereafter. The permitted transfer or 
merger does not result in any income inclusion by the 
participant or beneficiary and does not affect the tax-favored 
status of the qualified retirement plan or section 403(b) plan.

Investment of church plan and church assets in group trusts

    The provision allows the investment in a group trust of the 
assets of a church plan, including a qualified retirement plan 
and a retirement income account, as well as the assets of a 
church plan organization with respect to a church plan or 
retirement income account and any other assets permitted to be 
commingled for investment purposes with the assets of a church 
plan, retirement income account, or a church plan organization, 
without adversely affecting the tax status of the group trust, 
the church plan, the retirement income account, the church plan 
organization, or any other plan or trust that invests in the 
group trust.

                             Effective Date

    The changes made to the controlled group rules and the 
provision relating to limits on defined benefit section 403(b) 
plans apply to years beginning before, on, or after the date of 
enactment (December 18, 2015).
    The provision relating to automatic enrollment is effective 
on the date of enactment.
    The provision relating to plan transfers and mergers 
applies to transfers or mergers occurring after the date of 
enactment.
    The provision relating to investments in group trusts 
applies to investments made after the date of enactment.

                         D. Revenue Provisions


1. Updated ASHRAE standards for energy efficient commercial buildings 
        deduction (sec. 341 of the Act and sec. 179D of the Code) 
        \1067\
---------------------------------------------------------------------------

    \1067\ The Senate Committee on Finance reported S. 1946 on August 
5, 2015 (S. Rep. No. 114-118). See sec. 160.
---------------------------------------------------------------------------

                              Present Law


In general

    Code section 179D provides an election under which a 
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the 
taxpayer. Energy-efficient commercial building property is 
defined as property (1) which is installed on or in any 
building located in the United States that is within the scope 
of Standard 90.1-2001 of the American Society of Heating, 
Refrigerating, and Air Conditioning Engineers and the 
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior 
lighting systems, (ii) the heating, cooling, ventilation, and 
hot water systems, or (iii) the building envelope, and (3) 
which is certified as being installed as part of a plan 
designed to reduce the total annual energy and power costs with 
respect to the interior lighting systems, heating, cooling, 
ventilation, and hot water systems of the building by 50 
percent or more in comparison to a reference building which 
meets the minimum requirements of Standard 90.1-2001 (as in 
effect on April 2, 2003). The deduction is limited to an amount 
equal to $1.80 per square foot of the property for which such 
expenditures are made. The deduction is allowed in the year in 
which the property is placed in service.
    Certain certification requirements must be met in order to 
qualify for the deduction. The Secretary, in consultation with 
the Secretary of Energy, will promulgate regulations that 
describe methods of calculating and verifying energy and power 
costs using qualified computer software based on the provisions 
of the 2005 California Nonresidential Alternative Calculation 
Method Approval Manual or, in the case of residential property, 
the 2005 California Residential Alternative Calculation Method 
Approval Manual.
    The Secretary is granted authority to prescribe procedures 
for the inspection and testing for compliance of buildings that 
are comparable, given the difference between commercial and 
residential buildings, to the requirements in the Mortgage 
Industry National Accreditation Procedures for Home Energy 
Rating Systems.\1068\ Individuals qualified to determine 
compliance shall only be those recognized by one or more 
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
    \1068\ See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS 
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
---------------------------------------------------------------------------
    For energy-efficient commercial building property 
expenditures made by a public entity, such as public schools, 
the deduction may be allocated to the person primarily 
responsible for designing the property in lieu of the public 
entity.
    If a deduction is allowed under this section, the basis of 
the property is reduced by the amount of the deduction.
    The deduction is effective for property placed in service 
prior to January 1, 2015.

Partial allowance of deduction

            System-specific deductions
    In the case of a building that does not meet the overall 
building requirement of 50-percent energy savings, a partial 
deduction is allowed with respect to each separate building 
system that comprises energy efficient property and which is 
certified by a qualified professional as meeting or exceeding 
the applicable system-specific savings targets established by 
the Secretary. The applicable system-specific savings targets 
to be established by the Secretary are those that would result 
in a total annual energy savings with respect to the whole 
building of 50 percent, if each of the separate systems met the 
system specific target. The separate building systems are (1) 
the interior lighting system, (2) the heating, cooling, 
ventilation and hot water systems, and (3) the building 
envelope. The maximum allowable deduction is $0.60 per square 
foot for each separate system.
            Interim rules for lighting systems
    In general, in the case of system-specific partial 
deductions, no deduction is allowed until the Secretary 
establishes system-specific targets.\1069\ However, in the case 
of lighting system retrofits, until such time as the Secretary 
issues final regulations, the system-specific energy savings 
target for the lighting system is deemed to be met by a 
reduction in lighting power density of 40 percent (50 percent 
in the case of a warehouse) of the minimum requirements in 
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2001. Also, in the case of a lighting system that reduces 
lighting power density by 25 percent, a partial deduction of 30 
cents per square foot is allowed. A pro-rated partial deduction 
is allowed in the case of a lighting system that reduces 
lighting power density between 25 percent and 40 percent. 
Certain lighting level and lighting control requirements must 
also be met in order to qualify for the partial lighting 
deductions under the interim rule.
---------------------------------------------------------------------------
    \1069\ IRS Notice 2008-40, Supra, set a target of a 10-percent 
reduction in total energy and power costs with respect to the building 
envelope, and 20 percent each with respect to the interior lighting 
system and the heating, cooling, ventilation and hot water systems. IRS 
Notice 2012-26 (2012-17 I.R.B. 847 April 23, 2012) established new 
targets of 10-percent reduction in total energy and power costs with 
respect to the building envelope, 25 percent with respect to the 
interior lighting system and 15 percent with respect to the heating, 
cooling, ventilation and hot water systems, effective beginning March 
12, 2012. The targets from Notice 2008-40 may be used until December 
31, 2013, but the targets of Notice 2012-26 apply thereafter.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision increases the efficiency standards for 
property placed in service after December 31, 2015, such that 
qualifying buildings are determined relative to the ASHRAE/
IESNA 90.1-2007 standards. A separate section of the Act, 
section 190, extends the deduction for two years, through 
December 31, 2016.

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2015.

2. Excise tax equivalency for liquefied petroleum gas and liquefied 
        natural gas (sec. 342 of the Act and sec. 6426 of the Code) 
        \1070\
---------------------------------------------------------------------------

    \1070\ The Senate Committee on Finance reported S. 1946 on August 
5, 2015 (S. Rep. No. 114-118). See sec. 303.
---------------------------------------------------------------------------

                              Present Law


Fuel excise taxes

    The alternative fuel and alternative fuel excise tax 
credits are allowable as credits against the fuel excise taxes 
imposed by sections 4081 and 4041. 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.
    For fuel sold or used after December 31, 2015, liquefied 
petroleum gas will be taxed at 18.3 cents per energy equivalent 
of a gallon of gasoline (defined as 5.75 pounds of liquefied 
petroleum gas); liquefied natural gas will be taxed at 24.3 
cents per energy equivalent of a gallon of diesel (defined as 
6.06 pounds of liquefied natural gas); and compressed natural 
gas will be taxed at 18.3 cents per energy equivalent of a 
gallon of gasoline (defined as 5.66 pounds of compressed 
natural gas.

Excise tax credits and payments

    The alternative fuel and alternative fuel excise tax credit 
provides a 50 cents per gallon credit for specific alternative 
fuels. Nonliquid alternative fuels receive a credit of 50 cents 
per gasoline gallon equivalent (defined as the amount of such 
fuel having a Btu content of 128,700 (higher heating value). 
Liquefied natural gas and liquefied petroleum gas are afforded 
a credit of 50 cents per gallon. To the extent the alternative 
fuel credit exceeds tax, it is refundable as a payment under 
section 6427(e)(2). The alternative fuel mixture credit is not 
eligible for the payment incentive.

                        Explanation of Provision

    The alternative fuel excise tax credits and outlay payment 
provisions (extended by section 192 of the Act) related to 
liquefied natural gas and liquefied petroleum gas are converted 
to the same energy equivalent basis used for the purpose of the 
section 4041 tax for fuel sold or used after December 31, 2015. 
For liquefied natural gas the credit is 50 cents per energy 
equivalent of diesel fuel (6.06 pounds of liquefied natural 
gas) and for liquefied petroleum gas the credit is 50 cents per 
energy equivalent of gasoline (5.75 pounds of liquefied 
petroleum gas).

                             Effective Date

    The provision is effective for fuel sold or used after 
December 31, 2015.

3. Exclusion from gross income of certain clean coal power grants (sec. 
        343 of the Act) \1071\
---------------------------------------------------------------------------

    \1071\ The Senate Committee on Finance reported S. 1946 on August 
5, 2015 (S. Rep. No. 114-118). See sec. 301.
---------------------------------------------------------------------------

                              Present Law

    Section 402 of the Energy Policy Act of 2005 provides 
criteria for Federal financial assistance under the Clean Coal 
Power Initiative. To the extent this financial assistance comes 
in the form of a grant, award, or allowance, it must generally 
be included in income under section 61 of the Internal Revenue 
Code (the ``Code'').
    Corporate taxpayers may be eligible to exclude such 
financial assistance from gross income as a contribution of 
capital under section 118 of the Code. The basis of any 
property acquired by reason of such a contribution of capital 
must be reduced by the amount of the contribution. This 
exclusion is not available to non-corporate taxpayers.

                        Explanation of Provision

    With respect to eligible non-corporate recipients, the 
provision excludes from gross income and alternative minimum 
taxable income any grant, award, or allowance made pursuant to 
section 402 of the Energy Policy Act of 2005. The provision 
requires that, to the extent the grant, award or allowance is 
related to depreciable property, the adjusted basis is reduced 
by the amount excluded from income under the provision. The 
provision requires eligible non-corporate recipients to pay an 
upfront payment to the Federal government equal to 1.18 percent 
of the value of the grant, award, or allowance.
    Under the provision, eligible non-corporate recipients are 
defined as (1) any recipient (other than a corporation) of any 
grant, award, or allowance made pursuant to Section 402 of the 
Energy Policy Act of 2005 that (2) makes the upfront 1.18-
percent payment, where (3) the grant, award, or allowance would 
have been excludable from income by reason of Code section 118 
if the taxpayer had been a corporation. In the case of a 
partnership, the eligible non-corporate recipients are the 
partners.

                             Effective Date

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

4. Clarification of valuation rule for early termination of certain 
        charitable remainder unitrusts (sec. 344 of the Act and sec. 
        664(e) of the Code)

                              Present Law


Charitable remainder trusts

    A charitable remainder trust may be structured as a 
charitable remainder annuity trust (``CRAT'') or a charitable 
remainder unit trust (``CRUT''). A CRAT is a trust that is 
required to pay, at least annually, a fixed dollar amount of at 
least five percent of the initial value of the trust to a 
noncharity for the life of an individual or for a period of 20 
years or less, with the remainder passing to charity.\1072\ A 
CRUT is a trust that generally is required to pay, at least 
annually, a fixed percentage of at least five percent of the 
fair market value of the trust's assets determined at least 
annually to a noncharity (the income beneficiary) for the life 
of an individual or for a period 20 years or less, with the 
remainder passing to charity.\1073\
---------------------------------------------------------------------------
    \1072\ Sec. 664(d)(1).
    \1073\ Sec. 664(d)(2).
---------------------------------------------------------------------------
    The Code provides two exceptions under which the trustee of 
a CRUT may pay the income beneficiary an amount different from 
the fixed percentage of the value of the trust's assets, as 
described above. First, in a net income only CRUT (``NICRUT''), 
the trustee pays the income beneficiary the lesser of the trust 
income for the year or the fixed percentage of the value of the 
trust assets, described above.\1074\ Stated differently, the 
distribution that otherwise would be made to the income 
beneficiary is limited by the trust income. Second, in a net 
income CRUT with a make-up feature (``NIMCRUT''), the trustee 
makes make-up distributions when a CRUT has distributed less 
than the fixed percentage of the value of the trust assets in a 
prior year by reason of the net income limit.\1075\
---------------------------------------------------------------------------
    \1074\ Sec. 664(d)(3)(A).
    \1075\ Sec. 664(d)(3)(B).
---------------------------------------------------------------------------
    A trust does not qualify as a CRAT if the annuity for a 
year is greater than 50 percent of the initial fair market 
value of the trust's assets. A trust does not qualify as a CRUT 
if the percentage of assets that are required to be distributed 
at least annually is greater than 50 percent. A trust does not 
qualify as a CRAT or a CRUT unless the value of the remainder 
interest in the trust is at least 10 percent of the value of 
the assets contributed to the trust.
    Distributions from a CRAT or CRUT are treated in the 
following order as: (1) ordinary income to the extent of the 
trust's undistributed ordinary income for that year and all 
prior years; (2) capital gains to the extent of the trust's 
undistributed capital gain for that year and all prior years; 
(3) other income (e.g., tax-exempt income) to the extent of the 
trust's undistributed other income for that year and all prior 
years; and (4) corpus.\1076\
---------------------------------------------------------------------------
    \1076\ Sec. 664(b).
---------------------------------------------------------------------------
    In general, distributions to the extent they are 
characterized as income are includible in the income of the 
beneficiary for the year that the annuity or unitrust amount is 
required to be distributed even though the annuity or unitrust 
amount is not distributed until after the close of the trust's 
taxable year.\1077\
---------------------------------------------------------------------------
    \1077\ Treas. Reg. sec. 1.664-1(d)(4).
---------------------------------------------------------------------------
    CRATs and CRUTs are exempt from Federal income tax for a 
tax year unless the trust has any unrelated business taxable 
income for the year. Unrelated business taxable income includes 
certain debt financed income. A charitable remainder trust that 
loses exemption from income tax for a taxable year is taxed as 
a regular complex trust. As such, the trust is allowed a 
deduction in computing taxable income for amounts required to 
be distributed in a taxable year, not to exceed the amount of 
the trust's distributable net income for the year.

