[Congressional Record Volume 149, Number 77 (Thursday, May 22, 2003)]
[House]
[Pages H4625-H4706]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




         JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003

  Mr. THOMAS (during consideration of H.R. 2185) submitted the 
following conference report and statement on the bill (H.R. 2), to 
provide for reconciliation pursuant to section 201 of the concurrent 
resolution on the budget for fiscal year 2004:

                  Conference Report (H. Rept. 108-126)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     2), to provide for reconciliation pursuant to section 201 of 
     the concurrent resolution on the budget for fiscal year 2004, 
     having met, after full and free conference, have agreed to 
     recommend and do recommend to their respective Houses as 
     follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

     SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Jobs and 
     Growth Tax Relief Reconciliation Act of 2003''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents of this Act 
     is as follows:

Sec. 1. Short title; references; table of contents.

   TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS

Sec. 101. Acceleration of increase in child tax credit.
Sec. 102. Acceleration of 15-percent individual income tax rate bracket 
              expansion for married taxpayers filing joint returns.
Sec. 103. Acceleration of increase in standard deduction for married 
              taxpayers filing joint returns.
Sec. 104. Acceleration of 10-percent individual income tax rate bracket 
              expansion.
Sec. 105. Acceleration of reduction in individual income tax rates.
Sec. 106. Minimum tax relief to individuals.
Sec. 107. Application of EGTRRA sunset to this title.

                TITLE II--GROWTH INCENTIVES FOR BUSINESS

Sec. 201. Increase and extension of bonus depreciation.
Sec. 202. Increased expensing for small business.

      TITLE III--REDUCTION IN TAXES ON DIVIDENDS AND CAPITAL GAINS

Sec. 301. Reduction in capital gains rates for individuals; repeal of 
              5-year holding period requirement.
Sec. 302. Dividends of individuals taxed at capital gain rates.
Sec. 303. Sunset of title.

                TITLE IV--TEMPORARY STATE FISCAL RELIEF

Sec. 401. Temporary State fiscal relief.

           TITLE V--CORPORATE ESTIMATED TAX PAYMENTS FOR 2003

Sec. 501. Time for payment of corporate estimated taxes.
   TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS

     SEC. 101. ACCELERATION OF INCREASE IN CHILD TAX CREDIT.

       (a) In General.--The item relating to calendar years 2001 
     through 2004 in the table contained in paragraph (2) of 
     section 24(a) (relating to per child amount) is amended to 
     read as follows:

  ``2003 or 2004..........................................$1,000''.....

       (b) Advance Payment of Portion of Increased Credit in 
     2003.--
       (1) In general.--Subchapter B of chapter 65 (relating to 
     abatements, credits, and refunds) is amended by inserting 
     after section 6428 the following new section:

     ``SEC. 6429. ADVANCE PAYMENT OF PORTION OF INCREASED CHILD 
                   CREDIT FOR 2003.

       ``(a) In General.--Each taxpayer who was allowed a credit 
     under section 24 on the return for the taxpayer's first 
     taxable year beginning in 2002 shall be treated as having 
     made a payment against the tax imposed by chapter 1 for such 
     taxable year in an amount equal to the child tax credit 
     refund amount (if any) for such taxable year.
       ``(b) Child Tax Credit Refund Amount.--For purposes of this 
     section, the child tax credit refund amount is the amount by 
     which the aggregate credits allowed under part IV of 
     subchapter A of chapter 1 for such first taxable year would 
     have been increased if--
       ``(1) the per child amount under section 24(a)(2) for such 
     year were $1,000,
       ``(2) only qualifying children (as defined in section 
     24(c)) of the taxpayer for such year who had not attained age 
     17 as of December 31, 2003, were taken into account, and
       ``(3) section 24(d)(1)(B)(ii) did not apply.
       ``(c) Timing of Payments.--In the case of any overpayment 
     attributable to this section, the Secretary shall, subject to 
     the provisions of this title, refund or credit such 
     overpayment as rapidly as possible and, to the extent 
     practicable, before October 1, 2003. No refund or credit 
     shall be made or allowed under this section after December 
     31, 2003.
       ``(d) Coordination With Child Tax Credit.--
       ``(1) In general.--The amount of credit which would (but 
     for this subsection and section 26) be allowed under section 
     24 for the taxpayer's first taxable year beginning in 2003 
     shall be reduced (but not below zero) by the payments made to 
     the taxpayer under this section. Any failure to so reduce the 
     credit shall be treated as arising out of a mathematical or 
     clerical error and assessed according to section 6213(b)(1).
       ``(2) Joint returns.--In the case of a payment under this 
     section with respect to a joint return, half of such payment 
     shall be treated as having been made to each individual 
     filing such return.
       ``(e) No Interest.--No interest shall be allowed on any 
     overpayment attributable to this section.''.
       (2) Clerical amendment.--The table of sections for 
     subchapter B of chapter 65 is amended by adding at the end 
     the following new item:

``Sec. 6429. Advance payment of portion of increased child credit for 
              2003.''.

       (c) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2002.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall take effect on the date of the enactment of this Act.

     SEC. 102. ACCELERATION OF 15-PERCENT INDIVIDUAL INCOME TAX 
                   RATE BRACKET EXPANSION FOR MARRIED TAXPAYERS 
                   FILING JOINT RETURNS.

       (a) In General.--The table contained in subparagraph (B) of 
     section 1(f )(8) (relating to applicable percentage) is 
     amended by inserting before the item relating to 2005 the 
     following new item:

      ``2003 and 2004............................................200''.

       (b) Conforming Amendments.--
       (1) Section 1(f)(8)(A) is amended by striking ``2004'' and 
     inserting ``2002''.
       (2) Section 302(c) of the Economic Growth and Tax Relief 
     Reconciliation Act of 2001 is amended by striking ``2004'' 
     and inserting ``2002''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 103. ACCELERATION OF INCREASE IN STANDARD DEDUCTION FOR 
                   MARRIED TAXPAYERS FILING JOINT RETURNS.

       (a) In General.--The table contained in paragraph (7) of 
     section 63(c) (relating to applicable percentage) is amended 
     by inserting before the item relating to 2005 the following 
     new item:

      ``2003 and 2004............................................200''.

       (b) Conforming Amendment.--Section 301(d) of the Economic 
     Growth and Tax Relief Reconciliation Act of 2001 is amended 
     by striking ``2004'' and inserting ``2002''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

[[Page H4626]]

     SEC. 104. ACCELERATION OF 10-PERCENT INDIVIDUAL INCOME TAX 
                   RATE BRACKET EXPANSION.

       (a) In General.--Clause (i) of section 1(i)(1)(B) (relating 
     to the initial bracket amount) is amended by striking 
     ``($12,000 in the case of taxable years beginning before 
     January 1, 2008)'' and inserting ``($12,000 in the case of 
     taxable years beginning after December 31, 2004, and before 
     January 1, 2008)''.
       (b) Inflation Adjustment.--Subparagraph (C) of section 
     1(i)(1) is amended to read as follows:
       ``(C) Inflation adjustment.--In prescribing the tables 
     under subsection (f) which apply with respect to taxable 
     years beginning in calendar years after 2000--
       ``(i) except as provided in clause (ii), the Secretary 
     shall make no adjustment to the initial bracket amounts for 
     any taxable year beginning before January 1, 2009,
       ``(ii) there shall be an adjustment under subsection (f) of 
     such amounts which shall apply only to taxable years 
     beginning in 2004, and such adjustment shall be determined 
     under subsection (f)(3) by substituting `2002' for `1992' in 
     subparagraph (B) thereof,
       ``(iii) the cost-of-living adjustment used in making 
     adjustments to the initial bracket amounts for any taxable 
     year beginning after December 31, 2008, shall be determined 
     under subsection (f)(3) by substituting `2007' for `1992' in 
     subparagraph (B) thereof, and
       ``(iv) the adjustments under clauses (ii) and (iii) shall 
     not apply to the amount referred to in subparagraph (B)(iii).
     If any amount after adjustment under the preceding sentence 
     is not a multiple of $50, such amount shall be rounded to the 
     next lowest multiple of $50.''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2002.
       (2) Tables for 2003.--The Secretary of the Treasury shall 
     modify each table which has been prescribed under section 
     1(f) of the Internal Revenue Code of 1986 for taxable years 
     beginning in 2003 and which relates to the amendment made by 
     subsection (a) to reflect such amendment.

     SEC. 105. ACCELERATION OF REDUCTION IN INDIVIDUAL INCOME TAX 
                   RATES.

       (a) In General.--The table contained in paragraph (2) of 
     section 1(i) (relating to reductions in rates after June 30, 
     2001) is amended to read as follows:


------------------------------------------------------------------------
                                     The corresponding percentages shall
                                      be substituted for the following
  ``In the case of taxable years                percentages:
  beginning during calendar year:  -------------------------------------
                                      28%      31%      36%      39.6%
------------------------------------------------------------------------
2001..............................    27.5%    30.5%    35.5%      39.1%
2002..............................    27.0%    30.0%    35.0%      38.6%
2003 and thereafter...............    25.0%    28.0%    33.0%   35.0%''.
------------------------------------------------------------------------

       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 106. MINIMUM TAX RELIEF TO INDIVIDUALS.

       (a) In General.--
       (1) Subparagraph (A) of section 55(d)(1) is amended by 
     striking ``$49,000 in the case of taxable years beginning in 
     2001, 2002, 2003, and 2004'' and inserting ``$58,000 in the 
     case of taxable years beginning in 2003 and 2004''.
       (2) Subparagraph (B) of section 55(d)(1) is amended by 
     striking ``$35,750 in the case of taxable years beginning in 
     2001, 2002, 2003, and 2004'' and inserting ``$40,250 in the 
     case of taxable years beginning in 2003 and 2004''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 107. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.

       Each amendment made by this title shall be subject to title 
     IX of the Economic Growth and Tax Relief Reconciliation Act 
     of 2001 to the same extent and in the same manner as the 
     provision of such Act to which such amendment relates.
                TITLE II--GROWTH INCENTIVES FOR BUSINESS

     SEC. 201. INCREASE AND EXTENSION OF BONUS DEPRECIATION.

       (a) In General.--Section 168(k) (relating to special 
     allowance for certain property acquired after September 10, 
     2001, and before September 11, 2004) is amended by adding at 
     the end the following new paragraph:
       ``(4) 50-percent bonus depreciation for certain property.--
       ``(A) In general.--In the case of 50-percent bonus 
     depreciation property--
       ``(i) paragraph (1)(A) shall be applied by substituting `50 
     percent' for `30 percent', and
       ``(ii) except as provided in paragraph (2)(C), such 
     property shall be treated as qualified property for purposes 
     of this subsection.
       ``(B) 50-percent bonus depreciation property.--For purposes 
     of this subsection, the term `50-percent bonus depreciation 
     property' means property described in paragraph (2)(A)(i)--
       ``(i) the original use of which commences with the taxpayer 
     after May 5, 2003,
       ``(ii) which is acquired by the taxpayer after May 5, 2003, 
     and before January 1, 2005, but only if no written binding 
     contract for the acquisition was in effect before May 6, 
     2003, and
       ``(iii) which is placed in service by the taxpayer before 
     January 1, 2005, or, in the case of property described in 
     paragraph (2)(B) (as modified by subparagraph (C) of this 
     paragraph), before January 1, 2006.
       ``(C) Special rules.--Rules similar to the rules of 
     subparagraphs (B) and (D) of paragraph (2) shall apply for 
     purposes of this paragraph; except that references to 
     September 10, 2001, shall be treated as references to May 5, 
     2003.
       ``(D) Automobiles.--Paragraph (2)(E) shall be applied by 
     substituting `$7,650' for `$4,600' in the case of 50-percent 
     bonus depreciation property.
       ``(E) Election of 30-percent bonus.--If a taxpayer makes an 
     election under this subparagraph with respect to any class of 
     property for any taxable year, subparagraph (A)(i) shall not 
     apply to all property in such class placed in service during 
     such taxable year.''.
        (b) Extension of Certain Dates for 30-Percent Bonus 
     Depreciation Property.--
       (1) Portion of basis taken into account.--
       (A) Subparagraphs (B)(ii) and (D)(i) of section 168(k)(2) 
     are each amended by striking ``September 11, 2004'' each 
     place it appears in the text and inserting ``January 1, 
     2005''.
       (B) Clause (ii) of section 168(k)(2)(B) is amended by 
     striking ``pre-september 11, 2004'' in the heading and 
     inserting ``pre-january 1, 2005''.
       (2) Acquisition date.--Clause (iii) of section 168(k)(2)(A) 
     is amended by striking ``September 11, 2004'' each place it 
     appears and inserting ``January 1, 2005''.
       (3) Election.--Clause (iii) of section 168(k)(2)(C) is 
     amended by adding at the end the following: ``The preceding 
     sentence shall be applied separately with respect to property 
     treated as qualified property by paragraph (4) and other 
     qualified property.''.
       (c) Conforming Amendments.--
       (1) The subsection heading for section 168(k) is amended by 
     striking ``September 11, 2004'' and inserting ``January 1, 
     2005''.
       (2) The heading for clause (i) of section 1400L(b)(2)(C) is 
     amended by striking ``30-percent additional allowance 
     property'' and inserting ``Bonus depreciation property under 
     section 168(k)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after May 5, 2003.

     SEC. 202. INCREASED EXPENSING FOR SMALL BUSINESS.

       (a) In General.--Paragraph (1) of section 179(b) (relating 
     to dollar limitation) is amended to read as follows:
       ``(1) Dollar limitation.--The aggregate cost which may be 
     taken into account under subsection (a) for any taxable year 
     shall not exceed $25,000 ($100,000 in the case of taxable 
     years beginning after 2002 and before 2006).''.
       (b) Increase in Qualifying Investment at Which Phaseout 
     Begins.--Paragraph (2) of section 179(b) (relating to 
     reduction in limitation) is amended by inserting ``($400,000 
     in the case of taxable years beginning after 2002 and before 
     2006)'' after ``$200,000''.
       (c) Off-the-Shelf Computer Software.--Paragraph (1) of 
     section 179(d) (defining section 179 property) is amended to 
     read as follows:
       ``(1) Section 179 property.--For purposes of this section, 
     the term `section 179 property' means property--
       ``(A) which is--
       ``(i) tangible property (to which section 168 applies), or
       ``(ii) computer software (as defined in section 
     197(e)(3)(B)) which is described in section 197(e)(3)(A)(i), 
     to which section 167 applies, and which is placed in service 
     in a taxable year beginning after 2002 and before 2006,
       ``(B) which is section 1245 property (as defined in section 
     1245(a)(3)), and
       ``(C) which is acquired by purchase for use in the active 
     conduct of a trade or business.
     Such term shall not include any property described in section 
     50(b) and shall not include air conditioning or heating 
     units.''.
       (d) Adjustment of Dollar Limit and Phaseout Threshold for 
     Inflation.--Subsection (b) of section 179 (relating to 
     limitations) is amended by adding at the end the following 
     new paragraph:
       ``(5) Inflation adjustments.--
       ``(A) In general.--In the case of any taxable year 
     beginning in a calendar year after 2003 and before 2006, the 
     $100,000 and $400,000 amounts in paragraphs (1) and (2) shall 
     each be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 2002' for 
     `calendar year 1992' in subparagraph (B) thereof.
       ``(B) Rounding.--
       ``(i) Dollar limitation.--If the amount in paragraph (1) as 
     increased under subparagraph (A) is not a multiple of $1,000, 
     such amount shall be rounded to the nearest multiple of 
     $1,000.
       ``(ii) Phaseout amount.--If the amount in paragraph (2) as 
     increased under subparagraph (A) is not a multiple of 
     $10,000, such amount shall be rounded to the nearest multiple 
     of $10,000.''.
       (e) Revocation of Election.--Paragraph (2) of section 
     179(c) (relating to election irrevocable) is amended by 
     adding at the end the following new sentence: ``Any such 
     election or specification with respect to any taxable year 
     beginning after 2002 and before 2006 may be revoked by the 
     taxpayer with respect to any property, and such revocation, 
     once made, shall be irrevocable.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.
      TITLE III--REDUCTION IN TAXES ON DIVIDENDS AND CAPITAL GAINS

     SEC. 301. REDUCTION IN CAPITAL GAINS RATES FOR INDIVIDUALS; 
                   REPEAL OF 5-YEAR HOLDING PERIOD REQUIREMENT.

       (a) In General.--
       (1) Sections 1(h)(1)(B) and 55(b)(3)(B) are each amended by 
     striking ``10 percent'' and inserting ``5 percent (0 percent 
     in the case of taxable years beginning after 2007)''.

[[Page H4627]]

       (2) The following sections are each amended by striking 
     ``20 percent'' and inserting ``15 percent'':
       (A) Section 1(h)(1)(C).
       (B) Section 55(b)(3)(C).
       (C) Section 1445(e)(1).
       (D) The second sentence of section 7518(g)(6)(A).
       (E) The second sentence of section 607(h)(6)(A) of the 
     Merchant Marine Act, 1936.
       (b) Conforming Amendments.--
       (1) Section 1(h) is amended--
       (A) by striking paragraphs (2) and (9),
       (B) by redesignating paragraphs (3) through (8) as 
     paragraphs (2) through (7), respectively, and
       (C) by redesignating paragraphs (10), (11), and (12) as 
     paragraphs (8), (9), and (10), respectively.
       (2) Paragraph (3) of section 55(b) is amended by striking 
     ``In the case of taxable years beginning after December 31, 
     2000, rules similar to the rules of section 1(h)(2) shall 
     apply for purposes of subparagraphs (B) and (C).''.
       (3) Paragraph (7) of section 57(a) is amended--
       (A) by striking ``42 percent'' the first place it appears 
     and inserting ``7 percent'', and
       (B) by striking the last sentence.
       (c) Transitional Rules for Taxable Years Which Include May 
     6, 2003.--For purposes of applying section 1(h) of the 
     Internal Revenue Code of 1986 in the case of a taxable year 
     which includes May 6, 2003--
       (1) The amount of tax determined under subparagraph (B) of 
     section 1(h)(1) of such Code shall be the sum of--
       (A) 5 percent of the lesser of--
       (i) the net capital gain determined by taking into account 
     only gain or loss properly taken into account for the portion 
     of the taxable year on or after May 6, 2003 (determined 
     without regard to collectibles gain or loss, gain described 
     in section 1(h)(6)(A)(i) of such Code, and section 1202 
     gain), or
       (ii) the amount on which a tax is determined under such 
     subparagraph (without regard to this subsection),
       (B) 8 percent of the lesser of--
       (i) the qualified 5-year gain (as defined in section 
     1(h)(9) of the Internal Revenue Code of 1986, as in effect on 
     the day before the date of the enactment of this Act) 
     properly taken into account for the portion of the taxable 
     year before May 6, 2003, or
       (ii) the excess (if any) of--

       (I) the amount on which a tax is determined under such 
     subparagraph (without regard to this subsection), over
       (II) the amount on which a tax is determined under 
     subparagraph (A), plus

       (C) 10 percent of the excess (if any) of--
       (i) the amount on which a tax is determined under such 
     subparagraph (without regard to this subsection), over
       (ii) the sum of the amounts on which a tax is determined 
     under subparagraphs (A) and (B).
       (2) The amount of tax determined under subparagraph (C) of 
     section (1)(h)(1) of such Code shall be the sum of--
       (A) 15 percent of the lesser of--
       (i) the excess (if any) of the amount of net capital gain 
     determined under subparagraph (A)(i) of paragraph (1) of this 
     subsection over the amount on which a tax is determined under 
     subparagraph (A) of paragraph (1) of this subsection, or
       (ii) the amount on which a tax is determined under such 
     subparagraph (C) (without regard to this subsection), plus
       (B) 20 percent of the excess (if any) of--
       (i) the amount on which a tax is determined under such 
     subparagraph (C) (without regard to this subsection), over
       (ii) the amount on which a tax is determined under 
     subparagraph (A) of this paragraph.
       (3) For purposes of applying section 55(b)(3) of such Code, 
     rules similar to the rules of paragraphs (1) and (2) of this 
     subsection shall apply.
       (4) In applying this subsection with respect to any pass-
     thru entity, the determination of when gains and losses are 
     properly taken into account shall be made at the entity 
     level.
       (5) For purposes of applying section 1(h)(11) of such Code, 
     as added by section 302 of this Act, to this subsection, 
     dividends which are qualified dividend income shall be 
     treated as gain properly taken into account for the portion 
     of the taxable year on or after May 6, 2003.
       (6) Terms used in this subsection which are also used in 
     section 1(h) of such Code shall have the respective meanings 
     that such terms have in such section.
       (d) Effective Dates.--
       (1) In general.--Except as otherwise provided by this 
     subsection, the amendments made by this section shall apply 
     to taxable years ending on or after May 6, 2003.
       (2) Withholding.--The amendment made by subsection 
     (a)(2)(C) shall apply to amounts paid after the date of the 
     enactment of this Act.
       (3) Small business stock.--The amendments made by 
     subsection (b)(3) shall apply to dispositions on or after May 
     6, 2003.

     SEC. 302. DIVIDENDS OF INDIVIDUALS TAXED AT CAPITAL GAIN 
                   RATES.

       (a) In General.--Section 1(h) (relating to maximum capital 
     gains rate), as amended by section 301, is amended by adding 
     at the end the following new paragraph:
       ``(11) Dividends taxed as net capital gain.--
       ``(A) In general.--For purposes of this subsection, the 
     term `net capital gain' means net capital gain (determined 
     without regard to this paragraph) increased by qualified 
     dividend income.
       ``(B) Qualified dividend income.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `qualified dividend income' 
     means dividends received during the taxable year from--

       ``(I) domestic corporations, and
       ``(II) qualified foreign corporations.

       ``(ii) Certain dividends excluded.--Such term shall not 
     include--

       ``(I) any dividend from a corporation which for the taxable 
     year of the corporation in which the distribution is made, or 
     the preceding taxable year, is a corporation exempt from tax 
     under section 501 or 521,
       ``(II) any amount allowed as a deduction under section 591 
     (relating to deduction for dividends paid by mutual savings 
     banks, etc.), and
       ``(III) any dividend described in section 404(k).

       ``(iii) Coordination with section 246(c).--Such term shall 
     not include any dividend on any share of stock--

       ``(I) with respect to which the holding period requirements 
     of section 246(c) are not met (determined by substituting in 
     section 246(c)(1) `60 days' for `45 days' each place it 
     appears and by substituting `120-day period' for `90-day 
     period'), or
       ``(II) to the extent that the taxpayer is under an 
     obligation (whether pursuant to a short sale or otherwise) to 
     make related payments with respect to positions in 
     substantially similar or related property.

       ``(C) Qualified foreign corporations.--
       ``(i) In general.--Except as otherwise provided in this 
     paragraph, the term `qualified foreign corporation' means any 
     foreign corporation if--

       ``(I) such corporation is incorporated in a possession of 
     the United States, or
       ``(II) such corporation is eligible for benefits of a 
     comprehensive income tax treaty with the United States which 
     the Secretary determines is satisfactory for purposes of this 
     paragraph and which includes an exchange of information 
     program.

       ``(ii) Dividends on stock readily tradable on united states 
     securities market.--A foreign corporation not otherwise 
     treated as a qualified foreign corporation under clause (i) 
     shall be so treated with respect to any dividend paid by such 
     corporation if the stock with respect to which such dividend 
     is paid is readily tradable on an established securities 
     market in the United States.
       ``(iii) Exclusion of dividends of certain foreign 
     corporations.--Such term shall not include any foreign 
     corporation which for the taxable year of the corporation in 
     which the dividend was paid, or the preceding taxable year, 
     is a foreign personal holding company (as defined in section 
     552), a foreign investment company (as defined in section 
     1246(b)), or a passive foreign investment company (as defined 
     in section 1297).
       ``(iv) Coordination with foreign tax credit limitation.--
     Rules similar to the rules of section 904(b)(2)(B) shall 
     apply with respect to the dividend rate differential under 
     this paragraph.
       ``(D) Special rules.--
       ``(i) Amounts taken into account as investment income.--
     Qualified dividend income shall not include any amount which 
     the taxpayer takes into account as investment income under 
     section 163(d)(4)(B).
       ``(ii) Extraordinary dividends.--If an individual receives, 
     with respect to any share of stock, qualified dividend income 
     from 1 or more dividends which are extraordinary dividends 
     (within the meaning of section 1059(c)), any loss on the sale 
     or exchange of such share shall, to the extent of such 
     dividends, be treated as long-term capital loss.
       ``(iii) Treatment of dividends from regulated investment 
     companies and real estate investment trusts.--A dividend 
     received from a regulated investment company or a real estate 
     investment trust shall be subject to the limitations 
     prescribed in sections 854 and 857.''.
       (b) Exclusion of Dividends From Investment Income.--
     Subparagraph (B) of section 163(d)(4) (defining net 
     investment income) is amended by adding at the end the 
     following flush sentence:
     ``Such term shall include qualified dividend income (as 
     defined in section 1(h)(11)(B)) only to the extent the 
     taxpayer elects to treat such income as investment income for 
     purposes of this subsection.''.
       (c) Treatment of Dividends From Regulated Investment 
     Companies.--
       (1) Subsection (a) of section 854 (relating to dividends 
     received from regulated investment companies) is amended by 
     inserting ``section 1(h)(11) (relating to maximum rate of tax 
     on dividends) and'' after ``For purposes of''.
       (2) Paragraph (1) of section 854(b) (relating to other 
     dividends) is amended by redesignating subparagraph (B) as 
     subparagraph (C) and by inserting after subparagraph (A) the 
     following new subparagraph:
       ``(B) Maximum rate under section 1(h).--
       ``(i) In general.--If the aggregate dividends received by a 
     regulated investment company during any taxable year are less 
     than 95 percent of its gross income, then, in computing the 
     maximum rate under section 1(h)(11), rules similar to the 
     rules of subparagraph (A) shall apply.
       ``(ii) Gross income.--For purposes of clause (i), in the 
     case of 1 or more sales or other dispositions of stock or 
     securities, the term `gross income' includes only the excess 
     of--

       ``(I) the net short-term capital gain from such sales or 
     dispositions, over
       ``(II) the net long-term capital loss from such sales or 
     dispositions.

       ``(iii) Dividends from real estate investment trusts.--For 
     purposes of clause (i)--

       ``(I) paragraph (3)(B)(ii) shall not apply, and
       ``(II) in the case of a distribution from a trust described 
     in such paragraph, the amount of such distribution which is a 
     dividend shall be subject to the limitations under section 
     857(c).

       ``(iv) Dividends from qualified foreign corporations.--For 
     purposes of clause (i), dividends received from qualified 
     foreign corporations (as defined in section 1(h)(11)) shall 
     also be taken into account in computing aggregate dividends 
     received.''.

[[Page H4628]]

       (3) Subparagraph (C) of section 854(b)(1), as redesignated 
     by paragraph (2), is amended by striking ``subparagraph (A)'' 
     and inserting ``subparagraph (A) or (B)''.
       (4) Paragraph (2) of section 854(b) is amended by inserting 
     ``the maximum rate under section 1(h)(11) and'' after ``for 
     purposes of''.
       (5) Subsection (b) of section 854 is amended by adding at 
     the end the following new paragraph:
       ``(5) Coordination with section 1(h)(11).--For purposes of 
     paragraph (1)(B), an amount shall be treated as a dividend 
     only if the amount is qualified dividend income (within the 
     meaning of section 1(h)(11)(B)).''.
       (d) Treatment of Dividends Received From Real Estate 
     Investment Trusts.--Section 857(c) (relating to restrictions 
     applicable to dividends received from real estate investment 
     trusts) is amended to read as follows:
       ``(c) Restrictions Applicable to Dividends Received From 
     Real Estate Investment Trusts.--
       ``(1) Section 243.--For purposes of section 243 (relating 
     to deductions for dividends received by corporations), a 
     dividend received from a real estate investment trust which 
     meets the requirements of this part shall not be considered a 
     dividend.
       ``(2) Section 1(h)(11).--For purposes of section 1(h)(11) 
     (relating to maximum rate of tax on dividends)--
       ``(A) rules similar to the rules of subparagraphs (B) and 
     (C) of section 854(b)(1) shall apply to dividends received 
     from a real estate investment trust which meets the 
     requirements of this part, and
       ``(B) for purposes of such rules, such a trust shall be 
     treated as receiving qualified dividend income during any 
     taxable year in an amount equal to the sum of--
       ``(i) the excess of real estate investment trust taxable 
     income computed under section 857(b)(2) for the preceding 
     taxable year over the tax payable by the trust under section 
     857(b)(1) for such preceding taxable year, and
       ``(ii) the excess of the income subject to tax by reason of 
     the application of the regulations under section 337(d) for 
     the preceding taxable year over the tax payable by the trust 
     on such income for such preceding taxable year.''.
       (e) Conforming Amendments.--
       (1) Paragraph (3) of section 1(h), as redesignated by 
     section 301, is amended to read as follows:
       ``(3) Adjusted net capital gain.--For purposes of this 
     subsection, the term `adjusted net capital gain' means the 
     sum of--
       ``(A) net capital gain (determined without regard to 
     paragraph (11)) reduced (but not below zero) by the sum of--
       ``(i) unrecaptured section 1250 gain, and
       ``(ii) 28-percent rate gain, plus
       ``(B) qualified dividend income (as defined in paragraph 
     (11)).''.
       (2) Subsection (f) of section 301 is amended adding at the 
     end the following new paragraph:
       ``(4) For taxation of dividends received by individuals at 
     capital gain rates, see section 1(h)(11).''.
       (3) Paragraph (1) of section 306(a) is amended by adding at 
     the end the following new subparagraph:
       ``(D) Treatment as dividend.--For purposes of section 
     1(h)(11) and such other provisions as the Secretary may 
     specify, any amount treated as ordinary income under this 
     paragraph shall be treated as a dividend received from the 
     corporation.''.
       (4)(A) Subpart C of part II of subchapter C of chapter 1 
     (relating to collapsible corporations) is repealed.
       (B)(i) Section 338(h) is amended by striking paragraph 
     (14).
       (ii) Sections 467(c)(5)(C), 1255(b)(2), and 1257(d) are 
     each amended by striking ``, 341(e)(12),''.
       (iii) The table of subparts for part II of subchapter C of 
     chapter 1 is amended by striking the item related to subpart 
     C.
       (5) Section 531 is amended by striking ``equal to'' and all 
     that follows and inserting ``equal to 15 percent of the 
     accumulated taxable income.''.
       (6) Section 541 is amended by striking ``equal to'' and all 
     that follows and inserting ``equal to 15 percent of the 
     undistributed personal holding company income.''.
       (7) Section 584(c) is amended by adding at the end the 
     following new flush sentence:
     ``The proportionate share of each participant in the amount 
     of dividends received by the common trust fund and to which 
     section 1(h)(11) applies shall be considered for purposes of 
     such paragraph as having been received by such 
     participant.''.
       (8) Paragraph (5) of section 702(a) is amended to read as 
     follows:
       ``(5) dividends with respect to which section 1(h)(11) or 
     part VIII of subchapter B applies,''.
       (f) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2002.
       (2) Regulated investment companies and real estate 
     investment trusts.--In the case of a regulated investment 
     company or a real estate investment trust, the amendments 
     made by this section shall apply to taxable years ending 
     after December 31, 2002; except that dividends received by 
     such a company or trust on or before such date shall not be 
     treated as qualified dividend income (as defined in section 
     1(h)(11)(B) of the Internal Revenue Code of 1986, as added by 
     this Act).

     SEC. 303. SUNSET OF TITLE.

       All provisions of, and amendments made by, this title shall 
     not apply to taxable years beginning after December 31, 2008, 
     and the Internal Revenue Code of 1986 shall be applied and 
     administered to such years as if such provisions and 
     amendments had never been enacted.
                TITLE IV--TEMPORARY STATE FISCAL RELIEF

     SEC. 401. TEMPORARY STATE FISCAL RELIEF.