Valuation of interests in a charitable remainder trust

    When the grantor funds a CRAT or a CRUT, the grantor 
generally may take an income tax charitable deduction equal to 
the present value of the charitable remainder interest of the 
trust \1078\ determined on the date of the transfer (or, in the 
case of a testamentary transfer, on the date of the decedent's 
death or an alternate valuation date). For purposes of 
determining the amount of the grantor's charitable 
contribution, the remainder interest of a CRAT or CRUT (whether 
a standard CRUT, a NICRUT, or NIMCRUT) is computed on the basis 
that an amount equal to five percent of the net fair market 
value of its assets (or a greater amount, if required under the 
terms of the trust instrument) is to be distributed each year 
to the income beneficiary.\1079\ Thus, in the case of a NICRUT 
or a NIMCRUT, the net income limitation is disregarded.
---------------------------------------------------------------------------
    \1078\ Sec. 170(f)(2)(A).
    \1079\ Sec. 664(e).
---------------------------------------------------------------------------
    The Code does not provide a rule for valuing the interests 
in a charitable remainder trust in the event of an early 
termination of the trust.

                        Explanation of Provision

    Under the provision, in the case of the early termination 
of a NICRUT or NIMCRUT, the remainder interest is valued using 
rules similar to the rules for valuing the remainder interest 
of a charitable remainder trust when determining the amount of 
the grantor's charitable contribution deduction. In other 
words, the remainder interest is computed on the basis that an 
amount equal to five percent of the net fair market value of 
the trust assets (or a greater amount, if required under the 
terms of the trust instrument) is to be distributed each year, 
with any net income limit being disregarded.\1080\
---------------------------------------------------------------------------
    \1080\ The provision was introduced in the House of Representatives 
on December 8, 2015, as H.R. 4192 (114th Cong., 1st Sess.). For a 
statement of the bill sponsors' intent, see 161 Cong. Rec. E1726 (Dec. 
8, 2015) (statement of Rep. Tiberi) (``My bill provides that, on an 
early termination of a charitable remainder trust, the donor and the 
charity will apportion the value of the trust using the same 
methodology that was used to determine the value of the remainder 
interest on formation. The donor will recognize capital gain on the 
total value received, the charity will receive its share of the trust's 
assets, and the early termination will not constitute self-dealing or 
otherwise disqualify the charitable remainder trust.'').
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for terminations of trusts 
occurring after the date of enactment (December 18, 2015).

5. Prevention of transfer of certain losses from tax indifferent 
        parties (sec. 345 of the Act and sec. 267 of the Code)

                              Present Law


Related party sales

    Sections 267(a)(1) and 707(b) generally disallow a 
deduction for a loss on the sale or exchange of property, 
directly or indirectly, to certain related parties or 
controlled partnerships. When a loss has been so disallowed, 
section 267(d) provides that the transferee may reduce any gain 
that the transferee later recognizes on a disposition of the 
asset by the amount of loss disallowed to the transferor.\1081\ 
Thus, the application of section 267(d) shifts the benefit of 
the loss to the transferee to the extent of post-sale 
appreciation.
---------------------------------------------------------------------------
    \1081\ The loss disallowance rules of sections 267(a) and 707(b) 
together, and the corresponding rule under section 267(d), apply to 
transactions between the following parties:
    (1) Members of a family, which include ancestors, lineal 
descendants, spouse and siblings (whether by the whole or half blood).
    (2) An individual and a corporation more than 50 percent in value 
of the outstanding stock of which is owned, directly or indirectly, by 
or for the individual.
    (3) Two corporations which are members of the same controlled group 
(as defined in sec. 267(f)).
    (4) A grantor and a fiduciary of any trust.
    (5) A fiduciary of a trust and a fiduciary of another trust, if the 
same person is a grantor of both trusts.
    (6) A fiduciary of a trust and a beneficiary of such trust.
    (7) A fiduciary of a trust and a beneficiary of another trust, if 
the same person is a grantor of both trusts.
    (8) A fiduciary of a trust and a corporation more than 50 percent 
in value of the outstanding stock of which is owned, directly or 
indirectly, by or for the trust or by or for a person who is a grantor 
of the trust.
    (9) A person and an organization to which section 501 applies and 
which is controlled directly or indirectly by the person or (if such 
person is an individual) by members of the family of the individual.
    (10) A corporation and a partnership if the same persons own more 
than 50 percent in value of the outstanding stock of the corporation 
and more than 50 percent of the capital interest or profits interest in 
the partnership.
    (11) Two S corporations in which the same persons own more than 50 
percent in value of the outstanding stock of each corporation.
    (12) An S corporation and a C corporation if the same persons own 
more than 50 percent in value of the outstanding stock of each 
corporation.
    (13) Except in the case of a sale or exchange in satisfaction of a 
pecuniary bequest, an executor of an estate and a beneficiary of the 
estate.
    (14) A partnership and a person owning, directly or indirectly, 
more than 50 percent of the capital interest or profits interest in the 
partnership.
    (15) Two partnerships in which the same persons own, directly or 
indirectly, more than 50 percent of the capital interests or profits 
interests.
---------------------------------------------------------------------------
    A different rule applies in the case of a sale or exchange 
between two corporations that are members of the same 
controlled group. Under section 267(f), the loss to the 
transferor is not denied entirely, but rather is deferred until 
such time as the property is transferred outside the controlled 
group and there would be recognition of loss under consolidated 
return principles, or such other time as may be prescribed in 
regulations. While the loss is deferred, it is not transferred 
to another party.
    Sections 267 and 707 generally operate on an item-by-item 
basis, so that if a transferor sells several items of 
separately acquired property to a related or controlled party 
in a single transaction, the disallowance at the time of the 
sale applies to each loss regardless of any gains recognized on 
other property in the same transfer.\1082\
---------------------------------------------------------------------------
    \1082\ This rule in effect prevents a transferor from selectively 
realizing certain losses to offset gains in a transaction with a 
related party.
---------------------------------------------------------------------------

Transferee basis in gift cases

    In the case of property acquired by gift, the basis 
generally is the basis in the hands of the transferor. If the 
basis exceeds the fair market value at the time of the gift, 
however, the basis for purposes of determining loss is the fair 
market value at that time.\1083\ This rule has the same effect 
as the rule in section 267(d), in effect allowing the loss at 
the time of the transfer to offset post-transfer appreciation.
---------------------------------------------------------------------------
    \1083\ Sec. 1015.
---------------------------------------------------------------------------

Transferee basis in certain nontaxable corporate organizations and 
        reorganizations

    In the case of certain nontaxable organizations and 
reorganizations, the transferee corporation takes the same 
basis in property that the property had in the hands of the 
transferor, increased by the amount of any gain recognized by 
the transferor.\1084\ However, in cases involving the 
importation of a net built-in loss, the transferee's aggregate 
adjusted basis may not exceed the fair market value of the 
property immediately after the transaction.\1085\ This rule 
applies to a transfer of property if (i) gain or loss with 
respect to such property is not subject to Federal income tax 
in the hands of the transferor immediately before the transfer 
and (ii) gain or loss with respect to such property is subject 
to such tax in the hands of the transferee immediately after 
such transfer.
---------------------------------------------------------------------------
    \1084\ Sec. 362(a) and (b).
    \1085\ Sec. 362(e)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that the general rule of section 
267(d) does not apply to the extent gain or loss with respect 
to property that has been sold or exchanged is not subject to 
Federal income tax in the hands of the transferor immediately 
before the transfer but any gain or loss with respect to the 
property is subject to Federal income tax in the hands of the 
transferee immediately after the transfer. Thus, the basis of 
the property in the hands of the transferee will be its cost 
for purposes of determining gain or loss, thereby precluding a 
loss importation result.

                             Effective Date

    The provision applies to sales and other dispositions of 
property acquired after December 31, 2015, by the taxpayer in a 
sale or exchange to which section 267(a)(1) applied.

6. Treatment of certain persons as employers with respect to motion 
        picture projects (sec. 346 of the Act and new sec. 3512 of the 
        Code)

                              Present Law


FICA and FUTA taxes

    The Federal Insurance Contributions Act (``FICA'') imposes 
tax on employers and employees based on the amount of wages (as 
defined for FICA purposes) paid to an employee during the 
year.\1086\ The tax imposed on the employer and on the employee 
is each composed of two parts: (1) the Social Security or old 
age, survivors, and disability insurance (``OASDI'') tax equal 
to 6.2 percent of covered wages up to the OASDI wage base 
($118,500 for 2015); and (2) the Medicare or hospital insurance 
(``HI'') tax equal to 1.45 percent of all covered wages.\1087\ 
The employee portion of the FICA tax generally must be withheld 
and remitted to the Federal government by the employer.
---------------------------------------------------------------------------
    \1086\ Secs. 3101-3128. FICA taxes, FUTA taxes (discussed herein), 
taxes under the Railroad Retirement Tax Act or ``RRTA'' (secs. 3201-
3241) and income tax withholding (secs. 3401-3404) are commonly 
referred to collectively as employment taxes. Sections 3501-3511 
provide additional employment tax rules.
    \1087\ For taxable years beginning after 2012, the employee portion 
of the HI tax under FICA (not the employer portion) is increased by an 
additional tax of 0.9 percent on wages received in excess of a 
threshold amount. The threshold amount is $250,000 in the case of a 
joint return, $125,000 in the case of a married individual filing a 
separate return, and $200,000 in any other case.
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    The Federal Unemployment Tax Act (``FUTA'') imposes a tax 
on employers of six percent of wages up to the FUTA wage base 
of $7,000.\1088\ An employer may take a credit against its FUTA 
tax liability for its contributions to a State unemployment 
fund and, in certain cases, an additional credit for 
contributions that would have been required if the employer had 
been subject to a higher contribution rate under State law. For 
purposes of the credit, the term ``contributions'' means 
payments required by State law to be made by an employer into 
an unemployment fund, to the extent the payments are made by 
the employer without being deducted or deductible from 
employees' remuneration.
---------------------------------------------------------------------------
    \1088\ Secs. 3301-3311.
---------------------------------------------------------------------------

Responsibility for employment tax compliance

    FICA and FUTA tax responsibility generally rests with the 
person who is the employer of an employee under a common-law 
test that has been incorporated into Treasury 
regulations.\1089\ Under the regulations, an employer-employee 
relationship generally exists if the person for whom services 
are performed has the right to control and direct the 
individual who performs the services, not only as to the result 
to be accomplished by the work, but also as to the details and 
means by which that result is accomplished. That is, an 
employee is subject to the will and control of the employer, 
not only as to what is to be done, but also as to how it is to 
be done. It is not necessary that the employer actually control 
the manner in which the services are performed; rather, it is 
sufficient that the employer have a right to control. Whether 
the requisite control exists is determined on the basis of all 
the relevant facts and circumstances. The test of whether an 
employer-employee relationship exists often arises in 
determining whether a worker is an employee or an independent 
contractor. However, the same test applies in determining 
whether a worker is an employee of one person or another.
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    \1089\ Treas. Reg. secs. 31.3121(d)-1(c)(1) and 31.3306(i)-1(a).
---------------------------------------------------------------------------
    In some cases, a person other than the common-law employer 
(a ``third party'') may be liable for employment taxes. In 
particular, if wages are paid to an employee by a third party 
and the third party, rather than the employer, has control of 
the payment of the wages, the third party is the ``statutory'' 
employer responsible for complying with applicable employment 
tax requirements.\1090\
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    \1090\ Sec. 3401(d)(1) (for purposes of income tax withholding, if 
the employer does not have control of the payment of wages, the person 
having control of the payment of such wages is treated as the 
employer); Otte v. United States, 419 U.S. 43 (1974) (the person who 
has the control of the payment of wages is treated as the employer for 
purposes of withholding the employee's share of FICA taxes from wages); 
In re Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), and In re 
The Laub Baking Company v. United States, 642 F.2d 196 (6th Cir. 1981) 
(the person who has control of the payment of wages is the employer for 
purposes of the employer's share of FICA taxes and FUTA tax). The mere 
fact that wages are paid by a person other than the employer does not 
necessarily mean that the payor has control of the payment of the 
wages. Rather, control depends on the facts and circumstances. See, for 
example, Consolidated Flooring Services v. United States, 38 Fed. Cl. 
450 (1997), and Winstead v. United States, 109 F. 2d 989 (4th Cir. 
1997).
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    As indicated above, remuneration with respect to employment 
with a particular employer for a year is excepted from OASDI or 
FUTA taxes to the extent it exceeds the applicable OASDI or 
FUTA wage base.\1091\ In contrast, if an employee works for 
multiple employers during a year, a separate wage base 
generally applies in determining the employer share of OASDI 
tax and FUTA tax with respect to remuneration for employment 
with each employer, even if the wages earned with all the 
employers are paid by the same third party.\1092\
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    \1091\ An employee is subject to OASDI tax only with respect to 
remuneration up to the applicable wage base for a year, regardless of 
whether the employee works for only one employer or for more than one 
employer during the year. If, as a result of working for more than one 
employer, OASDI tax is withheld with respect to remuneration above the 
applicable wage base, the employee is allowed a credit under section 
31(b).
    \1092\ Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. 
Cir. 2013).
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                        Explanation of Provision

    Under the provision, for purposes of the OASDI and FUTA 
wage bases, remuneration paid by a ``motion picture project 
employer'' during a calendar year to a ``motion picture project 
worker'' is treated as remuneration paid with respect to 
employment of the motion picture project worker by the motion 
picture project employer. As a result, all remuneration paid by 
the motion picture project employer to a motion picture project 
worker during a calendar year is subject to a single OASDI wage 
base and a single FUTA wage base, without regard to the 
worker's status as a common law employee of multiple clients of 
the motion picture project employer during the year.
    A person must meet several criteria to be treated as a 
motion picture project employer. The person (directly or 
through an affiliate \1093\) must (1) be a party to a written 
contract covering the services of motion picture project 
workers with respect to motion picture projects \1094\ in the 
course of the trade or business of a client of the motion 
picture project employer, (2) be contractually obligated to pay 
remuneration to the motion picture project workers without 
regard to payment or reimbursement by any other person, (3) 
control the payment (within the meaning of the Code) of 
remuneration to the motion picture project workers and pay the 
remuneration from its own account or accounts, (4) be a 
signatory to one or more collective bargaining agreements with 
a labor organization that represents motion picture project 
workers, and (5) have treated substantially all motion picture 
project workers whom the person pays as employees (and not as 
independent contractors) during the calendar year for purposes 
of determining FICA, FUTA and other employment taxes. In 
addition, at least 80 percent of all FICA remuneration paid by 
the person in the calendar year must be paid to motion picture 
project workers.
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    \1093\ For purposes of the provision, ``affiliate'' and 
``affiliated'' status are based on the aggregation rules applicable for 
retirement plan purposes under section 414(b) and (c).
    \1094\ For purposes of the provision, a motion picture project 
generally means a project for the production of a motion picture film 
or video tape as described in section 168(f)(3).
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    A motion picture project worker means any individual who 
provides services on motion picture projects for clients of a 
motion picture project employer that are not affiliated with 
the motion picture project employer.