       (a) $10,000,000,000 for a Temporary Increase of the 
     Medicaid FMAP.--
       (1) Permitting maintenance of fiscal year 2002 fmap for 
     last 2 calendar quarters of fiscal year 2003.--Subject to 
     paragraph (5), if the FMAP determined without regard to this 
     subsection for a State for fiscal year 2003 is less than the 
     FMAP as so determined for fiscal year 2002, the FMAP for the 
     State for fiscal year 2002 shall be substituted for the 
     State's FMAP for the third and fourth calendar quarters of 
     fiscal year 2003, before the application of this subsection.
       (2) Permitting maintenance of fiscal year 2003 fmap for 
     first 3 quarters of fiscal year 2004.--Subject to paragraph 
     (5), if the FMAP determined without regard to this subsection 
     for a State for fiscal year 2004 is less than the FMAP as so 
     determined for fiscal year 2003, the FMAP for the State for 
     fiscal year 2003 shall be substituted for the State's FMAP 
     for the first, second, and third calendar quarters of fiscal 
     year 2004, before the application of this subsection.
       (3) General 2.95 percentage points increase for last 2 
     calendar quarters of fiscal year 2003 and first 3 calendar 
     quarters of fiscal year 2004.--Subject to paragraphs (5), 
     (6), and (7), for each State for the third and fourth 
     calendar quarters of fiscal year 2003 and for the first, 
     second, and third calendar quarters of fiscal year 2004, the 
     FMAP (taking into account the application of paragraphs (1) 
     and (2)) shall be increased by 2.95 percentage points.
       (4) Increase in cap on medicaid payments to territories.--
     Subject to paragraphs (6) and (7), with respect to the third 
     and fourth calendar quarters of fiscal year 2003 and the 
     first, second, and third calendar quarters of fiscal year 
     2004, the amounts otherwise determined for Puerto Rico, the 
     Virgin Islands, Guam, the Northern Mariana Islands, and 
     American Samoa under subsections (f) and (g) of section 1108 
     of the Social Security Act (42 U.S.C. 1308) shall each be 
     increased by an amount equal to 5.90 percent of such amounts.
       (5) Scope of application.--The increases in the FMAP for a 
     State under this subsection shall apply only for purposes of 
     title XIX of the Social Security Act and shall not apply with 
     respect to--
       (A) disproportionate share hospital payments described in 
     section 1923 of such Act (42 U.S.C. 1396r-4);
       (B) payments under title IV or XXI of such Act (42 U.S.C. 
     601 et seq. and 1397aa et seq.); or
       (C) any payments under XIX of such Act that are based on 
     the enhanced FMAP described in section 2105(b) of such Act 
     (42 U.S.C. 1397ee(b)).
       (6) State eligibility.--
       (A) In general.--Subject to subparagraph (B), a State is 
     eligible for an increase in its FMAP under paragraph (3) or 
     an increase in a cap amount under paragraph (4) only if the 
     eligibility under its State plan under title XIX of the 
     Social Security Act (including any waiver under such title or 
     under section 1115 of such Act (42 U.S.C. 1315)) is no more 
     restrictive than the eligibility under such plan (or waiver) 
     as in effect on September 2, 2003.
       (B) State reinstatement of eligibility permitted.--A State 
     that has restricted eligibility under its State plan under 
     title XIX of the Social Security Act (including any waiver 
     under such title or under section 1115 of such Act (42 U.S.C. 
     1315)) after September 2, 2003, is eligible for an increase 
     in its FMAP under paragraph (3) or an increase in a cap 
     amount under paragraph (4) in the first calendar quarter (and 
     subsequent calendar quarters) in which the State has 
     reinstated eligibility that is no more restrictive than the 
     eligibility under such plan (or waiver) as in effect on 
     September 2, 2003.
       (C) Rule of construction.--Nothing in subparagraph (A) or 
     (B) shall be construed as affecting a State's flexibility 
     with respect to benefits offered under the State medicaid 
     program under title XIX of the Social Security Act (42 U.S.C. 
     1396 et seq.) (including any waiver under such title or under 
     section 1115 of such Act (42 U.S.C. 1315)).
       (7) Requirement for certain states.--In the case of a State 
     that requires political subdivisions within the State to 
     contribute toward the non-Federal share of expenditures under 
     the State medicaid plan required under section 1902(a)(2) of 
     the Social Security Act (42 U.S.C. 1396a(a)(2)), the State 
     shall not require that such political subdivisions pay a 
     greater percentage of the non-Federal share of such 
     expenditures for the third and fourth calendar quarters of 
     fiscal year 2003 and the first, second and third calendar 
     quarters of fiscal year 2004, than the percentage that was 
     required by the State under such plan on April 1, 2003, prior 
     to application of this subsection.
       (8) Definitions.--In this subsection:
       (A) FMAP.--The term ``FMAP'' means the Federal medical 
     assistance percentage, as defined in section 1905(b) of the 
     Social Security Act (42 U.S.C. 1396d(b)).
       (B) State.--The term ``State'' has the meaning given such 
     term for purposes of title XIX of the Social Security Act (42 
     U.S.C. 1396 et seq.).
       (9) Repeal.--Effective as of October 1, 2004, this 
     subsection is repealed.
       (b) $10,000,000,000 to Assist States in Providing 
     Government Services.--The Social Security Act (42 U.S.C. 301 
     et seq.) is amended by inserting after title V the following:
               ``TITLE VI--TEMPORARY STATE FISCAL RELIEF

     ``SEC. 601. TEMPORARY STATE FISCAL RELIEF.

       ``(a) Appropriation.--There is authorized to be 
     appropriated and is appropriated for making payments to 
     States under this section, $5,000,000,000 for each of fiscal 
     years 2003 and 2004.
       ``(b) Payments.--
       ``(1) Fiscal year 2003.--From the amount appropriated under 
     subsection (a) for fiscal year

[[Page H4629]]

     2003, the Secretary of the Treasury shall, not later than the 
     later of the date that is 45 days after the date of enactment 
     of this Act or the date that a State provides the 
     certification required by subsection (e) for fiscal year 
     2003, pay each State the amount determined for the State for 
     fiscal year 2003 under subsection (c).
       ``(2) Fiscal year 2004.--From the amount appropriated under 
     subsection (a) for fiscal year 2004, the Secretary of the 
     Treasury shall, not later than the later of October 1, 2003, 
     or the date that a State provides the certification required 
     by subsection (e) for fiscal year 2004, pay each State the 
     amount determined for the State for fiscal year 2004 under 
     subsection (c).
       ``(c) Payments Based on Population.--
       ``(1) In general.--Subject to paragraph (2), the amount 
     appropriated under subsection (a) for each of fiscal years 
     2003 and 2004 shall be used to pay each State an amount equal 
     to the relative population proportion amount described in 
     paragraph (3) for such fiscal year.
       ``(2) Minimum payment.--
       ``(A) In general.--No State shall receive a payment under 
     this section for a fiscal year that is less than--
       ``(i) in the case of 1 of the 50 States or the District of 
     Columbia, \1/2\ of 1 percent of the amount appropriated for 
     such fiscal year under subsection (a); and
       ``(ii) in the case of the Commonwealth of Puerto Rico, the 
     United States Virgin Islands, Guam, the Commonwealth of the 
     Northern Mariana Islands, or American Samoa, \1/10\ of 1 
     percent of the amount appropriated for such fiscal year under 
     subsection (a).
       ``(B) Pro rata adjustments.--The Secretary of the Treasury 
     shall adjust on a pro rata basis the amount of the payments 
     to States determined under this section without regard to 
     this subparagraph to the extent necessary to comply with the 
     requirements of subparagraph (A).
       ``(3) Relative population proportion amount.--The relative 
     population proportion amount described in this paragraph is 
     the product of--
       ``(A) the amount described in subsection (a) for a fiscal 
     year; and
       ``(B) the relative State population proportion (as defined 
     in paragraph (4)).
       ``(4) Relative state population proportion defined.--For 
     purposes of paragraph (3)(B), the term ``relative State 
     population proportion'' means, with respect to a State, the 
     amount equal to the quotient of--
       ``(A) the population of the State (as reported in the most 
     recent decennial census); and
       ``(B) the total population of all States (as reported in 
     the most recent decennial census).
       ``(d) Use of Payment.--
       ``(1) In general.--Subject to paragraph (2), a State shall 
     use the funds provided under a payment made under this 
     section for a fiscal year to--
       ``(A) provide essential government services; or
       ``(B) cover the costs to the State of complying with any 
     Federal intergovernmental mandate (as defined in section 
     421(5) of the Congressional Budget Act of 1974) to the extent 
     that the mandate applies to the State, and the Federal 
     Government has not provided funds to cover the costs.
       ``(2) Limitation.--A State may only use funds provided 
     under a payment made under this section for types of 
     expenditures permitted under the most recently approved 
     budget for the State.
       ``(e) Certification.--In order to receive a payment under 
     this section for a fiscal year, the State shall provide the 
     Secretary of the Treasury with a certification that the 
     State's proposed uses of the funds are consistent with 
     subsection (d).
       ``(f) Definition of State.--In this section, the term 
     `State' means the 50 States, the District of Columbia, the 
     Commonwealth of Puerto Rico, the United States Virgin 
     Islands, Guam, the Commonwealth of the Northern Mariana 
     Islands, and American Samoa.
       ``(g) Repeal.--Effective as of October 1, 2004, this title 
     is repealed.''.
           TITLE V--CORPORATE ESTIMATED TAX PAYMENTS FOR 2003

     SEC. 501. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

       Notwithstanding section 6655 of the Internal Revenue Code 
     of 1986, 25 percent of the amount of any required installment 
     of corporate estimated tax which is otherwise due in 
     September 2003 shall not be due until October 1, 2003.
       And the Senate agree to the same.

     William M. Thomas,
     Tom Delay,
                                Managers on the Part of the House.

     Chuck Grassley,
     Orrin Hatch,
     Don Nickles,
     Trent Lott,
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate to the bill (H.R. 2), to provide for 
     reconciliation pursuant to section 201 of the concurrent 
     resolution on the budget for fiscal year 2004, submit the 
     following joint statement to the House and the Senate in 
     explanation of the effect of the action agreed upon by the 
     managers and recommended in the accompanying conference 
     report:
       The Senate amendment struck all of the House bill after the 
     enacting clause and inserted a substitute text.
       The House recedes from its disagreement to the amendment of 
     the Senate with an amendment that is a substitute for the 
     House bill and the Senate amendment. The differences between 
     the House bill, the Senate amendment, and the substitute 
     agreed to in conference are noted below, except for clerical 
     corrections, conforming changes made necessary by agreements 
     reached by the conferees, and minor drafting an clarifying 
     changes.

      I. Acceleration of Certain Previously Enacted Tax Reductions

  A. Accelerate the Increase in the Child Tax Credit (Sec. 101 of the 
 House Bill, Sec. 106 of the Senate Amendment, and Sec. 24 of the Code)


                              present law

     In general
       For 2003, an individual may claim a $600 tax credit for 
     each qualifying child under the age of 17. In general, a 
     qualifying child is an individual for whom the taxpayer can 
     claim a dependency exemption and who is the taxpayer's son or 
     daughter (or descendent of either), stepson or stepdaughter 
     (or descendent of either), or eligible foster child.
       The child tax credit is scheduled to increase to $1,000, 
     phased-in over several years.
       Table 1, below, shows the scheduled increases of the child 
     tax credit as provided under the Economic Growth and Tax 
     Relief Reconciliation Act of 2001 (``EGTRRA'').

          TABLE 1.--SCHEDULED INCREASE OF THE CHILD TAX CREDIT
------------------------------------------------------------------------
                                                       Credit amount per
                     Taxable year                            child
------------------------------------------------------------------------
2003-2004............................................               $600
2005-2008............................................                700
2009.................................................                800
2010\1\..............................................             1,000
------------------------------------------------------------------------
\1\ The credit reverts to $500 in taxable years beginning after December
  31, 2010, under the sunset provision of EGTRRA.

       The child tax credit is phased-out for individuals with 
     income over certain thresholds. 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.\1\ 
     The length of the phase-out range depends on the number of 
     qualifying children. For example, the phase-out range for a 
     single individual with one qualifying child is between 
     $75,000 and $87,000 of modified adjusted gross income. The 
     phase-out range for a single individual with two qualifying 
     children is between $75,000 and $99,000.
---------------------------------------------------------------------------
     \1\  Modified adjusted gross income is the taxpayer's total 
     gross income plus certain amounts excluded from gross income 
     (i.e., excluded income of: U.S. citizens or residents living 
     abroad (sec. 911), residents of Guam, American Samoa, and the 
     Northern Mariana Islands (sec. 931), and residents of Puerto 
     Rico (sec. 933)).
---------------------------------------------------------------------------
       The amount of the tax credit and the phase-out ranges are 
     not adjusted annually for inflation.
     Refundability
       For 2003, the child credit is refundable to the extent of 
     10 percent of the taxpayer's earned income in excess of 
     $10,500.\2\ The percentage is increased to 15 percent for 
     taxable years 2005 and thereafter. Families with three or 
     more children are allowed a refundable credit for the amount 
     by which the taxpayer's social security taxes exceed the 
     taxpayer's earned income credit, if that amount is greater 
     than the refundable credit based on the taxpayer's earned 
     income in excess of $10,500 (for 2003). The refundable 
     portion of the child credit does not constitute income and is 
     not treated as resources for purposes of determining 
     eligibility or the amount or nature of benefits or assistance 
     under any Federal program or any State or local program 
     financed with Federal funds. For taxable years beginning 
     after December 31, 2010, the sunset provision of EGTRRA 
     applies to the rules allowing refundable child credits.
---------------------------------------------------------------------------
     \2\ The $10,500 amount is indexed for inflation.
---------------------------------------------------------------------------
     Alternative minimum tax liability
       The child credit is allowed against the individual's 
     regular income tax and alternative minimum tax. For taxable 
     years beginning after December 31, 2010, the sunset provision 
     of EGTRRA applies to the rules allowing the child credit 
     against the alternative minimum tax.


                               house bill

       Under the House bill, the amount of the child credit is 
     increased to $1,000 for 2003 through 2005.\3\ After 2005, the 
     child credit will revert to the levels provided under present 
     law. For 2003, the increased amount of the child credit will 
     be paid in advance beginning in July, 2003, on the basis of 
     information on each taxpayer's 2002 return filed in 2003. 
     Such payments will be made in a manner similar to the advance 
     payment checks issued by the Treasury in 2001 to reflect the 
     creation of the 10-percent regular income tax rate bracket.
---------------------------------------------------------------------------
     \3\ The increase in refundability to 15 percent of the 
     taxpayer's earned income, scheduled for calendar years 2005 
     and thereafter, is not accelerated under the provision.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2002, and before 
     January 1, 2006.


                            senate amendment

       The amount of the child credit is increased to $1,000 for 
     2003 and thereafter. For 2003, the increased amount of the 
     child credit will be paid in advance beginning in July 2003 
     on the basis of information on each taxpayer's 2002 return 
     filed in 2003. Advance payments will be made in a similar 
     manner to the advance payment checks issued by the 
     Treasury in

[[Page H4630]]

     2001 to reflect the creation of the 10-percent regular 
     income tax rate bracket. The increase in the refundable 
     portion of the credit from 10 percent to 15 percent of the 
     taxpayer's earned income in excess of the threshold amount 
     is accelerated to 2003 from 2005.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2002.


                          conference agreement

       Under the conference agreement, the amount of the child 
     credit is increased to $1,000 for 2003 and 2004.\4\ After 
     2004, the child credit will revert to the levels provided 
     under present law. For 2003, the increased amount of the 
     child credit will be paid in advance beginning in July, 2003, 
     on the basis of information on each taxpayer's 2002 return 
     filed in 2003. The IRS is not expected to issue advance 
     payment checks to an individual who did not claim the child 
     credit for 2002. Such payments will be made in a manner 
     similar to the advance payment checks issued by the Treasury 
     in 2001 to reflect the creation of the 10-percent regular 
     income tax rate bracket.
---------------------------------------------------------------------------
     \4\ The increase in refundability to 15 percent of the 
     taxpayer's earned income, scheduled for calendar years 2005 
     and thereafter, is not accelerated under the provision.
---------------------------------------------------------------------------
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2002, and before January 1, 2005.

 B. Accelerate Marriage Penalty Relief (Secs. 102 and 103 of the House 
 Bill, Secs. 104 and 105 of the Senate Amendment and Secs. 1 and 63 of 
                               the Code)

     1. Standard deduction marriage penalty relief


                              present law

     Marriage penalty
       A married couple generally is treated as one tax unit that 
     must pay tax on the couple's total taxable income. Although 
     married couples may elect to file separate returns, the rate 
     schedules and other provisions are structured so that filing 
     separate returns usually results in a higher tax than filing 
     a joint return. Other rate schedules apply to single persons 
     and to single heads of households.
       A ``marriage penalty'' exists when the combined tax 
     liability of a married couple filing a joint return is 
     greater than the sum of the tax liabilities of each 
     individual computed as if they were not married. A ``marriage 
     bonus'' exists when the combined tax liability of a married 
     couple filing a joint return is less than the sum of the tax 
     liabilities of each individual computed as if they were not 
     married.
     Basic standard deduction
       Taxpayers who do not itemize deductions may choose the 
     basic standard deduction (and additional standard deductions, 
     if applicable),\5\ which is subtracted from adjusted gross 
     income (``AGI'') in arriving at taxable income. The size of 
     the basic standard deduction varies according to filing 
     status and is adjusted annually for inflation.\6\ For 2003, 
     the basic standard deduction for married couples filing a 
     joint return is 167 percent of the basic standard deduction 
     for single filers. (Alternatively, the basic standard 
     deduction amount for single filers is 60 percent of the basic 
     standard deduction amount for married couples filing joint 
     returns.) Thus, two unmarried individuals have standard 
     deductions whose sum exceeds the standard deduction for a 
     married couple filing a joint return.
---------------------------------------------------------------------------
     \5\ Additional standard deductions are allowed with respect 
     to any individual who is elderly (age 65 or over) or blind.
     \6\ For 2003, the basic standard deduction amounts are: (1) 
     $4,750 for unmarried individuals; (2) $7,950 for married 
     individuals filing a joint return; (3) $7,000 for heads of 
     households; and (4) $3,975 for married individuals filing 
     separately.
---------------------------------------------------------------------------
       EGTRRA increased the basic standard deduction for a married 
     couple filing a joint return to twice the basic standard 
     deduction for an unmarried individual filing a single 
     return.\7\ The increase in the standard deduction for married 
     taxpayers filing a joint return is scheduled to be phased-in 
     over five years beginning in 2005 and will be fully phased-in 
     for 2009 and thereafter. Table 2, below, shows the standard 
     deduction for married couples filing a joint return as a 
     percentage of the standard deduction for single individuals 
     during the phase-in period.
---------------------------------------------------------------------------
     \7\ The basic standard deduction for a married taxpayer 
     filing separately will continue to equal one-half of the 
     basic standard deduction for a married couple filing jointly; 
     thus, the basic standard deduction for unmarried individuals 
     filing a single return and for married couples filing 
     separately will be the same after the phase-in period.

TABLE 2.--SCHEDULED PHASE-IN OF INCREASE OF THE BASIC STANDARD DEDUCTION
                FOR MARRIED COUPLES FILING JOINT RETURNS
------------------------------------------------------------------------
                                               Standard deduction for
                                            married couples filing joint
               Taxable year                   returns as percentage of
                                               standard deduction for
                                            unmarried individual returns
------------------------------------------------------------------------
2005.....................................                           174
2006.....................................                           184
2007.....................................                           187
2008.....................................                           190
2009 and 2010\1\.........................                          200
------------------------------------------------------------------------
\1\ The basic standard deduction increases are repealed for taxable
  years beginning after December 31, 2010, under the sunset provision of
  EGTRRA.

                               House Bill

       The House bill accelerates the increase in the basic 
     standard deduction amount for joint returns to twice the 
     basic standard deduction amount for single returns effective 
     for 2003, 2004, and 2005. For taxable years beginning after 
     2005, the applicable percentages will revert to those allowed 
     under present law, as described above.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2002, and before 
     January 1, 2006.


                            Senate Amendment

       The Senate amendment increases in the basic standard 
     deduction amount for joint returns to 195 percent of the 
     basic standard deduction amount for single returns effective 
     for 2003. The Senate amendment also increases in the basic 
     standard deduction amount for joint returns to twice the 
     basic standard deduction amount for single returns effective 
     for 2004. For taxable years beginning after 2004, the 
     applicable percentages will revert to those allowed under 
     present law, as described above.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 2002 
     and before January 1, 2005.


                          conference agreement

       The conference agreement increases the basic standard 
     deduction amount for joint returns to twice the basic 
     standard deduction amount for single returns effective for 
     2003 and 2004. For taxable years beginning after 2004, the 
     applicable percentages will revert to those allowed under 
     present law, as described above.
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2002, and before January 1, 2005.
     2. Accelerate the expansion of the 15-percent rate bracket 
         for married couples filing joint returns


                              present law

     In general
       Under the Federal individual income tax system, an 
     individual who is a citizen or resident of the United States 
     generally is subject to tax on worldwide taxable income. 
     Taxable income is total gross income less certain exclusions, 
     exemptions, and deductions. An individual may claim either a 
     standard deduction or itemized deductions.
       An individual's income tax liability is determined by 
     computing his or her regular income tax liability and, if 
     applicable, alternative minimum tax liability.
     Regular income tax liability
       Regular income tax liability is determined by applying the 
     regular income tax rate schedules (or tax tables) to the 
     individual's taxable income and then is reduced by any 
     applicable tax credits. The regular income tax rate schedules 
     are divided into several ranges of income, known as income 
     brackets, and the marginal tax rate increases as the 
     individual's income increases. The income bracket amounts are 
     adjusted annually for inflation. Separate rate schedules 
     apply based on filing status: single individuals (other than 
     heads of households and surviving spouses), heads of 
     households, married individuals filing joint returns 
     (including surviving spouses), married individuals filing 
     separate returns, and estates and trusts. Lower rates may 
     apply to capital gains.
       In general, the bracket breakpoints for single individuals 
     are approximately 60 percent of the rate bracket breakpoints 
     for married couples filing joint returns.\8\ The rate bracket 
     breakpoints for married individuals filing separate returns 
     are exactly one-half of the rate brackets for married 
     individuals filing joint returns. A separate, compressed rate 
     schedule applies to estates and trusts.
---------------------------------------------------------------------------
     \8\  Under present law, the rate bracket breakpoint for the 
     38.6 percent marginal tax rate is the same for single 
     individuals and married couples filing joint returns.
---------------------------------------------------------------------------
     15-percent regular income tax rate bracket
       EGTRRA increased the size of the 15-percent regular income 
     tax rate bracket for a married couple filing a joint return 
     to twice the size of the corresponding rate bracket for a 
     single individual filing a single return. The increase is 
     phased-in over four years, beginning in 2005. Therefore, this 
     provision is fully effective (i.e., the size of the 15-
     percent regular income tax rate bracket for a married couple 
     filing a joint return is twice the size of the 15-percent 
     regular income tax rate bracket for an unmarried individual 
     filing a single return) for taxable years beginning after 
     December 31, 2007. Table 3, below, shows the increase in the 
     size of the 15-percent bracket during the phase-in period.

 TABLE 3.--SCHEDULED INCREASE IN SIZE OF THE 15-PERCENT RATE BRACKET FOR
                  MARRIED COUPLES FILING JOINT RETURNS
------------------------------------------------------------------------
                                            End point of 15-percent rate
                                            bracket for married couples
                                              filing joint returns as
               Taxable year                percentage of end point of 15-
                                              percent rate bracket for
                                               unmarried individuals
------------------------------------------------------------------------
2005.....................................                           180
2006.....................................                           187
2007.....................................                           193
2008 through 2010 \1\....................                          200
------------------------------------------------------------------------
\1\ The increases in the 15-percent rate bracket for married couples
  filing a joint return are repealed for taxable years beginning after
  December 31, 2010, under the sunset of EGTRRA.

                               house bill

       The House bill accelerates the increase of the size of the 
     15-percent regular income tax

[[Page H4631]]

     rate bracket for joint returns to twice the width of the 15-
     percent regular income tax rate bracket for single returns 
     for taxable years beginning in 2003, 2004, and 2005. For 
     taxable years beginning after 2005, the applicable 
     percentages will revert to those allowed under present law, 
     as described above.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2002, and before 
     January 1, 2006.


                            senate amendment

       The Senate amendment increases in the size of the 15-
     percent regular income tax rate bracket for joint returns to 
     195 percent of the size of the 15-percent regular income tax 
     rate bracket for single returns effective for 2003. The 
     Senate amendment also increases in the size of the 15-percent 
     regular income tax rate bracket for joint returns to twice 
     the size of the 15-percent regular income tax rate bracket 
     for single returns effective for 2004. For taxable years 
     beginning after 2004, the applicable percentages will revert 
     to those allowed under present law, as described above.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002 and before January 1, 
     2005.


                          Conference Agreement

       The conference agreement increases the size of the 15-
     percent regular income tax rate bracket for joint returns to 
     twice the width of the 15-percent regular income tax rate 
     bracket for single returns for taxable years beginning in 
     2003 and 2004. For taxable years beginning after 2004, the 
     applicable percentages will revert to those allowed under 
     present law, as described above.
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2002, and before January 1, 2005.

C. Accelerate Reductions in Individual Income Tax Rates (Secs. 101, 102 
    and 103 of the House Bill, Secs. 101, 102 and 103 of the Senate 
               Amendment, and Secs. 1 and 55 of the Code)


                              Present Law

     In general
       Under the Federal individual income tax system, an 
     individual who is a citizen or a resident of the United 
     States generally is subject to tax on worldwide taxable 
     income. Taxable income is total gross income less certain 
     exclusions, exemptions, and deductions. An individual may 
     claim either a standard deduction or itemized deductions.
       An individual's income tax liability is determined by 
     computing his or her regular income tax liability and, if 
     applicable, alternative minimum tax liability.
     Regular income tax liability
       Regular income tax liability is determined by applying the 
     regular income tax rate schedules (or tax tables) to the 
     individual's taxable income. This tax liability is then 
     reduced by any applicable tax credits. The regular income tax 
     rate schedules are divided into several ranges of income, 
     known as income brackets, and the marginal tax rate increases 
     as the individual's income increases. The income bracket 
     amounts are adjusted annually for inflation. Separate rate 
     schedules apply based on filing status: single individuals 
     (other than heads of households and surviving spouses), heads 
     of households, married individuals filing joint returns 
     (including surviving spouses), married individuals filing 
     separate returns, and estates and trusts. Lower rates may 
     apply to capital gains.
       For 2003, the regular income tax rate schedules for 
     individuals are shown in Table 4, below. The rate bracket 
     breakpoints for married individuals filing separate returns 
     are exactly one-half of the rate brackets for married 
     individuals filing joint returns. A separate, compressed rate 
     schedule applies to estates and trusts.

         TABLE 4.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2003
 
                                                     Then regular income
   If taxable income is over:       But not over:        tax equals:
 
                           Single Individuals
 
$0..............................  $6,000             10% of taxable
                                                      income.
$6,000..........................  $28,400            $600, plus 15% of
                                                      the amount over
                                                      $6,000.
$28,400.........................  $68,800            $3,960.00, plus 27%
                                                      of the amount over
                                                      $28,400.
$68,800.........................  $143,500           $14,868.00, plus
                                                      30% of the amount
                                                      over $68,800.
$143,500........................  $311,950           $37,278.00, plus
                                                      35% of the amount
                                                      over $143,500.
Over 311,950....................  .................  $96,235.50, plus
                                                      38.6% of the
                                                      amount over
                                                      $311,950.
 
                           Head of Households
 
$0..............................  $10,000            10% of taxable
                                                      income.
$10,000.........................  $38,050            $1,000, plus 15% of
                                                      the amount over
                                                      $10,000.
$38,050.........................  $98,250            $5,207.50, plus 27%
                                                      of the amount over
                                                      $38,050.
$98,250.........................  $159,100           $21,461.50, plus
                                                      30% of the amount
                                                      over $98,250.
$159,100........................  $311,950           $39,716.50, plus
                                                      35% of the amount
                                                      over $159,100.
Over 311,950....................  .................  $93,214, plus 38.6%
                                                      of the amount over
                                                      $311,950.
 
                Married Individuals Filing Joint Returns
 
$0..............................  $12,000            10% of taxable
                                                      income.
$12,000.........................  $47,450            $1,200, plus 15% of
                                                      the amount over
                                                      $12,000.
$47,450.........................  $114,650           $6,517.50, plus 27%
                                                      of the amount over
                                                      $47,450.
$114,650........................  $174,700           $24,661.50, plus
                                                      30% of the amount
                                                      over $114,650.
$174,700........................  $311,950           $42,676.50, plus
                                                      35% of the amount
                                                      over $174,700.
Over 311,950....................  .................  $90,714, plus 38.6%
                                                      of the amount over
                                                      $311,950.
 

     Ten-percent regular income tax rate
       Under present law, the 10-percent rate applies to the first 
     $6,000 of taxable income for single individuals, $10,000 of 
     taxable income for heads of households, and $12,000 for 
     married couples filing joint returns. Effective beginning in 
     2008, the $6,000 amount will increase to $7,000 and the 
     $12,000 amount will increase to $14,000.
       The taxable income levels for the 10-percent rate bracket 
     will be adjusted annually for inflation for taxable years 
     beginning after December 31, 2008. The bracket for single 
     individuals and married individuals filing separately is one-
     half for joint returns (after adjustment of that bracket for 
     inflation).
       The 10-percent rate bracket will expire for taxable years 
     beginning after December 31, 2010, under the sunset provision 
     of the Economic Growth and Tax Relief Reconciliation Act of 
     2001 (``EGTRRA'').
     Reduction of other regular income tax rates
       Prior to EGTRRA, the regular income tax rates were 15 
     percent, 28 percent, 31 percent, 36 percent, and 39.6 
     percent.\9\ EGTRRA added the 10-percent regular income tax 
     rate, described above, and retained the 15-percent regular 
     income tax rate. Also, the 15-percent regular income tax 
     bracket was modified to begin at the end of the 10-percent 
     regular income tax bracket. EGTRRA also made other changes to 
     the 15-percent regular income tax bracket.\10\
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     \9\ The regular income tax rates will revert to these 
     percentages for taxable years beginning after December 31, 
     2010, under the sunset of EGTRRA.
     \10\ See the discussion of the provision regarding marriage 
     penalty relief in the 15-percent regular income tax bracket, 
     above.
---------------------------------------------------------------------------
       Also, under EGTRRA, the 28 percent, 31 percent, 36 percent, 
     and 39.6 percent rates are phased down over six years to 25 
     percent, 28 percent, 33 percent, and 35 percent, effective 
     after June 30, 2001. The taxable income levels for the rates 
     above the 15-percent rate in all taxable years are the same 
     as the taxable income levels that apply under the prior-law 
     rates.
       Table 5, below, shows the schedule of regular income tax 
     rate reductions.

                             TABLE 5.--SCHEDULED REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                                28% rate     31% rate     36% rate    39.6% rate
                        Taxable year                          reduced to:  reduced to:  reduced to:  reduced to:
----------------------------------------------------------------------------------------------------------------
2001\1\-2003................................................          27%          30%          35%        38.6%
2004-2005...................................................          26%          29%          34%        37.6%
2006 thru 20102.............................................          25%          28%          33%       35.0%
----------------------------------------------------------------------------------------------------------------
\1\ Effective July 1, 2001.
\2\ The reduction in the regular income tax rates are repealed for taxable years beginning after December 31,
  2010, under the sunset provision of EGTRRA.

     Alternative minimum tax
       The alternative minimum tax is the amount by which the 
     tentative minimum tax exceeds the regular income tax. An 
     individual's tentative minimum tax is an amount equal to (1) 
     26 percent of the first $175,000 ($87,500 in the case of a 
     married individual filing a separate return) of alternative 
     minimum taxable income (``AMTI'') in excess of a phased-out 
     exemption amount and (2) 28 percent of the remaining AMTI. 
     The maximum tax rates on net capital gain used in computing 
     the tentative minimum tax are the same as under the regular 
     tax. AMTI is

[[Page H4632]]

     the individual's taxable income adjusted to take account of 
     specified preferences and adjustments. The exemption amounts 
     are: (1) $49,000 ($45,000 in taxable years beginning after 
     2004) in the case of married individuals filing a joint 
     return and surviving spouses; (2) $35,750 ($33,750 in taxable 
     years beginning after 2004) in the case of other unmarried 
     individuals; (3) $24,500 ($22,500 in taxable years beginning 
     after 2004) in the case of married individuals filing a 
     separate return; and (4) $22,500 in the case of an estate or 
     trust. The exemption amounts are phased out by an amount 
     equal to 25 percent of the amount by which the individual's 
     AMTI exceeds (1) $150,000 in the case of married individuals 
     filing a joint return and surviving spouses, (2) $112,500 in 
     the case of other unmarried individuals, and (3) $75,000 in 
     the case of married individuals filing separate returns or an 
     estate or a trust. These amounts are not indexed for 
     inflation.


                               House Bill

     Ten-percent regular income tax rate
       The House bill accelerates the increase in the taxable 
     income levels for the 10-percent rate bracket now scheduled 
     for 2008 to be effective in 2003, 2004, and 2005. 
     Specifically, for 2003, 2004, and 2005, the proposal 
     increases the taxable income level for the 10-percent regular 
     income tax rate brackets for unmarried individuals from 
     $6,000 to $7,000 and for married individuals filing jointly 
     from $12,000 to $14,000. The taxable income levels for the 
     10-percent regular income tax rate bracket will be adjusted 
     annually for inflation for taxable years beginning after 
     December 31, 2003.
       For taxable years beginning after December 31, 2005, the 
     taxable income levels for the 10-percent rate bracket will 
     revert to the levels allowed under present law. Therefore, 
     for 2006 and 2007, the levels will revert to $6,000 for 
     unmarried individuals and $12,000 for married individuals 
     filing jointly. In 2008, the taxable income levels for the 
     10-percent regular income tax rate brackets will be $7,000 
     for unmarried individuals and $14,000 for married individuals 
     filing jointly. The taxable income levels for the 10-percent 
     rate bracket will be adjusted annually for inflation for 
     taxable years beginning after December 31, 2008.
     Reduction of other regular income tax rates
       The House bill accelerates the reductions in the regular 
     income tax rates in excess of the 15-percent regular income 
     tax rate that are scheduled for 2004 and 2006. Therefore, for 
     2003 and thereafter, the regular income tax rates in excess 
     of 15 percent under the bill are 25 percent, 28 percent, 33 
     percent, and 35 percent.
     Alternative minimum tax exemption amounts
       The House bill increases the AMT exemption amount for 
     married taxpayers filing a joint return and surviving spouses 
     to $64,000, and for unmarried taxpayers to $43,250, for 
     taxable years beginning in 2003, 2004, and 2005.
     Effective date
       The House bill provision is effective for taxable years 
     beginning after December 31, 2002 and before January 1, 2006.


                            Senate Amendment

     Ten-percent regular income tax rate
       The Senate amendment accelerates the scheduled increase in 
     the taxable income levels for the 10-percent rate bracket. 
     Specifically, beginning in 2003, the Senate amendment 
     increases the taxable income level for the 10-percent regular 
     income tax rate brackets for single individuals from $6,000 
     to $7,000 and for married individuals filing jointly from 
     $12,000 to $14,000. The taxable income levels for the 10-
     percent regular income tax rate bracket will be adjusted 
     annually for inflation for taxable years beginning after 
     December 31, 2003.
     Reduction of other regular income tax rates
       The Senate amendment accelerates the reductions in the 
     regular income tax rates in excess of the 15-percent regular 
     income tax rate that are scheduled for 2004 and 2006. 
     Therefore, for 2003 and thereafter, the regular income tax 
     rates in excess of 15 percent under the bill are 25 percent, 
     28 percent, 33 percent, and 35 percent.
     Alternative minimum tax exemption amounts
       The Senate amendment increases the AMT exemption amount for 
     married taxpayers filing a joint return and surviving spouses 
     to $60,500, and for unmarried taxpayers to $41,500, for 
     taxable years beginning in 2003, 2004 and 2005.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 2002 
     and before January 1, 2006.


                          Conference Agreement

     Ten-percent regular income tax rate
       The conference agreement accelerates the increase in the 
     taxable income levels for the 10-percent rate bracket now 
     scheduled for 2008 to be effective in 2003 and 2004. 
     Specifically, for 2003 and 2004, the conference agreement 
     increases the taxable income level for the 10-percent regular 
     income tax rate brackets for unmarried individuals from 
     $6,000 to $7,000 and for married individuals filing jointly 
     from $12,000 to $14,000. The taxable income levels for the 
     10-percent regular income tax rate bracket will be adjusted 
     annually for inflation for taxable years beginning after 
     December 31, 2003.
       For taxable years beginning after December 31, 2004, the 
     taxable income levels for the 10-percent rate bracket will 
     revert to the levels allowed under present law. Therefore, 
     for 2005, 2006, and 2007, the levels will revert to $6,000 
     for unmarried individuals and $12,000 for married individuals 
     filing jointly. In 2008, the taxable income levels for the 
     10-percent regular income tax rate brackets will be $7,000 
     for unmarried individuals and $14,000 for married individuals 
     filing jointly. The taxable income levels for the 10-percent 
     rate bracket will be adjusted annually for inflation for 
     taxable years beginning after December 31, 2008.
     Reduction of other regular income tax rates
       The conference agreement follows the House bill and the 
     Senate amendment.
     Alternative minimum tax exemption amounts
       The conference agreement increases the AMT exemption amount 
     for married taxpayers filing a joint return and surviving 
     spouses to $58,000, and for unmarried taxpayers to $40,250 
     for taxable years beginning in 2003 and 2004.
     Effective date
       The conference agreement generally is effective for taxable 
     years beginning after December 31, 2002. The conferees 
     recognize that withholding at statutorily mandated rates 
     (such as pursuant to backup withholding under section 3406) 
     has already occurred. The conferees intend that taxpayers who 
     have been overwithheld as a consequence of this obtain a 
     refund of this overwithholding through the normal process of 
     filing an income tax return, and not through the payor. In 
     addition, the conferees anticipate that the Treasury will 
     provide a brief, reasonable period of transition for payors 
     to implement these changes in these statutorily mandated 
     withholding rates.

               II. Depreciation and Expensing Provisions

A. Special Depreciation Allowance for Certain Property (Sec. 201 of the 
                  House Bill and Sec. 168 of the Code)


                              Present Law

     In general
       A taxpayer is allowed to recover, through annual 
     depreciation deductions, the cost of certain property used in 
     a trade or business or for the production of income. The 
     amount of the depreciation deduction allowed with respect to 
     tangible property for a taxable year is determined under the 
     modified accelerated cost recovery system (``MACRS''). Under 
     MACRS, different types of property generally are assigned 
     applicable recovery periods and depreciation methods. The 
     recovery periods applicable to most tangible personal 
     property (generally tangible property other than residential 
     rental property and nonresidential real property) range from 
     3 to 25 years. The depreciation methods generally applicable 
     to tangible personal property are the 200-percent and 150-
     percent declining balance methods, switching to the straight-
     line method for the taxable year in which the depreciation 
     deduction would be maximized.
       Section 280F limits the annual depreciation deductions with 
     respect to passenger automobiles to specified dollar amounts, 
     indexed for inflation.
       Section 167(f)(1) provides that capitalized computer 
     software costs, other than computer software to which section 
     197 applies, are recovered ratably over 36 months.
       In lieu of depreciation, a taxpayer with a sufficiently 
     small amount of annual investment generally may elect to 
     deduct up to $25,000 of the cost of qualifying property 
     placed in service for the taxable year (sec. 179). 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.
     Additional first year depreciation deduction
       The Job Creation and Worker Assistance Act of 2002 \11\ 
     (``JCWAA'') allows an additional first-year depreciation 
     deduction equal to 30 percent of the adjusted basis of 
     qualified property.\12\ The amount of the additional first-
     year depreciation deduction is not affected by a short 
     taxable year. 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.\13\ The basis of the property 
     and the depreciation allowances in the year of purchase and 
     later years are appropriately adjusted to reflect the 
     additional first-year depreciation deduction. In addition, 
     there are no adjustments to the allowable amount of 
     depreciation for purposes of computing a taxpayer's 
     alternative minimum taxable income with respect to property 
     to which the provision applies. A taxpayer is allowed to 
     elect out of the additional first-year depreciation for any 
     class of property for any taxable year.
---------------------------------------------------------------------------
     \11\ Pub. Law No. 107-147, sec. 101 (2002).
     \12\ The additional first-year depreciation deduction is 
     subject to the general rules regarding whether an item is 
     deductible under section 162 or subject to capitalization 
     under section 263 or section 263A.
     \13\ However, the additional first-year depreciation 
     deduction is not allowed for purposes of computing earnings 
     and profits.
---------------------------------------------------------------------------
       In order for property to qualify for the additional first-
     year depreciation deduction it must meet all of the following 
     requirements. First, the property must be property (1) to 
     which 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

[[Page H4633]]

     (4) qualified leasehold improvement property (as defined in 
     section 168(k)(3)).\14\ Second, the original use \15\ of the 
     property must commence with the taxpayer on or after 
     September 11, 2001.\16\ Third, the taxpayer must purchase the 
     property within the applicable time period. Finally, the 
     property must be placed in service before January 1, 2005. An 
     extension of the placed in service date of one year (i.e., to 
     January 1, 2006) is provided for certain property with a 
     recovery period of ten years or longer and certain 
     transportation property.\17\ Transportation property is 
     defined as tangible personal property used in the trade or 
     business of transporting persons or property.
---------------------------------------------------------------------------
     \14\ A special rule precludes the additional first-year 
     depreciation deduction for any property that is required to 
     be depreciated under the alternative depreciation system of 
     MACRS.
     \15\ 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).
     \16\ A special rule applies in the case of certain leased 
     property. In the case of any property that is originally 
     placed in service by a person and that is sold to the 
     taxpayer and leased back to such person by the taxpayer 
     within three months after the date that the property was 
     placed in service, the property would be treated as 
     originally placed in service by the taxpayer not earlier than 
     the date that the property is used under the leaseback.
     If property is originally placed in service by a lessor 
     (including by operation of section 168(k)(2)(D)(i)), such 
     property is sold within three months after the date that the 
     property was placed in service, and the user of such property 
     does not change, then the property is treated as originally 
     placed in service by the taxpayer not earlier than the date 
     of such sale. A technical correction may be needed so the 
     statute reflects this intent.
     \17\ In order for property to qualify for the extended placed 
     in service date, the property is required to have a 
     production period exceeding two years or an estimated 
     production period exceeding one year and a cost exceeding $1 
     million.
---------------------------------------------------------------------------
       The applicable time period for acquired property is (1) 
     after September 10, 2001 and before September 11, 2004, but 
     only if no binding written contract for the acquisition is in 
     effect before September 11, 2001, or (2) pursuant to a 
     binding written contract which was entered into after 
     September 10, 2001, and before September 11, 2004.\18\ With 
     respect to property that is manufactured, constructed, or 
     produced by the taxpayer for use by the taxpayer, the 
     taxpayer must begin the manufacture, construction, or 
     production of the property after September 10, 2001, and 
     before September 11, 2004. Property that is manufactured, 
     constructed, or produced for the taxpayer by another person 
     under a contract that is entered into prior to the 
     manufacture, construction, or production of the property is 
     considered to be manufactured, constructed, or produced by 
     the taxpayer. For property eligible for the extended placed 
     in service date, a special rule limits the amount of costs 
     eligible for the additional first year depreciation. With 
     respect to such property, only the portion of the basis that 
     is properly attributable to the costs incurred before 
     September 11, 2004 (``progress expenditures'') is eligible 
     for the additional first-year depreciation.\19\
---------------------------------------------------------------------------
     \18\ Property does not fail to qualify for the additional 
     first-year depreciation merely because a binding written 
     contract to acquire a component of the property is in effect 
     prior to September 11, 2001.
     \19\ For purposes of determining the amount of eligible 
     progress expenditures, it is intended that rules similar to 
     sec. 46(d)(3) as in effect prior to the Tax Reform Act of 
     1986 shall apply.
---------------------------------------------------------------------------
       Property does not qualify for the additional first-year 
     depreciation deduction when the user of such property (or a 
     related party) would not have been eligible for the 
     additional first-year depreciation deduction if the user (or 
     a related party) were treated as the owner.\20\ For example, 
     if a taxpayer sells to a related party property that was 
     under construction prior to September 11, 2001, the property 
     does not qualify for the additional first-year depreciation 
     deduction. Similarly, if a taxpayer sells to a related party 
     property that was subject to a binding written contract prior 
     to September 11, 2001, the property does not qualify for the 
     additional first-year depreciation deduction. As a further 
     example, if a taxpayer (the lessee) sells property in a sale-
     leaseback arrangement, and the property otherwise would not 
     have qualified for the additional first-year depreciation 
     deduction if it were owned by the taxpayer-lessee, then the 
     lessor is not entitled to the additional first-year 
     depreciation deduction.
---------------------------------------------------------------------------
     \20\ A technical correction may be needed so that the statute 
     reflects this intent.
---------------------------------------------------------------------------
       The limitation on the amount of depreciation deductions 
     allowed with respect to certain passenger automobiles (sec. 
     280F) is increased in the first year by $4,600 for 
     automobiles that qualify (and do not elect out of the 
     increased first year deduction). The $4,600 increase is not 
     indexed for inflation.


                               House Bill

       The House bill provides an additional first-year 
     depreciation deduction equal to 50 percent of the adjusted 
     basis of qualified property.\21\ Qualified property is 
     defined in the same manner as for purposes of the 30-percent 
     additional first-year depreciation deduction provided by the 
     JCWAA except that the applicable time period for acquisition 
     (or self construction) of the property is modified. In 
     addition, property must be placed in service before January 
     1, 2006 to qualify.\22\ Property for which the 50-percent 
     additional first year depreciation deduction is claimed is 
     not eligible for the 30-percent additional first year 
     depreciation deduction.
---------------------------------------------------------------------------
     \21\ A taxpayer is permitted to elect out of the 50 percent 
     additional first-year depreciation deduction for any class of 
     property for any taxable year.
     \22\ An extension of the placed in service date of one year 
     (i.e., January 1, 2007) is provided for certain property with 
     a recovery period of ten years or longer and certain 
     transportation property as defined for purposes of the JCWAA.
---------------------------------------------------------------------------
       Under the House bill, in order to qualify the property must 
     be acquired after May 5, 2003 and before January 1, 2006, and 
     no binding written contract for the acquisition is in effect 
     before May 6, 2003.\23\ With respect to property that is 
     manufactured, constructed, or produced by the taxpayer for 
     use by the taxpayer, the taxpayer must begin the manufacture, 
     construction, or production of the property after May 5, 
     2003. For property eligible for the extended placed in 
     service date (i.e., certain property with a recovery period 
     of ten years or longer and certain transportation property), 
     a special rule limits the amount of costs eligible for the 
     additional first year depreciation. With respect to such 
     property, only progress expenditures properly attributable to 
     the costs incurred before January 1, 2006 shall be eligible 
     for the additional first year depreciation.\24\
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     \23\ Property does not fail to qualify for the additional 
     first-year depreciation merely because a binding written 
     contract to acquire a component of the property is in effect 
     prior to May 6, 2003. However, no additional first-year 
     depreciation is permitted on any such component. No inference 
     is intended as to the proper treatment of components placed 
     in service under the 30% additional first-year depreciation 
     provided by the JCWAA.
     \24\ For purposes of determining the amount of eligible 
     progress expenditures, it is intended that rules similar to 
     sec. 46(d)(3) as in effect prior to the Tax Reform Act of 
     1986 shall apply.
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       The Committee wishes to clarify that the adjusted basis of 
     qualified property acquired by a taxpayer in a like kind 
     exchange or an involuntary conversion is eligible for the 
     additional first year depreciation deduction.
       The House bill also increases the limitation on the amount 
     of depreciation deductions allowed with respect to certain 
     passenger automobiles (sec. 280F of the Code) in the first 
     year by $9,200 (in lieu of the $4,600 provided under the 
     JCWAA) for automobiles that qualify (and do not elect out of 
     the increased first year deduction). The $9,200 increase is 
     not indexed for inflation.
       For property eligible for the present law 30-percent 
     additional first year depreciation, the House bill extends 
     the date of the placed in service requirement to property 
     placed in service prior to January 1, 2006 (from January 1, 
     2005). Thus, property otherwise qualifying for the 30-percent 
     additional first year depreciation deduction will now qualify 
     if placed in service prior to January 1, 2006. The House bill 
     also extends the placed in service date requirement for 
     certain property with a recovery period of ten years or 
     longer and certain transportation property to property placed 
     in service prior to January 1, 2007 (instead of January 1, 
     2006). In addition, progress expenditures eligible for the 
     30-percent additional first year depreciation is extended to 
     include costs incurred prior to January 1, 2006 (instead of 
     September 11, 2004).
       Effective date.--The House bill applies to property placed 
     in service after May 5, 2003.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill provision 
     with the following modifications. The conference agreement 
     terminates the provision one year earlier than under the 
     House bill provision. Thus, all references to January 1, 
     2007, and January 1, 2006, are modified to January 1, 2006, 
     and January 1, 2005, respectively. In addition, the 
     conference agreement provides that the increase on the amount 
     of depreciation deductions allowed with respect to certain 
     passenger automobiles (sec. 280F of the Code) in the first 
     year is $7,650 for automobiles that qualify. The $7,650 
     increase is not indexed for inflation.
       Effective date.--The conference agreement applies to 
     taxable years ending after May 5, 2003.

B. Increase Section 179 Expensing (Sec. 202 of the House Bill, Sec. 107 
           of the Senate Amendment, and Sec. 179 of the Code)


                              Present Law

       Present law provides that, in lieu of depreciation, a 
     taxpayer with a sufficiently small amount of annual 
     investment may elect to deduct up to $25,000 (for taxable 
     years beginning in 2003 and thereafter) of the cost of 
     qualifying property placed in service for the taxable year 
     (sec. 179).\25\ 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. 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. An election to expense these 
     items generally is made on the taxpayer's original return for

[[Page H4634]]

     the taxable year to which the election relates, and may be 
     revoked only with the consent of the Commissioner.\26\ In 
     general, taxpayers may not elect to expense off-the-shelf 
     computer software.\27\
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     \25\ Additional section 179 incentives are provided with 
     respect to a qualified property used by a business in the New 
     York Liberty Zone (sec. 1400(f)) or an empowerment zone (sec. 
     1397A).
     \26\ Section 179(c)(2). A taxpayer may make the election on 
     the original return (whether or not the return is timely), or 
     on an amended return filed by the due date (including 
     extensions) for filing the return for the tax year the 
     property was placed in service. If the taxpayer timely filed 
     an original return without making the election, the taxpayer 
     may still make the election by filing an amended return 
     within six months of the due date of the return (excluding 
     extensions). Treas. Reg. sec. 1.179-5.
     \27\ Section 179(d)(1) requires that property be tangible to 
     be eligible for expensing; in general, computer software is 
     intangible property.
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       The amount eligible to be expensed for a taxable year may 
     not exceed the taxable income for a taxable year that is 
     derived from the active conduct of a trade or business 
     (determined without regard to this provision). Any amount 
     that is not allowed as a deduction because of the taxable 
     income limitation may be carried forward to succeeding 
     taxable years (subject to similar limitations). No general 
     business credit under section 38 is allowed with respect to 
     any amount for which a deduction is allowed under section 
     179.


                               House Bill

       The House bill provision provides that the maximum dollar 
     amount that may be deducted under section 179 is increased to 
     $100,000 for property placed in service in taxable years 
     beginning in 2003, 2004, 2005, 2006, and 2007. In addition, 
     the $200,000 amount is increased to $400,000 for property 
     placed in service in taxable years beginning in 2003, 2004, 
     2005, 2006 and 2007. The dollar limitations are indexed 
     annually for inflation for taxable years beginning after 2003 
     and before 2008. The provision also includes off-the-shelf 
     computer software placed in service in a taxable year 
     beginning in 2003, 2004, 2005, 2006, or 2007, as qualifying 
     property. With respect to a taxable year beginning after 2002 
     and before 2008, the provision permits taxpayers to make or 
     revoke expensing elections on amended returns without the 
     consent of the Commissioner.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with modifications. The conference 
     agreement provides that the increase in the dollar 
     limitations, as well as the provision relating to off-the-
     shelf computer software, apply for property placed in service 
     in taxable years beginning in 2003, 2004, and 2005. The 
     conference agreement provides that the dollar limitations are 
     indexed annually for inflation for taxable years beginning 
     after 2003 and before 2006. With respect to a taxable year 
     beginning after 2002 and before 2006, the conference 
     agreement permits taxpayers to make or revoke expensing 
     elections on amended returns without the consent of the 
     Commissioner.
       Effective date.--Same as the House bill and the Senate 
     amendment.

 C. Five-Year Carryback of Net Operating Losses (Sec. 203 of the House 
                 Bill and Secs. 172 and 56 of the Code)


                              Present Law

       A net operating loss (``NOL'') is, generally, the amount by 
     which a taxpayer's allowable deductions exceed the taxpayer's 
     gross income. A carryback of an NOL generally results in the 
     refund of Federal income tax for the carryback year. A 
     carryforward of an NOL reduces Federal income tax for the 
     carryforward year.
       In general, an NOL may be carried back two years and 
     carried forward 20 years to offset taxable income in such 
     years.\28\ Different rules apply with respect to NOLs arising 
     in certain circumstances. For example, a three-year carryback 
     applies with respect to NOLs (1) arising from casualty or 
     theft losses of individuals, or (2) attributable to 
     Presidentially declared disasters for taxpayers engaged in a 
     farming business or a small business. A five-year carryback 
     period applies to NOLs from a farming loss (regardless of 
     whether the loss was incurred in a Presidentially declared 
     disaster area). Special rules also apply to real estate 
     investment trusts (no carryback), specified liability losses 
     (10-year carryback), and excess interest losses (no carryback 
     to any year preceding a corporate equity reduction 
     transaction).
---------------------------------------------------------------------------
     \28\ Sec. 172.
---------------------------------------------------------------------------
       The alternative minimum tax rules provide that a taxpayer's 
     NOL deduction cannot reduce the taxpayer's alternative 
     minimum taxable income (``AMTI'') by more than 90 percent of 
     the AMTI (determined without regard to the NOL deduction).
       Section 202 of the Job Creation and Worker Assistance Act 
     of 2002 \29\ (``JCWAA'') provided a temporary extension of 
     the general NOL carryback period to five years (from two 
     years) for NOLs arising in taxable years ending in 2001 and 
     2002. In addition, the five-year carryback period applies to 
     NOLs from these years that qualify under present law for a 
     three-year carryback period (i.e., NOLs arising from casualty 
     or theft losses of individuals or attributable to certain 
     Presidentially declared disaster areas).
---------------------------------------------------------------------------
     \29\ Pub. L. No. 107-147.
---------------------------------------------------------------------------
       A taxpayer can elect to forgo the five-year carryback 
     period. The election to forgo the five-year carryback period 
     is made in the manner prescribed by the Secretary of the 
     Treasury and must be made by the due date of the return 
     (including extensions) for the year of the loss. The election 
     is irrevocable. If a taxpayer elects to forgo the five-year 
     carryback period, then the losses are subject to the rules 
     that otherwise would apply under section 172 absent the 
     provision.\30\
---------------------------------------------------------------------------
     \30\ Because JCWAA was enacted after some taxpayers had filed 
     tax returns for years affected by the provision, a technical 
     correction is needed to provide for a period of time in which 
     prior decisions regarding the NOL carryback may be reviewed. 
     Similarly, a technical correction is needed to modify the 
     carryback adjustment procedures of sec. 6411 for NOLs arising 
     in 2001 and 2002. These issues were addressed in a letter 
     dated April 15, 2002, sent by the Chairmen and Ranking 
     Members of the House Ways and Means Committee and Senate 
     Finance Committee, as well as in guidance issued by the IRS 
     pursuant to the Congressional letter (Rev. Proc. 2002-40, 
     2002-23 I.R.B. 1096, June 10, 2002).
---------------------------------------------------------------------------
       JCWAA also provided that an NOL deduction attributable to 
     NOL carrybacks arising in taxable years ending in 2001 and 
     2002, as well as NOL carryforwards to these taxable years, 
     may offset 100 percent of a taxpayer's AMTI.\31\
---------------------------------------------------------------------------
     \31\ Section 172(b)(2) should be appropriately applied in 
     computing AMTI to take proper account of the order that the 
     NOL carryovers and carrybacks are used as a result of this 
     provision. See section 56(d)(1)(B)(ii).
---------------------------------------------------------------------------


                               House Bill

       The provision extends the provisions of the five-year 
     carryback of NOLs enacted in JCWAA to NOLs arising in taxable 
     years ending in 2003, 2004, and 2005.\32\
---------------------------------------------------------------------------
     \32\ Because certain taxpayers may have already filed tax 
     returns (or be in the process of filing tax returns) for 
     taxable years ending in 2003, the proposal contains special 
     rules to provide until November 1, 2003 in which prior 
     decisions regarding the NOL carryback may be reviewed by 
     taxpayers.
---------------------------------------------------------------------------
       The provision also allows an NOL deduction attributable to 
     NOL carrybacks arising in taxable years ending in 2003, 2004, 
     and 2005, as well as NOL carryforwards to these taxable 
     years, to offset 100 percent of a taxpayer's AMTI.
       Effective date.--The five-year carryback provision is 
     effective for net operating losses generated in taxable years 
     ending in 2003, 2004 and 2005. The provision relating to AMTI 
     is effective for NOL carrybacks arising in, and NOL 
     carryforwards to, taxable years ending in 2003, 2004 and 
     2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

              III. Capital Gains and Dividends Provisions

 A. Reduce Individual Capital Gains Rates (Sec. 301 of the House Bill 
                       and Sec. 1(h) of the Code)


                              Present Law

       In general, gain or loss reflected in the value of an asset 
     is not recognized for income tax purposes until a taxpayer 
     disposes of the asset. On the sale or exchange of a capital 
     asset, any gain generally is included in income. Any net 
     capital gain of an individual is taxed at maximum rates lower 
     than the rates applicable to ordinary income. Net capital 
     gain is the excess of the net long-term capital gain for the 
     taxable year over the net short-term capital loss for the 
     year. Gain or loss is treated as long-term if the asset is 
     held for more than one year.
       Capital losses generally are deductible in full against 
     capital gains. In addition, individual taxpayers may deduct 
     capital losses against up to $3,000 of ordinary income in 
     each year. Any remaining unused capital losses may be carried 
     forward indefinitely to another taxable year.
       A capital asset generally means any property except (1) 
     inventory, stock in trade, or property held primarily for 
     sale to customers in the ordinary course of the taxpayer's 
     trade or business, (2) depreciable or real property used in 
     the taxpayer's trade or business, (3) specified literary or 
     artistic property, (4) business accounts or notes receivable, 
     (5) certain U.S. publications, (6) certain commodity 
     derivative financial instruments, (7) hedging transactions, 
     and (8) business supplies. In addition, the net gain from the 
     disposition of certain property used in the taxpayer's trade 
     or business is treated as long-term capital gain. Gain from 
     the disposition of depreciable personal property is not 
     treated as capital gain to the extent of all previous 
     depreciation allowances. Gain from the disposition of 
     depreciable real property is generally not treated as capital 
     gain to the extent of the depreciation allowances in excess 
     of the allowances that would have been available under the 
     straight-line method of depreciation.
       The maximum rate of tax on the adjusted net capital gain of 
     an individual is 20 percent. In addition, any adjusted net 
     capital gain which otherwise would be taxed at a 15-percent 
     rate is taxed at a 10-percent rate. These rates apply for 
     purposes of both the regular tax and the alternative minimum 
     tax.
       The ``adjusted net capital gain'' of an individual is the 
     net capital gain reduced (but not below zero) by the sum of 
     the 28-percent rate gain and the unrecaptured section 1250 
     gain. The net capital gain is reduced by the amount of gain 
     that the individual treats as investment income for purposes 
     of determining the investment interest limitation under 
     section 163(d).

[[Page H4635]]

       The term ``28-percent rate gain'' means the amount of net 
     gain attributable to long-term capital gains and losses from 
     the sale or exchange of collectibles (as defined in section 
     408(m) without regard to paragraph (3) thereof), an amount of 
     gain equal to the amount of gain excluded from gross income 
     under section 1202 (relating to certain small business 
     stock),\33\ the net short-term capital loss for the taxable 
     year, and any long-term capital loss carryover to the taxable 
     year.
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     \33\ This results in a maximum effective regular tax rate on 
     qualified gain from small business stock of 14 percent.
---------------------------------------------------------------------------
       ``Unrecaptured section 1250 gain'' means any long-term 
     capital gain from the sale or exchange of section 1250 
     property (i.e., depreciable real estate) held more than one 
     year to the extent of the gain that would have been treated 
     as ordinary income if section 1250 applied to all 
     depreciation, reduced by the net loss (if any) attributable 
     to the items taken into account in computing 28-percent rate 
     gain. The amount of unrecaptured section 1250 gain (before 
     the reduction for the net loss) attributable to the 
     disposition of property to which section 1231 applies shall 
     not exceed the net section 1231 gain for the year.
       The unrecaptured section 1250 gain is taxed at a maximum 
     rate of 25 percent, and the 28-percent rate gain is taxed at 
     a maximum rate of 28 percent. Any amount of unrecaptured 
     section 1250 gain or 28-percent rate gain otherwise taxed at 
     a 15-percent rate is taxed at the 15-percent rate.
       Any gain from the sale or exchange of property held more 
     than five years that would otherwise be taxed at the 10-
     percent rate is taxed at an 8-percent rate. Any gain from the 
     sale or exchange of property held more than five years and 
     the holding period for which begins after December 31, 2000, 
     which would otherwise be taxed at a 20-percent rate is taxed 
     at an 18-percent rate.


                               House Bill

       The House bill reduces the 10- and 20 percent rates on the 
     adjusted net capital gain to five and 15 percent, 
     respectively. These lower rates apply to both the regular tax 
     and the alternative minimum tax. The lower rates apply to 
     assets held more than one year.
       Effective date.--The provision applies to taxable years 
     ending on or after May 6, 2003, and beginning before January 
     1, 2013. For taxable years that include May 6, 2003, the 
     lower rates apply to amounts properly taken into account for 
     the portion of the year on or after that date. This generally 
     has the effect of applying the lower rates to capital assets 
     sold or exchanged (and installment payments received) on or 
     after May 6, 2003. In the case of gain and loss taken into 
     account by a pass-through entity, the date taken into account 
     by the entity is the appropriate date for applying this rule.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the 5-percent tax rate is reduced to zero percent for 
     taxable years beginning after December 31, 2007.
       Effective date.--The effective date is the same as the 
     House bill, except that the provision does not apply to 
     taxable years beginning after December 31, 2008.

 B. Treatment of Dividend Income of Individuals (Sec. 302 of the House 
   Bill, Sec. 201 of the Senate Amendment, and Sec. 1(h) of the Code)


                              Present Law

       Under present law, dividends received by an individual are 
     included in gross income and taxed as ordinary income at 
     rates up to 38.6 percent.\34\
---------------------------------------------------------------------------
     \34\ Section 105 of the bill reduces the maximum rate to 35 
     percent.
---------------------------------------------------------------------------
       The rate of tax on the net capital gain of an individual 
     generally is 20 percent (10 percent \35\ with respect to 
     income which would otherwise be taxed at the 10- or 15-
     percent rate).\36\ Net capital gain means net gain from the 
     sale or exchange of capital assets held for more than one 
     year in excess of net loss from the sale or exchange of 
     capital assets held not more than one year.
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     \35\ An eight percent rate applies to property held more than 
     five years.
     \36\ Section 301 of the bill reduces the capital gain rates 
     to five percent (zero percent for taxable years beginning 
     after 2007) and 15 percent, respectively.
---------------------------------------------------------------------------


                               House Bill

       Under the House bill, dividends received by an individual 
     shareholder from domestic corporations are taxed at the same 
     rates that apply to net capital gain. This treatment applies 
     for purposes of both the regular tax and the alternative 
     minimum tax. Thus, under the provision, dividends will be 
     taxed at rates of five and 15 percent.\37\
---------------------------------------------------------------------------
     \37\ Payments in lieu of dividends are not eligible for the 
     exclusion. See sections 6042(a) and 6045(d) relating to 
     statements required to be furnished by brokers regarding 
     these payments.
---------------------------------------------------------------------------
       If a shareholder does not hold a share of stock for more 
     than 45 days during the 90-day period beginning 45 days 
     before the ex-dividend date (as measured under section 
     246(c)),\38\ dividends received on the stock are not eligible 
     for the reduced rates. Also, the reduced rates are not 
     available for dividends to the extent that the taxpayer is 
     obligated to make related payments with respect to positions 
     in substantially similar or related property.
---------------------------------------------------------------------------
     \38\ In the case of preferred stock, the periods are doubled.
---------------------------------------------------------------------------
       If an individual receives an extraordinary dividend (within 
     the meaning of section 1059(c)) eligible for the reduced 
     rates with respect to any share of stock, any loss on the 
     sale of the stock is treated as a long-term capital loss to 
     the extent of the dividend.
       A dividend is treated as investment income for purposes of 
     determining the amount of deductible investment interest only 
     if the taxpayer elects to treat the dividend as not eligible 
     for the reduced rates.
       The amount of dividends qualifying for reduced rates that 
     may be paid by a regulated investment company (``RIC'') or 
     real estate investment trust (``REIT''), for any taxable year 
     that the aggregate qualifying dividends received by the RIC 
     or REIT are less than 95 percent of its gross income (as 
     specially computed), may not exceed the amount of the 
     aggregate qualifying dividends received by the company or 
     trust.
       The reduced rates do not apply to dividends received from 
     an organization that was exempt from tax under section 501 or 
     was a tax-exempt farmers' cooperative in either the taxable 
     year of the distribution or the preceding taxable year; 
     dividends received from a mutual savings bank that received a 
     deduction under section 591; or deductible dividends paid on 
     employer securities.
       The tax rate for the accumulated earnings tax (sec. 531) 
     and the personal holding company tax (sec. 541) is reduced to 
     15 percent.
       Amounts treated as ordinary income on the disposition of 
     certain preferred stock (sec. 306) are treated as dividends 
     for purposes of applying the reduced rates.
       The collapsible corporation rules (sec. 341) are repealed.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002, and beginning before 
     January 1, 2013.


                            Senate Amendment

       Under the Senate amendment, an individual may exclude from 
     gross income dividends received with respect to stock of a 
     domestic corporation, and stock of a foreign corporation that 
     is regularly tradable on an established securities market.
       For taxable years beginning in 2003, 50 percent of the 
     dividend may be excluded from income. For taxable years 
     beginning after 2006, the exclusion no longer applies.
       If a shareholder does not hold a share of stock for more 
     than 45 days during the 90-day period beginning 45 days 
     before the ex-dividend date (as measured under section 
     246(c)),\39\ dividends received on the stock are not eligible 
     for the exclusion. Also, the exclusion is not available for 
     dividends to the extent that the taxpayer is obligated to 
     make related payments with respect to positions in 
     substantially similar or related property.
---------------------------------------------------------------------------
     \39\ In the case of preferred stock, the periods are doubled.
---------------------------------------------------------------------------
       If an individual receives an extraordinary dividend (within 
     the meaning of section 1059(c)) eligible for the exclusion 
     with respect to any share of stock, the basis of the share is 
     reduced by the amount of the dividend excludable from income.
       A dividend is treated as investment income for purposes of 
     determining the amount of deductible investment interest only 
     if the taxpayer elects to treat the dividend as not eligible 
     for the exclusion.
       The amount of dividends qualifying for the exclusion that 
     may be paid by a RIC or REIT, for any taxable year that the 
     aggregate qualifying dividends received by the company or 
     trust are less than 95 percent of its gross income (as 
     specially computed), may not exceed the amount of such 
     aggregate dividends received by the company or trust.
       The exclusion does not apply to dividends received from an 
     organization that was exempt from tax under section 501 or 
     was a tax-exempt farmers' cooperative in either the taxable 
     year of the distribution or the preceding taxable year; 
     dividends received from a mutual savings bank that received a 
     deduction under section 591; deductible dividends paid on 
     employer securities; or dividends received from a foreign 
     corporation that was a foreign investment company (a defined 
     in section 1246(b)), a passive foreign investment company (as 
     defined in section 1297), or a foreign personal holding 
     company (as defined in section 552) in either the taxable 
     year of the distribution or the preceding taxable year.
       In the case of a nonresident alien, the exclusion applies 
     only for purposes of determining the taxes imposed pursuant 
     to sections 871(b) and 877.
       No foreign tax credit, or deduction with respect to taxes 
     paid, is allowable with respect to dividends excluded under 
     this provision.
       Dividends excluded under the proposal are included in 
     modified adjusted gross income for purposes of the provisions 
     of the Code determining the amount of any income inclusion, 
     exclusion, deduction or credit based on the amount of that 
     income.\40\ Also in determining eligibility for the earned 
     income credit, any dividends excluded from gross income under 
     this provision are included in disqualified income for 
     purposes of the determining whether the individual has 
     excessive investment income.
---------------------------------------------------------------------------
     \40\ These provisions include sections 86, 135, 137, 219, 
     221, 222, 408A, 469, 530, and the nonrefundable personal 
     credits.
---------------------------------------------------------------------------
       The tax rate for the accumulated earnings tax (sec. 531) 
     and the personal holding company tax (sec. 541) is the 
     taxable percent (i.e., 100 percent less the excludable 
     percentage applicable to dividends received in the

[[Page H4636]]

     taxable year) of the highest individual tax rate.
       Amounts treated as ordinary income on the disposition of 
     certain preferred stock (sec. 306) are treated as dividends 
     for purposes of the exclusion.
       The collapsible corporation rules (sec. 341) are repealed.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002.