                             Effective Date

    The provision applies to remuneration paid after December 
31, 2015. Nothing in the amendments made by the provision is to 
be construed to create any inference as to the law before the 
date of enactment (December 18, 2015).

                      TITLE IV--TAX ADMINISTRATION


               A. Internal Revenue Service Reforms\1095\

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    \1095\ The House Committee on Ways and Means reported H.R. 1058 on 
April 13, 2015 (H.R. Rep. 114-70). The House passed the bill on April 
15, 2015.
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1. Duty to ensure that Internal Revenue Service employees are familiar 
        with and act in accordance with certain taxpayer rights (sec. 
        401 of Act and sec. 7803 of the Code)

                              Present Law

    The Code\1096\ provides that the Commissioner has such 
duties and powers as prescribed by the Secretary. Unless 
otherwise specified by the Secretary, such duties and powers 
include the power to administer, manage, conduct, direct, and 
supervise the execution and application of the internal revenue 
laws or related statutes and tax conventions to which the 
United States is a party, and to recommend to the President a 
candidate for Chief Counsel (and recommend the removal of the 
Chief Counsel). If the Secretary determines not to delegate 
such specified duties to the Commissioner, such determination 
will not take effect until 30 days after the Secretary notifies 
the House Committees on Ways and Means, Government Reform and 
Oversight, and Appropriations, and the Senate Committees on 
Finance, Governmental Affairs, and Appropriations. The 
Commissioner is to consult with the Oversight Board on all 
matters within the Board's authority (other than the 
recommendation of candidates for Commissioner and the 
recommendation to remove the Commissioner).
---------------------------------------------------------------------------
    \1096\ Sec. 7803(a).
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    Unless otherwise specified by the Secretary, the 
Commissioner is authorized to employ such persons as the 
Commissioner deems proper for the administration and 
enforcement of the internal revenue laws and is required to 
issue all necessary directions, instructions, orders, and rules 
applicable to such persons. Unless otherwise provided by the 
Secretary, the Commissioner will determine and designate the 
posts of duty.

                        Explanation of Provision

    The provision adds to the Commissioner's duties the 
requirement to ensure that employees of the IRS are familiar 
with and act in accord with taxpayer rights as afforded by 
other provisions of the Internal Revenue Code. These rights are 
enumerated as follows: (A) the right to be informed, (B) the 
right to quality service, (C) the right to pay no more than the 
correct amount of tax, (D) the right to challenge the position 
of the Internal Revenue Service and be heard, (E) the right to 
appeal a decision of the Internal Revenue Service in an 
independent forum, (F) the right to finality, (G) the right to 
privacy, (H) the right to confidentiality, (I) the right to 
retain representation, and (J) the right to a fair and just tax 
system.

                             Effective Date

    The provision is effective on the date of enactment 
(December 18, 2015).

2. Prohibition of use of personal e-mail for official government 
        business (sec. 402 of the Act)

                              Present Law

    Federal executive agencies are required to maintain and 
preserve Federal records,\1097\ whether in paper or electronic 
form, and protect against unauthorized removal of such records. 
Policies for the retention and disposal of records must conform 
to the requirements of the record-management procedures, as 
implemented by the Archivist of the United States.\1098\ Email 
accounts are specifically included within the scope of records 
subject to the record-retention policies.\1099\ Each agency is 
required to provide instruction and guidance to persons 
conducting business on behalf of the agency, including 
employees, officers and contractors, and use of personal email 
accounts for agency business is to be discouraged.\1100\
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    \1097\ 44 U.S.C. sec. 3101. See 44 U.S.C. sec. 3301 for a 
definition of Federal records that generally includes all documentary 
materials that agencies receive or create in the conduct of official 
business and that may have evidentiary value with respect to official 
business, regardless of the physical form of the materials.
    \1098\ See generally Title 44, at chapter 29 (records management by 
the Archivist of the United States and the General Services 
Administration), chapter 31 (records management of Federal agencies) 
and chapter 33 (disposal of records).
    \1099\ 36 CFR sec. 1236.22(a).
    \1100\ A quarterly bulletin published by the National Archives and 
Records Administration provides guidance to executive agencies. See 
generally NARA Bulletin 2013-03, available at http://www.archives.gov/
records-mgmt/bulletins/2013/2013-03.html.
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    The government-wide record-management requirements are in 
addition to the obligations to protect the sensitive 
information for which the IRS is responsible. Tax information 
is sensitive and confidential.\1101\ The Code imposes civil and 
criminal penalties to protect it from unauthorized use, 
inspection or disclosure.\1102\ As a condition of receiving tax 
data, outside agencies must establish to the satisfaction of 
the IRS that they have adequate programs and security protocols 
in place to protect the data received.\1103\ Personal email 
computer storage systems are not inspected by the IRS for 
security.
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    \1101\ Sec. 6103(a).
    \1102\ See secs. 7213 (criminal unauthorized disclosure), 7213A 
(criminal unauthorized inspection) and 7431 (civil remedy for 
unauthorized inspection or disclosure).
    \1103\ Sec. 6103(p)(4).
---------------------------------------------------------------------------
    Given the sensitive and confidential nature of the 
information handled by the IRS and the need to be accountable 
for all agency records, the IRS has in place policies 
restricting the use of email accounts.\1104\ Transmission of 
Federal tax information is only permitted outside the IRS in 
limited circumstances. In 2012, the IRS published a revised 
section of its manual in which it updated its administrative 
rules on e-records generally, and banned use of non-IRS/
Treasury email for any governmental or official purpose.\1105\
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    \1104\ I.R.M. paragraphs 1.10.3 et seq., and 11.3.1.
    \1105\ I.R.M. paragraph 10.8.1.4.6.3.1, ``Privately Owned E-Mail 
Accounts.'' (May 3, 2012).
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                        Explanation of Provision

    The provision bars use of personal email accounts by IRS 
employees for official government business.

                             Effective Date

    The provision is effective on the date of enactment 
(December 18, 2015).

3. Release of information regarding the status of certain 
        investigations (sec. 403 of the Act and sec. 6103 of the Code)

                              Present Law


Section 6103: Rules and penalties associated with the disclosure of 
        confidential returns and return information

            In general
    Generally, tax returns and return information (``tax 
information'') are confidential and may not be disclosed unless 
authorized in the Code.\1106\ Return information includes data 
received, collected or prepared by the Secretary with respect 
to the determination of the existence or possible existence of 
liability of any person under the Code for any tax, penalty, 
interest, fine, forfeiture, or other imposition or offense. 
Information received, collected, or prepared by the Secretary 
with respect to a Title 26 offense is the return information of 
the person being investigated. Thus, generally, the Secretary 
may not disclose the status of an investigation to a person 
alleging a violation of their privacy (i.e., an unauthorized 
disclosure of their return information) or other offense under 
the Code committed by a third party.
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    \1106\ Sec. 6103(a).
---------------------------------------------------------------------------
            Exceptions to the general rule
    Section 6103 provides exceptions to the general rule of 
confidentiality, detailing permissible disclosures. Among those 
exceptions are disclosures to specified persons with a 
``material interest'' in the return or return 
information.\1107\ For example, upon written request, an 
individual can obtain that individual's return, joint returns 
are available to either spouse with respect to whom the return 
was filed, and the administrator of an estate can obtain the 
return of an estate. Similarly, return information may be 
disclosed to those authorized to receive the return. However, 
the Secretary may withhold return information the disclosure of 
which the Secretary determines would seriously impair Federal 
tax administration.\1108\
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    \1107\ Sec. 6103(e).
    \1108\ Sec. 6103(e)(7).
---------------------------------------------------------------------------
    Under section 6103(c), the Secretary may disclose a 
taxpayer's return or return information to such person or 
persons as the taxpayer may designate in a request for or 
consent to such disclosure. There are no restrictions placed on 
the recipient of tax information received pursuant to the 
consent of the taxpayer, and the penalties for unauthorized 
disclosure or inspection (discussed below) do not apply to 
persons receiving tax information pursuant to a taxpayer's 
consent.
            Criminal and civil penalties (sections 7213, 7213A, and 
                    7431)
    Criminal penalties apply for the unauthorized inspection or 
disclosure of tax information. Willful unauthorized disclosure 
is a felony under section 7213 and the willful unauthorized 
inspection of tax information is a misdemeanor under section 
7213A. Under section 7431, taxpayers may also pursue a civil 
cause of action for disclosures and inspections not authorized 
by section 6103.\1109\
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    \1109\ Sec. 7431.
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Section 7214: Other offenses by officers and employees of the United 
        States

    Section 7214 concerns offenses by officers and employees of 
the United States. It provides, upon conviction, for the 
dismissal from office, a $10,000 fine and/or five years 
imprisonment of any officer or employee:
         1. who is guilty of any extortion or willful 
        oppression under color of law; or
         2. who knowingly demands other or greater sums than 
        are authorized by law, or receives any fee, 
        compensation, or reward, except as by law prescribed, 
        for the performance of any duty; or
         3. who with intent to defeat the application of any 
        provision of this title fails to perform any of the 
        duties of his office or employment; or
         4. who conspires or colludes with any other person to 
        defraud the United States; or
         5. who knowingly makes opportunity for any person to 
        defraud the United States; or
         6. who does or omits to do any act with intent to 
        enable any other person to defraud the United States; 
        or
          7. who makes or signs any fraudulent entry in any 
        book, or makes or signs any fraudulent certificate, 
        return, or statement; or
          8. who, having knowledge or information of the 
        violation of any revenue law by any person, or of fraud 
        committed by any person against the United States under 
        any revenue law, fails to report, in writing, such 
        knowledge or information to the Secretary; or
          19. who demands, or accepts, or attempts to collect, 
        directly or indirectly as payment or gift, or 
        otherwise, any sum of money or other thing of value for 
        the compromise, adjustment, or settlement of any charge 
        or complaint for any violation or alleged violation of 
        law, except as expressly authorized by law so to do.
    In the discretion of the court, up to one-half of the 
amount of fine for a section 7214 violation may be awarded for 
the use of the informer. In addition, the court is to render 
judgment against said officer or employee for the amount of 
damages sustained in favor of the party injured.
    Section 7214 also provides that any internal revenue 
officer or employee interested, directly or indirectly, in the 
manufacture of tobacco, snuff, cigarettes, or in the 
production, rectification or redistillation of distilled 
spirits is to be dismissed from office and each such officer or 
employee so interested in any such manufacture or production, 
rectification, or redistillation of fermented liquors is to be 
fined not more than $5,000.

                        Explanation of Provision

    The provision amends section 6103(e) to provide that in the 
case of an investigation involving the return or return 
information of an individual alleging a violation of sections 
7213, 7213A or 7214, the Secretary may disclose to the 
complainant (or such person's designee) whether an 
investigation, based on the person's provision of information 
indicating a violation of sections 7213, 7213A or 7214 of the 
Code, has been initiated, is open or is closed. The Secretary 
may disclose whether the investigation substantiated a 
violation of sections 7213, 7213A or 7214 of the Code, and 
whether action has been taken with respect to the individual 
who committed the substantiated violation, including whether 
any referral has been made for prosecution of such individual. 
As under present law section 6103(e), the Secretary may 
disclose return information if the disclosure would not 
seriously impair Federal tax administration.

                             Effective Date

    The provision is effective for disclosures made on or after 
the date of enactment (December 18, 2015).