                          Conference Agreement

       The conference agreement follows the House bill taxing 
     dividends at the same rates as net capital gain with the 
     following modifications:
       The 45-day holding period requirement is increased to 60 
     days during the 120-day period beginning 60 days before the 
     ex-dividend date.
       Qualified dividend income includes otherwise qualified 
     dividends received from qualified foreign corporations. The 
     term ``qualified foreign corporation'' includes a foreign 
     corporation that is eligible for the benefits of a 
     comprehensive income tax treaty with the United States which 
     the Treasury Department determines to be satisfactory for 
     purposes of this provision, and which includes an exchange of 
     information program. The conferees do not believe that the 
     current income tax treaty between the United States and 
     Barbados is satisfactory for this purpose because that treaty 
     may operate to provide benefits that are intended for the 
     purpose of mitigating or eliminating double taxation to 
     corporations that are not at risk of double taxation. The 
     conferees intend that, until the Treasury Department issues 
     guidance regarding the determination of treaties as 
     satisfactory for this purpose, a foreign corporation will be 
     considered to be a qualified foreign corporation if it is 
     eligible for the benefits of a comprehensive income tax 
     treaty with the United States that includes an exchange of 
     information program other than the current U.S.-Barbados 
     income tax treaty. The conferees further intend that a 
     company will be eligible for benefits of a comprehensive 
     income tax treaty within the meaning of this provision if it 
     would qualify for the benefits of the treaty with respect to 
     substantially all of its income in the taxable year in which 
     the dividend is paid.
       In addition, a foreign corporation is treated as a 
     qualified foreign corporation with respect to any dividend 
     paid by the corporation with respect to stock that is readily 
     tradable on an established securities market in the United 
     States.\41\
---------------------------------------------------------------------------
     \41\ For this purpose, a share shall be treated as so traded 
     if an American Depository Receipt (ADR) backed by such share 
     is so traded.
---------------------------------------------------------------------------
       Dividends received from a foreign corporation that was a 
     foreign investment company (as defined in section 1246(b)), a 
     passive foreign investment company (as defined in section 
     1297), or a foreign personal holding company (as defined in 
     section 552) in either the taxable year of the distribution 
     or the preceding taxable year are not qualified dividends.
       Special rules apply in determining a taxpayer's foreign tax 
     credit limitation under section 904 in the case of qualified 
     dividend income. For these purposes, rules similar to the 
     rules of section 904(b)(2)(B) concerning adjustments to the 
     foreign tax credit limitation to reflect any capital gain 
     rate differential will apply to any qualified dividend 
     income. Additionally, it is anticipated that regulations 
     promulgated under this provision will coordinate the 
     operation of the rules applicable to qualified dividend 
     income and capital gain.
       In the case of a REIT, an amount equal to the excess of the 
     income subject to the taxes imposed by section 857(b)(1) and 
     the regulations prescribed under section 337(d) for the 
     preceding taxable year over the amount of these taxes for the 
     preceding taxable year is treated as qualified dividend 
     income.
       In the case of brokers and dealers who engage in securities 
     lending transactions, short sales, or other similar 
     transactions on behalf of their customers in the normal 
     course of their trade or business, the conferees intend that 
     the IRS will exercise its authority under section 6724(a) to 
     waive penalties where dealers and brokers attempt in good 
     faith to comply with the information reporting requirements 
     under sections 6042 and 6045, but are unable to reasonably 
     comply because of the period necessary to conform their 
     information reporting systems to the retroactive rate 
     reductions on qualified dividends provided by the conference 
     agreement. In addition, the conferees expect that individual 
     taxpayers who receive payments in lieu of dividends from 
     these transactions may treat the payments as dividend income 
     to the extent that the payments are reported to them as 
     dividend income on their Forms 1099-DIV received for calendar 
     year 2003, unless they know or have reason to know that the 
     payments are in fact payments in lieu of dividends rather 
     than actual dividends. The conferees expect that the Treasury 
     Department will issue guidance as rapidly as possible on 
     information reporting with respect to payments in lieu of 
     dividends made to individuals.
       The conference agreement provides that the amendment to 
     section 306 treating certain ordinary income as a dividend 
     for purposes of the rate computation under section 1(h) may 
     also apply to such other provisions as the Secretary may 
     provide, including provisions at the corporate level.
       Effective date.--The conference agreement applies to 
     taxable years beginning after December 31, 2002, and 
     beginning before January 1, 2009.

                     IV. Corporate Estimated Taxes

 A. Modification to Corporate Estimated Tax Requirements (Sec. 401 of 
                            the House Bill)


                              Present Law

       In general, corporations are required to make quarterly 
     estimated tax payments of their income tax liability (section 
     6655). 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.


                               House Bill

       With respect to corporate estimated tax payments due on 
     September 15, 2003, 52 percent is required to be paid by 
     October 1, 2003.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       With respect to corporate estimated tax payments due on 
     September 15, 2003, 25 percent is required to be paid by 
     October 1, 2003.
       Effective date.--The provision is effective on the date of 
     enactment.

                         V. Revenue Provisions

             A. Provisions Designed To Curtail Tax Shelters

     1. Clarification of the economic substance doctrine (sec. 301 
         of the Senate amendment and sec. 7701 of the Code)


                              Present Law

     In general
       The Code provides specific rules regarding the computation 
     of taxable income, including the amount, timing, source, and 
     character of items of income, gain, loss and deduction. These 
     rules are designed to provide for the computation of taxable 
     income in a manner that provides for a degree of specificity 
     to both taxpayers and the government. Taxpayers generally may 
     plan their transactions in reliance on these rules to 
     determine the federal income tax consequences arising from 
     the transactions.
       In addition to the statutory provisions, courts have 
     developed several doctrines that can be applied to deny the 
     tax benefits of tax motivated transactions, notwithstanding 
     that the transaction may satisfy the literal requirements of 
     a specific tax provision. The common-law doctrines are not 
     entirely distinguishable, and their application to a given 
     set of facts is often blurred by the courts and the IRS. 
     Although these doctrines serve an important role in the 
     administration of the tax system, invocation of these 
     doctrines can be seen as at odds with an objective, ``rule-
     based'' system of taxation. Nonetheless, courts have applied 
     the doctrines to deny tax benefits arising from certain 
     transactions.\42\
---------------------------------------------------------------------------
     \42\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 
     (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. 
     denied 526 U.S. 1017 (1999).
---------------------------------------------------------------------------
       A common-law doctrine applied with increasing frequency is 
     the ``economic substance'' doctrine. In general, this 
     doctrine denies tax benefits arising from transactions that 
     do not result in a meaningful change to the taxpayer's 
     economic position other than a purported reduction in federal 
     income tax.\43\
---------------------------------------------------------------------------
     \43\ Closely related doctrines also applied by the courts 
     (sometimes interchangeable with the economic substance 
     doctrine) include the ``sham transaction doctrine'' and the 
     ``business purpose doctrine''. See, e.g., Knetsch v. United 
     States, 364 U.S. 361 (1960) (denying interest deductions on a 
     ``sham transaction'' whose only purpose was to create the 
     deductions).
---------------------------------------------------------------------------
       Economic substance doctrine
       Courts generally deny claimed tax benefits if the 
     transaction that gives rise to those benefits lacks economic 
     substance independent of tax considerations--notwithstanding 
     that the purported activity actually occurred. The tax court 
     has described the doctrine as follows:

       The tax law * * * requires that the intended transactions 
     have economic substance separate and distinct from economic 
     benefit achieved solely by tax reduction. The doctrine of 
     economic substance becomes applicable, and a judicial remedy 
     is warranted, where a taxpayer seeks to claim tax benefits, 
     unintended by Congress, by means of transactions that serve 
     no economic purpose other than tax savings.\44\
---------------------------------------------------------------------------
     \44\ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
---------------------------------------------------------------------------
       Business purpose doctrine
       Another common law doctrine that overlays and is often 
     considered together with (if not part and parcel of) the 
     economic substance doctrine is the business purpose doctrine. 
     The business purpose test is a subjective inquiry into the 
     motives of the taxpayer--that is, whether the taxpayer 
     intended the transaction to serve some useful non-tax 
     purpose. In making this determination, some courts have 
     bifurcated a transaction in which independent activities with 
     non-tax objectives have been combined with an unrelated item 
     having only tax-avoidance objectives in order to disallow the 
     tax benefits of the overall transaction.\45\
---------------------------------------------------------------------------
     \45\ ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
---------------------------------------------------------------------------
     Application by the courts
       Elements of the doctrine
       There is a lack of uniformity regarding the proper 
     application of the economic substance doctrine. Some courts 
     apply a conjunctive test that requires a taxpayer to 
     establish the

[[Page H4637]]

     presence of both economic substance (i.e., the objective 
     component) and business purpose (i.e., the subjective 
     component) in order for the transaction to sustain court 
     scrutiny.\46\ A narrower approach used by some courts is to 
     invoke the economic substance doctrine only after a 
     determination that the transaction lacks both a business 
     purpose and economic substance (i.e., the existence of either 
     a business purpose or economic substance would be sufficient 
     to respect the transaction).\47\ A third approach regards 
     economic substance and business purpose as ``simply more 
     precise factors to consider'' in determining whether a 
     transaction has any practical economic effects other than the 
     creation of tax benefits.\48\
---------------------------------------------------------------------------
     \46\ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 
     (6th Cir. 1993) (``The threshold question is whether the 
     transaction has economic substance. If the answer is yes, the 
     question becomes whether the taxpayer was motivated by profit 
     to participate in the transaction.'')
     \47\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 
     89, 91-92 (4th Cir. 1985) (``To treat a transaction as a 
     sham, the court must find that the taxpayer was motivated by 
     no business purposes other than obtaining tax benefits in 
     entering the transaction, and, second, that the transaction 
     has no economic substance because no reasonable possibility 
     of a profit exists.''); IES Industries v. United States, 253 
     F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
     transaction is a sham for tax purposes [under the Eighth 
     Circuit test], a transaction will be characterized as a sham 
     if it is not motivated by any economic purpose out of tax 
     considerations (the business purpose test), and if it is 
     without economic substance because no real potential for 
     profit exists'' (the economic substance test).'') As noted 
     earlier, the economic substance doctrine and the sham 
     transaction doctrine are similar and sometimes are applied 
     interchangeably. For a more detailed discussion of the sham 
     transaction doctrine, see, e.g., Joint Committee on Taxation, 
     Study of Present-Law Penalty and Interest Provisions as 
     Required by Section 3801 of the Internal Revenue Service 
     Restructuring and Reform Act of 1998 (including Provisions 
     Relating to Corporate Tax Shelters) (JCS-3-99) at 182.
     \48\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 
     247; James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 
     1995); Sacks v. Commissioner, 69 F.3d 982, 985 (9th Cir. 
     1995) (``Instead, the consideration of business purpose and 
     economic substance are simply more precise factors to 
     consider . . . .We have repeatedly and carefully noted that 
     this formulation cannot be used as a `rigid two-step 
     analysis'.'').
---------------------------------------------------------------------------
       Profit potential
       There also is a lack of uniformity regarding the necessity 
     and level of profit potential necessary to establish economic 
     substance. Since the time of Gregory, several courts have 
     denied tax benefits on the grounds that the subject 
     transactions lacked profit potential.\49\ In addition, some 
     courts have applied the economic substance doctrine to 
     disallow tax benefits in transactions in which a taxpayer was 
     exposed to risk and the transaction had a profit potential, 
     but the court concluded that the economic risks and profit 
     potential were insignificant when compared to the tax 
     benefits.\50\ Under this analysis, the taxpayer's profit 
     potential must be more than nominal. Conversely, other courts 
     view the application of the economic substance doctrine as 
     requiring an objective determination of whether a 
     ``reasonable possibility of profit'' from the transaction 
     existed apart from the tax benefits.\51\ In these cases, in 
     assessing whether a reasonable possibility of profit exists, 
     it is sufficient if there is a nominal amount of pre-tax 
     profit as measured against expected net tax benefits.
---------------------------------------------------------------------------
     \49\ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
     Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
     unprofitable, leveraged acquisition of Treasury bills, and 
     accompanying prepaid interest deduction, lacked economic 
     substance); Ginsburg v. Commissioner, 35 T.C.M. (CCH) 860 
     (1976) (holding that a leveraged cattle-breeding program 
     lacked economic substance).
     \50\ See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 
     (disallowing deduction even though taxpayer had a possibility 
     of small gain or loss by owning Treasury bills); Sheldon v. 
     Commissioner, 94 T.C. 738, 768 (1990) (stating, ``potential 
     for gain . . . is infinitesimally nominal and vastly 
     insignificant when considered in comparison with the claimed 
     deductions'').
     \51\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 
     at 94 (the economic substance inquiry requires an objective 
     determination of whether a reasonable possibility of profit 
     from the transaction existed apart from tax benefits); Compaq 
     Computer Corp. v. Commissioner, 277 F.3d at 781 (applied the 
     same test, citing Rice's Toyota World); IES Industries v. 
     United States, 253 F.3d at 354 (the application of the 
     objective economic substance test involves determining 
     whether there was a ``reasonable possibility of profit . . . 
     apart from tax benefits.'').
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment clarifies and enhances the application 
     of the economic substance doctrine. The Senate amendment 
     provides that a transaction has economic substance (and thus 
     satisfies the economic substance doctrine) only if the 
     taxpayer establishes that (1) the transaction changes in a 
     meaningful way (apart from Federal income tax consequences) 
     the taxpayer's economic position, and (2) the taxpayer has a 
     substantial non-tax purpose for entering into such 
     transaction and the transaction is a reasonable means of 
     accomplishing such purpose.\52\
---------------------------------------------------------------------------
     \52\ If the tax benefits are clearly contemplated and 
     expected by the language and purpose of the relevant 
     authority, it is not intended that such tax benefits be 
     disallowed if the only reason for such disallowance is that 
     the transaction fails the economic substance doctrine as 
     defined in this provision.
---------------------------------------------------------------------------
       The Senate amendment does not change current law standards 
     used by courts in determining when to utilize an economic 
     substance analysis. Also, the Senate amendment does not alter 
     the court's ability to aggregate or disaggregate a 
     transaction when applying the doctrine. The Senate amendment 
     provides a uniform definition of economic substance, but does 
     not alter court flexibility in other respects.
     Conjunctive analysis
       The Senate amendment clarifies that the economic substance 
     doctrine involves a conjunctive analysis--there must be an 
     objective inquiry regarding the effects of the transaction on 
     the taxpayer's economic position, as well as a subjective 
     inquiry regarding the taxpayer's motives for engaging in the 
     transaction. Under the Senate amendment, a transaction must 
     satisfy both tests--i.e., it must change in a meaningful way 
     (apart from Federal income tax consequences) the taxpayer's 
     economic position, and the taxpayer must have a substantial 
     non-tax purpose for entering into such transaction (and the 
     transaction is a reasonable means of accomplishing such 
     purpose)--in order to satisfy the economic substance 
     doctrine. This clarification eliminates the disparity that 
     exists among the circuits regarding the application of the 
     doctrine, and modifies its application in those circuits in 
     which either a change in economic position or a non-tax 
     business purpose (without having both) is sufficient to 
     satisfy the economic substance doctrine.
     Non-tax business purpose
       The Senate amendment provides that a taxpayer's non-tax 
     purpose for entering into a transaction (the second prong in 
     the analysis) must be ``substantial,'' and that the 
     transaction must be ``a reasonable means'' of accomplishing 
     such purpose. Under this formulation, the non-tax purpose for 
     the transaction must bear a reasonable relationship to the 
     taxpayer's normal business operations or investment 
     activities.\53\
---------------------------------------------------------------------------
     \53\ See, Martin McMahon Jr., Economic Substance, Purposive 
     Activity, and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 
     (Feb. 25, 2002) (advocates ``confining the most rigorous 
     application of business purpose, economic substance, and 
     purposive activity tests to transactions outside the ordinary 
     course of the taxpayer's business--those transactions that do 
     not appear to contribute to any business activity or 
     objective that the taxpayer may have had apart from tax 
     planning but are merely loss generators.''); Mark P. Gergen, 
     The Common Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 
     (Winter 2001) (``The message is that you can pick up tax gold 
     if you find it in the street while going about your business, 
     but you cannot go hunting for it.'').
---------------------------------------------------------------------------
       In determining whether a taxpayer has a substantial non-tax 
     business purpose, an objective of achieving a favorable 
     accounting treatment for financial reporting purposes will 
     not be treated as having a substantial non-tax purpose if the 
     origin of such financial accounting benefit is a reduction of 
     income tax. Furthermore, a transaction that is expected to 
     increase financial accounting income as a result of 
     generating tax deductions or losses without a corresponding 
     financial accounting charge (i.e., a permanent book-tax 
     difference) \54\ should not be considered to have a 
     substantial non-tax purpose unless a substantial non-tax 
     purpose exists apart from the financial accounting 
     benefits.\55\
---------------------------------------------------------------------------
     \54\ This includes tax deductions or losses that are 
     anticipated to be recognized in a period subsequent to the 
     period the financial accounting benefit is recognized. For 
     example, FAS 109 in some cases permits the recognition of 
     financial accounting benefits prior to the period in which 
     the tax benefits are recognized for income tax purposes.
     \55\ Claiming that a financial accounting benefit constitutes 
     a substantial non-tax purpose fails to consider the origin of 
     the accounting benefit (i.e., reduction of taxes) and 
     significantly diminishes the purpose for having a substantial 
     non-tax purpose requirement. See, e.g., American Electric 
     Power, Inc. v. U.S., 136 F. Supp. 2d 762, 791-92 (S.D. Ohio, 
     2001), aff'd by 2003 Fed. App. para. 0125 (CCH) (6th Cir. 
     2003) (``AEP's intended use of the cash flows generated by 
     the [corporate-owned life insurance] plan is irrelevant to 
     the subjective prong of the economic substance analysis. If a 
     legitimate business purpose for the use of the tax savings 
     ``were sufficient to breathe substance into a transaction 
     whose only purpose was to reduce taxes, [then] every sham 
     tax-shelter device might succeed,'' citing Winn-Dixie v. 
     Commissioner, 113 T.C. 254, 287 (1999)).
---------------------------------------------------------------------------
       By requiring that a transaction be a ``reasonable means'' 
     of accomplishing its non-tax purpose, the Senate amendment 
     broadens the ability of the courts to bifurcate a transaction 
     in which independent activities with non-tax objectives are 
     combined with an unrelated item having only tax-avoidance 
     objectives in order to disallow the tax benefits of the 
     overall transaction.
     Profit potential
       Under the Senate amendment, a taxpayer may rely on factors 
     other than profit potential to demonstrate that a transaction 
     results in a meaningful change in the taxpayer's economic 
     position; the Senate amendment merely sets forth a minimum 
     threshold of profit potential if that test is relied on to 
     demonstrate a meaningful change in economic position. If a 
     taxpayer relies on a profit potential, however, the present 
     value of the reasonably expected pre-tax profit must be 
     substantial in relation to the present value of the expected 
     net tax benefits that would be allowed if the transaction 
     were respected.\56\ Moreover, the profit potential must 
     exceed a risk-free rate of return. In addition, in 
     determining pre-tax profit, fees and other transaction 
     expenses and foreign taxes are treated as expenses.
---------------------------------------------------------------------------
     \56\ Thus, a ``reasonable possibility of profit'' will not be 
     sufficient to establish that a transaction has economic 
     substance.
---------------------------------------------------------------------------
       A lessor of tangible property subject to a qualified lease 
     shall be considered to have

[[Page H4638]]

     satisfied the profit test with respect to the leased 
     property. For this purpose, a ``qualified lease'' is a lease 
     that satisfies the factors for advance ruling purposes as 
     provided by the Treasury Department.\57\ In applying the 
     profit test to the lessor of tangible property, certain 
     deductions and other applicable tax credits (such as the 
     rehabilitation tax credit and the low income housing tax 
     credit) are not taken into account in measuring tax benefits. 
     Thus, a traditional leveraged lease is not affected by the 
     Senate amendment to the extent it meets the present law 
     standards.
---------------------------------------------------------------------------
     \57\ See Rev. Proc. 2001-28, 2001-19 I.R.B. 1156 which 
     provides guidelines that must be present for a lease to be 
     eligible for advance ruling purposes. It is intended that a 
     lease that satisfies Treasury Department guidelines for 
     advance ruling purposes would be treated as a qualified 
     lease.
---------------------------------------------------------------------------
     Transactions with tax-indifferent parties
       The Senate amendment also provides special rules for 
     transactions with tax-indifferent parties. For this purpose, 
     a tax-indifferent party means any person or entity not 
     subject to Federal income tax, or any person to whom an item 
     would have no substantial impact on its income tax liability. 
     Under these rules, the form of a financing transaction will 
     not be respected if the present value of the tax deductions 
     to be claimed is substantially in excess of the present value 
     of the anticipated economic returns to the lender. Also, the 
     form of a transaction with a tax-indifferent party will not 
     be respected if it results in an allocation of income or gain 
     to the tax-indifferent party in excess of the tax-indifferent 
     party's economic gain or income or if the transaction results 
     in the shifting of basis on account of overstating the income 
     or gain of the tax-indifferent party.
     Other rules
       The Secretary may prescribe regulations which provide (1) 
     exemptions from the application of the Senate amendment, and 
     (2) other rules as may be necessary or appropriate to carry 
     out the purposes of the Senate amendment.
       No inference is intended as to the proper application of 
     the economic substance doctrine under present law. In 
     addition, except with respect to the economic substance 
     doctrine, the Senate amendment shall not be construed as 
     altering or supplanting any other common law doctrine 
     (including the sham transaction doctrine), and the Senate 
     amendment shall be construed as being additive to any such 
     other doctrine.
     Effective date
       The provision applies to transactions entered into on or 
     after May 8, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Penalty for failure to disclose reportable transactions 
         (sec. 302 of the Senate amendment and sec. 6707A of the 
         Code)


                              Present Law

       Regulations under section 6011 require a taxpayer to 
     disclose with its tax return certain information with respect 
     to each ``reportable transaction'' in which the taxpayer 
     participates.\58\
---------------------------------------------------------------------------
     \58\ On February 27, 2003, the Treasury Department and the 
     IRS released final regulations regarding the disclosure of 
     reportable transactions. In general, the regulations are 
     effective for transactions entered into on or after February 
     28, 2003.
     The discussion of present law refers to the new regulations. 
     The rules that apply with respect to transactions entered 
     into on or before February 28, 2003, are contained in Treas. 
     Reg. sec. 1.6011-4T in effect on the date the transaction was 
     entered into.
---------------------------------------------------------------------------
       There are six categories of reportable transactions. The 
     first category is any transaction that is the same as (or 
     substantially similar to)\59\ a transaction that is specified 
     by the Treasury Department as a tax avoidance transaction 
     whose tax benefits are subject to disallowance under present 
     law (referred to as a ``listed transaction'').\60\
---------------------------------------------------------------------------
     \59\ The regulations clarify that the term ``substantially 
     similar'' includes any transaction that is expected to obtain 
     the same or similar types of tax consequences and that is 
     either factually similar or based on the same or similar tax 
     strategy. Further, the term must be broadly construed in 
     favor of disclosure. Treas. Reg. sec. 1-6011-4(c)(4).
     \60\ Treas. Reg. sec. 1.6011-4(b)(2).
---------------------------------------------------------------------------
       The second category is any transaction that is offered 
     under conditions of confidentiality. In general, if a 
     taxpayer's disclosure of the structure or tax aspects of the 
     transaction is limited in any way by an express or implied 
     understanding or agreement with or for the benefit of any 
     person who makes or provides a statement, oral or written, as 
     to the potential tax consequences that may result from the 
     transaction, it is considered offered under conditions of 
     confidentiality (whether or not the understanding is legally 
     binding).\61\
---------------------------------------------------------------------------
     \61\ Treas. Reg. sec. 1.6011-4(b)(3).
---------------------------------------------------------------------------
       The third category of reportable transactions is any 
     transaction for which (1) the taxpayer has the right to a 
     full or partial refund of fees if the intended tax 
     consequences from the transaction are not sustained or, (2) 
     the fees are contingent on the intended tax consequences from 
     the transaction being sustained.\62\
---------------------------------------------------------------------------
     \62\ Treas. Reg. sec. 1.6011-4(b)(4).
---------------------------------------------------------------------------
       The fourth category of reportable transactions relates to 
     any transaction resulting in a taxpayer claiming a loss 
     (under section 165) of at least (1) $10 million in any single 
     year or $20 million in any combination of years by a 
     corporate taxpayer or a partnership with only corporate 
     partners; (2) $2 million in any single year or $4 million in 
     any combination of years by all other partnerships, S 
     corporations, trusts, and individuals; or (3) $50,000 in any 
     single year for individuals or trusts if the loss arises with 
     respect to foreign currency translation losses.\63\
---------------------------------------------------------------------------
     \63\ Treas. Reg. sec. 1.6011-4(b)(5). IRS Rev. Proc. 2003-24, 
     2003-11 I.R.B. 599, exempts certain types of losses from this 
     reportable transaction category.
---------------------------------------------------------------------------
       The fifth category of reportable transactions refers to any 
     transaction done by certain taxpayers \64\ in which the tax 
     treatment of the transaction differs (or is expected to 
     differ) by more than $10 million from its treatment for book 
     purposes (using generally accepted accounting principles) in 
     any year.\65\
---------------------------------------------------------------------------
     \64\ The significant book-tax category applies only to 
     taxpayers that are reporting companies under the Securities 
     Exchange Act of 1934 or business entities that have $250 
     million or more in gross assets.
     \65\ Treas. Reg. sec. 1.6011-4(b)(6). IRS Rev. Proc. 2003-25, 
     2003-11 I.R.B. 601, exempts certain types of transactions 
     from this reportable transaction category.
---------------------------------------------------------------------------
       The final category of reportable transactions is any 
     transaction that results in a tax credit exceeding $250,000 
     (including a foreign tax credit) if the taxpayer holds the 
     underlying asset for less than 45 days.\66\
---------------------------------------------------------------------------
     \66\ Treas. Reg. sec. 1.6011-4(b)(7).
---------------------------------------------------------------------------
       Under present law, there is no specific penalty for failing 
     to disclose a reportable transaction; however, such a failure 
     may jeopardize a taxpayer's ability to claim that any income 
     tax understatement attributable to such undisclosed 
     transaction is due to reasonable cause, and that the taxpayer 
     acted in good faith.\67\
---------------------------------------------------------------------------
     \67\ Section 6664(c) provides that a taxpayer can avoid the 
     imposition of a section 6662 accuracy-related penalty in 
     cases where the taxpayer can demonstrate that there was 
     reasonable cause for the underpayment and that the taxpayer 
     acted in good faith. On December 31, 2002, the Treasury 
     Department and IRS issued proposed regulations under sections 
     6662 and 6664 (REG-126016-01) that limit the defenses 
     available to the imposition of an accuracy-related penalty in 
     connection with a reportable transaction when the transaction 
     is not disclosed.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

     In general
       The Senate amendment creates a new penalty for any person 
     who fails to include with any return or statement any 
     required information with respect to a reportable 
     transaction. The new penalty applies without regard to 
     whether the transaction ultimately results in an 
     understatement of tax, and applies in addition to any 
     accuracy-related penalty that may be imposed.
     Transactions to be disclosed
       The Senate amendment does not define the terms ``listed 
     transaction'' \68\ or ``reportable transaction,'' nor does 
     the Senate amendment explain the type of information that 
     must be disclosed in order to avoid the imposition of a 
     penalty. Rather, the Senate amendment authorizes the Treasury 
     Department to define a ``listed transaction'' and a 
     ``reportable transaction'' under section 6011.
---------------------------------------------------------------------------
     \68\ The provision states that, except as provided in 
     regulations, a listed transaction means a reportable 
     transaction, which is the same as, or substantially similar 
     to, a transaction specifically identified by the Secretary as 
     a tax avoidance transaction for purposes of section 6011. For 
     this purpose, it is expected that the definition of 
     ``substantially similar'' will be the definition used in 
     Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may 
     modify this definition (as well as the definitions of 
     ``listed transaction'' and ``reportable transactions'') as 
     appropriate.
---------------------------------------------------------------------------
     Penalty rate
       The penalty for failing to disclose a reportable 
     transaction is $50,000. The amount is increased to $100,000 
     if the failure is with respect to a listed transaction. For 
     large entities and high net worth individuals, the penalty 
     amount is doubled (i.e., $100,000 for a reportable 
     transaction and $200,000 for a listed transaction). The 
     penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the penalty can 
     be rescinded (or abated) only if: (1) the taxpayer on whom 
     the penalty is imposed has a history of complying with the 
     Federal tax laws, (2) it is shown that the violation is due 
     to an unintentional mistake of fact, (3) imposing the penalty 
     would be against equity and good conscience, and (4) 
     rescinding the penalty would promote compliance with the tax 
     laws and effective tax administration. The authority to 
     rescind the penalty can only be exercised by the IRS 
     Commissioner personally or the head of the Office of Tax 
     Shelter Analysis. Thus, the penalty cannot be rescinded by a 
     revenue agent, an Appeals officer, or any other IRS 
     personnel. The decision to rescind a penalty must be 
     accompanied by a record describing the facts and reasons for 
     the action and the amount rescinded. There will be no 
     taxpayer right to appeal a refusal to rescind a penalty. The 
     IRS also is required to submit an annual report to Congress 
     summarizing the application of the disclosure penalties and 
     providing a description of each penalty rescinded under this 
     provision and the reasons for the rescission.
       A ``large entity'' is defined as any entity with gross 
     receipts in excess of $10 million in the year of the 
     transaction or in the preceding year. A ``high net worth 
     individual'' is defined as any individual whose net worth 
     exceeds $2 million, based on the fair market value of the 
     individual's assets and liabilities immediately before 
     entering into the transaction.
       A public entity that is required to pay a penalty for 
     failing to disclose a listed transaction (or is subject to an 
     understatement

[[Page H4639]]

     penalty attributable to a non-disclosed listed transaction, a 
     non-disclosed reportable avoidance transaction,\69\ or a 
     transaction that lacks economic substance) must disclose the 
     imposition of the penalty in reports to the Securities and 
     Exchange Commission for such period as the Secretary shall 
     specify. The provision applies without regard to whether the 
     taxpayer determines the amount of the penalty to be material 
     to the reports in which the penalty must appear, and treats 
     any failure to disclose a transaction in such reports as a 
     failure to disclose a listed transaction. A taxpayer must 
     disclose a penalty in reports to the Securities and Exchange 
     Commission once the taxpayer has exhausted its administrative 
     and judicial remedies with respect to the penalty (or if 
     earlier, when paid).
---------------------------------------------------------------------------
     \69\ A reportable avoidance transaction is a reportable 
     transaction with a significant tax avoidance purpose.
---------------------------------------------------------------------------
     Effective date
       The provision is effective for returns and statements the 
     due date for which is after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Modifications to the accuracy-related penalties for listed 
         transactions and reportable transactions having a 
         significant tax avoidance purpose (sec. 303 of the Senate 
         amendment and sec. 6662A of the Code)


                              Present Law

       The accuracy-related penalty applies to the portion of any 
     underpayment that is attributable to (1) negligence, (2) any 
     substantial understatement of income tax, (3) any substantial 
     valuation misstatement, (4) any substantial overstatement of 
     pension liabilities, or (5) any substantial estate or gift 
     tax valuation understatement. If the correct income tax 
     liability exceeds that reported by the taxpayer by the 
     greater of 10 percent of the correct tax or $5,000 ($10,000 
     in the case of corporations), then a substantial 
     understatement exists and a penalty may be imposed equal to 
     20 percent of the underpayment of tax attributable to the 
     understatement.\70\ The amount of any understatement 
     generally is reduced by any portion attributable to an item 
     if (1) the treatment of the item is supported by substantial 
     authority, or (2) facts relevant to the tax treatment of the 
     item were adequately disclosed and there was a reasonable 
     basis for its tax treatment.\71\
---------------------------------------------------------------------------
     \70\ Sec. 6662.
     \71\ Sec. 6662(d)(2)(B).
---------------------------------------------------------------------------
       Special rules apply with respect to tax shelters.\72\ For 
     understatements by non-corporate taxpayers attributable to 
     tax shelters, the penalty may be avoided only if the taxpayer 
     establishes that, in addition to having substantial authority 
     for the position, the taxpayer reasonably believed that the 
     treatment claimed was more likely than not the proper 
     treatment of the item. This reduction in the penalty is 
     unavailable to corporate tax shelters.
---------------------------------------------------------------------------
     \72\ Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
       The understatement penalty generally is abated (even with 
     respect to tax shelters) in cases in which the taxpayer can 
     demonstrate that there was ``reasonable cause'' for the 
     underpayment and that the taxpayer acted in good faith.\73\ 
     The relevant regulations provide that reasonable cause exists 
     where the taxpayer ``reasonably relies in good faith on an 
     opinion based on a professional tax advisor's analysis of the 
     pertinent facts and authorities [that] * * * unambiguously 
     concludes that there is a greater than 50-percent likelihood 
     that the tax treatment of the item will be upheld if 
     challenged'' by the IRS.\74\
---------------------------------------------------------------------------
     \73\ Sec. 6664(c).
     \74\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
     1.6664-4(c).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            senate amendment