4. Require the Secretary of the Treasury to describe administrative 
        appeals procedures relating to adverse determinations of tax-
        exempt status of certain organizations (sec. 404 of the Act and 
        sec. 7123 of the Code)

                              Present Law


Section 501(c) organizations

    Section 501(c) describes certain organizations that are 
exempt from Federal income tax under section 501(a). Section 
501(c) organizations include, among others, charitable 
organizations (501(c)(3)), social welfare organizations 
(501(c)(4)),\1110\ labor organizations (501(c)(5)), and trade 
associations and business leagues (501(c)(6)). In addition to 
being exempt from Federal income tax, section 501(c)(3) 
organizations generally are eligible to receive tax deductible 
contributions. Section 501(c)(3) organizations are subject to 
operational rules and restrictions that do not apply to many 
other types of tax-exempt organizations.
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    \1110\ Section 501(c)(4) provides tax exemption for civic leagues 
or organizations not organized for profit but operated exclusively for 
the promotion of social welfare, and no part of the net earnings of 
which inures to the benefit of any private shareholder or individual. 
An organization is operated exclusively for the promotion of social 
welfare if it is engaged primarily in promoting in some way the common 
good and general welfare of the people of a community. Treas. Reg. sec. 
1.501(c)(4)-1(a)(2). The promotion of social welfare does not include 
direct or indirect participation or intervention in political campaigns 
on behalf of or in opposition to any candidate for public office; 
however, social welfare organizations are permitted to engage in 
political activity so long as the organization remains engaged 
primarily in activities that promote social welfare. The lobbying 
activities of a social welfare organization generally are not limited. 
An organization is not operated primarily for the promotion of social 
welfare if its primary activity is operating a social club for the 
benefit, pleasure, or recreation of its members, or is carrying on a 
business with the general public in a manner similar to organizations 
that are operated for profit.
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Application for tax exemption

            Section 501(c)(3) organizations
    Section 501(c)(3) organizations (with certain exceptions) 
are required to seek formal recognition of tax-exempt status by 
filing an application with the Internal Revenue Service 
(``IRS'') (Form 1023 or Form 1023 EZ for small 
organizations).\1111\ In response to the application, the IRS 
issues a determination letter or ruling either recognizing the 
applicant as tax-exempt or not. Certain organizations are not 
required to apply for recognition of tax-exempt status in order 
to qualify as tax-exempt under section 501(c)(3) but may do so. 
These organizations include churches, certain church-related 
organizations, organizations (other than private foundations) 
the gross receipts of which in each taxable year are normally 
not more than $5,000, and organizations (other than private 
foundations) subordinate to another tax-exempt organization 
that are covered by a group exemption letter.
---------------------------------------------------------------------------
    \1111\ See sec. 508(a).
---------------------------------------------------------------------------
    A favorable determination by the IRS on an application for 
recognition of tax-exempt status will generally be retroactive 
to the date that the section 501(c)(3) organization was created 
if it files a completed Form 1023 or Form 1023 EZ within 15 
months of the end of the month in which it was formed.\1112\ If 
the organization does not file either form or files a late 
application, it will not be treated as tax-exempt under section 
501(c)(3) for any period prior to the filing of an application 
for recognition of tax exemption.\1113\ Contributions to 
section 501(c)(3) organizations that are subject to the 
requirement that the organization apply for recognition of tax-
exempt status generally are not deductible from income, gift, 
or estate tax until the organization receives a determination 
letter from the IRS.\1114\
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    \1112\ Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv), 
organizations are allowed an automatic 12-month extension as long as 
the application for recognition of tax exemption is filed within the 
extended, i.e., 27-month, period. The IRS also may grant an extension 
beyond the 27-month period if the organization is able to establish 
that it acted reasonably and in good faith and that granting relief 
will not prejudice the interests of the government. Treas. Reg. secs. 
301.9100-1 and 301.9100-3.
    \1113\ Treas. Reg. sec. 1.508-1(a)(1).
    \1114\ Sec. 508(d)(2)(B). Contributions made prior to receipt of a 
favorable determination letter may be deductible prior to the 
organization's receipt of such favorable determination letter if the 
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
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    Information required on Form 1023 includes, but is not 
limited to: (1) a detailed statement of actual and proposed 
activities; (2) compensation and financial information 
regarding officers, directors, trustees, employees, and 
independent contractors; (3) a statement of revenues and 
expenses for the current year and the three preceding years (or 
for the years of the organization's existence, if less than 
four years); (4) a balance sheet for the current year; (5) a 
description of anticipated receipts and contemplated 
expenditures; (6) a copy of the articles of incorporation, 
trust document, or other organizational or enabling document; 
(7) organization bylaws (if any); and (8) information about 
previously filed Federal income tax and exempt organization 
returns, if applicable. The Form 1023 EZ requires less 
information and relies primarily on attestations of the 
applicant.
    A favorable determination letter issued by the IRS will 
state that the application for recognition of tax exemption and 
supporting documents establish that the organization submitting 
the application meets the requirements of section 501(c)(3) and 
will classify the organization as either a public charity or a 
private foundation.
    Organizations that are classified as public charities (or 
as private operating foundations) and not as private 
nonoperating foundations may cease to satisfy the conditions 
that entitled the organization to such status. The IRS makes an 
initial determination of public charity or private foundation 
status that is subsequently monitored by the IRS through annual 
return filings. The IRS periodically announces in the Internal 
Revenue Bulletin a list of organizations that have failed to 
establish, or have been unable to maintain, their status as 
public charities or as private operating foundations, and that 
become private nonoperating foundations.
    If the IRS denies an organization's application for 
recognition of exemption under section 501(c)(3), the 
organization may seek a declaratory judgment regarding its tax 
status.\1115\ Prior to utilizing the declaratory judgment 
procedure, the organization must have exhausted all 
administrative remedies available to it within the IRS.
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    \1115\ Sec. 7428.
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            Other section 501(c) organizations
    Most section 501(c) organizations--including organizations 
described within sections 501(c)(4) (social welfare 
organizations, etc.), 501(c)(5) (labor organizations, etc.), or 
501(c)(6) (business leagues, etc.)--are not required to provide 
notice to the Secretary that they are requesting recognition of 
exempt status. Rather, organizations are exempt under these 
provisions if they satisfy the requirements applicable to such 
organizations. However, in order to obtain certain benefits 
such as public recognition of tax-exempt status, exemption from 
certain State taxes, and nonprofit mailing privileges, such 
organizations voluntarily may request a formal recognition of 
exempt status by filing a Form 1024.
    If such an organization voluntarily requests a 
determination letter by filing Form 1024 within 27 months of 
the end of the month in which it was formed, its determination 
of exempt status, once provided, generally will be effective as 
of the organization's date of formation.\1116\ If, however, the 
organization files Form 1024 after the 27-month deadline has 
passed, its exempt status will be formally recognized only as 
of the date the organization filed Form 1024.
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    \1116\ Rev. Proc. 2015-9, sec. 11, 2015-2 I.R.B. 249.
---------------------------------------------------------------------------
    The declaratory judgment process available to organizations 
seeking exemption under section 501(c)(3) is not available to 
organizations seeking exemption under other subsections of the 
Code, including sections 501(c)(4), 501(c)(5), and 501(c)(6).

Revocation (and suspension) of exempt status

    An organization that has received a favorable tax-exemption 
determination from the IRS generally may continue to rely on 
the determination as long as there is not a ``material change, 
inconsistent with exemption, in the character, the purpose, or 
the method of operation of the organization, or a change in the 
applicable law.'' \1117\ A ruling or determination letter 
concluding that an organization is exempt from tax may, 
however, be revoked or modified: (1) by notice from the IRS to 
the organization to which the ruling or determination letter 
was originally issued; (2) by enactment of legislation or 
ratification of a tax treaty; (3) by a decision of the United 
States Supreme Court; (4) by issuance of temporary or final 
Regulations by the Treasury Department; (5) by issuance of a 
revenue ruling, a revenue procedure, or other statement in the 
Internal Revenue Bulletin; or (6) automatically, in the event 
the organization fails to file a required annual return or 
notice for three consecutive years.\1118\ A revocation or 
modification of a determination letter or ruling may be 
retroactive if, for example, there has been a change in the 
applicable law, the organization omitted or misstated a 
material fact, or the organization has operated in a manner 
materially different from that originally represented.\1119\
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    \1117\ Ibid.
    \1118\ Ibid., sec. 12.
    \1119\ Ibid.
---------------------------------------------------------------------------
    The IRS generally issues a letter revoking recognition of 
an organization's tax-exempt status only after: (1) conducting 
an examination of the organization; (2) issuing a letter to the 
organization proposing revocation; and (3) allowing the 
organization to exhaust the administrative appeal rights that 
follow the issuance of the proposed revocation letter. In the 
case of a section 501(c)(3) organization, the revocation letter 
immediately is subject to judicial review under the declaratory 
judgment procedures of section 7428. To sustain a revocation of 
tax-exempt status under section 7428, the IRS must demonstrate 
that the organization no longer is entitled to exemption.
    Upon revocation of tax-exemption or change in the 
classification of an organization (e.g., from public charity to 
private foundation status), the IRS publishes an announcement 
of such revocation or change in the Internal Revenue Bulletin. 
Contributions made to organizations by donors who are unaware 
of the revocation or change in status ordinarily will be 
deductible if made on or before the date of publication of the 
announcement.
    The IRS may suspend the tax-exempt status of an 
organization for any period during which an organization is 
designated or identified by U.S. authorities as a terrorist 
organization or supporter of terrorism.\1120\ Such an 
organization also is ineligible to apply for tax exemption. The 
period of suspension runs from the date the organization is 
first designated or identified to the date when all 
designations or identifications with respect to the 
organization have been rescinded pursuant to the law or 
Executive Order under which the designation or identification 
was made. During the period of suspension, no deduction is 
allowed for any contribution to a terrorist organization.
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    \1120\ Sec. 501(p) (enacted by Pub. L. No. 108-121, sec. 108(a), 
effective for designations made before, on, or after November 11, 
2003).
---------------------------------------------------------------------------

Appeals of adverse determinations or revocations of exempt status

            Adverse determination
    If the IRS reaches the conclusion that an organization does 
not qualify for exempt status, the exempt organizations Rulings 
and Agreements unit (``EO Rulings and Agreements'') will issue 
a proposed adverse determination letter or ruling. The proposed 
adverse determination will advise the taxpayer of its 
opportunity to appeal the determination by requesting Appeals 
Office consideration.\1121\
---------------------------------------------------------------------------
    \1121\ Rev. Proc. 2015-9, 2015-2 I.R.B. 249, secs. 5 and 7.
---------------------------------------------------------------------------
    If an organization protests an adverse determination, EO 
Rulings and Agreements (if it maintains its adverse position) 
will forward the protest and the application case file to the 
Appeals Office, which will consider the organization's appeal. 
If the Appeals Office agrees with EO Rulings and Agreements, it 
will issue a final adverse determination letter or, if a 
conference was requested, schedule a conference with the 
organization. At the end of the conference process, the Appeals 
Office will issue a final adverse determination letter or a 
favorable determination letter.\1122\
---------------------------------------------------------------------------
    \1122\ Ibid, sec. 7.
---------------------------------------------------------------------------
    Prior to early 2015, certain cases were referred to EO 
Technical, and that unit would issue the proposed adverse 
determination. Under interim guidance issued on May 19, 2014, 
by the Acting Director, Rulings and Agreements (Exempt 
Organizations), an organization that receives a proposed 
adverse determination with regard to an application that has 
been transferred to EO Technical (or its successor) may request 
a conference with EO Technical in addition to requesting 
Appeals Office Consideration.\1123\ Prior to that time, 
however, a determination letter issued on the basis of 
technical advice from EO Technical could not be appealed to the 
Appeals Office on issues that were the subject of the technical 
advice.\1124\ The procedure described in the interim guidance 
has since been added to the IRS Revenue Procedure relating to 
exempt status determinations.\1125\
---------------------------------------------------------------------------
    \1123\ IRS Memorandum, Appeals Office Consideration of All Proposed 
Adverse Rulings Relating to Tax-Exempt Status from EO Technical by 
Request, May 19, 2014.
    \1124\ Rev. Proc. 2014-9, 2014-2 I.R.B. 281, sec. 7.
    \1125\ Rev. Proc. 2015-9, 2015-2 I.R.B. 249, secs. 5 and 7.
---------------------------------------------------------------------------
            Revocation or modification of a determination
    As stated above, a determination letter or ruling 
recognizing exemption may be revoked or modified. In the case 
of a revocation or modification of a determination letter or 
ruling, the appeal and conference procedures are essentially 
the same as described above in connection with initial 
determinations of exempt status.\1126\
---------------------------------------------------------------------------
    \1126\ Ibid., sec. 12.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision effectively codifies the May 19, 2014, 
interim guidance by requiring the Secretary to describe 
procedures under which a section 501(c) organization may 
request an administrative appeal (including a conference 
relating to such an appeal, if requested) to the Internal 
Office of Appeals of an adverse determination. For this 
purpose, an adverse determination includes a determination 
adverse to the organization relating to:
    1. the initial qualification or continuing classification 
of the organization as exempt from tax under section 501(a);
    2. the initial qualification or continuing classification 
of the organization as an organization described in section 
170(c)(2) (generally describing certain corporations, trusts, 
community chests, funds, and foundations that are eligible 
recipients of tax deductible contributions);
    3. the initial or continuing classification of the 
organization as a private foundation under section 509(a); or
    4. the initial or continuing classification of the 
organization as a private operating foundation under section 
4942(j)(3).

                             Effective Date

    The provision is effective for determinations made on or 
after May 19, 2014.

5. Require section 501(c)(4) organizations to provide notice of 
        formation (sec. 405 of the Act, secs. 6033 and 6652 of the 
        Code, and new sec. 506 of the Code) \1127\
---------------------------------------------------------------------------

    \1127\ The House Committee on Ways and Means reported H.R.1295 on 
April 13, 2015 (H.R. Rep. 114-71). The House passed the bill on April 
15, 2015.
---------------------------------------------------------------------------

                              Present Law 


Section 501(c)(4) organizations

    Section 501(c)(4) provides tax exemption for civic leagues 
or organizations not organized for profit but operated 
exclusively for the promotion of social welfare, or certain 
local associations of employees, provided that no part of the 
net earnings of the entity inures to the benefit of any private 
shareholder or individual. An organization is operated 
exclusively for the promotion of social welfare if it is 
engaged primarily in promoting in some way the common good and 
general welfare of the people of a community.\1128\ The 
promotion of social welfare does not include direct or indirect 
participation or intervention in political campaigns on behalf 
of or in opposition to any candidate for public office; 
however, social welfare organizations are permitted to engage 
in political activity so long as the organization remains 
engaged primarily in activities that promote social welfare. 
The lobbying activities of a social welfare organization 
generally are not limited. An organization is not operated 
primarily for the promotion of social welfare if its primary 
activity is operating a social club for the benefit, pleasure, 
or recreation of its members, or is carrying on a business with 
the general public in a manner similar to organizations that 
are operated for profit.
---------------------------------------------------------------------------
    \1128\ Treas. Reg. sec. 1.501(c)(4)-1(a)(2).
---------------------------------------------------------------------------

Application for tax exemption

            Section 501(c)(3) organizations
    Section 501(c)(3) organizations (with certain exceptions) 
are required to seek formal recognition of tax-exempt status by 
filing an application with the IRS (Form 1023).\1129\ In 
response to the application, the IRS issues a determination 
letter or ruling either recognizing the applicant as tax-exempt 
or not. Certain organizations are not required to apply for 
recognition of tax-exempt status in order to qualify as tax-
exempt under section 501(c)(3) but may do so. These 
organizations include churches, certain church-related 
organizations, organizations (other than private foundations) 
the gross receipts of which in each taxable year are normally 
not more than $5,000, and organizations (other than private 
foundations) subordinate to another tax-exempt organization 
that are covered by a group exemption letter.
---------------------------------------------------------------------------
    \1129\ See sec. 508(a).
---------------------------------------------------------------------------
    A favorable determination by the IRS on an application for 
recognition of tax-exempt status will generally be retroactive 
to the date that the section 501(c)(3) organization was created 
if it files a completed Form 1023 or Form 1023 EZ within 15 
months of the end of the month in which it was formed.\1130\ If 
the organization does not file either form or files a late 
application, it will not be treated as tax-exempt under section 
501(c)(3) for any period prior to the filing of an application 
for recognition of tax exemption.\1131\ Contributions to 
section 501(c)(3) organizations that are subject to the 
requirement that the organization apply for recognition of tax-
exempt status generally are not deductible from income, gift, 
or estate tax until the organization receives a determination 
letter from the IRS.\1132\
---------------------------------------------------------------------------
    \1130\ Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv), 
organizations are allowed an automatic 12-month extension as long as 
the application for recognition of tax exemption is filed within the 
extended, i.e., 27-month, period. The IRS also may grant an extension 
beyond the 27-month period if the organization is able to establish 
that it acted reasonably and in good faith and that granting relief 
will not prejudice the interests of the government. Treas. Reg. secs. 
301.9100-1 and 301.9100-3.
    \1131\ Treas. Reg. sec. 1.508-1(a)(1).
    \1132\ Sec. 508(d)(2)(B). Contributions made prior to receipt of a 
favorable determination letter may be deductible prior to the 
organization's receipt of such favorable determination letter if the 
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
---------------------------------------------------------------------------
    Information required on Form 1023 includes, but is not 
limited to: (1) a detailed statement of actual and proposed 
activities; (2) compensation and financial information 
regarding officers, directors, trustees, employees, and 
independent contractors; (3) a statement of revenues and 
expenses for the current year and the three preceding years (or 
for the years of the organization's existence, if less than 
four years); (4) a balance sheet for the current year; (5) a 
description of anticipated receipts and contemplated 
expenditures; (6) a copy of the articles of incorporation, 
trust document, or other organizational or enabling document; 
(7) organization bylaws (if any); and (8) information about 
previously filed Federal income tax and exempt organization 
returns, if applicable. The Form 1023 EZ requires less 
information and relies primarily on attestations of the 
applicant.
    A favorable determination letter issued by the IRS will 
state that the application for recognition of tax exemption and 
supporting documents establish that the organization submitting 
the application meets the requirements of section 501(c)(3) and 
will classify the organization as either a public charity or a 
private foundation.
    Organizations that are classified as public charities (or 
as private operating foundations) and not as private 
nonoperating foundations may cease to satisfy the conditions 
that entitled the organization to such status. The IRS makes an 
initial determination of public charity or private foundation 
status that is subsequently monitored by the IRS through annual 
return filings. The IRS periodically announces in the Internal 
Revenue Bulletin a list of organizations that have failed to 
establish, or have been unable to maintain, their status as 
public charities or as private operating foundations, and that 
become private nonoperating foundations.
    If the IRS denies an organization's application for 
recognition of exemption under section 501(c)(3), the 
organization may seek a declaratory judgment regarding its tax 
status.\1133\ Prior to utilizing the declaratory judgment 
procedure, the organization must have exhausted all 
administrative remedies available to it within the IRS.
---------------------------------------------------------------------------
    \1133\ Sec. 7428.
---------------------------------------------------------------------------
            Other section 501(c) organizations
    Most section 501(c) organizations--including organizations 
described within sections 501(c)(4) (social welfare 
organizations, etc.), 501(c)(5) (labor organizations, etc.), or 
501(c)(6) (business leagues, etc.)--are not required to provide 
notice to the Secretary that they are requesting recognition of 
exempt status. Rather, organizations are exempt under these 
provisions if they satisfy the requirements applicable to such 
organizations. However, in order to obtain certain benefits 
such as public recognition of tax-exempt status, exemption from 
certain State taxes, and nonprofit mailing privileges, such 
organizations voluntarily may request a formal recognition of 
exempt status by filing a Form 1024.
    If such an organization voluntarily requests a 
determination letter by filing Form 1024 within 27 months of 
the end of the month in which it was formed, its determination 
of exempt status, once provided, generally will be effective as 
of the organization's date of formation.\1134\ If, however, the 
organization files Form 1024 after the 27-month deadline has 
passed, its exempt status will be formally recognized only as 
of the date the organization filed Form 1024.
---------------------------------------------------------------------------
    \1134\ Rev. Proc. 2013-9, 2013-2 I.R.B. 255. Prior to the issuance 
of Revenue Procedure 2013-9 in early 2013, an organization that filed 
an application for exemption on Form 2014 generally could obtain a 
determination that it was exempt as of its date of formation, 
regardless of when it filed Form 1024.
---------------------------------------------------------------------------
    The declaratory judgment process available to organizations 
seeking exemption under section 501(c)(3) is not available to 
organizations seeking exemption under other subsections of the 
Code, including sections 501(c)(4), 501(c)(5), and 501(c)(6).

Revocation (and suspension) of exempt status

    An organization that has received a favorable tax-exemption 
determination from the IRS generally may continue to rely on 
the determination as long as ``there are no substantial changes 
in the organization's character, purposes, or methods of 
operation.'' \1135\ A ruling or determination letter concluding 
that an organization is exempt from tax may, however, be 
revoked or modified: (1) by notice from the IRS to the 
organization to which the ruling or determination letter was 
originally issued; (2) by enactment of legislation or 
ratification of a tax treaty; (3) by a decision of the United 
States Supreme Court; (4) by issuance of temporary or final 
Regulations by the Treasury Department; (5) by issuance of a 
revenue ruling, a revenue procedure, or other statement in the 
Internal Revenue Bulletin; or (6) automatically, in the event 
the organization fails to file a required annual return or 
notice for three consecutive years.\1136\ A revocation or 
modification of a determination letter or ruling may be 
retroactive if, for example, there has been a change in the 
applicable law, the organization omitted or misstated a 
material fact, or the organization has operated in a manner 
materially different from that originally represented.\1137\
---------------------------------------------------------------------------
    \1135\ Treas. Reg. sec. 1.501(a)-1(a)(2).
    \1136\ Rev. Proc. 2013-9, 2013-2 I.R.B. 255.
    \1137\ Ibid.
---------------------------------------------------------------------------
    The IRS generally issues a letter revoking recognition of 
an organization's tax-exempt status only after: (1) conducting 
an examination of the organization; (2) issuing a letter to the 
organization proposing revocation; and (3) allowing the 
organization to exhaust the administrative appeal rights that 
follow the issuance of the proposed revocation letter. In the 
case of a section 501(c)(3) organization, the revocation letter 
immediately is subject to judicial review under the declaratory 
judgment procedures of section 7428. To sustain a revocation of 
tax-exempt status under section 7428, the IRS must demonstrate 
that the organization no longer is entitled to exemption.
    Upon revocation of tax-exemption or change in the 
classification of an organization (e.g., from public charity to 
private foundation status), the IRS publishes an announcement 
of such revocation or change in the Internal Revenue Bulletin. 
Contributions made to organizations by donors who are unaware 
of the revocation or change in status ordinarily will be 
deductible if made on or before the date of publication of the 
announcement.
    The IRS may suspend the tax-exempt status of an 
organization for any period during which an organization is 
designated or identified by U.S. authorities as a terrorist 
organization or supporter of terrorism.\1138\ Such an 
organization also is ineligible to apply for tax exemption. The 
period of suspension runs from the date the organization is 
first designated or identified to the date when all 
designations or identifications with respect to the 
organization have been rescinded pursuant to the law or 
Executive Order under which the designation or identification 
was made. During the period of suspension, no deduction is 
allowed for any contribution to a terrorist organization.
---------------------------------------------------------------------------
    \1138\ Sec. 501(p) (enacted by Pub. L. No. 108-121, sec. 108(a), 
effective for designations made before, on, or after November 11, 
2003).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, an organization described in section 
501(c)(4) must provide to the Secretary notice of its formation 
and intent to operate as such an organization, in such manner 
as the Secretary may prescribe. The notice, together with a 
reasonable user fee in an amount to be established by the 
Secretary, must be provided no later than 60 days following the 
organization's establishment and must include the following 
information: (1) the name, address, and taxpayer identification 
number of the organization; (2) the date on which, and the 
State under the laws of which, the organization was organized; 
and (3) a statement of the purpose of the organization. The 
Secretary may extend the 60-day deadline for reasonable cause. 
Any such fees collected may not be expended by the Secretary 
unless provided by an appropriations Act. Within 60 days of 
receipt of a notice of an organization's formation and intent 
to operate as an organization described in section 501(c)(4), 
the Secretary shall issue to the organization an acknowledgment 
of the notice.
    The provision amends section 6652(c) (which provides for 
penalties in the event of certain failures to file an exempt 
organization return or disclosure) to impose penalties for 
failure to file the notice required under the proposal. An 
organization that fails to file a notice within 60 days of its 
formation (or, if an extension is granted for reasonable cause, 
by the deadline established by the Secretary) is subject to a 
penalty equal to $20 for each day during which the failure 
occurs, up to a maximum of $5,000. In the event such a penalty 
is imposed, the Secretary may make a written demand on the 
organization specifying a date by which the notice must be 
provided. If any person fails to comply with such a demand on 
or before the date specified in the demand, a penalty of $20 is 
imposed for each day the failure continues, up to a maximum of 
$5,000.
    With its first annual information return (Form 990, Form 
990-EZ, or Form 990-N) filed after providing the notice 
described above, a section 501(c)(4) organization must provide 
such information as the Secretary may require, and in the form 
prescribed by the Secretary, to support its qualification as an 
organization described in section 501(c)(4). The Secretary is 
not required to issue a determination letter following the 
organization's filing of the expanded first annual information 
return.
    A section 501(c)(4) organization that desires additional 
certainty regarding its qualification as an organization 
described in section 501(c)(4) may file a request for a 
determination, together with the required user fee, with the 
Secretary. Such a request is in addition to, not in lieu of, 
filing the required notice described above. It is intended that 
such a request for a determination be submitted on a new form 
(separate from Form 1024, which may continue to be used by 
certain other organizations) that clearly states that filing 
such a request is optional. The request for a determination is 
treated as an application subject to public inspection and 
disclosure under sections 6104(a) and (d).

                             Effective Date

    The provision generally is effective for organizations 
organized after the date of enactment (December 18, 2015).
    Organizations organized on or before the date of enactment 
that have not filed an application for exemption (Form 1024) or 
annual information return or notice (under section 6033) on or 
before the date of enactment must provide the notice required 
under the provision within 180 days of the date of enactment.

6. Declaratory judgments for section 501(c)(4) and other exempt 
        organizations (sec. 406 of the Act and sec. 7428 of the Code) 
        \1139\
---------------------------------------------------------------------------

    \1139\ The House Committee on Ways and Means reported H.R. 1295 on 
April 13, 2015 (H.R. Rep. 114-71). The House passed the bill on April 
15, 2015.
---------------------------------------------------------------------------

                              Present Law

    In order for an organization to be granted tax exemption as 
a charitable entity described in section 501(c)(3), it must 
file an application for recognition of exemption with the IRS 
and receive a favorable determination of its status.\1140\ For 
most section 501(c)(3) organizations, eligibility to receive 
tax-deductible contributions similarly is dependent upon its 
receipt of a favorable determination from the IRS. In general, 
a section 501(c)(3) organization can rely on a determination 
letter or ruling from the IRS regarding its tax-exempt status, 
unless there is a material change in its character, purposes, 
or methods of operation. In cases where an organization 
violates one or more of the requirements for tax exemption 
under section 501(c)(3), the IRS generally may revoke an 
organization's tax exemption, notwithstanding an earlier 
favorable determination.
---------------------------------------------------------------------------
    \1140\ Sec. 508(a).
---------------------------------------------------------------------------
    Present law authorizes an organization to seek a 
declaratory judgment regarding its tax-exempt status as a 
remedy if the IRS denies its application for recognition of 
exemption under section 501(c)(3), fails to act on such an 
application, or informs a section 501(c)(3) organization that 
it is considering revoking or adversely modifying its tax-
exempt status.\1141\ The right to seek a declaratory judgment 
arises in the case of a dispute involving a determination by 
the IRS with respect to: (1) the initial qualification or 
continuing qualification of an organization as a charitable 
organization for tax exemption purposes or for charitable 
contribution deduction purposes; (2) the initial classification 
or continuing classification of an organization as a private 
foundation; (3) the initial classification or continuing 
classification of an organization as a private operating 
foundation; or (4) the failure of the IRS to make a 
determination with respect to (1), (2), or (3).\1142\ A 
``determination'' in this context generally means a final 
decision by the IRS affecting the tax qualification of a 
charitable organization. Section 7428 vests jurisdiction over 
controversies involving such a determination in the U.S. 
District Court for the District of Columbia, the U.S. Court of 
Federal Claims, and the U.S. Tax Court.\1143\
---------------------------------------------------------------------------
    \1141\ Sec. 7428.
    \1142\ Sec. 7428(a)(1).
    \1143\ Sec. 7428(a)(2).
---------------------------------------------------------------------------
    Prior to utilizing the declaratory judgment procedure, an 
organization must have exhausted all administrative remedies 
available to it within the IRS.\1144\ For the first 270 days 
after a request for a determination is made and before the IRS 
informs the organization of its decision, an organization is 
deemed not to have exhausted its administrative remedies. If no 
determination is made during the 270-day period, the 
organization may initiate an action for declaratory judgment 
after the period has elapsed. If, however, the IRS makes an 
adverse determination during the 270-day period, an 
organization may immediately seek declaratory relief. The 270-
day period does not begin with respect to applications for 
recognition of tax-exempt status until the date a substantially 
completed application is submitted.
---------------------------------------------------------------------------
    \1144\ Sec. 7428(b)(2).
---------------------------------------------------------------------------
    Under present law, a non-charity (i.e., an organization not 
described in section 501(c)(3)) may not seek a declaratory 
judgment with respect to an IRS determination regarding its 
tax-exempt status. In general, such an organization must 
petition the U.S. Tax Court for relief following the issuance 
of a notice of deficiency or pay any tax owed and file a refund 
action in Federal district court or the U.S. Court of Federal 
Claims.