     In general
       The Senate amendment modifies the present-law accuracy 
     related penalty by replacing the rules applicable to tax 
     shelters with a new accuracy-related penalty that applies to 
     listed transactions and reportable transactions with a 
     significant tax avoidance purpose (hereinafter referred to as 
     a ``reportable avoidance transaction'').\75\ The penalty rate 
     and defenses available to avoid the penalty vary depending on 
     whether the transaction was adequately disclosed.
---------------------------------------------------------------------------
     \75\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meanings as used for purposes of 
     the penalty for failing to disclose reportable transactions.
---------------------------------------------------------------------------
       Disclosed transactions
       In general, a 20-percent accuracy-related penalty is 
     imposed on any understatement attributable to an adequately 
     disclosed listed transaction or reportable avoidance 
     transaction. The only exception to the penalty is if the 
     taxpayer satisfies a more stringent reasonable cause and good 
     faith exception (hereinafter referred to as the 
     ``strengthened reasonable cause exception''), which is 
     described below. The strengthened reasonable cause exception 
     is available only if the relevant facts affecting the tax 
     treatment are adequately disclosed, there is or was 
     substantial authority for the claimed tax treatment, and the 
     taxpayer reasonably believed that the claimed tax treatment 
     was more likely than not the proper treatment.
       Undisclosed transactions
       If the taxpayer does not adequately disclose the 
     transaction, the strengthened reasonable cause exception is 
     not available (i.e., a strict-liability penalty applies), and 
     the taxpayer is subject to an increased penalty rate equal to 
     30 percent of the understatement.
       In addition, a public entity that is required to pay the 30 
     percent penalty must disclose the imposition of the penalty 
     in reports to the SEC for such periods as the Secretary shall 
     specify. The disclosure to the SEC applies without regard to 
     whether the taxpayer determines the amount of the penalty to 
     be material to the reports in which the penalty must appear, 
     and any failure to disclose such penalty in the reports is 
     treated as a failure to disclose a listed transaction. A 
     taxpayer must disclose a penalty in reports to the SEC once 
     the taxpayer has exhausted its administrative and judicial 
     remedies with respect to the penalty (or if earlier, when 
     paid).
       Once the 30 percent penalty has been included in the 
     Revenue Agent Report, the penalty cannot be compromised for 
     purposes of a settlement without approval of the Commissioner 
     personally or the head of the Office of Tax Shelter Analysis. 
     Furthermore, the IRS is required to submit an annual report 
     to Congress summarizing the application of this penalty and 
     providing a description of each penalty compromised under 
     this provision and the reasons for the compromise.
     Determination of the understatement amount
       The penalty is applied to the amount of any understatement 
     attributable to the listed or reportable avoidance 
     transaction without regard to other items on the tax return. 
     For purposes of the Senate amendment, the amount of the 
     understatement is determined as the sum of (1) the product of 
     the highest corporate or individual tax rate (as appropriate) 
     and the increase in taxable income resulting from the 
     difference between the taxpayer's treatment of the item and 
     the proper treatment of the item (without regard to other 
     items on the tax return),\76\ and (2) the amount of any 
     decrease in the aggregate amount of credits which results 
     from a difference between the taxpayer's treatment of an item 
     and the proper tax treatment of such item.
---------------------------------------------------------------------------
     \76\ For this purpose, any reduction in the excess of 
     deductions allowed for the taxable year over gross income for 
     such year, and any reduction in the amount of capital losses 
     which would (without regard to section 1211) be allowed for 
     such year, shall be treated as an increase in taxable income.
---------------------------------------------------------------------------
       Except as provided in regulations, a taxpayer's treatment 
     of an item shall not take into account any amendment or 
     supplement to a return if the amendment or supplement is 
     filed after the earlier of when the taxpayer is first 
     contacted regarding an examination of the return or such 
     other date as specified by the Secretary.
     Strengthened reasonable cause exception
       A penalty is not imposed under the Senate amendment with 
     respect to any portion of an understatement if it show that 
     there was reasonable cause for such portion and the taxpayer 
     acted in good faith. Such a showing requires (1) adequate 
     disclosure of the facts affecting the transaction in 
     accordance with the regulations under section 6011,\77\ (2) 
     that there is or was substantial authority for such 
     treatment, and (3) that the taxpayer reasonably believed that 
     such treatment was more likely than not the proper treatment. 
     For this purpose, a taxpayer will be treated as having a 
     reasonable belief with respect to the tax treatment of an 
     item only if such belief (1) is based on the facts and law 
     that exist at the time the tax return (that includes the 
     item) is filed, and (2) relates solely to the taxpayer's 
     chances of success on the merits and does not take into 
     account the possibility that (a) a return will not be 
     audited, (b) the treatment will not be raised on audit, or 
     (c) the treatment will be resolved through settlement if 
     raised.
---------------------------------------------------------------------------
     \77\ See the previous discussion regarding the penalty for 
     failing to disclose a reportable transaction.
---------------------------------------------------------------------------
       A taxpayer may (but is not required to) rely on an opinion 
     of a tax advisor in establishing its reasonable belief with 
     respect to the tax treatment of the item. However, a taxpayer 
     may not rely on an opinion of a tax advisor for this purpose 
     if the opinion (1) is provided by a ``disqualified tax 
     advisor,'' or (2) is a ``disqualified opinion.''
       Disqualified tax advisor
       A disqualified tax advisor is any advisor who (1) is a 
     material advisor \78\ and who participates in the 
     organization, management, promotion or sale of the 
     transaction or is related (within the meaning of section 267 
     or 707) to any person who so participates, (2) is compensated 
     directly or indirectly \79\ by a

[[Page H4640]]

     material advisor with respect to the transaction, (3) has a 
     fee arrangement with respect to the transaction that is 
     contingent on all or part of the intended tax benefits from 
     the transaction being sustained, or (4) as determined under 
     regulations prescribed by the Secretary, has a continuing 
     financial interest with respect to the transaction.
---------------------------------------------------------------------------
     \78\ The term ``material advisor'' (defined below in 
     connection with the new information filing requirements for 
     material advisors) means any person who provides any material 
     aid, assistance, or advice with respect to organizing, 
     promoting, selling, implementing, or carrying out any 
     reportable transaction, and who derives gross income in 
     excess of $50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons ($250,000 in any other case).
     \79\ This situation could arise, for example, when an advisor 
     has an arrangement or understanding (oral or written) with an 
     organizer, manager, or promoter of a reportable transaction 
     that such party will recommend or refer potential 
     participants to the advisor for an opinion regarding the tax 
     treatment of the transaction.
---------------------------------------------------------------------------
       A material advisor is considered as participating in the 
     ``organization'' of a transaction if the advisor performs 
     acts relating to the development of the transaction. This may 
     include, for example, preparing documents (1) establishing a 
     structure used in connection with the transaction (such as a 
     partnership agreement), (2) describing the transaction (such 
     as an offering memorandum or other statement describing the 
     transaction), or (3) relating to the registration of the 
     transaction with any federal, state or local government 
     body.\80\ Participation in the ``management'' of a 
     transaction means involvement in the decision-making process 
     regarding any business activity with respect to the 
     transaction. Participation in the ``promotion or sale'' of a 
     transaction means involvement in the marketing or 
     solicitation of the transaction to others. Thus, an advisor 
     who provides information about the transaction to a potential 
     participant is involved in the promotion or sale of a 
     transaction, as is any advisor who recommends the transaction 
     to a potential participant.
---------------------------------------------------------------------------
     \80\ An advisor should not be treated as participating in the 
     organization of a transaction if the advisor's only 
     involvement with respect to the organization of the 
     transaction is the rendering of an opinion regarding the tax 
     consequences of such transaction. However, such an advisor 
     may be a ``disqualified tax advisor'' with respect to the 
     transaction if the advisor participates in the management, 
     promotion or sale of the transaction (or if the advisor is 
     compensated by a material advisor, has a fee arrangement that 
     is contingent on the tax benefits of the transaction, or as 
     determined by the Secretary, has a continuing financial 
     interest with respect to the transaction).
---------------------------------------------------------------------------
       Disqualified opinion
       An opinion may not be relied upon if the opinion (1) is 
     based on unreasonable factual or legal assumptions (including 
     assumptions as to future events), (2) unreasonably relies 
     upon representations, statements, finding or agreements of 
     the taxpayer or any other person, (3) does not identify and 
     consider all relevant facts, or (4) fails to meet any other 
     requirement prescribed by the Secretary.
     Coordination with other penalties
       Any understatement upon which a penalty is imposed under 
     this provision is not subject to the accuracy-related penalty 
     under section 6662. However, such understatement is included 
     for purposes of determining whether any understatement (as 
     defined in sec. 6662(d)(2)) is a substantial understatement 
     as defined under section 6662(d)(1).
       The penalty imposed under this provision shall not apply to 
     any portion of an understatement to which a fraud penalty is 
     applied under section 6663.
     Effective date
       The provision is effective for taxable years ending after 
     the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Penalty for understatements from transactions lacking 
         economic substance (sec. 304 of the Senate amendment and 
         sec. 6662B of the Code)


                              Present Law

       An accuracy-related penalty applies to the portion of any 
     underpayment that is attributable to (1) negligence, (2) any 
     substantial understatement of income tax, (3) any substantial 
     valuation misstatement, (4) any substantial overstatement of 
     pension liabilities, or (5) any substantial estate or gift 
     tax valuation understatement. If the correct income tax 
     liability exceeds that reported by the taxpayer by the 
     greater of 10 percent of the correct tax or $5,000 ($10,000 
     in the case of corporations), then a substantial 
     understatement exists and a penalty may be imposed equal to 
     20 percent of the underpayment of tax attributable to the 
     understatement.\81\ The amount of any understatement is 
     reduced by any portion attributable to an item if (1) the 
     treatment of the item is supported by substantial authority, 
     or (2) facts relevant to the tax treatment of the item were 
     adequately disclosed and there was a reasonable basis for its 
     tax treatment.
---------------------------------------------------------------------------
     \81\ Sec. 6662.
---------------------------------------------------------------------------
       Special rules apply with respect to tax shelters.\82\ For 
     understatements by non-corporate taxpayers attributable to 
     tax shelters, the penalty may be avoided only if the taxpayer 
     establishes that, in addition to having substantial authority 
     for the position, the taxpayer reasonably believed that the 
     treatment claimed was more likely than not the proper 
     treatment of the item. This reduction in the penalty is 
     unavailable to corporate tax shelters.
---------------------------------------------------------------------------
     \82\ Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
       The penalty generally is abated (even with respect to tax 
     shelters) in cases in which the taxpayer can demonstrate that 
     there was ``reasonable cause'' for the underpayment and that 
     the taxpayer acted in good faith. \83\ The relevant 
     regulations provide that reasonable cause exists where the 
     taxpayer ``reasonably relies in good faith on an opinion 
     based on a professional tax advisor's analysis of the 
     pertinent facts and authorities [that] . . . unambiguously 
     concludes that there is a greater than 50-percent likelihood 
     that the tax treatment of the item will be upheld if 
     challenged'' by the IRS. \84\
---------------------------------------------------------------------------
     \83\ Sec. 6664(c).
     \84\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
     1.6664-4(c).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment imposes a penalty for an 
     understatement attributable to any transaction that lacks 
     economic substance (referred to in the statute as a ``non-
     economic substance transaction understatement'').\85\ The 
     penalty rate is 40 percent (reduced to 20 percent if the 
     taxpayer adequately discloses the relevant facts in 
     accordance with regulations prescribed under section 6011). 
     No exceptions (including the reasonable cause or rescission 
     rules) to the penalty would be available under the Senate 
     amendment (i.e., the penalty is a strict-liability penalty).
---------------------------------------------------------------------------
     \85\ Thus, unlike the new accuracy-related penalty under 
     section 6662A (which applies only to listed and reportable 
     avoidance transactions), the new penalty under this provision 
     applies to any transaction that lacks economic substance.
---------------------------------------------------------------------------
       A ``non-economic substance transaction'' means any 
     transaction if (1) the transaction lacks economic substance 
     (as defined in the earlier Senate amendment provision 
     regarding the economic substance doctrine),\86\ (2) the 
     transaction was not respected under the rules relating to 
     transactions with tax-indifferent parties (as described in 
     the earlier Senate amendment provision regarding the economic 
     substance doctrine),\87\ or (3) any similar rule of law. For 
     this purpose, a similar rule of law would include, for 
     example, an understatement attributable to a transaction that 
     is determined to be a sham transaction.
---------------------------------------------------------------------------
     \86\ The provision provides that a transaction has economic 
     substance only if: (1) the transaction changes in a 
     meaningful way (apart from Federal income tax effects) the 
     taxpayer's economic position, and (2) the transaction has a 
     substantial non-tax purpose for entering into such 
     transaction and is a reasonable means of accomplishing such 
     purpose.
     \87\ The provision provides that the form of a transaction 
     that involves a tax-indifferent party will not be respected 
     in certain circumstances.
---------------------------------------------------------------------------
       For purposes of the Senate amendment, the calculation of an 
     ``understatement'' is made in the same manner as in the 
     separate Senate amendment provision relating to accuracy-
     related penalties for listed and reportable avoidance 
     transactions (new sec. 6662A). Thus, the amount of the 
     understatement under the Senate amendment would be determined 
     as the sum of (1) the product of the highest corporate or 
     individual tax rate (as appropriate) and the increase in 
     taxable income resulting from the difference between the 
     taxpayer's treatment of the item and the proper treatment of 
     the item (without regard to other items on the tax 
     return),\88\ and (2) the amount of any decrease in the 
     aggregate amount of credits which results from a difference 
     between the taxpayer's treatment of an item and the proper 
     tax treatment of such item. In essence, the penalty will 
     apply to the amount of any understatement attributable solely 
     to a non-economic substance transaction.
---------------------------------------------------------------------------
     \88\ For this purpose, any reduction in the excess of 
     deductions allowed for the taxable year over gross income for 
     such year, and any reduction in the amount of capital losses 
     that would (without regard to section 1211) be allowed for 
     such year, would be treated as an increase in taxable income.
---------------------------------------------------------------------------
       Except as provided in regulations, the taxpayer's treatment 
     of an item will not take into account any amendment or 
     supplement to a return if the amendment or supplement is 
     filed after the earlier of the date the taxpayer is first 
     contacted regarding an examination of the return or such 
     other date as specified by the Secretary.
       A public entity that is required to pay a penalty under the 
     Senate amendment (regardless of whether the transaction was 
     disclosed) must disclose the imposition of the penalty in 
     reports to the SEC for such periods as the Secretary shall 
     specify. The disclosure to the SEC applies without regard to 
     whether the taxpayer determines the amount of the penalty to 
     be material to the reports in which the penalty must appear, 
     and any failure to disclose such penalty in the reports is 
     treated as a failure to disclose a listed transaction. A 
     taxpayer must disclose a penalty in reports to the SEC once 
     the taxpayer has exhausted its administrative and judicial 
     remedies with respect to the penalty (or if earlier, when 
     paid).
       Once a penalty (regardless of whether the transaction was 
     disclosed) has been included in the Revenue Agent Report, the 
     penalty cannot be compromised for purposes of a settlement 
     without approval of the Commissioner personally or the head 
     of the Office of Tax Shelter Analysis. Furthermore, the IRS 
     is required to submit an annual report to Congress 
     summarizing the application of this penalty and providing a 
     description of each penalty compromised under this provision 
     and the reasons for the compromise.
       Any understatement to which a penalty is imposed under the 
     Senate amendment will not be subject to the accuracy-related 
     penalty under section 6662 or under new 6662A (accuracy-
     related penalties for listed and reportable avoidance 
     transactions). However, an understatement under this 
     provision would be taken into account for purposes of 
     determining whether any understatement (as defined in sec. 
     6662(d)(2)) is a substantial understatement as defined under 
     section 6662(d)(1). The penalty imposed under this

[[Page H4641]]

     provision will not apply to any portion of an understatement 
     to which a fraud penalty is applied under section 6663.
       Effective date.--The provision applies to transactions 
     entered into on or after May 8, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Modifications to the substantial understatement penalty 
         (sec. 305 of the Senate amendment and sec. 6662 of the 
         Code)


                              Present Law

     Definition of substantial understatement
       An accuracy-related penalty equal to 20 percent applies to 
     any substantial understatement of tax. A ``substantial 
     understatement'' exists if the correct income tax liability 
     for a taxable year exceeds that reported by the taxpayer by 
     the greater of 10 percent of the correct tax or $5,000 
     ($10,000 in the case of most corporations).\89\
---------------------------------------------------------------------------
     \89\ Sec. 6662(a) and (d)(1)(A).
---------------------------------------------------------------------------
     Reduction of understatement for certain positions
       For purposes of determining whether a substantial 
     understatement penalty applies, the amount of any 
     understatement generally is reduced by any portion 
     attributable to an item if (1) the treatment of the item is 
     supported by substantial authority, or (2) facts relevant to 
     the tax treatment of the item were adequately disclosed and 
     there was a reasonable basis for its tax treatment.\90\
---------------------------------------------------------------------------
     \90\ Sec. 6662(d)(2)(B).
---------------------------------------------------------------------------
       The Secretary is required to publish annually in the 
     Federal Register a list of positions for which the Secretary 
     believes there is not substantial authority and which affect 
     a significant number of taxpayers.\91\
---------------------------------------------------------------------------
     \91\ Sec. 6662(d)(2)(D).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Definition of substantial understatement
       The Senate amendment modifies the definition of 
     ``substantial'' for corporate taxpayers. Under the Senate 
     amendment, a corporate taxpayer has a substantial 
     understatement if the amount of the understatement for the 
     taxable year exceeds the lesser of (1) 10 percent of the tax 
     required to be shown on the return for the taxable year (or, 
     if greater, $10,000), or (2) $10 million.
     Reduction of understatement for certain positions
       The Senate amendment elevates the standard that a taxpayer 
     must satisfy in order to reduce the amount of an 
     understatement for undisclosed items. With respect to the 
     treatment of an item whose facts are not adequately 
     disclosed, a resulting understatement is reduced only if the 
     taxpayer had a reasonable belief that the tax treatment was 
     more likely than not the proper treatment. The Senate 
     amendment also authorizes (but does not require) the 
     Secretary to publish a list of positions for which it 
     believes there is not substantial authority or there is no 
     reasonable belief that the tax treatment is more likely than 
     not the proper treatment (without regard to whether such 
     positions affect a significant number of taxpayers). The list 
     shall be published in the Federal Register or the Internal 
     Revenue Bulletin.
     Effective date
       The provision is effective for taxable years beginning 
     after date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Tax shelter exception to confidentiality privileges 
         relating to taxpayer communications (sec. 306 of the 
         Senate amendment and sec. 7525 of the Code)


                              Present Law

       In general, a common law privilege of confidentiality 
     exists for communications between an attorney and client with 
     respect to the legal advice the attorney gives the client. 
     The Code provides that, with respect to tax advice, the same 
     common law protections of confidentiality that apply to a 
     communication between a taxpayer and an attorney also apply 
     to a communication between a taxpayer and a federally 
     authorized tax practitioner to the extent the communication 
     would be considered a privileged communication if it were 
     between a taxpayer and an attorney. This rule is inapplicable 
     to communications regarding corporate tax shelters.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the rule relating to 
     corporate tax shelters by making it applicable to all tax 
     shelters, whether entered into by corporations, individuals, 
     partnerships, tax-exempt entities, or any other entity. 
     Accordingly, communications with respect to tax shelters are 
     not subject to the confidentiality provision of the Code that 
     otherwise applies to a communication between a taxpayer and a 
     federally authorized tax practitioner.
       Effective date.--The provision is effective with respect to 
     communications made on or after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Disclosure of reportable transactions by material advisors 
         (secs. 307 and 308 of the Senate amendment and secs. 6111 
         and 6707 of the Code)


                              Present Law

     Registration of tax shelter arrangements
       An organizer of a tax shelter is required to register the 
     shelter with the Secretary not later than the day on which 
     the shelter is first offered for sale.\92\ A ``tax shelter'' 
     means any investment with respect to which the tax shelter 
     ratio \93\ for any investor as of the close of any of the 
     first five years ending after the investment is offered for 
     sale may be greater than two to one and which is: (1) 
     required to be registered under Federal or State securities 
     laws, (2) sold pursuant to an exemption from registration 
     requiring the filing of a notice with a Federal or State 
     securities agency, or (3) a substantial investment (greater 
     than $250,000 and at least five investors).\94\
---------------------------------------------------------------------------
     \92\ Sec. 6111(a).
     \93\ The tax shelter ratio is, with respect to any year, the 
     ratio that the aggregate amount of the deductions and 350 
     percent of the credits, which are represented to be 
     potentially allowable to any investor, bears to the 
     investment base (money plus basis of assets contributed) as 
     of the close of the tax year.
     \94\ Sec. 6111(c).
---------------------------------------------------------------------------
       Other promoted arrangements are treated as tax shelters for 
     purposes of the registration requirement if: (1) a 
     significant purpose of the arrangement is the avoidance or 
     evasion of Federal income tax by a corporate participant; (2) 
     the arrangement is offered under conditions of 
     confidentiality; and (3) the promoter may receive fees in 
     excess of $100,000 in the aggregate.\95\
---------------------------------------------------------------------------
     \95\ Sec. 6111(d).
---------------------------------------------------------------------------
       In general, a transaction has a ``significant purpose of 
     avoiding or evading Federal income tax'' if the transaction: 
     (1) is the same as or substantially similar to a ``listed 
     transaction,''\96\ or (2) is structured to produce tax 
     benefits that constitute an important part of the intended 
     results of the arrangement and the promoter reasonably 
     expects to present the arrangement to more than one 
     taxpayer.\97\ Certain exceptions are provided with respect to 
     the second category of transactions.\98\
---------------------------------------------------------------------------
     \96\ Treas. Reg. sec. 301.6111-2(b)(2).
     \97\ Treas. Reg. sec. 301.6111-2(b)(3).
     \98\ Treas. Reg. sec. 301.6111-2(b)(4).
---------------------------------------------------------------------------
       An arrangement is offered under conditions of 
     confidentiality if: (1) an offeree has an understanding or 
     agreement to limit the disclosure of the transaction or any 
     significant tax features of the transaction; or (2) the 
     promoter knows, or has reason to know that the offeree's use 
     or disclosure of information relating to the transaction is 
     limited in any other manner.\99\
---------------------------------------------------------------------------
     \99\ The regulations provide that the determination of 
     whether an arrangement is offered under conditions of 
     confidentiality is based on all the facts and circumstances 
     surrounding the offer. If an offeree's disclosure of the 
     structure or tax aspects of the transaction are limited in 
     any way by an express or implied understanding or agreement 
     with or for the benefit of a tax shelter promoter, an offer 
     is considered made under conditions of confidentiality, 
     whether or not such understanding or agreement is legally 
     binding. Treas. Reg. sec. 301.6111-2(c)(1).
---------------------------------------------------------------------------
     Failure to register tax shelter
       The penalty for failing to timely register a tax shelter 
     (or for filing false or incomplete information with respect 
     to the tax shelter registration) generally is the greater of 
     one percent of the aggregate amount invested in the shelter 
     or $500.\100\ However, if the tax shelter involves an 
     arrangement offered to a corporation under conditions of 
     confidentiality, the penalty is the greater of $10,000 or 50 
     percent of the fees payable to any promoter with respect to 
     offerings prior to the date of late registration. Intentional 
     disregard of the requirement to register increases the 
     penalty to 75 percent of the applicable fees.
---------------------------------------------------------------------------
     \100\ Sec. 6707.
---------------------------------------------------------------------------
       Section 6707 also imposes (1) a $100 penalty on the 
     promoter for each failure to furnish the investor with the 
     required tax shelter identification number, and (2) a $250 
     penalty on the investor for each failure to include the tax 
     shelter identification number on a return.


                               House Bill

       No provision.


                            Senate Amendment

     Disclosure of reportable transactions by material advisors
       The Senate amendment repeals the present law rules with 
     respect to registration of tax shelters. Instead, the Senate 
     amendment requires each material advisor with respect to any 
     reportable transaction (including any listed transaction) 
     \101\ to timely file an information return with the Secretary 
     (in such form and manner as the Secretary may prescribe). The 
     return must be filed on such date as specified by the 
     Secretary.
---------------------------------------------------------------------------
     \101\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meaning as previously described 
     in connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
       The information return will include (1) information 
     identifying and describing the transaction, (2) information 
     describing any potential tax benefits expected to result from 
     the transaction, and (3) such other information as the 
     Secretary may prescribe. It is expected that the Secretary 
     may seek from the material advisor the same type of 
     information that the Secretary may request from a taxpayer in 
     connection with a reportable transaction.\102\
---------------------------------------------------------------------------
     \102\ See the previous discussion regarding the disclosure 
     requirements under new section 6707A.

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

[[Page H4642]]

       A ``material advisor'' means any person (1) who provides 
     material aid, assistance, or advice with respect to 
     organizing, promoting, selling, implementing, or carrying out 
     any reportable transaction, and (2) who directly or 
     indirectly derives gross income in excess of $250,000 
     ($50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons) for such advice or assistance.
       The Secretary may prescribe regulations which provide (1) 
     that only one material advisor has to file an information 
     return in cases in which two or more material advisors would 
     otherwise be required to file information returns with 
     respect to a particular reportable transaction, (2) 
     exemptions from the requirements of this section, and (3) 
     other rules as may be necessary or appropriate to carry out 
     the purposes of this section (including, for example, rules 
     regarding the aggregation of fees in appropriate 
     circumstances).
     Penalty for failing to furnish information regarding 
         reportable transactions
       The Senate amendment repeals the present law penalty for 
     failure to register tax shelters. Instead, the Senate 
     amendment imposes a penalty on any material advisor who fails 
     to file an information return, or who files a false or 
     incomplete information return, with respect to a reportable 
     transaction (including a listed transaction).\103\ The amount 
     of the penalty is $50,000. If the penalty is with respect to 
     a listed transaction, the amount of the penalty is increased 
     to the greater of (1) $200,000, or (2) 50 percent of the 
     gross income of such person with respect to aid, assistance, 
     or advice which is provided with respect to the transaction 
     before the date the information return that includes the 
     transaction is filed. Intentional disregard by a material 
     advisor of the requirement to disclose a listed transaction 
     increases the penalty to 75 percent of the gross income.
---------------------------------------------------------------------------
     \103\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meaning as previously described 
     in connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
       The penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the penalty can 
     be rescinded (or abated) only in exceptional 
     circumstances.\104\ All or part of the penalty may be 
     rescinded only if: (1) the material advisor on whom the 
     penalty is imposed has a history of complying with the 
     Federal tax laws, (2) it is shown that the violation is due 
     to an unintentional mistake of fact, (3) imposing the penalty 
     would be against equity and good conscience, and (4) 
     rescinding the penalty would promote compliance with the tax 
     laws and effective tax administration. The authority to 
     rescind the penalty can only be exercised by the Commissioner 
     personally or the head of the Office of Tax Shelter Analysis; 
     this authority to rescind cannot otherwise be delegated by 
     the Commissioner. Thus, the penalty cannot be rescinded by a 
     revenue agent, an Appeals officer, or other IRS personnel. 
     The decision to rescind a penalty must be accompanied by a 
     record describing the facts and reasons for the action and 
     the amount rescinded. There will be no right to appeal a 
     refusal to rescind a penalty. The IRS also is required to 
     submit an annual report to Congress summarizing the 
     application of the disclosure penalties and providing a 
     description of each penalty rescinded under this provision 
     and the reasons for the rescission.
---------------------------------------------------------------------------
     \104\ The Secretary's present-law authority to postpone 
     certain tax-related deadlines because of Presidentially-
     declared disasters (sec. 7508A) will also encompass the 
     authority to postpone the reporting deadlines established by 
     the provision.
---------------------------------------------------------------------------
     Effective date
       The Senate amendment requiring disclosure of reportable 
     transactions by material advisors applies to transactions 
     with respect to which material aid, assistance or advice is 
     provided after the date of enactment. The Senate amendment 
     imposing a penalty for failing to disclose reportable 
     transactions applies to returns the due date for which is 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Investor lists and modification of penalty for failure to 
         maintain investor lists (secs. 307 and 309 of the Senate 
         amendment and secs. 6112 and 6708 of the Code)


                              Present Law

     Investor lists
       Any organizer or seller of a potentially abusive tax 
     shelter must maintain a list identifying each person who was 
     sold an interest in any such tax shelter with respect to 
     which registration was required under section 6111 (even 
     though the particular party may not have been subject to 
     confidentiality restrictions).\105\ Recently issued 
     regulations under section 6112 contain rules regarding the 
     list maintenance requirements.\106\ In general, the 
     regulations apply to transactions that are potentially 
     abusive tax shelters entered into, or acquired after, 
     February 28, 2003.\107\
---------------------------------------------------------------------------
     \105\ Sec. 6112.
     \106\ Treas. Reg. sec. 301-6112-1.
     \107\ A special rule applies the list maintenance 
     requirements to transactions entered into after February 28, 
     2000 if the transaction becomes a listed transaction (as 
     defined in Treas. Reg. 1.6011-4) after February 28, 2003.
---------------------------------------------------------------------------
       The regulations provide that a person is an organizer or 
     seller of a potentially abusive tax shelter if the person is 
     a material advisor with respect to that transaction.\108\ A 
     material advisor is defined any person who is required to 
     register the transaction under section 6111, or expects to 
     receive a minimum fee of (1) $250,000 for a transaction that 
     is a potentially abusive tax shelter if all participants are 
     corporations, or (2) $50,000 for any other transaction that 
     is a potentially abusive tax shelter.\109\ For listed 
     transactions (as defined in the regulations under section 
     6011), the minimum fees are reduced to $25,000 and $10,000, 
     respectively.
---------------------------------------------------------------------------
     \108\ Treas. Reg. sec. 301.6112-1(c)(1).
     \109\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
---------------------------------------------------------------------------
       A potentially abusive tax shelter is any transaction that 
     (1) is required to be registered under section 6111, (2) is a 
     listed transaction (as defined under the regulations under 
     section 6011), or (3) any transaction that a potential 
     material advisor, at the time the transaction is entered 
     into, knows is or reasonably expects will become a reportable 
     transaction (as defined under the new regulations under 
     section 6011).\110\
---------------------------------------------------------------------------
     \110\ Treas. Reg. sec. 301.6112-1(b).
---------------------------------------------------------------------------
       The Secretary is required to prescribe regulations which 
     provide that, in cases in which two or more persons are 
     required to maintain the same list, only one person would be 
     required to maintain the list.\111\
---------------------------------------------------------------------------
     \111\ Sec. 6112(c)(2).
---------------------------------------------------------------------------
     Penalty for failing to maintain investor lists
       Under section 6708, the penalty for failing to maintain the 
     list required under section 6112 is $50 for each name omitted 
     from the list (with a maximum penalty of $100,000 per year).


                               House Bill

       No provision.