                        Explanation of Provision

    The provision extends the section 7428 declaratory judgment 
procedure to the initial determination or continuing 
classification of an organization as tax-exempt under section 
501(a) as an organization described in: (1) any subsection of 
section 501(c) (including social welfare and certain other 
organizations described in section 501(c)(4)); or (2) section 
501(d) (religious and apostolic organizations).

                             Effective Date

    The provision is effective for pleadings filed after the 
date of enactment (December 18, 2015).

7. Termination of employment of Internal Revenue Service employees for 
        taking official actions for political purposes (sec. 407 of the 
        Act and sec. 1203(b) of the Internal Revenue Service 
        Restructuring and Reform Act of 1998)

                              Present Law

    The IRS Restructuring and Reform Act of 1998 (the 
``Restructuring Act'') \1145\ requires the IRS to terminate an 
employee for certain proven violations committed by the 
employee in connection with the performance of official duties. 
The violations include: (1) willful failure to obtain the 
required approval signatures on documents authorizing the 
seizure of a taxpayer's home, personal belongings, or business 
assets; (2) providing a false statement under oath material to 
a matter involving a taxpayer; (3) with respect to a taxpayer, 
taxpayer representative, or other IRS employee, the violation 
of any right under the U.S. Constitution, or any civil right 
established under titles VI or VII of the Civil Rights Act of 
1964, title IX of the Educational Amendments of 1972, the Age 
Discrimination in Employment Act of 1967, the Age 
Discrimination Act of 1975, sections 501 or 504 of the 
Rehabilitation Act of 1973 and title I of the Americans with 
Disabilities Act of 1990; (4) falsifying or destroying 
documents to conceal mistakes made by any employee with respect 
to a matter involving a taxpayer or a taxpayer representative; 
(5) assault or battery on a taxpayer or other IRS employee, but 
only if there is a criminal conviction or a final judgment by a 
court in a civil case, with respect to the assault or battery; 
(6) violations of the Internal Revenue Code, Treasury 
Regulations, or policies of the IRS (including the Internal 
Revenue Manual) for the purpose of retaliating or harassing a 
taxpayer or other IRS employee; (7) willful misuse of section 
6103 for the purpose of concealing data from a Congressional 
inquiry; (8) willful failure to file any tax return required 
under the Code on or before the due date (including extensions) 
unless failure is due to reasonable cause; (9) willful 
understatement of Federal tax liability, unless such 
understatement is due to reasonable cause; and (10) threatening 
to take an official action, such as an audit, or delay or fail 
to take official action with respect to a taxpayer for the 
purpose of extracting personal gain or benefit.
---------------------------------------------------------------------------
    \1145\ Pub. L. No. 105-206, sec. 1203(b), July 22, 1998.
---------------------------------------------------------------------------
    The Act provides non-delegable authority to the 
Commissioner to determine that mitigating factors exist, that, 
in the Commissioner's sole discretion, mitigate against 
terminating the employee. The Act also provides that the 
Commissioner, in his sole discretion, may establish a procedure 
to determine whether an individual should be referred for such 
a determination by the Commissioner. The Treasury Inspector 
General (``IG'') is required to track employee terminations and 
terminations that would have occurred had the Commissioner not 
determined that there were mitigation factors and include such 
information in the IG's annual report to Congress.

                        Explanation of Provision

    The provision amends the Restructuring Act to expand the 
scope of the violation concerning an IRS employee threatening 
to audit a taxpayer for the purpose of extracting personal gain 
or benefit to include actions taken for political purposes. As 
a result, the provision requires the IRS to terminate an 
employee who, for political purposes or personal gain, 
undertakes official action with respect to a taxpayer or, 
depending on the circumstances, fails to do so, delays action 
or threatens to perform, delay or omit such official action. 
Official actions for purposes of this provision include audits 
or examinations.

                             Effective Date

    The provision is effective on the date of enactment 
(December 18, 2015).

8. Gift tax not to apply to gifts made to certain exempt organizations 
        (sec. 408 of the Act and sec. 2501(a) of the Code) \1146\
---------------------------------------------------------------------------

    \1146\ The House Committee on Ways and Means reported H.R. 1104 on 
April 13, 2015 (H.R. Rep. 114-64). The House passed the bill on April 
15, 2015.
---------------------------------------------------------------------------

                              Present Law


Overview

    The Code imposes a tax for each calendar year on the 
transfer of property by gift during such year by any 
individual, whether a resident or nonresident of the United 
States.\1147\ The amount of taxable gifts for a calendar year 
is determined by subtracting from the total amount of gifts 
made during the year: (1) the gift tax annual exclusion 
(described below); and (2) allowable deductions.
---------------------------------------------------------------------------
    \1147\ Sec. 2501(a).
---------------------------------------------------------------------------
    Gift tax for the current taxable year is determined by: (1) 
computing a tentative tax on the combined amount of all taxable 
gifts for the current and all prior calendar years using the 
common gift tax and estate tax rate table; (2) computing a 
tentative tax only on all prior-year gifts; (3) subtracting the 
tentative tax on prior-year gifts from the tentative tax 
computed for all years to arrive at the portion of the total 
tentative tax attributable to current-year gifts; and, finally, 
(4) subtracting the amount of unified credit not consumed by 
prior-year gifts.

Unified credit (exemption) and tax rates

            Unified credit
    A unified credit is available with respect to taxable 
transfers by gift and at death.\1148\ The unified credit 
offsets tax, computed using the applicable estate and gift tax 
rates, on a specified amount of transfers, referred to as the 
applicable exclusion amount, or exemption amount. The exemption 
amount was set at $5 million for 2011 and is indexed for 
inflation for later years.\1149\ For 2015, the inflation-
indexed exemption amount is $5.43 million.\1150\ Exemption used 
during life to offset taxable gifts reduces the amount of 
exemption that remains at death to offset the value of a 
decedent's estate. An election is available under which 
exemption that is not used by a decedent may be used by the 
decedent's surviving spouse (exemption portability).
---------------------------------------------------------------------------
    \1148\ Sec. 2010.
    \1149\ For 2011 and later years, the gift and estate taxes were 
reunified, meaning that the gift tax exemption amount was increased to 
equal the estate tax exemption amount.
    \1150\ For 2015, the $5.43 exemption amount results in a unified 
credit of $2,117,800, after applying the applicable rates set forth in 
section 2001(c).
---------------------------------------------------------------------------
            Common tax rate table
    A common tax-rate table with a top marginal tax rate of 40 
percent is used to compute gift tax and estate tax. The 40-
percent rate applies to transfers in excess of $1 million (to 
the extent not exempt). Because the exemption amount currently 
shields the first $5.43 million in gifts and bequests from tax, 
transfers in excess of the exemption amount generally are 
subject to tax at the highest marginal 40-percent rate.

Transfers by gift

    The gift tax applies to a transfer by gift regardless of 
whether: (1) the transfer is made outright or in trust; (2) the 
gift is direct or indirect; or (3) the property is real or 
personal, tangible or intangible.\1151\ For gift tax purposes, 
the value of a gift of property is the fair market value of the 
property at the time of the gift.\1152\ Where property is 
transferred for less than full consideration, the amount by 
which the value of the property exceeds the value of the 
consideration is considered a gift and is included in computing 
the total amount of a taxpayer's gifts for a calendar 
year.\1153\
---------------------------------------------------------------------------
    \1151\ Sec. 2511(a).
    \1152\ Sec. 2512(a).
    \1153\ Sec. 2512(b).
---------------------------------------------------------------------------
    For a gift to occur, a donor generally must relinquish 
dominion and control over donated property. For example, if a 
taxpayer transfers assets to a trust established for the 
benefit of his or her children, but retains the right to revoke 
the trust, the taxpayer may not have made a completed gift, 
because the taxpayer has retained dominion and control over the 
transferred assets. A completed gift made in trust, on the 
other hand, often is treated as a gift to the trust 
beneficiaries.
    By reason of statute, certain transfers are not treated as 
transfers by gift for gift tax purposes. These include, for 
example, certain transfers for educational and medical purposes 
\1154\ and transfers to section 527 political 
organizations.\1155\
---------------------------------------------------------------------------
    \1154\ Sec. 2503(e).
    \1155\ Sec. 2501(a)(4).
---------------------------------------------------------------------------
    Under present law, there is no explicit exception from the 
gift tax for a transfer to a tax-exempt organization described 
in section 501(c)(4) (generally, social welfare organizations), 
501(c)(5) (generally, labor and certain other organizations), 
or section 501(c)(6) (generally, trade associations and 
business leagues).

Taxable gifts

    As stated above, the amount of a taxpayer's taxable gifts 
for the year is determined by subtracting from the total amount 
of the taxpayer's gifts for the year the gift tax annual 
exclusion and any available deductions.
            Gift tax annual exclusion
    Under present law, donors of lifetime gifts are provided an 
annual exclusion of $14,000 per donee in 2015 (indexed for 
inflation from the 1997 annual exclusion amount of $10,000) for 
gifts of present interests in property during the taxable 
year.\1156\ If the non-donor spouse consents to split the gift 
with the donor spouse, then the annual exclusion is $28,000 per 
donee in 2015. In general, unlimited transfers between U.S. 
spouses are permitted without imposition of a gift tax. Special 
rules apply to the contributions to a qualified tuition program 
(``529 Plan'') including an election to treat a contribution 
that exceeds the annual exclusion as a contribution made 
ratably over a five-year period beginning with the year of the 
contribution.\1157\
---------------------------------------------------------------------------
    \1156\ Sec. 2503(b).
    \1157\ Sec. 529(c)(2).
---------------------------------------------------------------------------
            Transfers between spouses
    A 100-percent marital deduction generally is permitted for 
the value of property transferred between U.S. spouses.\1158\
---------------------------------------------------------------------------
    \1158\ Sec. 2523.
---------------------------------------------------------------------------
            Transfers to charity
    Contributions to section 501(c)(3) charitable organizations 
and certain other organizations may be deducted from the value 
of a gift for Federal gift tax purposes.\1159\ The effect of 
the deduction generally is to remove the full fair market value 
of assets transferred to charity from the gift tax base; unlike 
the income tax charitable deduction, there are no percentage 
limits on the deductible amount. A charitable contribution of a 
partial interest in property, such as a remainder or future 
interest, generally is not deductible for gift tax 
purposes.\1160\
---------------------------------------------------------------------------
    \1159\ Sec. 2522.
    \1160\ Sec. 2522(c)(2).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the gift tax shall not apply to the 
transfer of money or other property to an organization 
described in section 501(c)(4), 501(c)(5), or 501(c)(6) and 
exempt from tax under section 501(a) for the use of such 
organization.

                             Effective Date

    The provision is effective for gifts made after the date of 
enactment (December 18, 2015). The provision shall not be 
construed to create an inference with respect to whether any 
transfer of property to such an organization, whether made 
before, on, or after the date of enactment, is a transfer by 
gift for gift tax purposes.

9. Extend the Internal Revenue Service authority to require a truncated 
        Social Security Number (``SSN'') on Form
        W-2 (sec. 409 of the Act and sec. 6051 of the Code)

                              Present Law

    Section 6051(a) generally requires that an employer provide 
a written statement to each employee on or before January 31 of 
the succeeding year showing the remuneration paid to that 
employee during the calendar year and other information 
including the employee's Social Security number. The Form W-2, 
Wage and Tax Statement, is used to provide this information to 
employees and contains the taxpayer's SSN, wages paid, taxes 
withheld, and other information.
    Other statements provided to taxpayers, such as Forms 1099, 
generally issued to any individual or unincorporated business 
paid in excess of $600 per calendar year for services rendered, 
are subject to rules under section 6109 dealing with 
identifying numbers. Section 6109 requires that the filer 
provide the taxpayer's ``identifying number'' which is an 
individual's SSN except as otherwise specified in 
regulations.\1161\ Accordingly, for Forms 1099, the Department 
of the Treasury has the authority to require or permit filers 
to use a number other than a taxpayer's SSN, including a 
truncated SSN (the last four numbers of the SSN).
---------------------------------------------------------------------------
    \1161\ See Treas. Reg. sec. 301.6109-1.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision revises section 6051 to require employers to 
include an ``identifying number'' for each employee, rather 
than an employee's SSN, on Form W-2. This change will permit 
the Department of the Treasury to promulgate regulations 
requiring or permitting a truncated SSN on Form W-2, under 
authority currently provided in section 6109(d).

                             Effective Date

    The provision is effective on the date of enactment 
(December 18, 2015).

10. Clarification of enrolled agent credentials (sec. 410 of the Act)

                              Present Law

    Treasury Department Circular No. 230 provides rules 
relating to practice before the IRS by attorneys, certified 
public accountants, enrolled agents, enrolled actuaries, and 
others.

                        Explanation of Provision

    The provision amends Title 31 of the U.S. Code to permit 
enrolled agents meeting the Secretary's qualifications to use 
the designation ``enrolled agent,'' ``EA,'' or ``E.A.''