                            Senate Amendment

     Investor lists
       Each material advisor \112\ with respect to a reportable 
     transaction (including a listed transaction) \113\ is 
     required to maintain a list that (1) identifies each person 
     with respect to whom the advisor acted as a material advisor 
     with respect to the reportable transaction, and (2) contains 
     other information as may be required by the Secretary. In 
     addition, the Senate amendment authorizes (but does not 
     require) the Secretary to prescribe regulations which provide 
     that, in cases in which 2 or more persons are required to 
     maintain the same list, only one person would be required to 
     maintain the list.
---------------------------------------------------------------------------
     \112\ The term ``material advisor'' has the same meaning as 
     when used in connection with the requirement to file an 
     information return under section 6111.
     \113\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meaning as previously described 
     in connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
     Penalty for failing to maintain investor lists
       The Senate amendment modifies the penalty for failing to 
     maintain the required list by making it a time-sensitive 
     penalty. Thus, a material advisor who is required to maintain 
     an investor list and who fails to make the list available 
     upon written request by the Secretary within 20 business days 
     after the request will be subject to a $10,000 per day 
     penalty. The penalty applies to a person who fails to 
     maintain a list, maintains an incomplete list, or has in fact 
     maintained a list but does not make the list available to the 
     Secretary. The penalty can be waived if the failure to make 
     the list available is due to reasonable cause.\114\
---------------------------------------------------------------------------
     \114\ In no event will failure to maintain a list be 
     considered reasonable cause for failing to make a list 
     available to the Secretary.
---------------------------------------------------------------------------
     Effective date
       The Senate amendment requiring a material advisor to 
     maintain an investor list applies to transactions with 
     respect to which material aid, assistance or advice is 
     provided after the date of enactment. The Senate amendment 
     imposing a penalty for failing to maintain investor lists 
     applies to requests made after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Actions to enjoin conduct with respect to tax shelters and 
         reportable transactions (sec. 310 of the Senate amendment 
         and sec. 7408 of the Code)


                              Present Law

       The Code authorizes civil action to enjoin any person from 
     promoting abusive tax shelters or aiding or abetting the 
     understatement of tax liability.\115\
---------------------------------------------------------------------------
     \115\ Sec. 7408.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment expands this rule so that injunctions 
     may also be sought with respect to the requirements relating 
     to the reporting of reportable transactions \116\ and the 
     keeping of lists of investors by material advisors.\117\ 
     Thus, under the Senate amendment, an injunction may be sought 
     against a material advisor to enjoin the advisor from (1) 
     failing to file an information return with respect to a 
     reportable transaction, or (2) failing to maintain, or to 
     timely furnish upon written request by the Secretary, a list

[[Page H4643]]

     of investors with respect to each reportable transaction.
---------------------------------------------------------------------------
     \116\ Sec. 6707, as amended by other provisions of this bill.
     \117\ Sec. 6708, as amended by other provisions of this bill.
---------------------------------------------------------------------------
       Effective date.--The provision is effective on the day 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Understatement of taxpayer's liability by income tax 
         return preparer (sec. 311 of the Senate amendment and 
         sec. 6694 of the Code)


                              Present Law

       An income tax return preparer who prepares a return with 
     respect to which there is an understatement of tax that is 
     due to a position for which there was not a realistic 
     possibility of being sustained on its merits and the position 
     was not disclosed (or was frivolous) is liable for a penalty 
     of $250, provided that the preparer knew or reasonably should 
     have known of the position. An income tax return preparer who 
     prepares a return and engages in specified willful or 
     reckless conduct with respect to preparing such a return is 
     liable for a penalty of $1,000.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment alters the standards of conduct that 
     must be met to avoid imposition of the first penalty. The 
     Senate amendment replaces the realistic possibility standard 
     with a requirement that there be a reasonable belief that the 
     tax treatment of the position was more likely than not the 
     proper treatment. The Senate amendment also replaces the not 
     frivolous standard with the requirement that there be a 
     reasonable basis for the tax treatment of the position.
       In addition, the Senate amendment increases the amount of 
     these penalties. The penalty relating to not having a 
     reasonable belief that the tax treatment was more likely than 
     not the proper tax treatment is increased from $250 to 
     $1,000. The penalty relating to willful or reckless conduct 
     is increased from $1,000 to $5,000.
       Effective date.--The provision is effective for documents 
     prepared after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Penalty for failure to report interests in foreign 
         financial accounts (sec. 312 of the Senate amendment and 
         sec. 5321 of Title 31, United States Code)


                              Present Law

       The Secretary of the Treasury must require citizens, 
     residents, or persons doing business in the United States to 
     keep records and file reports when that person makes a 
     transaction or maintains an account with a foreign financial 
     entity.\118\ In general, individuals must fulfill this 
     requirement by answering questions regarding foreign accounts 
     or foreign trusts that are contained in Part III of Schedule 
     B of the IRS Form 1040. Taxpayers who answer ``yes'' in 
     response to the question regarding foreign accounts must then 
     file Treasury Department Form TD F 90-22.1. This form must be 
     filed with the Department of the Treasury, and not as part of 
     the tax return that is filed with the IRS.
---------------------------------------------------------------------------
     \118\ 31 U.S.C. 5314.
---------------------------------------------------------------------------
       The Secretary of the Treasury may impose a civil penalty on 
     any person who willfully violates this reporting requirement. 
     The civil penalty is the amount of the transaction or the 
     value of the account, up to a maximum of $100,000; the 
     minimum amount of the penalty is $25,000.\119\ In addition, 
     any person who willfully violates this reporting requirement 
     is subject to a criminal penalty. The criminal penalty is a 
     fine of not more than $250,000 or imprisonment for not more 
     than five years (or both); if the violation is part of a 
     pattern of illegal activity, the maximum amount of the fine 
     is increased to $500,000 and the maximum length of 
     imprisonment is increased to 10 years.\120\
---------------------------------------------------------------------------
     \119\ 31 U.S.C. 5321(a)(5).
     \120\ 31 U.S.C. 5322.
---------------------------------------------------------------------------
       On April 26, 2002, the Secretary of the Treasury submitted 
     to the Congress a report on these reporting 
     requirements.\121\ This report, which was statutorily 
     required,\122\ studies methods for improving compliance with 
     these reporting requirements. It makes several administrative 
     recommendations, but no legislative recommendations. A 
     further report was required to be submitted by the Secretary 
     of the Treasury to the Congress by October 26, 2002.
---------------------------------------------------------------------------
     \121\ A Report to Congress in Accordance with Sec. 361(b) of 
     the Uniting and Strengthening America by Providing 
     Appropriate Tools Required to Intercept and Obstruct 
     Terrorism Act of 2001, April 26, 2002.
     \122\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 
     107-56).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment adds an additional civil penalty that 
     may be imposed on any person who violates this reporting 
     requirement (without regard to willfulness). This new civil 
     penalty is up to $5,000. The penalty may be waived if any 
     income from the account was properly reported on the income 
     tax return and there was reasonable cause for the failure to 
     report.
       Effective date.--The provision is effective with respect to 
     failures to report occurring on or after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Frivolous tax returns and submissions (sec. 313 of the 
         Senate amendment and sec. 6702 of the Code)


                              Present Law

       The Code provides that an individual who files a frivolous 
     income tax return is subject to a penalty of $500 imposed by 
     the IRS (sec. 6702). The Code also permits the Tax Court 
     \123\ to impose a penalty of up to $25,000 if a taxpayer has 
     instituted or maintained proceedings primarily for delay or 
     if the taxpayer's position in the proceeding is frivolous or 
     groundless (sec. 6673(a)).
---------------------------------------------------------------------------
     \123\ Because in general the Tax Court is the only pre-
     payment forum available to taxpayers, it deals with most of 
     the frivolous, groundless, or dilatory arguments raised in 
     tax cases.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the IRS-imposed penalty by 
     increasing the amount of the penalty to up to $5,000 and by 
     applying it to all taxpayers and to all types of Federal 
     taxes.
       The Senate amendment also modifies present law with respect 
     to certain submissions that raise frivolous arguments or that 
     are intended to delay or impede tax administration. The 
     submissions to which the Senate amendment applies are 
     requests for a collection due process hearing, installment 
     agreements, offers-in-compromise, and taxpayer assistance 
     orders. First, the Senate amendment permits the IRS to 
     dismiss such requests. Second, the Senate amendment permits 
     the IRS to impose a penalty of up to $5,000 for such 
     requests, unless the taxpayer withdraws the request after 
     being given an opportunity to do so.
       The Senate amendment requires the IRS to publish a list of 
     positions, arguments, requests, and submissions determined to 
     be frivolous for purposes of these provisions.
       Effective date.--The provision is effective for submissions 
     made and issues raised after the date on which the Secretary 
     first prescribes the required list.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     13. Penalties on promoters of tax shelters (sec. 314 of the 
         Senate amendment and sec. 6700 of the Code)


                              Present Law

       A penalty is imposed on any person who organizes, assists 
     in the organization of, or participates in the sale of any 
     interest in, a partnership or other entity, any investment 
     plan or arrangement, or any other plan or arrangement, if in 
     connection with such activity the person makes or furnishes a 
     qualifying false or fraudulent statement or a gross valuation 
     overstatement.\124\ A qualified false or fraudulent statement 
     is any statement with respect to the allowability of any 
     deduction or credit, the excludability of any income, or the 
     securing of any other tax benefit by reason of holding an 
     interest in the entity or participating in the plan or 
     arrangement which the person knows or has reason to know is 
     false or fraudulent as to any material matter. A ``gross 
     valuation overstatement'' means any statement as to the value 
     of any property or services if the stated value exceeds 200 
     percent of the correct valuation, and the value is directly 
     related to the amount of any allowable income tax deduction 
     or credit.
---------------------------------------------------------------------------
     \124\ Sec. 6700.
---------------------------------------------------------------------------
       The amount of the penalty is $1,000 (or, if the person 
     establishes that it is less, 100 percent of the gross income 
     derived or to be derived by the person from such activity). A 
     penalty attributable to a gross valuation misstatement can be 
     waived on a showing that there was a reasonable basis for the 
     valuation and it was made in good faith.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the penalty amount to equal 
     50 percent of the gross income derived by the person from the 
     activity for which the penalty is imposed. The new penalty 
     rate applies to any activity that involves a statement 
     regarding the tax benefits of participating in a plan or 
     arrangement if the person knows or has reason to know that 
     such statement is false or fraudulent as to any material 
     matter. The enhanced penalty does not apply to a gross 
     valuation overstatement.
       Effective date.--The provision is effective for activities 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Extend statute of limitations for certain undisclosed 
         transactions (sec. 315 of the Senate amendment and sec. 
         6501 of the Code)


                              Present Law

       In general, the Code requires that taxes be assessed within 
     three years \125\ after the date a return is filed.\126\ If 
     there has been a substantial omission of items of gross 
     income that total more than 25 percent of the amount of gross 
     income shown on the return,

[[Page H4644]]

     the period during which an assessment must be made is 
     extended to six years.\127\ If an assessment is not made 
     within the required time periods, the tax generally cannot be 
     assessed or collected at any future time. Tax may be assessed 
     at any time if the taxpayer files a false or fraudulent 
     return with the intent to evade tax or if the taxpayer does 
     not file a tax return at all.\128\
---------------------------------------------------------------------------
     \125\ Sec. 6501(a).
     \126\ For this purpose, a return that is filed before the 
     date on which it is due is considered to be filed on the 
     required due date (sec. 6501(b)(1)).
     \127\ Sec. 6501(e).
     \128\ Sec. 6501(c).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the statute of limitations to 
     six years with respect to the entire tax return \129\ if a 
     taxpayer required to disclose a listed transaction \130\ 
     fails to do so in the manner required. For example, if a 
     taxpayer entered into a transaction in 2005 that becomes a 
     listed transaction in 2006 and the taxpayer fails to disclose 
     such transaction in the manner required by Treasury 
     regulations, the 2005 tax return will be subject to a six-
     year statute of limitations.\131\
---------------------------------------------------------------------------
     \129\ The tax year extended is the tax year the transaction 
     is entered into.
     \130\ The term ``listed transaction'' has the same meaning as 
     described in a previous provision regarding the penalty for 
     failure to disclose reportable transactions.
     \131\ However, if the Treasury Department lists a transaction 
     in a year subsequent to the year a taxpayer entered into such 
     transaction, and the taxpayer's tax return for the year the 
     transaction was entered into is closed by the statute of 
     limitations prior to the transaction becoming a listed 
     transaction, this provision does not re-open the statute of 
     limitations for such year.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for 
     transactions entered into in taxable years beginning after 
     the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     15. Deny deduction for interest paid to IRS on underpayments 
         involving certain tax-motivated transactions (sec. 316 of 
         the Senate amendment and sec. 163 of the Code)


                              Present Law

       In general, corporations may deduct interest paid or 
     accrued within a taxable year on indebtedness.\132\ Interest 
     on indebtedness to the Federal government attributable to an 
     underpayment of tax generally may be deducted pursuant to 
     this provision.
---------------------------------------------------------------------------
     \132\ Sec. 163(a).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment disallows any deduction for interest 
     paid or accrued within a taxable year on any portion of an 
     underpayment of tax that is attributable to an understatement 
     arising from (1) an undisclosed reportable avoidance 
     transaction, (2) an undisclosed listed transaction, or (3) a 
     transaction that lacks economic substance.\133\
---------------------------------------------------------------------------
     \133\ The definitions of these transactions are the same as 
     those previously described in connection with the provision 
     to modify the accuracy-related penalty for listed and certain 
     reportable transactions and the provision to impose a penalty 
     on understatements attributable to transactions that lack 
     economic substance.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for 
     underpayments attributable to transactions entered into in 
     taxable years beginning after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

            B. Enron-Related Tax Shelter Related Provisions

     1. Limitation on transfer and importation of built-in losses 
         (sec. 321 of the Senate amendment and secs. 362 and 334 
         of the Code)


                              present law

       Generally, no gain or loss is recognized when one or more 
     persons transfer property to a corporation in exchange for 
     stock and immediately after the exchange such person or 
     persons control the corporation.\134\ The transferor's basis 
     in the stock of the controlled corporation is the same as the 
     basis of the property contributed to the controlled 
     corporation, increased by the amount of any gain (or 
     dividend) recognized by the transferor on the exchange, and 
     reduced by the amount of any money or property received, and 
     by the amount of any loss recognized by the transferor.\135\
---------------------------------------------------------------------------
     \134\ Sec. 351.
     \135\ Sec. 358.
---------------------------------------------------------------------------
       The basis of property received by a corporation, whether 
     from domestic or foreign transferors, in a tax-free 
     incorporation, reorganization, or liquidation of a subsidiary 
     corporation is the same as the adjusted basis in the hands of 
     the transferor, adjusted for gain or loss recognized by the 
     transferor.\136\
---------------------------------------------------------------------------
     \136\ Secs. 334(b) and 362(a) and (b).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

     Importation of built-in losses
       The Senate amendment provides that if a net built-in loss 
     is imported into the U.S in a tax-free organization or 
     reorganization from persons not subject to U.S. tax, the 
     basis of each property so transferred is its fair market 
     value.\137\ A similar rule applies in the case of the tax-
     free liquidation by a domestic corporation of its foreign 
     subsidiary.
---------------------------------------------------------------------------
     \137\ The Senate Amendment also applies to transfers from a 
     tax-exempt organization where gain or loss would not be 
     subject to tax if the property were sold by the organization.
---------------------------------------------------------------------------
       Under the Senate amendment, a net built-in loss is treated 
     as imported into the U.S. if the aggregate adjusted bases of 
     property received by a transferee corporation exceeds the 
     fair market value of the properties transferred. Thus, for 
     example, if in a tax-free incorporation, some properties are 
     received by a corporation from U. S. persons subject to tax, 
     and some properties are received from foreign persons not 
     subject to U.S. tax, this provision applies to limit the 
     adjusted basis of each property received from the foreign 
     persons to the fair market value of the property. In the case 
     of a transfer by a partnership (either domestic or foreign), 
     this provision applies as if the properties had been 
     transferred by each of the partners in proportion to their 
     interests in the partnership.
     Limitation on transfer of built-in-losses in section 351 
         transactions
       The Senate amendment provides that if the aggregate 
     adjusted bases of property contributed by a transferor (or by 
     a control group of which the transferor is a member) to a 
     corporation exceed the aggregate fair market value of the 
     property transferred in a tax-free incorporation, the 
     transferee's aggregate basis of the properties is limited to 
     the aggregate fair market value of the transferred property. 
     Under the Senate amendment, any required basis reduction is 
     allocated among the transferred properties in proportion to 
     their built-in-loss immediately before the transaction. In 
     the case of a transfer in which the transferor owns at least 
     80 percent of the vote and value of the stock of the 
     transferee corporation, any basis reduction required by the 
     provision is made to the stock received by the transferor and 
     not to the assets transferred.
     Effective date
       The provision applies to transactions after February 13, 
     2003.


                           conference report

       The conference agreement does not include the Senate 
     amendment provision.
     2. No reduction of basis under section 734 in stock held by 
         partnership in corporate partner (sec. 322 of the Senate 
         amendment and sec. 755 of the Code)


                              present law

     In general
       Generally, a partner and the partnership do not recognize 
     gain or loss on a contribution of property to a 
     partnership.\138\ Similarly, a partner and the partnership 
     generally do not recognize gain or loss on the distribution 
     of partnership property.\139\ This includes current 
     distributions and distributions in liquidation of a partner's 
     interest.
---------------------------------------------------------------------------
     \138\ Sec. 721(a).
     \139\ Sec. 731(a) and (b).
---------------------------------------------------------------------------
     Basis of property distributed in liquidation
       The basis of property distributed in liquidation of a 
     partner's interest is equal to the partner's tax basis in its 
     partnership interest (reduced by any money distributed in the 
     same transaction).\140\ Thus, the partnership's tax basis in 
     the distributed property is adjusted (increased or decreased) 
     to reflect the partner's tax basis in the partnership 
     interest.
---------------------------------------------------------------------------
     140 Sec. 732(b).
---------------------------------------------------------------------------

            Election to adjust basis of partnership property

       When a partnership distributes partnership property, 
     generally, the basis of partnership property is not adjusted 
     to reflect the effects of the distribution or transfer. The 
     partnership is permitted, however, to make an election 
     (referred to as a 754 election) to adjust the basis of 
     partnership property in the case of a distribution of 
     partnership property.\141\ The effect of the 754 election is 
     that the partnership adjusts the basis of its remaining 
     property to reflect any change in basis of the distributed 
     property in the hands of the distributee partner resulting 
     from the distribution transaction. Such a change could be a 
     basis increase due to gain recognition, or a basis decrease 
     due to the partner's adjusted basis in its partnership 
     interest exceeding the adjusted basis of the property 
     received. If the 754 election is made, it applies to the 
     taxable year with respect to which such election was filed 
     and all subsequent taxable years.
---------------------------------------------------------------------------
     \141\ Sec. 754.
---------------------------------------------------------------------------
       In the case of a distribution of partnership property to a 
     partner with respect to which the 754 election is in effect, 
     the partnership increases the basis of partnership property 
     by (1) any gain recognized by the distributee partner (2) the 
     excess of the adjusted basis of the distributed property to 
     the partnership immediately before its distribution over the 
     basis of the property to the distributee partner, and 
     decreases the basis of partnership property by (1) any loss 
     recognized by the distributee partner and (2) the excess of 
     the basis of the property to the distributee partner over the 
     adjusted basis of the distributed property to the partnership 
     immediately before the distribution.
       The allocation of the increase or decrease in basis of 
     partnership property is made in a manner which has the effect 
     of reducing the difference between the fair market value and 
     the adjusted basis of partnership properties.\142\ In 
     addition, the allocation rules require that any increase or 
     decrease in basis

[[Page H4645]]

     be allocated to partnership property of a like character to 
     the property distributed. For this purpose, the two 
     categories of assets are (1) capital assets and depreciable 
     and real property used in the trade or business held for more 
     than one year, and (2) any other property.\143\
---------------------------------------------------------------------------
     \142\ Sec. 755(a).
     \143\ Sec. 755(b).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that in applying the basis 
     allocation rules to a distribution in liquidation of a 
     partner's interest, a partnership is precluded from 
     decreasing the basis of corporate stock of a partner or a 
     related person. Any decrease in basis that, absent the 
     proposal, would have been allocated to the stock is allocated 
     to other partnership assets. If the decrease in basis exceeds 
     the basis of the other partnership assets, then gain is 
     recognized by the partnership in the amount of the excess.
       Effective date.--The provision applies to distributions 
     after February 13, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Repeal of special rules for FASITs (sec. 323 of the Senate 
         amendment and secs. 860H through 860L of the Code)


                              present law

     Financial asset securitization investment trusts
       In 1996, Congress created a new type of statutory entity 
     called a ``financial asset securitization trust'' (``FASIT'') 
     that facilitates the securitization of debt obligations such 
     as credit card receivables, home equity loans, and auto 
     loans.\144\ A FASIT generally is not taxable; the FASIT's 
     taxable income or net loss flows through to the owner of the 
     FASIT.
---------------------------------------------------------------------------
     \144\ Sections 860H through 860L.
---------------------------------------------------------------------------
       The ownership interest of a FASIT generally is required to 
     be entirely held by a single domestic C corporation. In 
     addition, a FASIT generally may hold only qualified debt 
     obligations, and certain other specified assets, and is 
     subject to certain restrictions on its activities. An entity 
     that qualifies as a FASIT can issue one or more classes of 
     instruments that meet certain specified requirements and 
     treat those instruments as debt for Federal income tax 
     purposes. Instruments issued by a FASIT bearing yields to 
     maturity over five percentage points above the yield to 
     maturity on specified United States government obligations 
     (i.e., ``high-yield interests'') must be held, directly or 
     indirectly, only by domestic C corporations that are not 
     exempt from income tax.
       Qualification as a FASIT
       To qualify as a FASIT, an entity must: (1) make an election 
     to be treated as a FASIT for the year of the election and all 
     subsequent years;\145\ (2) have assets substantially all of 
     which (including assets that the FASIT is treated as owning 
     because they support regular interests) are specified types 
     called ``permitted assets;'' (3) have non-ownership interests 
     be certain specified types of debt instruments called 
     ``regular interests''; (4) have a single ownership interest 
     which is held by an ``eligible holder''; and (5) not qualify 
     as a regulated investment company (``RIC''). Any entity, 
     including a corporation, partnership, or trust may be treated 
     as a FASIT. In addition, a segregated pool of assets may 
     qualify as a FASIT.
---------------------------------------------------------------------------
     \145\ Once an election to be a FASIT is made, the election 
     applies from the date specified in the election and all 
     subsequent years until the entity ceases to be a FASIT. If an 
     election to be a FASIT is made after the initial year of an 
     entity, all of the assets in the entity at the time of the 
     FASIT election are deemed contributed to the FASIT at that 
     time and, accordingly, any gain (but not loss) on such assets 
     will be recognized at that time.
---------------------------------------------------------------------------
       An entity ceases qualifying as a FASIT if the entity's 
     owner ceases being an eligible corporation. Loss of FASIT 
     status is treated as if all of the regular interests of the 
     FASIT were retired and then reissued without the application 
     of the rule that deems regular interests of a FASIT to be 
     debt.
       Permitted assets
       For an entity or arrangement to qualify as a FASIT, 
     substantially all of its assets must consist of the following 
     ``permitted assets'': (1) cash and cash equivalents; (2) 
     certain permitted debt instruments; (3) certain foreclosure 
     property; (4) certain instruments or contracts that represent 
     a hedge or guarantee of debt held or issued by the FASIT; (5) 
     contract rights to acquire permitted debt instruments or 
     hedges; and (6) a regular interest in another FASIT. 
     Permitted assets may be acquired at any time by a FASIT, 
     including any time after its formation.
       ``Regular interests'' of a FASIT
       ``Regular interests'' of a FASIT are treated as debt for 
     Federal income tax purposes, regardless of whether 
     instruments with similar terms issued by non-FASITs might be 
     characterized as equity under general tax principles. To be 
     treated as a ``regular interest'', an instrument must have 
     fixed terms and must: (1) unconditionally entitle the holder 
     to receive a specified principal amount; (2) pay interest 
     that is based on (a) fixed rates, or (b) except as provided 
     by regulations issued by the Treasury Secretary, variable 
     rates permitted with respect to REMIC interests under section 
     860G(a)(1)(B)(i); (3) have a term to maturity of no more than 
     30 years, except as permitted by Treasury regulations; (4) be 
     issued to the public with a premium of not more than 25 
     percent of its stated principal amount; and (5) have a yield 
     to maturity determined on the date of issue of less than five 
     percentage points above the applicable Federal rate (``AFR'') 
     for the calendar month in which the instrument is issued.
       Permitted ownership holder
       A permitted holder of the ownership interest in a FASIT 
     generally is a non-exempt (i.e., taxable) domestic C 
     corporation, other than a corporation that qualifies as a 
     RIC, REIT, REMIC, or cooperative.
       Transfers to FASITs
       In general, gain (but not loss) is recognized immediately 
     by the owner of the FASIT upon the transfer of assets to a 
     FASIT. Where property is acquired by a FASIT from someone 
     other than the FASIT's owner (or a person related to the 
     FASIT's owner), the property is treated as being first 
     acquired by the FASIT's owner for the FASIT's cost in 
     acquiring the asset from the non-owner and then transferred 
     by the owner to the FASIT.
       Valuation rules.--In general, except in the case of debt 
     instruments, the value of FASIT assets is their fair market 
     value. Similarly, in the case of debt instruments that are 
     traded on an established securities market, the market price 
     is used for purposes of determining the amount of gain 
     realized upon contribution of such assets to a FASIT. 
     However, in the case of debt instruments that are not traded 
     on an established securities market, special valuation rules 
     apply for purposes of computing gain on the transfer of such 
     debt instruments to a FASIT. Under these rules, the value of 
     such debt instruments is the sum of the present values of the 
     reasonably expected cash flows from such obligations 
     discounted over the weighted average life of such assets. The 
     discount rate is 120 percent of the AFR, compounded 
     semiannually, or such other rate that the Treasury Secretary 
     shall prescribe by regulations.
       Taxation of a FASIT
       A FASIT generally is not subject to tax. Instead, all of 
     the FASIT's assets and liabilities are treated as assets and 
     liabilities of the FASIT's owner and any income, gain, 
     deduction or loss of the FASIT is allocable directly to its 
     owner. Accordingly, income tax rules applicable to a FASIT 
     (e.g., related party rules, sec. 871(h), sec. 165(g)(2)) are 
     to be applied in the same manner as they apply to the FASIT's 
     owner. The taxable income of a FASIT is calculated using an 
     accrual method of accounting. The constant yield method and 
     principles that apply for purposes of determining original 
     issue discount (``OID'') accrual on debt obligations whose 
     principal is subject to acceleration apply to all debt 
     obligations held by a FASIT to calculate the FASIT's interest 
     and discount income and premium deductions or adjustments.
       Taxation of holders of FASIT regular interests
       In general, a holder of a regular interest is taxed in the 
     same manner as a holder of any other debt instrument, except 
     that the regular interest holder is required to account for 
     income relating to the interest on an accrual method of 
     accounting, regardless of the method of accounting otherwise 
     used by the holder.
       Taxation of holders of FASIT ownership interests
       Because all of the assets and liabilities of a FASIT are 
     treated as assets and liabilities of the holder of a FASIT 
     ownership interest, the ownership interest holder takes into 
     account all of the FASIT's income, gain, deduction, or loss 
     in computing its taxable income or net loss for the taxable 
     year. The character of the income to the holder of an 
     ownership interest is the same as its character to the FASIT, 
     except tax-exempt interest is included in the income of the 
     holder as ordinary income.
       Although the recognition of losses on assets contributed to 
     the FASIT is not allowed upon contribution of the assets, 
     such losses may be allowed to the FASIT owner upon their 
     disposition by the FASIT. Furthermore, the holder of a FASIT 
     ownership interest is not permitted to offset taxable income 
     from the FASIT ownership interest (including gain or loss 
     from the sale of the ownership interest in the FASIT) with 
     other losses of the holder. In addition, any net operating 
     loss carryover of the FASIT owner shall be computed by 
     disregarding any income arising by reason of a disallowed 
     loss. Where the holder of a FASIT ownership interest is a 
     member of a consolidated group, this rule applies to the 
     consolidated group of corporations of which the holder is a 
     member as if the group were a single taxpayer.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment repeals the special rules for FASITs. 
     The Senate amendment provides a transition period for 
     existing FASITs, pursuant to which the repeal of the FASIT 
     rules would not apply to any FASIT in existence on the date 
     of enactment to the extent that regular interests issued by 
     the FASIT prior to such date continue to remain outstanding 
     in accordance with their original terms.
       Effective date.--Except as provided by the transition 
     period for existing FASITs, the Senate amendment provision is 
     effective after February 13, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page H4646]]

     4. Expanded disallowance of deduction for interest on 
         convertible debt (sec. 324 of the Senate amendment and 
         sec. 163 of the Code)


                              Present Law

       Whether an instrument qualifies for tax purposes as debt or 
     equity is determined under all the facts and circumstances 
     based on principles developed in case law. If an instrument 
     qualifies as equity, the issuer generally does not receive a 
     deduction for dividends paid and the holder generally 
     includes such dividends in income (although corporate holders 
     generally may obtain a dividends-received deduction of at 
     least 70 percent of the amount of the dividend). If an 
     instrument qualifies as debt, the issuer may receive a 
     deduction for accrued interest and the holder generally 
     includes interest in income, subject to certain limitations.
       Original issue discount (``OID'') on a debt instrument is 
     the excess of the stated redemption price at maturity over 
     the issue price of the instrument. An issuer of a debt 
     instrument with OID generally accrues and deducts the 
     discount as interest over the life of the instrument even 
     though interest may not be paid until the instrument matures. 
     The holder of such a debt instrument also generally includes 
     the OID in income on an accrual basis.
       Under present law, no deduction is allowed for interest or 
     OID on a debt instrument issued by a corporation (or issued 
     by a partnership to the extent of its corporate partners) 
     that is payable in equity of the issuer or a related party 
     (within the meaning of sections 267(b) and 707(b)), including 
     a debt instrument a substantial portion of which is 
     mandatorily convertible or convertible at the issuer's option 
     into equity of the issuer or a related party.\146\ In 
     addition, a debt instrument is treated as payable in equity 
     if a substantial portion of the principal or interest is 
     required to be determined, or may be determined at the option 
     of the issuer or related party, by reference to the value of 
     equity of the issuer or related party.\147\ A debt instrument 
     also is treated as payable in equity if it is part of an 
     arrangement that is designed to result in the payment of the 
     debt instrument with or by reference to such equity, such as 
     in the case of certain issuances of a forward contract in 
     connection with the issuance of debt, nonrecourse debt that 
     is secured principally by such equity, or certain debt 
     instruments that are paid in, converted to, or determined 
     with reference to the value of equity if it may be so 
     required at the option of the holder or a related party and 
     there is a substantial certainty that option will be 
     exercised.\148\
---------------------------------------------------------------------------
     \146\ Sec. 163(l), enacted in the Taxpayer Relief Act of 
     1997, Pub. L. No. 105-34, sec. 1005(a).
     \147\ Sec. 163(l)(3)(B).
     \148\ Sec. 163(l)(3)(C).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment expands the present-law disallowance 
     of interest deductions on certain convertible or equity-
     linked corporate debt that is payable in, or by reference to 
     the value of, equity. Under the Senate amendment, the 
     disallowance is expanded to include interest on corporate 
     debt that is payable in, or by reference to the value of, any 
     equity held by the issuer (or by any related party) in any 
     other person, without regard to whether such equity 
     represents more than a 50-percent ownership interest in such 
     person. However, the Senate amendment does not apply to debt 
     that is issued by an active dealer in securities (or by a 
     related party) if the debt is payable in, or by reference to 
     the value of, equity that is held by the securities dealer in 
     its capacity as a dealer in securities.
       Effective date.--The Senate amendment provision applies to 
     debt instruments that are issued after February 13, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Expanded authority to disallow tax benefits under section 
         269 (sec. 325 of the Senate amendment and sec. 269 of the 
         Code)


                              Present Law

       Section 269 provides that if a taxpayer acquires, directly 
     or indirectly, control (defined as at least 50 percent of 
     vote or value) of a corporation, and the principal purpose of 
     the acquisition is the evasion or avoidance of Federal income 
     tax by securing the benefit of a deduction, credit, or other 
     allowance that would not otherwise have been available, the 
     Secretary may disallow such tax benefits.\149\ Similarly, if 
     a corporation acquires, directly or indirectly, property of 
     another corporation (not controlled, directly or indirectly, 
     by the acquiring corporation or its stockholders immediately 
     before the acquisition), the basis of such property is 
     determined by reference to the basis in the hands of the 
     transferor corporation, and the principal purpose of the 
     acquisition is the evasion or avoidance of Federal income tax 
     by securing a tax benefit that would not otherwise have been 
     available, the Secretary may disallow such tax benefits.\150\
---------------------------------------------------------------------------
     \149\ Sec. 269(a)(1).
     \149\ Sec. 269(a)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment expands section 269 by repealing (1) 
     the requirement that the acquisition of stock be sufficient 
     to obtain control of the corporation, and (2) the requirement 
     that the acquisition of property be from a corporation not 
     controlled by the acquirer. Thus, under the provision, 
     section 269 disallows the tax benefits of (1) any acquisition 
     of stock in a corporation,\151\ and (2) any acquisition by a 
     corporation of property from a corporation in which the basis 
     of such property is determined by reference to the basis in 
     the hands of the transferor corporation, if the principal 
     purpose of such acquisition is the of evasion or avoidance of 
     Federal income tax.
---------------------------------------------------------------------------
     \151\ In this regard, the provision applies regardless of 
     whether an acquisition results in an increase in the 
     acquiror's ownership percentage in a corportion or involves 
     the issuance of actual stock certificates or shares by a 
     corporation to the acquiror.
---------------------------------------------------------------------------
       Effective date.--The provision applies to stock and 
     property acquired after February 13, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Modification of controlled foreign corporation--passive 
         foreign investment company coordination rules (sec. 326 
         of the Senate amendment and sec. 1297 of the Code)


                              Present Law

       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. 
     Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income generally is 
     deferred. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless of whether the income has been 
     distributed as a dividend to the domestic parent corporation. 
     The main anti-deferral regimes in this context are the 
     controlled foreign corporation rules of subpart F \152\ and 
     the passive foreign investment company rules.\153\ A foreign 
     tax credit generally is available to offset, in whole or in 
     part, the U.S. tax owed on foreign-source income, whether 
     earned directly by the domestic corporation, repatriated as 
     an actual dividend, or included under one of the anti-
     deferral regimes.\154\
---------------------------------------------------------------------------
     \152\ Secs. 951-964.
     \153\ Secs. 1291-1298.
     \154\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
       Generally, income earned indirectly by a domestic 
     corporation through a foreign corporation is subject to U.S. 
     tax only when the income is distributed to the domestic 
     corporation, because corporations generally are treated as 
     separate taxable persons for Federal tax purposes. However, 
     this deferral of U.S. tax is limited by anti-deferral regimes 
     that impose current U.S. tax on certain types of income 
     earned by certain corporations, in order to prevent taxpayers 
     from avoiding U.S. tax by shifting passive or other highly 
     mobile income into low-tax jurisdictions. Deferral of U.S. 
     tax is considered appropriate, on the other hand, with 
     respect to most types of active business income earned 
     abroad.
       Subpart F,\155\ applicable to controlled foreign 
     corporations and their shareholders, is the main anti-
     deferral regime of relevance to a U.S.-based multinational 
     corporate group. A controlled foreign corporation generally 
     is defined as any foreign corporation if U.S. persons own 
     (directly, indirectly, or constructively) more than 50 
     percent of the corporation's stock (measured by vote or 
     value), taking into account only those U.S. persons that own 
     at least 10 percent of the stock (measured by vote 
     only).\156\ Under the subpart F rules, the United States 
     generally taxes the U.S. 10-percent shareholders of a 
     controlled foreign corporation on their pro rata shares of 
     certain income of the controlled foreign corporation 
     (referred to as ``subpart F income''), without regard to 
     whether the income is distributed to the shareholders.\157\
---------------------------------------------------------------------------
     \155\ Secs. 951-964.
     \156\ Secs. 951(b), 957, 958.
     \157\ Sec. 951(a).
---------------------------------------------------------------------------
       Subpart F income generally includes passive income and 
     other income that is readily movable from one taxing 
     jurisdiction to another. Subpart F income consists of foreign 
     base company income,\158\ insurance income,\159\ and certain 
     income relating to international boycotts and other 
     violations of public policy.\160\ Foreign base company income 
     consists of foreign personal holding company income, which 
     includes passive income (e.g., dividends, interest, rents, 
     and royalties), as well as a number of categories of non-
     passive income, including foreign base company sales income, 
     foreign base company services income, foreign base company 
     shipping income and foreign base company oil-related 
     income.\161\
---------------------------------------------------------------------------
     \158\ Sec. 954.
     \159\ Sec. 953.
     \160\ Sec. 952(a)(3)-(5).
     \161\ Sec. 954.
---------------------------------------------------------------------------
       In effect, the United States treats the U.S. 10-percent 
     shareholders of a controlled foreign corporation as having 
     received a current distribution out of the corporation's 
     subpart F income. In addition, the U.S. 10-percent 
     shareholders of a controlled foreign

[[Page H4647]]

     corporation are required to include currently in income for 
     U.S. tax purposes their pro rata shares of the corporation's 
     earnings invested in U.S. property.\162\
---------------------------------------------------------------------------
     \162\ Secs. 951(a)(1)(B), 956.
---------------------------------------------------------------------------
       The Tax Reform Act of 1986 established an additional anti-
     deferral regime, for passive foreign investment companies. A 
     passive foreign investment company generally is defined as 
     any foreign corporation if 75 percent or more of its gross 
     income for the taxable year consists of passive income, or 50 
     percent or more of its assets consists of assets that 
     produce, or are held for the production of, passive 
     income.\163\ Alternative sets of income inclusion rules apply 
     to U.S. persons that are shareholders in a passive foreign 
     investment company, regardless of their percentage ownership 
     in the company. One set of rules applies to passive foreign 
     investment companies that are ``qualified electing funds,'' 
     under which electing U.S. shareholders currently include in 
     gross income their respective shares of the company's 
     earnings, with a separate election to defer payment of tax, 
     subject to an interest charge, on income not currently 
     received.\164\ A second set of rules applies to passive 
     foreign investment companies that are not qualified electing 
     funds, under which U.S. shareholders pay tax on certain 
     income or gain realized through the company, plus an interest 
     charge that is attributable to the value of deferral.\165\ A 
     third set of rules applies to passive foreign investment 
     company stock that is marketable, under which electing U.S. 
     shareholders currently take into account as income (or loss) 
     the difference between the fair market value of the stock as 
     of the close of the taxable year and their adjusted basis in 
     such stock (subject to certain limitations), often referred 
     to as ``marking to market.'' \166\
---------------------------------------------------------------------------
     \163\ Sec. 1297.
     \164\ Sec. 1293-1295.
     \165\ Sec. 1291.
     \166\ Sec. 1296.
---------------------------------------------------------------------------
       Under section 1297(e), which was enacted in 1997 to address 
     the overlap of the passive foreign investment company rules 
     and subpart F, a controlled foreign corporation generally is 
     not also treated as a passive foreign investment company with 
     respect to a U.S. shareholder of the corporation. This 
     exception applies regardless of the likelihood that the U.S. 
     shareholder would actually be taxed under subpart F in the 
     event that the controlled foreign corporation earns subpart F 
     income. Thus, even in a case in which a controlled foreign 
     corporation's subpart F income would be allocated to a 
     different shareholder under the subpart F allocation rules, a 
     U.S. shareholder would still qualify for the exception from 
     the passive foreign investment company rules under section 
     1297(e).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment adds an exception to section 1297(e) 
     for U.S. shareholders that face only a remote likelihood of 
     incurring a subpart F inclusion in the event that a 
     controlled foreign corporation earns subpart F income, thus 
     preserving the potential application of the passive foreign 
     investment company rules in such cases.
       Effective date.--The provision is effective for taxable 
     years of controlled foreign corporations beginning after 
     February 13, 2003, and for taxable years of U.S. shareholders 
     in which or with which such taxable years of controlled 
     foreign corporations end.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Modify treatment of closely-held REITs (sec. 327 of the 
         Senate amendment and sec. 856 of the Code)


                              Present Law

       In general, a real estate investment trust (``REIT'') is an 
     entity that receives most of its income from passive real 
     estate related investments and that receives pass-through 
     treatment for income that is distributed to shareholders. If 
     an entity meets the qualifications for REIT status and elects 
     to be taxed as a REIT, the portion of its income that is 
     distributed to the investors each year generally is taxed 
     to the investors without being subjected to tax at the 
     REIT level.
       A REIT must satisfy a number of tests on a year-by-year 
     basis that relate to the entity's (1) organizational 
     structure; (2) source of income; (3) nature of assets; and 
     (4) distribution of income.
       Under the organizational structure test, except for the 
     first taxable year for which an entity elects to be a REIT, 
     the beneficial ownership of the entity must be held by 100 or 
     more persons. Generally, no more than 50 percent of the value 
     of the REIT stock can be owned by five or fewer individuals 
     during the last half of the taxable year. Certain attribution 
     rules apply in making this determination.