                             Effective Date

    The provision is effective on the date of enactment 
(December 18, 2015).

11. Partnership audit rules (sec. 411 of the Act and secs. 6225, 6226, 
        6234, 6235, and 6031 of the Code)

                              Present Law

    Under recent amendments to Chapter 63,\1162\ relating to 
partnership audit rules, the returns filed for partnership 
taxable years beginning after 2017 are subject to a centralized 
system for audit, adjustment and collection of tax that applies 
to all partnerships, except those eligible partnerships that 
have filed a valid election out. The Secretary may initiate an 
examination of a partnership by issuing a notice of 
administrative proceeding to the partnership or its designated 
representative.\1163\ Any adjustment to items of income, gain, 
loss, deduction, or credit of a partnership for a partnership 
taxable year, and any partner's distributive share thereof, 
generally is determined at the partnership level.\1164\ The 
Secretary is required to notify the partnership and the 
partnership representative of any proposed partnership 
adjustment before the Secretary may issue a notice of final 
partnership adjustment.\1165\ A notice of proposed adjustment 
issued to the partnership identifies both the substance of the 
adjustment and informs the partnership of the amount of any 
imputed underpayment that results. If the adjustments result in 
any underpayment of tax attributable to these items, the tax is 
generally imputed to the partnership and may be assessed and 
collected at the partnership level in the year that the 
partnership adjustment becomes final (the adjustment 
year).\1166\ As an alternative to partnership payment of the 
imputed underpayment, a partnership may elect to furnish a 
statement of each partner's share of any adjustments (similar 
to a Schedule K-1) to each reviewed-year partner, who is then 
required to pay tax attributable to the partnership 
adjustment.\1167\
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    \1162\ Sections 6221 through 6241, as amended by section 1101, 
``The Bipartisan Budget Act of 2015,'' Pub. L. 114-74. For years prior 
to the effective date of the new provisions, there remain three sets of 
rules for tax audits of partners and partnerships. Partnerships with 
more than 100 partners may elect the electing large partnership audit 
rules of sections 6240 through 6256. Partnerships with more than 10 
partners (and that are not electing large partnerships) are subject to 
the TEFRA partnership audit rules enacted in 1982, found in sections 
6221 through 6234. Under these two sets of rules, partnership items 
generally are determined at the partnership level under unified audit 
procedures. All other partnerships (those with 10 or fewer partners 
that have not elected the TEFRA audit rules) are subject to the audit 
rules applicable generally, with the tax treatment of an adjustment to 
a partnership's items of income, gain, loss, deduction, or credit 
determined for each partner in separate proceedings, both 
administrative and judicial.
    \1163\ Sec. 6231(a)(1).
    \1164\ Sec. 6221(a).
    \1165\ Sec. 6231(a)(1) and (2).
    \1166\ For purposes of the centralized system, the reviewed year 
means the partnership taxable year to which the item being adjusted 
relates (sec. 6225(d)(1)). The adjustment year means (1) in the case of 
an adjustment pursuant to the decision of a court (under the 
centralized system's judicial review provisions), the partnership 
taxable year in which the decision becomes final; (2) in the case of an 
administrative adjustment request, the partnership taxable year in 
which it is made; or (3) in any other case, the partnership taxable 
year in which the notice of final partnership adjustment is mailed 
(sec. 6225(d)(2)).
    \1167\ Sec. 6226.
---------------------------------------------------------------------------
    An imputed underpayment of tax with respect to a 
partnership adjustment for any reviewed year is determined by 
netting all adjustments of items of income, gain, loss, or 
deduction and multiplying the net amount by the highest rate of 
Federal income tax applicable either to individuals or to 
corporations that is in effect for the reviewed year.\1168\ Any 
adjustments to items of credit are taken into account as an 
increase or decrease of the product of this multiplication. Any 
net increase or decrease in loss is treated as a decrease or 
increase, respectively, in income. Netting is done taking into 
account applicable limitations, restrictions, and special rules 
under present law.
---------------------------------------------------------------------------
    \1168\ Sec. 6225(b)(1).
---------------------------------------------------------------------------

Modification of an imputed underpayment generally

    If the partnership disagrees with the computation of the 
imputed underpayment during an administrative proceeding, it 
may seek modification of the computation, subject to the 
approval of the Secretary.\1169\ Modification procedures permit 
redetermination of the imputed underpayment (1) to take into 
account amounts paid with amended returns filed by reviewed 
year partners, (2) to disregard the portion allocable to a tax-
exempt partner, and (3) to take into account a rate of tax 
lower than the highest tax rate for individuals or corporations 
for the reviewed year. In addition, regulations or guidance may 
provide for additional procedures to modify imputed 
underpayment amounts on the basis of other necessary or 
appropriate factors. In the case of a publicly traded 
partnership, such other appropriate factors could include 
taking into account the present-law section 469(k) rule 
requiring that deductions that exceed income (passive activity 
losses) be carried forward and applied against income from the 
publicly traded partnership, not against other income of the 
partners.
---------------------------------------------------------------------------
    \1169\ Sec. 6225(c).
---------------------------------------------------------------------------

Modifying an imputed underpayment based on applicable highest tax rates

    The partnership may seek to modify an imputed underpayment 
amount by demonstrating that a lower tax rate is applicable to 
partners.\1170\ For example, the partnership may demonstrate 
that a portion of an imputed underpayment is allocable to a 
partner that is a C corporation, and for that C corporation 
partner, the highest marginal rate of Federal income tax (35 
percent in 2015, for example) for ordinary income for the 
reviewed year is lower than the highest marginal rate of 
Federal income tax for individuals (39.6 percent in 2015, for 
example). The statutory language refers to ordinary income but 
does not refer to capital gain of a corporation, which is 
generally subject to tax at the same rate as ordinary income of 
a corporation.
---------------------------------------------------------------------------
    \1170\ Sec. 6225(c)(4).
---------------------------------------------------------------------------

Limitations period for partnership adjustments

    In general, the Secretary may adjust an item on a 
partnership return at any time within three years of the date a 
return is filed (or the return due date, if the return is not 
filed) or an administrative adjustment request is made. The 
time within which the adjustment is made by the Secretary may 
be later if a notice of proposed adjustment \1171\ is issued, 
because the issuance of a notice of proposed partnership 
adjustment begins the running of a period of 270 days in which 
the partnership may seek a modification of the imputed 
underpayment. Although the partnership generally is limited to 
270 days from the issuance of that notice to seek a 
modification of the imputed underpayment, extensions may be 
permitted by the IRS. During the 270-day period, the Secretary 
may not issue a notice of final partnership adjustment.
---------------------------------------------------------------------------
    \1171\ Sec. 6231.
---------------------------------------------------------------------------
    After a notice of proposed adjustment resulting in an 
imputed underpayment is issued, the final partnership notice 
may be issued no later than either the date which is 270 days 
after the partnership has completed its response seeking a 
revision of an imputed underpayment, or, if the partnership 
provides an incomplete or no response, no later than 270 days 
after the date of a notice of proposed adjustment.

Forum for judicial review

    A partnership may seek judicial review of a notice of final 
partnership adjustment within 90 days after the notice is 
mailed, in the U.S. Tax Court, the Court of Federal Claims or a 
U.S. district court for the district in which the partnership 
has its principal place of business. The statutory language 
refers to the Claims Court rather than the Court of Federal 
Claims.

Restriction on authority to amend partner information statements

    Partner information returns (currently Schedules K-1) 
required to be furnished by the partnership may not be amended 
after the due date of the partnership return to which the 
partner information returns relate.\1172\ A conforming 
amendment inadvertently strikes newly added language relating 
to the restriction on amended partner information statements.
---------------------------------------------------------------------------
    \1172\ After that date, a timely administrative adjustment request 
may address Schedule K-1 errors. Sec. 6227.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision corrects and clarifies several provisions 
relating to partnership audits to express the intended rule.

Modifying an imputed underpayment based on applicable highest tax rates

    The provision strikes the reference to ordinary income of 
corporations in the rule that provides procedures for 
modification of an imputed underpayment to make clear that a 
lower rate of tax may be taken into account in the case of 
either capital gain or ordinary income of a partner that is a C 
corporation.

Modifying an imputed underpayment based on certain passive losses of 
        publicly traded partnerships

    Under the provision, certain section 469(k) passive 
activity losses can reduce the imputed underpayment of a 
publicly traded partnership under the centralized system. The 
imputed underpayment can be determined without regard to the 
portion of the underpayment that the partnership demonstrates 
is attributable to (i.e., would be offset by) specified passive 
activity losses attributable to a specified partner. The amount 
of the specified passive activity loss is concomitantly 
decreased, and the partnership takes the net decrease into 
account as an adjustment in the adjustment year with respect to 
the specified partners to which the net decrease relates.
    A specified passive activity loss for any specified partner 
of a publicly traded partnership means the lesser of the 
section 469(k) passive activity loss of that partner which is 
separately determined with respect to the partnership (1) for 
the partner's taxable year in which or with which the reviewed 
year of the partnership ends, or (2) for the partner's taxable 
year in which or with which the adjustment year of the 
partnership ends. A specified partner is a person who 
continuously meets each of three requirements for the period 
starting with the partner's taxable year in which or with which 
the partnership reviewed year ends through the partner's 
taxable year in which or with which the partnership adjustment 
year ends. These three requirements are that the person is a 
partner of the publicly traded partnership; the person is an 
individual, estate, trust, closely held C corporation, or 
personal service corporation; and the person has a specified 
passive activity loss with respect to the publicly traded 
partnership.

Limitations period for partnership adjustments

    The provision clarifies the unintended conflict between 
section 6231 (barring the Secretary from issuing the notice of 
final partnership adjustment earlier than the expiration of the 
270 days after the notice of a proposed adjustment) and section 
6235 (requiring that a notice of final partnership adjustment 
be filed no later than 270 days after the notice of proposed 
adjustment in the case of a partnership that does not seek 
modification of the imputed underpayment). As amended, section 
6235 provides that a notice of final partnership adjustment to 
a partnership that does not seek modification of an 
underpayment in response to a notice of proposed adjustment may 
be issued up to 330 days (plus any additional number of days 
that were agreed upon as an extension of time for taxpayer 
response) after the notice of proposed adjustment.

Forum for judicial review

    The provision correctly identifies the Court of Federal 
Claims in section 6234.
    The provision adds a cross reference within the alternative 
payment rules \1173\ to the time period for seeking judicial 
review,\1174\ clarifying that judicial review is available to a 
partnership that has made the election \1175\ under the 
alternative payment rules.
---------------------------------------------------------------------------
    \1173\ Sec. 6226.
    \1174\ Sec. 6234(a).
    \1175\ Sec. 6226(a)(1).
---------------------------------------------------------------------------

Restriction on authority to amend partner information statements

    The provision corrects the conforming amendment so that it 
correctly strikes the last sentence of section 6031(b) under 
prior law, which sentence related to repealed provisions on 
electing large partnerships.

                             Effective Date

    The provision is effective as if included in section 1101 
of the Bipartisan Budget Act of 2015.\1176\
---------------------------------------------------------------------------
    \1176\ Pub. L. No. 114-74, enacted November 2, 2015.
---------------------------------------------------------------------------

                   B. United States Tax Court \1177\

---------------------------------------------------------------------------
    \1177\ The Senate Committee on Finance reported S. 903 on April 14, 
2015 (S. Rep. No. 114-14).
---------------------------------------------------------------------------

           Part 1--Taxpayer Access to United States Tax Court


1. Filing period for interest abatement cases (sec. 421 of the Act and 
        sec. 6404 of the Code)

                              Present Law

    The United States Tax Court (herein the ``Tax Court'') has 
jurisdiction over actions brought by a taxpayer for review of a 
denial of a request for interest abatement if (1) the taxpayer 
meets certain net worth requirements, and (2) the petition is 
filed within 180 days of mailing of a final determination by 
the Secretary not to abate interest.\1178\ In the absence of 
the mailing of a final determination by the Secretary, the Code 
does not authorize the filing of a Tax Court petition, and the 
taxpayer is unable to seek judicial review of the claim.
---------------------------------------------------------------------------
    \1178\ Sec. 6404(h).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends the Code to authorize a petition with 
the Tax Court to seek review of a claim for interest abatement 
upon the expiration of a 180-day period after the filing with 
the IRS of a claim for abatement of interest, in instances in 
which the Secretary has failed to issue a final determination 
within that period.

                             Effective Date

    The provision is effective for claims filed after the date 
of enactment (December 18, 2015).

2. Small tax case election for interest abatement cases (sec. 422 of 
        the Act and secs. 6404 and 7463 of the Code)

                              Present Law

    The Code provides certain proceedings for small tax cases, 
generally those that involve disputes of $50,000 or less.\1179\ 
Under the Code, the Tax Court has exclusive jurisdiction to 
review a failure by the Secretary to abate interest.\1180\ 
However, the Code presently does not authorize cases to be 
conducted using small tax case procedures, unless the issue 
arises as part of a request for review of collection 
actions.\1181\
---------------------------------------------------------------------------
    \1179\ Sec. 7463. These cases are handled under less formal 
procedures than regular cases. The Tax Court's decision in a small tax 
case is final and cannot be appealed to any court by the IRS or by the 
petitioner. See sec. 7463, Title XVII of the United States Tax Court 
rules, and http://www.ustaxcourt.gov/forms/Petition_Kit.pdf.
    \1180\ Sec. 6404(h). Hinck v. United States, 127 S.Ct. 2011 (2007).
    \1181\ Secs. 7463, 6330.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends the Code to extend the small tax case 
procedures to petitions brought under section 6404(h), for 
review of a decision by the Secretary not to abate interest in 
cases in which the total amount of interest for which abatement 
is sought does not exceed $50,000.

                             Effective Date

    The provision applies to cases pending as of the day after 
the date of enactment (December 18, 2015), and cases commencing 
after the date of enactment.