                               House Bill

       No provision.


                            Senate Amendment

       The bill imposes as an additional requirement for REIT 
     qualification that, except for the first taxable year for 
     which an entity elects to be a REIT, no person can own stock 
     of a REIT possessing 50 percent or more of the combined 
     voting power of all classes of voting stock or 50 percent or 
     more of the total value of all classes of stock of the REIT. 
     For purposes of determining a person's stock ownership, rules 
     similar to attribution rules for REIT qualification under 
     present law apply (secs. 856(d)(5) and 856(h)(3)). A special 
     rule prevents reattribution in certain circumstances.
       The provision does not apply to ownership by a REIT of 50 
     percent or more of the stock (vote or value) of another REIT.
       An exception applies for a limited period of time to 
     certain ``incubator REITs'' that meet specified 
     qualifications. A penalty is imposed on a corporation's 
     directors if an ``incubator REIT'' election is made for a 
     principal purpose other than as part of a reasonable plan to 
     undertake a going public transaction (as defined in the 
     bill).
       Effective date.--The bill is effective for entities 
     electing REIT status for taxable years ending after May 8, 
     2003. Any entity that elects (or has elected) REIT status for 
     a taxable year including May 8, 2003 and which is both a 
     controlled entity and has significant business assets or 
     activities on such date, will not be subject to the bill. 
     Under this rule, a controlled entity with significant 
     business assets or activities on May 8, 2003, can be 
     grandfathered even if it makes its first REIT election after 
     that date with its return for the taxable year including that 
     date.
       For purposes of the transition rules, the significant 
     business assets or activities in place on May 8, 2003 must be 
     real estate assets and activities of a type that would be 
     qualified real estate assets and would produce qualified real 
     estate related income for a REIT.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.

                C. Other Corporate Governance Provisions

1. Affirmation of consolidated return regulation authority (sec. 331 of 
            the Senate amendment and sec. 1502 of the Code)


                              Present Law

       An affiliated group of corporations may elect to file a 
     consolidated return in lieu of separate returns. A condition 
     of electing to file a consolidated return is that all 
     corporations that are members of the consolidated group must 
     consent to all the consolidated return regulations prescribed 
     under section 1502 prior to the last day prescribed by law 
     for filing such return.\167\
---------------------------------------------------------------------------
     \167\ Sec. 1501.
---------------------------------------------------------------------------
       Section 1502 states:

       The Secretary shall prescribe such regulations as he may 
     deem necessary in order that the tax liability of any 
     affiliated group of corporations making a consolidated return 
     and of each corporation in the group, both during and after 
     the period of affiliation, may be returned, determined, 
     computed, assessed, collected, and adjusted, in such manner 
     as clearly to reflect the income-tax liability and the 
     various factors necessary for the determination of such 
     liability, and in order to prevent the avoidance of such tax 
     liability.\168\
---------------------------------------------------------------------------
     \168\ Sec. 1502.
---------------------------------------------------------------------------
       Under this authority, the Treasury Department has issued 
     extensive consolidated return regulations.\169\
---------------------------------------------------------------------------
     \169\ Regulations issued under the authority of section 1502 
     are considered to be ``legislative'' regulations rather than 
     ``interpretative'' regulations, and as such are usually given 
     greater deference by courts in case of a taxpayer challenge 
     to such a regulation. See, S. Rep. No. 960, 70th Cong., 1st 
     Sess. at 15, describing the consolidated return regulations 
     as ``legislative in character''. The Supreme Court has stated 
     that ``* * * legislative regulations are given controlling 
     weight unless they are arbitrary, capricious, or manifestly 
     contrary to the statute.'' Chevron, U.S.A., Inc. v. Natural 
     Resources Defense Council, Inc., 467 U.S. 837, 844 (1984) 
     (involving an environmental protection regulation). For 
     examples involving consolidated return regulations, see, 
     e.g., Wolter Construction Company v. Commissioner, 634 F.2d 
     1029 (6th Cir. 1980); Garvey, Inc. v. United States, 1 Ct. 
     Cl. 108 (1983), aff'd 726 F.2d 1569 (Fed. Cir. 1984), cert. 
     denied 469 U.S. 823 (1984). Compare, e.g., Audrey J. Walton 
     v. Commissioner, 115 T.C. 589 (2000), describing different 
     standards of review. The case did not involve a consolidated 
     return regulation.
---------------------------------------------------------------------------
       In the recent case of Rite Aid Corp. v. United States,\170\ 
     the Federal Circuit Court of Appeals addressed the 
     application of a particular provision of certain consolidated 
     return loss disallowance regulations, and concluded that the 
     provision was invalid.\171\ The

[[Page H4648]]

     particular provision, known as the ``duplicated loss'' 
     provision,\172\ would have denied a loss on the sale of stock 
     of a subsidiary by a parent corporation that had filed a 
     consolidated return with the subsidiary, to the extent the 
     subsidiary corporation had assets that had a built-in loss, 
     or had a net operating loss, that could be recognized or used 
     later.\173\
---------------------------------------------------------------------------
     \170\ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. 
     App. LEXIS 23207 (Fed. Cir. Oct. 3, 2001).
     \171\ Prior to this decision, there had been a few instances 
     involving prior laws in which certain consolidated return 
     regulations were held to be invalid. See, e.g., American 
     Standard, Inc. v. United States, 602 F.2d 256 (Ct. Cl. 1979), 
     discussed in the text infra. See also Union Carbide Corp. v. 
     United States, 612 F.2d 558 (Ct. Cl. 1979), and Allied 
     Corporation v. United States, 685 F. 2d 396 (Ct. Cl. 1982), 
     all three cases involving the allocation of income and loss 
     within a consolidated group for purposes of computation of a 
     deduction allowed under prior law by the Code for Western 
     Hemisphere Trading Corporations. See also Joseph Weidenhoff 
     v. Commissioner, 32 T.C. 1222, 1242-1244 (1959), involving 
     the application of certain regulations to the excess profits 
     tax credit allowed under prior law, and concluding that the 
     Commissioner had applied a particular regulation in an 
     arbitrary manner inconsistent with the wording of the 
     regulation and inconsistent with even a consolidated group 
     computation. Cf. Kanawha Gas & Utilities Co. v. Commissioner, 
     214 F.2d 685 (1954), concluding that the substance of a 
     transaction was an acquisition of assets rather than stock. 
     Thus, a regulation governing basis of the assets of 
     consolidated subsidiaries did not apply to the case. See also 
     General Machinery Corporation v. Commissioner, 33 B.T.A. 1215 
     (1936); Lefcourt Realty Corporation, 31 B.T.A. 978 (1935); 
     Helvering v. Morgans, Inc., 293 U.S. 121 (1934), interpreting 
     the term ``taxable year.''
     \172\ Treas. Reg. Sec. 1.1502-20(c)(1)(iii).
     \173\ Treasury Regulation section 1.1502-20, generally 
     imposing certain ``loss disallowance'' rules on the 
     disposition of subsidiary stock, contained other limitations 
     besides the ``duplicated loss'' rule that could limit the 
     loss available to the group on a disposition of a 
     subsidiary's stock. Treasury Regulation section 1.1502-20 as 
     a whole was promulgated in connection with regulations issued 
     under section 337(d), principally in connection with the so-
     called General Utilities repeal of 1986 (referring to the 
     case of General Utilities & Operating Company v. Helvering, 
     296 U.S. 200 (1935)). Such repeal generally required a 
     liquidating corporation, or a corporation acquired in a stock 
     acquisition treated as a sale of assets, to pay corporate 
     level tax on the excess of the value of its assets over the 
     basis. Treasury regulation section 1.1502-20 principally 
     reflected an attempt to prevent corporations filing 
     consolidated returns from offsetting income with a loss on 
     the sale of subsidiary stock. Such a loss could result from 
     the unique upward adjustment of a subsidiary's stock basis 
     required under the consolidated return regulations for 
     subsidiary income earned in consolidation, an adjustment 
     intended to prevent taxation of both the subsidiary and the 
     parent on the same income or gain. As one example, absent a 
     denial of certain losses on a sale of subsidiary stock, a 
     consolidated group could obtain a loss deduction with respect 
     to subsidiary stock, the basis of which originally reflected 
     the subsidiary's value at the time of the purchase of the 
     stock, and that had then been adjusted upward on recognition 
     of any built-in income or gain of the subsidiary reflected in 
     that value. The regulations also contained the duplicated 
     loss factor addressed by the court in Rite Aid. The preamble 
     to the regulations stated: ``it is not administratively 
     feasible to differentiate between loss attributable to built-
     in gain and duplicated loss.'' T.D. 8364, 1991-2 C.B. 43, 46 
     (Sept. 13, 1991). The government also argued in the Rite Aid 
     case that duplicated loss was a separate concern of the 
     regulations. 255 F.3d at 1360.
---------------------------------------------------------------------------
       The Federal Circuit Court opinion contained language 
     discussing the fact that the regulation produced a result 
     different than the result that would have obtained if the 
     corporations had filed separate returns rather than 
     consolidated returns.\174\
---------------------------------------------------------------------------
     \174\ For example, the court stated: ``The duplicated loss 
     factor * * * addresses a situation that arises from the sale 
     of stock regardless of whether corporations file separate or 
     consolidated returns. With I.R.C. secs. 382 and 383, Congress 
     has addressed this situation by limiting the subsidiary's 
     potential future deduction, not the parent's loss on the sale 
     of stock under I.R.C. sec. 165.'' 255 F.3d 1357, 1360 (Fed. 
     Cir. 2001).
---------------------------------------------------------------------------
       The Federal Circuit Court opinion cited a 1928 Senate 
     Finance Committee Report to legislation that authorized 
     consolidated return regulations, which stated that ``many 
     difficult and complicated problems, * * * have arisen in the 
     administration of the provisions permitting the filing of 
     consolidated returns'' and that the committee ``found it 
     necessary to delegate power to the commissioner to prescribe 
     regulations legislative in character covering them.'' \175\ 
     The Court's opinion also cited a previous decision of the 
     Court of Claims for the proposition, interpreting this 
     legislative history, that section 1502 grants the Secretary 
     ``the power to conform the applicable income tax law of the 
     Code to the special, myriad problems resulting from the 
     filing of consolidated income tax returns;'' but that section 
     1502 ``does not authorize the Secretary to choose a method 
     that imposes a tax on income that would not otherwise be 
     taxed.'' \176\
---------------------------------------------------------------------------
     \175\ S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928). 
     Though not quoted by the court in Rite Aid, the same Senate 
     report also indicated that one purpose of the consolidated 
     return authority was to permit treatment of the separate 
     corporations as if they were a single unit, stating ``The 
     mere fact that by legal fiction several corporations owned by 
     the same shareholders are separate entities should not 
     obscure the fact that they are in reality one and the same 
     business owned by the same individuals and operated as a 
     unit.'' S. Rep. No. 960, 70th Cong., 1st Sess. 29 (1928).
     \176\ American Standard, Inc. v. United States, 602 F.2d 256, 
     261 (Ct. Cl. 1979). That case did not involve the question of 
     separate returns as compared to a single return approach. It 
     involved the computation of a Western Hemisphere Trade 
     Corporation (``WHTC'') deduction under prior law (which 
     deduction would have been computed as a percentage of each 
     WHTC's taxable income if the corporations had filed separate 
     returns), in a case where a consolidated group included 
     several WHTCs as well as other corporations. The question was 
     how to apportion income and losses of the admittedly 
     consolidated WHTCs and how to combine that computation with 
     the rest of the group's consolidated income or losses. The 
     court noted that the new, changed regulations approach varied 
     from the approach taken to a similar problem involving public 
     utilities within a group and previously allowed for WHTCs. 
     The court objected that the allocation method adopted by the 
     regulation allowed non-WHTC losses to reduce WHTC income. 
     However, the court did not disallow a method that would net 
     WHTC income of one WHTC with losses of another WHTC, a result 
     that would not have occurred under separate returns. Nor did 
     the court expressly disallow a different fractional method 
     that would net both income and losses of the WHTCs with those 
     of other corporations in the consolidated group. The court 
     also found that the regulation had been adopted without 
     proper notice.
---------------------------------------------------------------------------
       The Federal Circuit Court construed these authorities and 
     applied them to invalidate Treas. Reg. Sec. 1.1502-
     20(c)(1)(iii), stating that:

       The loss realized on the sale of a former subsidiary's 
     assets after the consolidated group sells the subsidiary's 
     stock is not a problem resulting from the filing of 
     consolidated income tax returns. The scenario also arises 
     where a corporate shareholder sells the stock of a non-
     consolidated subsidiary. The corporate shareholder could 
     realize a loss under I.R.C. sec. 1001, and deduct the loss 
     under I.R.C. sec. 165. The subsidiary could then deduct any 
     losses from a later sale of assets. The duplicated loss 
     factor, therefore, addresses a situation that arises from the 
     sale of stock regardless of whether corporations file 
     separate or consolidated returns. With I.R.C. secs. 382 and 
     383, Congress has addressed this situation by limiting the 
     subsidiary's potential future deduction, not the parent's 
     loss on the sale of stock under I.R.C. sec. 165.\177\
---------------------------------------------------------------------------
     \177\ Rite Aid, 255 F.3d at 1360.

       The Treasury Department has announced that it will not 
     continue to litigate the validity of the duplicated loss 
     provision of the regulations, and has issued interim 
     regulations that permit taxpayers for all years to elect a 
     different treatment, though they may apply the provision for 
     the past if they wish.\178\
---------------------------------------------------------------------------
     \178\ See Temp. Reg. 1.1502-20T(i)(2). The Treasury 
     Department has also indicated its intention to continue to 
     study all the issues that the original loss disallowance 
     regulations addressed (including issues of furthering single 
     entity principles) and possibly issue different regulations 
     (not including the particular approach of Treas. Reg. Sec. 
     1.1502-20(c)(1)(iii)) on the issues in the future. See Notice 
     2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 
     F.R. 11034 (March 12, 2002); REG-102740-02, 67 F.R. 11070 
     (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644 
     (March 25, 2002).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The bill confirms that, in exercising its authority under 
     section 1502 to issue consolidated return regulations, the 
     Treasury Department may provide rules treating corporations 
     filing consolidated returns differently from corporations 
     filing separate returns.
       Thus, under the statutory authority of section 1502, the 
     Treasury Department is authorized to issue consolidated 
     return regulations utilizing either a single taxpayer or 
     separate taxpayer approach or a combination of the two 
     approaches, as Treasury deems necessary in order that the tax 
     liability of any affiliated group of corporations making a 
     consolidated return, and of each corporation in the group, 
     both during and after the period of affiliation, may be 
     determined and adjusted in such manner as clearly to reflect 
     the income-tax liability and the various factors necessary 
     for the determination of such liability, and in order to 
     prevent avoidance of such liability.
       Rite Aid is thus overruled to the extent it suggests that 
     there is not a problem that can be addressed in consolidated 
     return regulations if application of a particular Code 
     provision on a separate taxpayer basis would produce a result 
     different from single taxpayer principles that may be used 
     for consolidation.
       The bill nevertheless allows the result of the Rite Aid 
     case to stand with respect to the type of factual situation 
     presented in the case. That is, the legislation provides for 
     the override of the regulatory provision that took the 
     approach of denying a loss on a deconsolidating disposition 
     of stock of a consolidated subsidiary \179\ to the extent the 
     subsidiary had net operating losses or built in losses that 
     could be used later outside the group.\180\
---------------------------------------------------------------------------
     \179\ Treas. Reg. Sec. 1.1502-20(c)(1)(iii).
     \180\ The provision is not intended to overrule the current 
     Treasury Department regulations, which allow taxpayers for 
     the past to follow Treasury Regulations Section 1.1502-
     20(c)(1)(iii), if they choose to do so. Temp. Reg. Sec. 
     1.1502-20T(i)(2).
---------------------------------------------------------------------------
       Retaining the result in the Rite Aid case with respect to 
     the particular regulation section 1.1502-20(c)(1)(iii) as 
     applied to the factual situation of the case does not in any 
     way prevent or invalidate the various approaches Treasury has 
     announced it will apply or that it intends to consider in 
     lieu of the approach of that regulation, including, for 
     example, the denial of a loss on a stock sale if inside 
     losses of a subsidiary may also be used by the consolidated 
     group, and the possible requirement that inside attributes be 
     adjusted when a subsidiary leaves a group.\181\
---------------------------------------------------------------------------
     \181\ See, e.g., Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 
     2002); T.D. 8984, 67 F.R. 11034 (Mar.12, 2002); REG-102740-
     02, 67 F.R. 11070 (Mar.12, 2002); see also Notice 2002-18, 
     2002-12 I.R.B. 644 (Mar. 25, 2002). In exercising its 
     authority under section 1502, the Secretary is also 
     authorized to prescribe rules that protect the purpose of 
     General Utilities repeal using presumptions and other 
     simplifying conventions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for all years, 
     whether beginning before, on, or after the date of enactment 
     of the provision. No inference is intended that the results 
     following from this provision are not the same as the results 
     under present law.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Chief Executive Officer required to sign corporate income 
         tax returns (sec. 332 of the Senate amendment and sec. 
         6062 of the Code)


                              Present Law

       The Code requires \182\ that the income tax return of a 
     corporation must be signed by either the president, the vice-
     president, the treasurer, the assistant treasurer, the chief 
     accounting officer, or any other officer of the corporation 
     authorized by the corporation to sign the return.
---------------------------------------------------------------------------
     \182\ Sec. 6062.
---------------------------------------------------------------------------
       The Code also imposes \183\ a criminal penalty on any 
     person who willfully signs any

[[Page H4649]]

     tax return under penalties of perjury that that person does 
     not believe to be true and correct with respect to every 
     material matter at the time of filing. If convicted, the 
     person is guilty of a felony; the Code imposes a fine of not 
     more than $100,000 \184\ ($500,000 in the case of a 
     corporation) or imprisonment of not more than three years, or 
     both, together with the costs of prosecution.
---------------------------------------------------------------------------
     \183\ Sec. 7206.
     \184\ Pursuant to 18 U.S.C. 3571, the maximum fine for an 
     individual convicted of a felony is $250,000.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment requires that the chief executive 
     officer of a corporation sign that corporation's income tax 
     returns.\185\ If the corporation does not have a chief 
     executive officer, the IRS may designate another officer of 
     the corporation; otherwise, no other person is permitted to 
     sign the income tax return of a corporation. It is intended 
     that the IRS issue general guidance, such as a revenue 
     procedure, to (1) address situations when a corporation does 
     not have a chief executive officer, and (2) define who the 
     chief executive officer is, in situations (for example) when 
     the primary official bears a different title or when a 
     corporation has multiple chief executive officers. It is 
     intended that, in every instance, the highest ranking 
     corporate officer (regardless of title) sign the tax return.
---------------------------------------------------------------------------
     \185\ Because the provision amends section 6062, it applies 
     only to the Form 1120 itself (or its equivalent) and any 
     disclosures required under section 6662 or related 
     provisions. It does not apply to any other schedules or 
     attachments.
---------------------------------------------------------------------------
       The provision does not apply to the income tax returns of 
     mutual funds;\186\ they are required to be signed as under 
     present law.
---------------------------------------------------------------------------
     \186\ The provision does, however, apply to the income tax 
     returns of mutual fund management companies and advisors.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for returns 
     filed after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     3. Denial of deduction for certain fines, penalties, and 
         other amounts (sec. 333 of the Senate amendment and sec. 
         162 of the Code)


                              Present Law

       Under present law, no deduction is allowed as a trade or 
     business expense under section 162(a) for the payment of a 
     fine or similar penalty to a government for the violation of 
     any law (sec. 162(f)). The enactment of section 162(f) in 
     1969 codified existing case law that denied the deductibility 
     of fines as ordinary and necessary business expenses on the 
     grounds that ``allowance of the deduction would frustrate 
     sharply defined national or State policies proscribing the 
     particular types of conduct evidenced by some governmental 
     declaration thereof.'' \187\
---------------------------------------------------------------------------
     \187\ S. Rep. 91-552, 91st Cong, 1st Sess., 273-74 (1969), 
     referring to Tank Truck Rentals, Inc. v. Commissioner, 356 
     U.S. 30 (1958).
---------------------------------------------------------------------------
       Treasury regulation section 1.162-21(b)(1) provides that a 
     fine or similar penalty includes an amount: (1) paid pursuant 
     to conviction or a plea of guilty or nolo contendere for a 
     crime (felony or misdemeanor) in a criminal proceeding; (2) 
     paid as a civil penalty imposed by Federal, State, or local 
     law, including additions to tax and additional amounts and 
     assessable penalties imposed by chapter 68 of the Code; (3) 
     paid in settlement of the taxpayer's actual or potential 
     liability for a fine or penalty (civil or criminal); or (4) 
     forfeited as collateral posted in connection with a 
     proceeding which could result in imposition of such a fine or 
     penalty. Treasury regulation section 1.162-21(b)(2) provides, 
     among other things, that compensatory damages (including 
     damages under section 4A of the Clayton Act (15 U.S.C. 15a), 
     as amended) paid to a government do not constitute a fine or 
     penalty.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the rules regarding the 
     determination whether payments are nondeductible payments of 
     fines or penalties under section 162(f). In particular, the 
     bill generally provides that amounts paid or incurred 
     (whether by suit, agreement, or otherwise) to, or at the 
     direction of, a government in relation to the violation of 
     any law or the investigation or inquiry into the potential 
     violation of any law \188\ are nondeductible under any 
     provision of the income tax provisions.\189\ The bill applies 
     to deny a deduction for any such payments, including those 
     where there is no admission of guilt or liability and those 
     made for the purpose of avoiding further investigation or 
     litigation. An exception applies to payments that the 
     taxpayer establishes are restitution.\190\
---------------------------------------------------------------------------
     \188\ The bill does not affect amounts paid or incurred in 
     performing routine audits or reviews such as annual audits 
     that are required of all organizations or individuals in a 
     similar business sector, or profession, as a requirement for 
     being allowed to conduct business. However, if the government 
     or regulator raised an issue of compliance and a payment is 
     required in settlement of such issue, the bill would affect 
     that payment.
     \189\ The bill provides that such amounts are nondeductible 
     under chapter 1 of the Internal Revenue Code.
     \190\ The bill does not affect the treatment of antitrust 
     payments made under section 4 of the Clayton Act, which will 
     continue to be governed by the provisions of section 162(g).
---------------------------------------------------------------------------
       It is intended that a payment will be treated as 
     restitution only if the payment is required to be paid to the 
     specific persons, or in relation to the specific property, 
     actually harmed by the conduct of the taxpayer that resulted 
     in the payment. Thus, a payment to or with respect to a class 
     broader than the specific persons or property that were 
     actually harmed (e.g., to a class including similarly 
     situated persons or property) does not qualify as 
     restitution.\191\ Restitution is limited to the amount that 
     bears a substantial quantitative relationship to the harm 
     caused by the past conduct or actions of the taxpayer that 
     resulted in the payment in question. If the party harmed is a 
     government or other entity, then restitution includes payment 
     to such harmed government or entity, provided the payment 
     bears a substantial quantitative relationship to the harm. 
     However, restitution does not include reimbursement of 
     government investigative or litigation costs, or payments to 
     whistleblowers.
---------------------------------------------------------------------------
     \191\ Similarly, a payment to a charitable organization 
     benefitting a broader class than the persons or property 
     actually harmed, or to be paid out without a substantial 
     quantitative relationship to the harm caused, would not 
     qualify as restitution. Under the provision, such a payment 
     not deductible under section 162 would also not be deductible 
     under section 170.
---------------------------------------------------------------------------
       Amounts paid or incurred (whether by suit, agreement, or 
     otherwise) to, or at the direction of, any self-regulatory 
     entity that regulates a financial market or other market that 
     is a qualified board or exchange under section 1256(g)(7), 
     and that is authorized to impose sanctions (e.g., the 
     National Association of Securities Dealers) are likewise 
     subject to the provision if paid in relation to a violation, 
     or investigation or inquiry into a potential violation, of 
     any law (or any rule or other requirement of such entity). To 
     the extent provided in regulations, amounts paid or incurred 
     to, or at the direction of, any other nongovernmental entity 
     that exercises self-regulatory powers as part of performing 
     an essential governmental function are similarly subject to 
     the provision. The exception for payments that the taxpayer 
     establishes are restitution likewise applies in these cases.
       No inference is intended as to the treatment of payments as 
     nondeductible fines or penalties under present law. In 
     particular, the Senate amendment is not intended to limit the 
     scope of present-law section 162(f) or the regulations 
     thereunder.
       Effective date.--The Senate amendment is effective for 
     amounts paid or incurred on or after April 28, 2003; however 
     the proposal does not apply to amounts paid or incurred under 
     any binding order or agreement entered into before such date. 
     Any order or agreement requiring court approval is not a 
     binding order or agreement for this purpose unless such 
     approval was obtained on or before April 27, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Denial of deduction for punitive damages (sec. 334 of the 
         Senate amendment and sec. 162 of the Code)


                              Present Law

       In general, a deduction is allowed for all ordinary and 
     necessary expenses that are paid or incurred by the taxpayer 
     during the taxable year in carrying on any trade or 
     business.\192\ However, no deduction is allowed for any 
     payment that is made to an official of any governmental 
     agency if the payment constitutes an illegal bribe or 
     kickback or if the payment is to an official or employee of a 
     foreign government and is illegal under Federal law.\193\ In 
     addition, no deduction is allowed under present law for any 
     fine or similar payment made to a government for violation of 
     any law.\194\ Furthermore, no deduction is permitted for two-
     thirds of any damage payments made by a taxpayer who is 
     convicted of a violation of the Clayton antitrust law or any 
     related antitrust law.\195\
---------------------------------------------------------------------------
     \192\ Sec. 162(a).
     \193\ Sec. 162(c).
     \194\ Sec. 162(f).
     \195\ Sec. 162(g).
---------------------------------------------------------------------------
       In general, gross income does not include amounts received 
     on account of personal physical injuries and physical 
     sickness.\196\ However, this exclusion does not apply to 
     punitive damages.\197\
---------------------------------------------------------------------------
     \196\ Sec. 104(a).
     \197\ Sec. 104(a)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment denies any deduction for punitive 
     damages that are paid or incurred by the taxpayer as a result 
     of a judgment or in settlement of a claim. If the liability 
     for punitive damages is covered by insurance, any such 
     punitive damages paid by the insurer are included in gross 
     income of the insured person and the insurer is required to 
     report such amounts to both the insured person and the IRS.
       Effective date.--The Senate amendment provision is 
     effective for punitive damages that are paid or incurred on 
     or after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Criminal tax fraud (sec. 335 of the Senate amendment and 
         secs. 7201, 7203, and 7206 of the Code)


                              Present Law

     Attempt to evade or defeat tax
       In general, section 7201 imposes a criminal penalty on 
     persons who willfully attempt to

[[Page H4650]]

     evade or defeat any tax imposed by the Code. Upon conviction, 
     the Code provides that the penalty is up to $100,000 or 
     imprisonment of not more than five years (or both). In the 
     case of a corporation, the Code increases the monetary 
     penalty to a maximum of $500,000.
     Willful failure to file return, supply information, or pay 
         tax
       In general, section 7203 imposes a criminal penalty on 
     persons required to make estimated tax payments, pay taxes, 
     keep records, or supply information under the Code who 
     willfully fail to do so. Upon conviction, the Code provides 
     that the penalty is up to $25,000 or imprisonment of not more 
     than one year (or both). In the case of a corporation, the 
     Code increases the monetary penalty to a maximum of $100,000.
     Fraud and false statements
       In general, section 7206 imposes a criminal penalty on 
     persons who make fraudulent or false statements under the 
     Code. Upon conviction, the Code provides that the penalty is 
     up to $100,000 or imprisonment of not more than three years 
     (or both). In the case of a corporation, the Code increases 
     the monetary penalty to a maximum of $500,000.
     Uniform sentencing guidelines
       Under the uniform sentencing guidelines established by 18 
     U.S.C. 3571, a defendant found guilty of a criminal offense 
     is subject to a maximum fine that is the greatest of: (a) the 
     amount specified in the underlying provision, (b) for a 
     felony \198\ $250,000 for an individual or $500,000 for an 
     organization, or (c) twice the gross gain if a person derives 
     pecuniary gain from the offense. This Title 18 provision 
     applies to all criminal provisions in the United States Code, 
     including those in the Internal Revenue Code. For example, 
     for an individual, the maximum fine under present law upon 
     conviction of violating section 7206 is $250,000 or, if 
     greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
     \198\ Section 7206 states that making fraudulent or false 
     statements under the Code is a felony. In addition, this 
     offense is a felony pursuant to the classification guidelines 
     of 18 U.S.C. 3559(a)(5).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Attempt to evade or defeat tax
       The Senate amendment increases the criminal penalty under 
     section 7201 of the Code for individuals to $250,000 and for 
     corporations to $1,000,000. The Senate amendment increases 
     the maximum prison sentence to ten years.
     Willful failure to file return, supply information, or pay 
         tax
       The Senate amendment increases the criminal penalty under 
     section 7203 of the Code from a misdemeanor to a felony and 
     increases the maximum prison sentence to ten years.
     Fraud and false statements
       The Senate amendment increases the criminal penalty under 
     section 7206 of the Code for individuals to $250,000 and for 
     corporations to $1,000,000. The Senate amendment increases 
     the maximum prison sentence to five years. The Senate 
     amendment also provides that in no event shall the amount of 
     the monetary penalty under this provision be less than the 
     amount of the underpayment or overpayment attributable to 
     fraud.
     Effective date
       The provision is effective for offenses committed after the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Executive compensation reforms (sec. 336, 337 and 338 of 
         the Senate amendment and sec. 83 and new sec. 409A of the 
         Code)