3. Venue for appeal of spousal relief and collection cases (sec. 423 of 
        the Act and sec. 7482 of the Code)

                              Present Law

    The jurisdiction of the Tax Court includes authority to 
render decisions on a taxpayer's entitlement to relief from 
joint and several liability and collection of taxes by lien and 
levy.\1182\
---------------------------------------------------------------------------
    \1182\ Secs. 6015, 6320, and 6330.
---------------------------------------------------------------------------
    Venue for appellate review of Tax Court decisions by the 
U.S. Court of Appeals is determined for certain specified cases 
by the taxpayer's legal residence, principal place of business, 
or principal office or agency is located. A default rule 
prescribes that venue for review of all other cases lies in the 
U.S. Court of Appeals for the District of Columbia.\1183\ Cases 
involving relief from joint or several liability or collection 
by lien and levy are not among those expressly identified as 
appealable to the circuit of residence or principal business/
office. However, routine practice since enactment, on the part 
of both the litigants and the courts, has been to treat such 
cases as appealable to the U.S. Court of Appeals for the 
circuit corresponding to the petitioner's residence or 
principal business or office.
---------------------------------------------------------------------------
    \1183\ Sec. 7482.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends section 7482(b) to clarify that Tax 
Court decisions rendered in cases involving petitions under 
sections 6015, 6320, or 6330 follow the generally applicable 
rule for appellate review. That rule provides that the cases 
are appealable to the U.S. Court of Appeals for the circuit in 
which is located the petitioner's legal residence in the case 
of an individual or the petitioner's principal place of 
business or principal office of agency in the case of an entity 
other than an individual.

                             Effective Date

    The provision applies to petitions filed after the date of 
enactment. No inference is intended with respect to the 
application of section 7482 to petitions filed on or before the 
date of enactment.

4. Suspension of running of period for filing petition of spousal 
        relief and collection cases (sec. 424 of the Act and secs. 6015 
        and 6330 of the Code)

                              Present Law

    Section 6015(e) addresses procedures by which taxpayers may 
petition the Tax Court to determine the appropriate relief 
available to the individual in matters involving spousal relief 
from joint and several liability and collection of taxes by 
lien and levy. It also provides for suspension of the running 
of a period of limitations \1184\ on the collection of 
assessments that may apply, limits on tax court jurisdictions 
in certain circumstances, and rules for providing adequate 
notice of proceedings to the other spouse.
---------------------------------------------------------------------------
    \1184\ Sec. 6502.
---------------------------------------------------------------------------
    Section 6330 disallows levies to be made on property or 
rights to property unless the Secretary has notified the 
taxpayer in writing of their right to a hearing before such 
levy is made. Under subsection (d), once a determination is 
made, the taxpayer may appeal the determination to the Tax 
Court within 30 days. Under subsection (e), the levy actions 
which are the subject of the requested hearing and the running 
of any relevant period of limitations \1185\ are suspended for 
the period during which such hearing and appeals are pending.
---------------------------------------------------------------------------
    \1185\ Secs. 6502, 6531, and 6532.
---------------------------------------------------------------------------
    Neither section 6015 or 6330 includes a rule similar to the 
coordination rule found in the general provisions regarding 
filing a petition with the Tax Court for taxpayers in 
bankruptcy.\1186\ Under that rule, the period of the automatic 
stay in bankruptcy is disregarded, and the taxpayer may file 
its petition with the Tax Court within 60 days after the stay 
is lifted.
---------------------------------------------------------------------------
    \1186\ Sec. 6213(f).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision adds to existing rules a suspension of the 
running of a period of limitations on filing a petition as 
described in section 6015(e) for a taxpayer who is prohibited 
from filing such a petition under U.S.C. Title 11. The 
suspension is for the period during which the taxpayer is 
prohibited from filing such a petition and for 60 days 
thereafter.
    The provision also adds to existing rules a suspension of 
the running of a period of limitations on filing a petition as 
described in section 6330(e) for a taxpayer who is prohibited 
from filing such a petition under U.S.C. Title 11. The 
suspension is for the period during which the taxpayer is 
prohibited from filing such a petition and for 30 days 
thereafter.

                             Effective Date

    The provision applies to petitions filed under section 
6015(e) of the Code after the date of enactment and to 
petitions filed under section 6330 of the Code after the date 
of enactment.

5. Application of Federal rules of evidence (sec. 425 of the Act and 
        sec. 7453 of the Code)

                              Present Law

    In general, the Code provides that the proceedings of the 
Tax Court shall be conducted in accordance with rules of 
practice and procedure (other than rules of evidence) as 
prescribed by the Tax Court, and in accordance with the rules 
of evidence applicable in trials without a jury in the United 
States District Court of the District of Columbia.\1187\ The 
Tax Court has interpreted the Code to require the Tax Court to 
apply the evidentiary precedent of the D.C. Circuit in all 
cases \1188\, an exception to the Tax Court's regular practice 
under Golsen v. Commissioner \1189\ of applying the precedent 
of the circuit court of appeals to which its decision is 
appealable (``the Golsen rule'').
---------------------------------------------------------------------------
    \1187\ Sec. 7453.
    \1188\ All cases except those cases in which section 7453 does not 
apply, e.g., small tax cases.
    \1189\ 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
---------------------------------------------------------------------------
    The Federal Rules of Evidence \1190\ are the applicable 
rules of evidence for all Federal district courts in all 
judicial districts, including the District of Columbia. In 
addition, the United States Code includes specific rules and 
procedures for evidence.\1191\ Rule 143 of the Rules of 
Practice and Procedure promulgated by the Tax Court, states 
``those rules include the rules of evidence in the Federal 
Rules of Civil Procedure and any rules of evidence generally 
applicable in the Federal courts (including the United States 
District Court for the District of Columbia).''
---------------------------------------------------------------------------
    \1190\ The Federal Rules of Evidence, as amended through 2012, 
under the authority of 28 U.S.C. sec. 2074, is available at http://
www.uscourts.gov/uscourts/rules/rules-evidence.pdf. ``The Act to 
Establish Rules of Evidence for Certain Courts and Proceedings,'' Pub. 
L. No. 93-595 (January 2, 1975).
    \1191\ 28 U.S.C. secs. 1731 through 1828.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision amends the Code to provide that proceedings 
of the Tax Court be conducted in accordance with rules of 
practice and procedure as prescribed by the Tax Court, and in 
accordance with Federal Rules of Evidence. Thus, under the 
Golsen rule, the Tax Court will apply the evidentiary precedent 
of the circuit court of appeals to which its decision is 
appealable.

                             Effective Date

    The provision applies to proceedings commenced after the 
date of enactment, and to the extent that it is just and 
practicable, to all proceedings pending on such date.

             Part 2--United States Tax Court Administration


6. Judicial conduct and disability procedures (sec. 431 of the Act and 
        new sec. 7466 of the Code)

                              Present Law

    Under Title 28 of the United States Code, any person is 
authorized to file a complaint alleging that an Article III 
Judge has engaged in conduct prejudicial to the effective and 
expeditious administration of the business of the courts; the 
law also permits any person to allege conduct reflecting a 
covered Judge's inability to perform his or her duties because 
of mental or physical disability.\1192\ A judicial council 
exercises specific powers in investigating and taking action 
with respect to such complaints, including paying certain fees 
and allowances incurred in conducting hearings and awarding 
reimbursement of reasonable expenses in appropriate 
circumstances from appropriated funds.\1193\ Title 28 directs 
other Article I courts, including the Court of Federal Claims 
\1194\ and the Court of Appeals for Veterans Claims,\1195\ to 
prescribe similar rules for the filing of complaints with 
respect to the conduct or disability of any Judge and for the 
investigation and resolution of such complaints.
---------------------------------------------------------------------------
    \1192\ Judicial Conduct and Disability Act of 1980, 28 U.S.C. secs. 
351-364. On March 11, 2008, the Judicial Conference of the United 
States promulgated rules governing such proceedings.
    \1193\ 28 U.S.C. chapter 16.
    \1194\ 28 U.S.C. sec. 363.
    \1195\ 38 U.S.C. sec. 7253(g).
---------------------------------------------------------------------------
    Unlike the prescriptions of Title 28 for Article III courts 
and other Article I courts, there is no statutory provision 
related to complaints regarding the conduct or disability of a 
Tax Court Judge, Senior Judge, or Special Trial Judge, although 
they voluntarily agree to follow the rules contained in the 
Code of Conduct for U.S. Judges.\1196\
---------------------------------------------------------------------------
    \1196\ Available at http://www.uscourts.gov/uscourts/
RulesAndPolicies/conduct/vol02a-ch02.pdf.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision authorizes the Tax Court to prescribe 
procedures for the filing of complaints with respect to the 
conduct of any judge or special trial judge of the Tax Court 
and for the investigation and resolution of such complaints. In 
investigating and taking action with respect to such a 
complaint, the provision authorizes the Tax Court to exercise 
the powers granted to a judicial council under Title 28.

                             Effective Date

    The provision applies to proceedings commenced after the 
date which is 180 days after the date of enactment, and to the 
extent that it is just and practicable, to all proceedings 
pending on such date.

7. Administration, judicial conference, and fees (sec. 432 of the Act; 
        Code sec. 7473 and new secs. 7470 and 7470A of the Code)

                              Present Law

    Congress established the Tax Court as a court of law under 
Article I with its governing provisions in the Code. However, 
provisions governing most Federal courts are codified in Title 
28 of the United States Code. Congress has, from time to time, 
amended the governing laws of other Federal courts and the laws 
that apply to the Administrative Office of the United States 
Courts relating to administering certain authorities of the 
judiciary.\1197\
---------------------------------------------------------------------------
    \1197\ These authorities are available to Article III courts either 
directly or through the laws enacted for the Administrative Office of 
the United States Court under U.S.C. title 28 (see e.g., 28 U.S.C. 
secs. 601, et seq.) and to other Article I courts such as the U.S. 
Court of Appeals for Veterans Claims under 38 U.S.C. sec. 7287.
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    Federal courts, including Article I courts such as the 
Court of Appeals for Veterans Claims, have express statutory 
authority to conduct an annual judicial conference.\1198\ The 
Tax Court has conducted periodic judicial conferences in order 
to consider the business of the Tax Court and to discuss means 
of improving the administration of justice within the Tax 
Court's jurisdiction. The Tax Court's judicial conferences have 
been attended by persons admitted to practice before the Tax 
Court, including representatives of the Internal Revenue 
Service, the Department of Justice, private practitioners, low-
income taxpayer clinics, and by other persons active in the 
legal profession.
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    \1198\ 38 U.S.C. sec. 7286.
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    Federal courts are authorized to deposit certain court fees 
into a special fund of the Treasury to be available to offset 
funds appropriated for the operation and maintenance of the 
courts.\1199\ The Tax Court's filing fees are statutorily set 
at ``not in excess of $60'' and are covered into the Treasury 
as miscellaneous receipts.\1200\
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    \1199\ 28 U.S.C. secs. 1941(A) and 1931.
    \1200\ Sec. 7473.
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                        Explanation of Provision

    The provision amends the Code to provide the Tax Court with 
the same general management, administrative, and expenditure 
authorities that are available to other Article I courts.
    The provision amends the Code to provide the Tax Court with 
express authority to conduct an annual judicial conference and 
charge a reasonable registration fee.
    The provision amends the Code to authorize the Tax Court to 
deposit certain fees into a special fund of the Treasury to be 
available to offset funds appropriated for the operation and 
maintenance of the Tax Court.

                             Effective Date

    The provision is effective on the date of enactment.

     Part 3--Clarification Relating to the United States Tax Court


8. Clarification relating to the United States Tax Court (sec. 441 of 
        the Act and sec. 7441 of the Code)

                              Present Law

    The Tax Court was created in 1969 as a court of record 
established under Article I of the U.S. Constitution with 
jurisdiction over tax matters as conferred upon it under the 
Code.\1201\ It superseded an independent agency of the 
Executive Branch known as the Tax Court of the United States, 
which itself superseded the Board of Tax Appeals.\1202\
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    \1201\ Sec. 7441.
    \1202\ The Board of Tax Appeals was created in 1924 to review 
deficiency determinations. In 1942, it was renamed the Tax Court of the 
United States.
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    As judges of an Article I court, Tax Court judges do not 
have lifetime tenure nor do they enjoy the salary protection 
afforded judges in Article III courts. They are subject to 
removal only for cause, by the President.\1203\ The authority 
to remove a judge for cause was the basis for a recent 
unsuccessful challenge to an order of the Tax Court, in which 
the taxpayer invoked the separation of powers doctrine to argue 
that the removal authority is an unconstitutional interference 
of the executive branch with the exercise of judicial powers. 
In rejecting that challenge, the Court of Appeals for the 
District of Columbia held in Kuretski v. Commissioner \1204\ 
that the Tax Court is an independent Executive Branch agency, 
while acknowledging that the Tax Court is a ``Court of Law'' 
for purposes of the Appointments Clause.\1205\
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    \1203\ Section 7443(f) permits the President to remove a Tax Court 
judge for inefficiency, neglect of duty, or malfeasance in office, 
after notice and opportunity for a public hearing.
    \1204\ Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), 
petition for cert. filed (U.S. Nov. 26, 2014) (No. 14-622), available 
at http://www.procedurallytaxing.com/wp-content/uploads/2014/12/
Kuretski-Supreme-Court-Petition.pdf. For an explanation of the status 
of Article I courts in comparison to the Article III judiciary, see, 
Federal Courts: A Legal Overview (Report No. R43746), October 1, 2014, 
available at http://www.fas.org/sgp/crs/misc/R43746.pdf.
    \1205\ Kuretski v. Commissioner, p. 932, distinguishing Freytag v. 
Commissioner, 501 U.S. 868 (1991).
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                        Explanation of Provision

    To avoid confusion about the independence of the Tax Court 
as an Article I court, the provision clarifies that the Tax 
Court is not an agency of the Executive Branch.

                             Effective Date

    The provision is effective on the date of enactment.

 APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN 2015


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