                              Present Law

     Property transferred in connection with the performance of 
         services
       Section 83 applies to transfers of property in connection 
     with the performance of services. Under section 83, if, in 
     connection with the performance of services, property is 
     transferred to any person other than the person for whom such 
     services are performed, the excess of the fair market value 
     of such property over the amount (if any) paid for the 
     property is includible in income at the first time that the 
     property is transferable or not subject to substantial risk 
     of forfeiture.
       Stock granted to an employee (or other service provider) is 
     subject to the rules that apply under section 83. When stock 
     is vested and transferred to an employee, the excess of the 
     fair market value of the stock over the amount, if any, the 
     employee pays for the stock is includible in the employee's 
     income for the year in which the transfer occurs.
       The income taxation of a nonqualified stock option is 
     determined under section 83 and depends on whether the option 
     has a readily ascertainable fair market value. If the 
     nonqualified option does not have a readily ascertainable 
     fair market value at the time of grant, no amount is 
     includible in the gross income of the recipient with respect 
     to the option until the recipient exercises the option. The 
     transfer of stock on exercise of the option is subject to the 
     general rules of section 83. That is, if vested stock is 
     received on exercise of the option, the excess of the fair 
     market value of the stock over the option price is includible 
     in the recipient's gross income as ordinary income in the 
     taxable year in which the option is exercised. If the stock 
     received on exercise of the option is not vested, the excess 
     of the fair market value of the stock at the time of vesting 
     over the option price is includible in the recipient's income 
     for the year in which vesting occurs unless the recipient 
     elects to apply section 83 at the time of exercise.
       Other forms of stock-based compensation are also subject to 
     the rules of section 83.
     Nonqualified deferred compensation
       The determination of when amounts deferred under a 
     nonqualified deferred compensation arrangement are includible 
     in the gross income of the individual earning the 
     compensation depends on the facts and circumstances of the 
     arrangement. A variety of tax principles and Code provisions 
     may be relevant in making this determination, including the 
     doctrine of constructive receipt, the economic benefit 
     doctrine,\199\ the provisions of section 83 relating 
     generally to transfers of property in connection with the 
     performance of services, and provisions relating specifically 
     to nonexempt employee trusts (sec. 402(b)) and nonqualified 
     annuities (sec. 403(c)).
---------------------------------------------------------------------------
     \199\ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), 
     aff'd per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-
     31, 1960-1 C.B. 174.
---------------------------------------------------------------------------
       In general, the time for income inclusion of nonqualified 
     deferred compensation depends on whether the arrangement is 
     unfunded or funded. If the arrangement is unfunded, then the 
     compensation is generally includible in income when it is 
     actually or constructively received. If the arrangement is 
     funded, then income is includible for the year in which the 
     individual's rights are transferable or not subject to a 
     substantial risk of forfeiture.
       Nonqualified deferred compensation is generally subject to 
     social security and Medicare tax when it is earned (i.e., 
     when services are performed), unless the nonqualified 
     deferred compensation is subject to a substantial risk of 
     forfeiture. If nonqualified deferred compensation is subject 
     to a substantial risk of forfeiture, it is subject to social 
     security and Medicare tax when the risk of forfeiture is 
     removed (i.e., when the right to the nonqualified deferred 
     compensation vests). This treatment is not affected by 
     whether the arrangement is funded or unfunded, which is 
     relevant in determining when amounts are includible in income 
     (and subject to income tax withholding).
       In general, an arrangement is considered funded if there 
     has been a transfer of property under section 83. Under that 
     section, a transfer of property occurs when a person acquires 
     a beneficial ownership interest in such property. The term 
     ``property'' is defined very broadly for purposes of section 
     83.\200\ Property includes real and personal property other 
     than money or an unfunded and unsecured promise to pay money 
     in the future. Property also includes a beneficial interest 
     in assets (including money) that are transferred or set aside 
     from claims of the creditors of the transferor, for example, 
     in a trust or escrow account. Accordingly, if, in connection 
     with the performance of services, vested contributions are 
     made to a trust on an individual's behalf and the trust 
     assets may be used solely to provide future payments to the 
     individual, the payment of the contributions to the trust 
     constitutes a transfer of property to the individual that is 
     taxable under section 83. On the other hand, deferred amounts 
     are generally not includible in income in situations where 
     nonqualified deferred compensation is payable from general 
     corporate funds that are subject to the claims of general 
     creditors, as such amounts are treated as unfunded and 
     unsecured promises to pay money or property in the future.
---------------------------------------------------------------------------
     \200\ Treas. Reg. sec. 1.83-3(e). This definition in part 
     reflects previous IRS rulings on nonqualified deferred 
     compensation.
---------------------------------------------------------------------------
       As discussed above, if the arrangement is unfunded, then 
     the compensation is generally includible in income when it is 
     actually or constructively received under section 451. Income 
     is constructively received when it is credited to an 
     individual's account, set apart, or otherwise made available 
     so that it can be drawn on at any time. Income is not 
     constructively received if the taxpayer's control of its 
     receipt is subject to substantial limitations or 
     restrictions. A requirement to relinquish a valuable right in 
     order to make withdrawals is generally treated as a 
     substantial limitation or restriction.
     Rabbi trusts
       Arrangements have developed in an effort to provide 
     employees with security for nonqualified deferred 
     compensation, while still allowing deferral of income 
     inclusion. A ``rabbi trust'' is a trust or other fund 
     established by the employer to hold assets from which 
     nonqualified deferred compensation payments will be made. The 
     trust or fund is generally irrevocable and does not permit 
     the employer to use the assets for purposes other than to 
     provide nonqualified deferred compensation, except that the 
     terms of the trust or fund provide that the assets are 
     subject to the claims of the employer's creditors in the case 
     of insolvency or bankruptcy.
       As discussed above, for purposes of section 83, property 
     includes a beneficial interest in assets set aside from the 
     claims of creditors, such as in a trust or fund, but does not 
     include an unfunded and unsecured promise to pay money in the 
     future. In the case of a rabbi trust, terms providing that 
     the assets are subject to the claims of creditors of the

[[Page H4651]]

     employer in the case of insolvency or bankruptcy have been 
     the basis for the conclusion that the creation of a rabbi 
     trust does not cause the related nonqualified deferred 
     compensation arrangement to be funded for income tax 
     purposes.\201\ As a result, no amount is included in income 
     by reason of the rabbi trust; generally income inclusion 
     occurs as payments are made from the trust.
---------------------------------------------------------------------------
     \201\ This conclusion was first provided in a 1980 private 
     ruling issued by the IRS with respect to an arrangement 
     covering a rabbi; hence the popular name ``rabbi trust.'' 
     Priv. Ltr. Rul. 8113107 (Dec. 31, 1980).
---------------------------------------------------------------------------
       The IRS has issued guidance setting forth model rabbi trust 
     provisions.\202\ Revenue Procedure 92-64 provides a safe 
     harbor for taxpayers who adopt and maintain grantor trusts in 
     connection with unfunded deferred compensation arrangements. 
     The model trust language requires that the trust provide that 
     all assets of the trust are subject to the claims of the 
     general creditors of the company in the event of the 
     company's insolvency or bankruptcy.
---------------------------------------------------------------------------
     \202\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by 
     Notice 2000-56, 2000-2 C.B. 393.
---------------------------------------------------------------------------
       Since the concept of rabbi trusts was developed, 
     arrangements have developed which attempt to protect the 
     assets from creditors despite the terms of the trust. 
     Arrangements also have developed which effectively allow 
     deferred amounts to be available to individuals, while still 
     meeting the safe harbor requirements set forth by the IRS.


                               House Bill

       No provision.


                            Senate Amendment

     Taxation of nonqualified deferred compensation funded with 
         assets located outside of the United States
       The Senate amendment provides that assets that are 
     designated or otherwise available for the use of providing 
     nonqualified deferred compensation and are located outside 
     the United States (e.g., in a foreign trust, arrangement or 
     account) are not treated as subject to the claims of general 
     creditors. Therefore, to the extent of such assets, 
     nonqualified deferred compensation amounts are not treated as 
     unfunded and unsecured promises to pay, but are treated as 
     property under section 83 and includible in income when the 
     right to the compensation is no longer subject to a 
     substantial risk of forfeiture, regardless of when the 
     compensation is paid. No inference is intended that 
     nonqualified deferred compensation assets located outside 
     of the U.S. would be treated as subject to the claims of 
     creditors under present law.
       The Senate amendment does not apply to assets located in a 
     foreign jurisdiction if substantially all of the services to 
     which the nonqualified deferred compensation relates are 
     performed in such foreign jurisdiction.
       The Senate amendment is specifically intended to apply to 
     foreign trusts and arrangements that effectively shield from 
     the claims of general creditors any assets intended to 
     satisfy nonqualified deferred compensation obligations. The 
     Senate amendment provides the Secretary of the Treasury 
     authority to prescribe regulations as are necessary to carry 
     out the provision and to provide additional exceptions for 
     specific arrangements which do not result in improper 
     deferral of U.S. tax if the assets involved in the 
     arrangement are readily accessible in any insolvency or 
     bankruptcy proceeding.
     Inclusion in gross income of funded deferred compensation of 
         corporate insiders
       Under the Senate amendment, if an employer maintains a 
     funded deferred compensation plan,\203\ compensation of any 
     disqualified individual which is deferred under the plan is 
     includible in the gross income of the individual or 
     beneficiary for the first taxable year in which there is no 
     substantial risk of forfeiture.\204\
---------------------------------------------------------------------------
     \203\ A plan includes an agreement or arrangement.
     \204\ Compensation is treated as subject to a substantial 
     risk of forfeiture if the rights to such compensation are 
     conditioned upon the future performance of substantial 
     services by any individual. If an arrangement is treated as a 
     funded deferred compensation plan under the provision, 
     amounts may be includible in gross income before they are 
     paid or made available. In determining the tax treatment of 
     amounts available under the plan, the rules applicable to the 
     taxation of annuities apply.
---------------------------------------------------------------------------
       Under the Senate amendment, a plan is treated as a funded 
     deferred compensation plan unless (1) the employee's rights 
     to the compensation deferred under the plan, and all income 
     attributable to such amounts, are no greater than the rights 
     of a general creditor of the employer; (2) until made 
     available to the participant or beneficiary, all amounts set 
     aside (directly or indirectly) for the purposes of paying the 
     deferred compensation, and all income attributable to such 
     amounts, remain solely the property of the employer and are 
     not restricted to the provision of benefits under the plan; 
     (3) at all times (not merely after bankruptcy or insolvency), 
     all amounts set aside are available to satisfy the claims of 
     the employer's general creditors; and (4) investment options 
     under which a participant may elect under the nonqualified 
     deferred compensation plan are the same as those which may be 
     elected by participants of the qualified employer plan that 
     has the fewest investment options. Under the Senate 
     amendment, if amounts are set aside for the exclusive purpose 
     of paying deferred compensation benefits, the plan is treated 
     as a funded plan. Amounts set aside in an employer's general 
     assets, even if such assets are segregated for bookkeeping or 
     accounting purposes, which are not restricted to the payment 
     of deferred compensation, and are subject to the claims of 
     general creditors, are not treated as funded if the other 
     requirements under the provision are satisfied.
       An employee's right to deferred compensation is treated as 
     greater than the rights of general creditors unless (1) the 
     deferred compensation, and all income attributable to such 
     amounts, is payable only upon separation from service, 
     disability, death, or at a specified time (or pursuant to a 
     fixed schedule) and (2) the plan does not permit the 
     acceleration of the time of such payments by reason of any 
     event. Amounts payable upon a specified event are not treated 
     as amounts payable at a specified time. For example, amounts 
     payable when an individual attains age 65 are payable at a 
     specified time, while amounts payable when an individual's 
     child begins college are payable by reason of an event. 
     Disability is defined as under the Social Security Act. Under 
     such definition, an individual is considered to be disabled 
     if he is unable to engage in any substantial gainful activity 
     by reason of any medically determinable physical or mental 
     impairment 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 twelve months. A plan which allows payment 
     of deferred compensation or earnings other than upon 
     separation from service, disability, death, or specified 
     time, or allows for any acceleration of payments, is treated 
     as funded and compensation deferred under such plan is 
     includible in income when the rights to such compensation are 
     not subject to a substantial risk of forfeiture.
       Even if an employee's rights are treated as no greater than 
     the rights of general creditors in compliance with the 
     previously discussed criteria, if the employer and employee 
     agree to a modification of the plan that accelerates the time 
     for payment of deferred compensation, then all compensation 
     previously deferred is includible in gross income for the 
     taxable year in which the modification takes effect. In 
     addition, upon such a modification, the taxpayer is required 
     to pay interest at the underpayment rate on the underpayments 
     that would have occurred had the deferred compensation been 
     includible in gross income on the earliest date that there is 
     no substantial risk of forfeiture of the right to the 
     compensation. Such interest is treated as interest on an 
     underpayment of tax.
       With respect to amounts set aside in a trust, a plan is 
     treated as failing to meet the requirement that amounts set 
     aside remain solely the property of the employer and are not 
     restricted to the payment of benefits under the plan unless 
     certain specified criteria are met: (1) the employee must 
     have no beneficial interest in the trust; (2) assets in the 
     trust must be available to satisfy the claims of general 
     creditors at all times (not merely after bankruptcy or 
     insolvency); and (3) no factor can exist which would make it 
     more difficult for general creditors to reach the assets in 
     the trust than it would be if the trust assets were held 
     directly by the employer in the United States. The location 
     of the trust outside of the United States is such a 
     prohibited factor, unless substantially all of the services 
     to which the nonqualified deferred compensation relates are 
     performed in such foreign jurisdiction. The Senate amendment 
     provides the Secretary of the Treasury authority to provide 
     additional exceptions from the requirement for specific 
     arrangements which do not result in improper deferral of U.S. 
     tax if the assets involved in the arrangement are readily 
     accessible to general creditors. If any of the criteria are 
     not satisfied, the trust is treated as a funded arrangement 
     and compensation deferred is includible in gross income when 
     such compensation is not subject to a substantial risk of 
     forfeiture.
       A disqualified individual is any individual who, with 
     respect to a corporation, is subject to the requirements of 
     section 16(a) of the Securities Act of 1934, or would be 
     subject to such requirements if such corporation were an 
     issuer of equity securities referred to in that section. 
     Generally, disqualified individuals include officers (as 
     defined by section 16(a)),\205\ directors, or 10-percent 
     owners of both private and publicly-held corporations.
---------------------------------------------------------------------------
     \205\ An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policymaking function, or any 
     other person who performs similar policymaking functions.
---------------------------------------------------------------------------
       A funded deferred compensation plan does not include a 
     qualified retirement plan or annuity, a tax-sheltered 
     annuity, a simplified employee pension, a simple retirement 
     account, certain plans funded solely by employee 
     contributions, a governmental plan, or a plan of a tax-exempt 
     organization. Present law rules continue to apply to plans or 
     arrangements not subject to the Senate amendment (e.g., secs. 
     401(a), 403(b), and 457).
       It is not intended that the Senate amendment change the tax 
     treatment of trusts under section 402(b) or of any 
     arrangements under which amounts are otherwise includible in 
     income. It is not intended that the Senate amendment change 
     the rules applicable to an employer's deduction for 
     nonqualified deferred compensation.
       The Senate amendment provides the Secretary of the Treasury 
     authority to prescribe regulations as are necessary to carry 
     out the provision.

[[Page H4652]]

     Denial of deferral of certain stock option and restricted 
         stock gains
       Under the Senate amendment, gains attributable to stock 
     options (including exercises of stock options), vesting of 
     restricted stock, and other employer security based 
     compensation cannot be deferred by electing to receive a 
     future payment in lieu of such amounts. The Senate amendment 
     applies even if the future right to payment is treated as an 
     unfunded to promise to pay.
       The Senate amendment is not intended to imply that such 
     practices result in permissive deferral of income under 
     present law.
     Effective date
       The Senate amendment relating to nonqualified deferred 
     compensation assets located outside of the United States is 
     effective for amounts deferred in taxable years beginning 
     after December 31, 2003.
       The Senate amendment requiring inclusion in income of 
     funded nonqualified deferred compensation of corporate 
     insiders is effective for amounts deferred in taxable years 
     beginning after December 31, 2003.
       The Senate amendment denying deferral of certain stock 
     option and restricted stock gains is effective for exchanges 
     after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provisions.
     7. Increase in withholding from supplemental wage payments in 
         excess of $1 million (sec. 339 of the Senate amendment 
         and sec. 13273 of the Revenue Reconciliation Act of 1993)


                              Present Law

       An employer must withhold income taxes from wages paid to 
     employees; there are several possible methods for determining 
     the amount of income tax to be withheld. The IRS publishes 
     tables (Publication 15, ``Circular E'') to be used in 
     determining the amount of income tax to be withheld. The 
     tables generally reflect the income tax rates under the Code 
     so that withholding approximates the ultimate tax liability 
     with respect to the wage payments. In some cases, 
     ``supplemental'' wage payments (e.g., bonuses or commissions) 
     may be subject to withholding at a flat rate,\206\ based on 
     the third lowest income tax rate under the Code (27 percent 
     for 2003).\207\
---------------------------------------------------------------------------
     \206\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
     \207\ Sec. 101(c)(11) of the Economic Growth and Tax Relief 
     Reconciliation Act of 2001.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, once annual supplemental wage 
     payments to an employee exceed $1 million, any additional 
     supplemental wage payments to the employee in that year are 
     subject to withholding at the highest income tax rate (38.6 
     percent for 2003), regardless of any other withholding rules 
     and regardless of the employee's Form W-4.
       This rule applies only for purposes of wage withholding; 
     other types of withholding (such as pension withholding and 
     backup withholding) are not affected.
       Effective date.--The provision is effective with respect to 
     payments made after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                      D. International Provisions

     1. Impose mark-to-market on individuals who expatriate (sec. 
         340 of the Senate amendment and secs. 102, 877, 2107, 
         2501, 7701 and 6039G of the Code)


                              Present Law

     In general
       U.S. citizens and residents generally are subject to U.S. 
     income taxation on their worldwide income. The U.S. tax may 
     be reduced or offset by a credit allowed for foreign income 
     taxes paid with respect to foreign-source income. 
     Nonresidents who are not U.S. citizens are taxed at a flat 
     rate of 30 percent (or a lower treaty rate) on certain types 
     of passive income derived from U.S. sources, and at regular 
     graduated rates on net profits derived from a U.S. business.
     Income tax rules with respect to expatriates
       An individual who relinquishes his or her U.S. citizenship 
     or terminates his or her U.S. residency with a principal 
     purpose of avoiding U.S. taxes is subject to an alternative 
     method of income taxation for the 10 taxable years ending 
     after the expatriation or residency termination under section 
     877. The alternative method of taxation for expatriates 
     modifies the rules generally applicable to the taxation of 
     nonresident noncitizens in several ways. First, the 
     individual is subject to tax on his or her U.S.-source income 
     at the rates applicable to U.S. citizens rather than the 
     rates applicable to other nonresident noncitizens. Unlike 
     U.S. citizens, however, individuals subject to section 877 
     are not taxed on foreign-source income. Second, the scope of 
     items treated as U.S.-source income for section 877 purposes 
     is broader than those items generally considered to be U.S.-
     source income under the Code.\208\ Third, individuals subject 
     to section 877 are taxed on exchanges of certain types of 
     property that give rise to U.S.-source income for property 
     that gives rise to foreign-source income.\209\ Fourth, an 
     individual subject to section 877 who contributes property to 
     a controlled foreign corporation is treated as receiving 
     income or gain from such property directly and is taxable on 
     such income or gain. The alternative method of taxation for 
     expatriates applies only if it results in a higher U.S. tax 
     liability than would otherwise be determined if the 
     individual were taxed as a nonresident noncitizen.
---------------------------------------------------------------------------
     \208\ For example, gains on the sale or exchange of personal 
     property located in the United States, and gains on the sale 
     or exchange of stocks and securities issued by U.S. persons, 
     generally are not considered to be U.S.-source income under 
     the Code. Thus, such gains would not be taxable to a 
     nonresident noncitizen. However, if an individual is subject 
     to the alternative regime under sec. 877, such gains are 
     treated as U.S.-source income with respect to that 
     individual.
     \209\ For example, a former citizen who is subject to the 
     alternative tax regime and who removes appreciated artwork 
     that he or she owns from the United States could be subject 
     to immediate U.S. tax on the appreciation. In this regard, 
     the removal from the United States of appreciated tangible 
     personal property having an aggregate fair market value in 
     excess of $250,000 within the 15-year period beginning five 
     years prior to the expatriation will be treated as an 
     ``exchange'' subject to these rules.
---------------------------------------------------------------------------
       The expatriation tax provisions apply to long-term 
     residents of the United States whose U.S. residency is 
     terminated. For this purpose, a long-term resident is any 
     individual who was a lawful permanent resident of the United 
     States for at least 8 out of the 15 taxable years ending with 
     the year in which such termination occurs. In applying the 8-
     year test, an individual is not considered to be a lawful 
     permanent resident for any year in which the individual is 
     treated as a resident of another country under a treaty tie-
     breaker rule (and the individual does not elect to waive the 
     benefits of such treaty).
       Subject to the exceptions described below, an individual is 
     treated as having expatriated or terminated residency with a 
     principal purpose of avoiding U.S. taxes if either: (1) the 
     individual's average annual U.S. Federal income tax liability 
     for the 5 taxable years ending before the date of the 
     individual's loss of U.S. citizenship or termination of U.S. 
     residency is greater than $100,000 (the ``tax liability 
     test''), or (2) the individual's net worth as of the date of 
     such loss or termination is $500,000 or more (the ``net worth 
     test''). The dollar amount thresholds contained in the tax 
     liability test and the net worth test are indexed for 
     inflation in the case of a loss of citizenship or termination 
     of residency occurring in any calendar year after 1996. An 
     individual who falls below these thresholds is not 
     automatically treated as having a principal purpose of tax 
     avoidance, but nevertheless is subject to the expatriation 
     tax provisions if the individual's loss of citizenship or 
     termination of residency in fact did have as one of its 
     principal purposes the avoidance of tax.
       Certain exceptions from the treatment that an individual 
     relinquished his or her U.S. citizenship or terminated his or 
     her U.S. residency for tax avoidance purposes may also apply. 
     For example, a U.S. citizen who loses his or her citizenship 
     and who satisfies either the tax liability test or the net 
     worth test (described above) can avoid being deemed to have a 
     principal purpose of tax avoidance if the individual falls 
     within certain categories (such as being a dual citizen) and 
     the individual, within one year from the date of loss of 
     citizenship, submits a ruling request for a determination by 
     the Secretary of the Treasury as to whether such loss had as 
     one of its principal purposes the avoidance of taxes.
     Estate tax rules with respect to expatriates
       Nonresident noncitizens generally are subject to estate tax 
     on certain transfers of U.S.-situated property at death.\210\ 
     Such property includes real estate and tangible property 
     located within the United States. Moreover, for estate tax 
     purposes, stock held by nonresident noncitizens is treated as 
     U.S.-situated if issued by a U.S. corporation.
---------------------------------------------------------------------------
     \210\ The Economic Growth and Tax Relief Reconciliation Act 
     of 2001 (the ``Act'') repealed the estate tax for estates of 
     decedents dying after December 31, 2009. However, the Act 
     included a ``sunset'' provision, pursuant to which the Act's 
     provisions (including estate tax repeal) do not apply to 
     estates of decedents dying after December 31, 2010.
---------------------------------------------------------------------------
       Special rules apply to U.S. citizens who relinquish their 
     citizenship and long-term residents who terminate their U.S. 
     residency within the 10 years prior to the date of death, 
     unless the loss of status did not have as one its principal 
     purposes the avoidance of tax (sec. 2107). Under these rules, 
     the decedent's estate includes the proportion of the 
     decedent's stock in a foreign corporation that the fair 
     market value of the U.S.-situs assets owned by the 
     corporation bears to the total assets of the corporation. 
     This rule applies only if (1) the decedent owned, directly, 
     at death 10 percent or more of the combined voting power of 
     all voting stock of the corporation and (2) the decedent 
     owned, directly or indirectly, at death more than 50 percent 
     of the total voting stock of the corporation or more than 50 
     percent of the total value of all stock of the corporation.
       Taxpayers are deemed to have a principal purpose of tax 
     avoidance if they meet the five-year tax liability test or 
     the net worth test, discussed above. Exceptions from this tax 
     avoidance treatment apply in the same circumstances as those 
     described above (relating to certain dual citizens and other 
     individuals who submit a timely and complete

[[Page H4653]]

     ruling request with the IRS as to whether their expatriation 
     or residency termination had a principal purpose of tax 
     avoidance).
     Gift tax rules with respect to expatriates
       Nonresident noncitizens generally are subject to gift tax 
     on certain transfers by gift of U.S.-situated property. Such 
     property includes real estate and tangible property located 
     within the United States. Unlike the estate tax rules for 
     U.S. stock held by nonresidents, however, nonresident 
     noncitizens generally are not subject to U.S. gift tax on the 
     transfer of intangibles, such as stock or securities, 
     regardless of where such property is situated.
       Special rules apply to U.S. citizens who relinquish their 
     U.S. citizenship or long-term residents of the United States 
     who terminate their U.S. residency within the 10 years prior 
     to the date of transfer, unless such loss did not have as one 
     of its principal purposes the avoidance of tax (sec. 
     2501(a)(3)). Under these rules, nonresident noncitizens are 
     subject to gift tax on transfers of intangibles, such as 
     stock or securities. Taxpayers are deemed to have a principal 
     purpose of tax avoidance if they meet the five-year tax 
     liability test or the net worth test, discussed above. 
     Exceptions from this tax avoidance treatment apply in the 
     same circumstances as those described above (relating to 
     certain dual citizens and other individuals who submit a 
     timely and complete ruling request with the IRS as to whether 
     their expatriation or residency termination had a principal 
     purpose of tax avoidance).
     Other tax rules with respect to expatriates
       The expatriation tax provisions permit a credit against the 
     U.S. tax imposed under such provisions for any foreign 
     income, gift, estate, or similar taxes paid with respect to 
     the items subject to such taxation. This credit is available 
     only against the tax imposed solely as a result of the 
     expatriation tax provisions, and is not available to be used 
     to offset any other U.S. tax liability.
       In addition, certain information reporting requirements 
     apply. Under these rules, a U.S. citizen who loses his or her 
     citizenship is required to provide a statement to the State 
     Department (or other designated government entity) that 
     includes the individual's social security number, forwarding 
     foreign address, new country of residence and citizenship, a 
     balance sheet in the case of individuals with a net worth of 
     at least $500,000, and such other information as the 
     Secretary may prescribe. The information statement must be 
     provided no later than the earliest day on which the 
     individual (1) renounces the individual's U.S. nationality 
     before a diplomatic or consular officer of the United States, 
     (2) furnishes to the U.S. Department of State a statement of 
     voluntary relinquishment of U.S. nationality confirming an 
     act of expatriation, (3) is issued a certificate of loss of 
     U.S. nationality by the U.S. Department of State, or (4) 
     loses U.S. nationality because the individual's certificate 
     of naturalization is canceled by a U.S. court. The entity to 
     which such statement is to be provided is required to provide 
     to the Secretary of the Treasury copies of all statements 
     received and the names of individuals who refuse to provide 
     such statements. A long-term resident whose U.S. residency is 
     terminated is required to attach a similar statement to his 
     or her U.S. income tax return for the year of such 
     termination. An individual's failure to provide the required 
     statement results in the imposition of a penalty for each 
     year the failure continues equal to the greater of (1) 5 
     percent of the individual's expatriation tax liability for 
     such year, or (2) $1,000.
       The State Department is required to provide the Secretary 
     of the Treasury with a copy of each certificate of loss of 
     nationality approved by the State Department. Similarly, the 
     agency administering the immigration laws is required to 
     provide the Secretary of the Treasury with the name of each 
     individual whose status as a lawful permanent resident has 
     been revoked or has been determined to have been abandoned. 
     Further, the Secretary of the Treasury is required to publish 
     in the Federal Register the names of all former U.S. citizens 
     with respect to whom it receives the required statements or 
     whose names or certificates of loss of nationality it 
     receives under the foregoing information-sharing provisions.
     Immigration rules with respect to expatriates
       Under U.S. immigration laws, any former U.S. citizen who 
     officially renounces his or her U.S. citizenship and who is 
     determined by the Attorney General to have renounced for the 
     purpose of U.S. tax avoidance is ineligible to receive a U.S. 
     visa and will be denied entry into the United States. This 
     provision was included as an amendment (the ``Reed 
     amendment'') to immigration legislation that was enacted in 
     1996.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment generally subjects certain U.S. 
     citizens who relinquish their U.S. citizenship and certain 
     long-term U.S. residents who terminate their U.S. residence 
     to tax on the net unrealized gain in their property as if 
     such property were sold for fair market value on the day 
     before the expatriation or residency termination. Gain from 
     the deemed sale is taken into account at that time without 
     regard to other Code provisions; any loss from the deemed 
     sale generally would be taken into account to the extent 
     otherwise provided in the Code. Any net gain on the deemed 
     sale is recognized to the extent it exceeds $600,000 ($1.2 
     million in the case of married individuals filing a joint 
     return, both of whom relinquish citizenship or terminate 
     residency). The $600,000 amount is increased by a cost of 
     living adjustment factor for calendar years after 2003.
     Individuals covered
       Under the Senate amendment, the mark-to-market tax applies 
     to U.S. citizens who relinquish citizenship and long-term 
     residents who terminate U.S. residency. An individual is a 
     long-term resident if he or she was a lawful permanent 
     resident for at least eight out of the 15 taxable years 
     ending with the year in which the termination of residency 
     occurs. An individual is considered to terminate long-term 
     residency when either the individual ceases to be a lawful 
     permanent resident (i.e., loses his or her green card 
     status), or the individual is treated as a resident of 
     another country under a tax treaty and the individual does 
     not waive the benefits of the treaty.
       Exceptions from the mark-to-market tax are provided in two 
     situations. The first exception applies to an individual who 
     was born with citizenship both in the United States and in 
     another country; provided that (1) as of the expatriation 
     date the individual continues to be a citizen of, and is 
     taxed as a resident of, such other country, and (2) the 
     individual was not a resident of the United States for the 
     five taxable years ending with the year of expatriation. The 
     second exception applies to a U.S. citizen who relinquishes 
     U.S. citizenship before reaching age 18 and a half, provided 
     that the individual was a resident of the United States for 
     no more than five taxable years before such relinquishment.
     Election to be treated as a U.S. citizen
       Under the Senate amendment, an individual is permitted to 
     make an irrevocable election to continue to be taxed as a 
     U.S. citizen with respect to all property that otherwise is 
     covered by the expatriation tax. This election is an ``all or 
     nothing'' election; an individual is not permitted to elect 
     this treatment for some property but not for other property. 
     The election, if made, would apply to all property that would 
     be subject to the expatriation tax and to any property the 
     basis of which is determined by reference to such property. 
     Under this election, the individual would continue to pay 
     U.S. income taxes at the rates applicable to U.S. citizens 
     following expatriation on any income generated by the 
     property and on any gain realized on the disposition of the 
     property. In addition, the property would continue to be 
     subject to U.S. gift, estate, and generation-skipping 
     transfer taxes. In order to make this election, the taxpayer 
     would be required to waive any treaty rights that would 
     preclude the collection of the tax.
       The individual also would be required to provide security 
     to ensure payment of the tax under this election in such 
     form, manner, and amount as the Secretary of the Treasury 
     requires. The amount of mark-to-market tax that would have 
     been owed but for this election (including any interest, 
     penalties, and certain other items) shall be a lien in favor 
     of the United States on all U.S.-situs property owned by the 
     individual. This lien shall arise on the expatriation date 
     and shall continue until the tax liability is satisfied, the 
     tax liability has become unenforceable by reason of lapse of 
     time, or the Secretary is satisfied that no further tax 
     liability may arise by reason of this provision. The rules of 
     section 6324A(d)(1), (3), and (4) (relating to liens arising 
     in connection with the deferral of estate tax under section 
     6166) apply to liens arising under this provision.
     Date of relinquishment of citizenship
       Under the Senate amendment, an individual is treated as 
     having relinquished U.S. citizenship on the earliest of four 
     possible dates: (1) the date that the individual renounces 
     U.S. nationality before a diplomatic or consular officer of 
     the United States (provided that the voluntary relinquishment 
     is later confirmed by the issuance of a certificate of loss 
     of nationality); (2) the date that the individual furnishes 
     to the State Department a signed statement of voluntary 
     relinquishment of U.S. nationality confirming the performance 
     of an expatriating act (again, provided that the voluntary 
     relinquishment is later confirmed by the issuance of a 
     certificate of loss of nationality); (3) the date that the 
     State Department issues a certificate of loss of nationality; 
     or (4) the date that a U.S. court cancels a naturalized 
     citizen's certificate of naturalization.
     Deemed sale of property upon expatriation or residency 
         termination
       The deemed sale rule of the Senate amendment generally 
     applies to all property interests held by the individual on 
     the date of relinquishment of citizenship or termination of 
     residency. Special rules apply in the case of trust 
     interests, as described below. U.S. real property interests, 
     which remain subject to U.S. tax in the hands of nonresident 
     noncitizens, generally are excepted from the provision. 
     Regulatory authority is granted to the Treasury to except 
     other types of property from the provision.
       Under the Senate amendment, an individual who is subject to 
     the mark-to-market tax is required to pay a tentative tax 
     equal to the amount of tax that would be due for a 
     hypothetical short tax year ending on the date the individual 
     relinquished citizenship or terminated residency. Thus, the 
     tentative tax is based on all income, gain, deductions, loss, 
     and credits of the individual for the year through such date, 
     including amounts

[[Page H4654]]

     realized from the deemed sale of property. The tentative tax 
     is due on the 90th day after the date of relinquishment of 
     citizenship or termination of residency.
     Retirement plans and similar arrangements
       Subject to certain exceptions, the Senate amendment applies 
     to all property interests held by the individual at the time 
     of relinquishment of citizenship or termination of residency. 
     Accordingly, such property includes an interest in an 
     employer-sponsored retirement plan or deferred compensation 
     arrangement as well as an interest in an individual 
     retirement account or annuity (i.e., an IRA).\211\ However, 
     the Senate amendment contains a special rule for an interest 
     in a ``qualified retirement plan.'' For purposes of the 
     provision, a ``qualified retirement plan'' includes an 
     employer-sponsored qualified plan (sec. 401(a)), a qualified 
     annuity (sec. 403(a)), a tax-sheltered annuity (sec. 403(b)), 
     an eligible deferred compensation plan of a governmental 
     employer (sec. 457(b)), or an IRA (sec. 408). The special 
     retirement plan rule applies also, to the extent provided in 
     regulations, to any foreign plan or similar retirement 
     arrangement or program. An interest in a trust that is part 
     of a qualified retirement plan or other arrangement that is 
     subject to the special retirement plan rule is not subject to 
     the rules for interests in trusts (discussed below).
---------------------------------------------------------------------------
     \211\ Application of the provision is not limited to an 
     interest that meets the definition of property under section 
     83 (relating to property transferred in connection with the 
     performance of services).
---------------------------------------------------------------------------
       Under the special rule, an amount equal to the present 
     value of the individual's vested, accrued benefit under a 
     qualified retirement plan is treated as having been received 
     by the individual as a distribution under the plan on the day 
     before the individual's relinquishment of citizenship or 
     termination of residency. It is not intended that the plan 
     would be deemed to have made a distribution for purposes of 
     the tax-favored status of the plan, such as whether a plan 
     may permit distributions before a participant has severed 
     employment. In the case of any later distribution to the 
     individual from the plan, the amount otherwise includible in 
     the individual's income as a result of the distribution is 
     reduced to reflect the amount previously included in income 
     under the special retirement plan rule. The amount of the 
     reduction applied to a distribution is the excess of: (1) the 
     amount included in income under the special retirement plan 
     rule over (2) the total reductions applied to any prior 
     distributions. However, under the provision, the retirement 
     plan, and any person acting on the plan's behalf, will treat 
     any later distribution in the same manner as the distribution 
     would be treated without regard to the special retirement 
     plan rule.
       It is expected that the Treasury Department will provide 
     guidance for determining the present value of an individual's 
     vested, accrued benefit under a qualified retirement plan, 
     such as the individual's account balance in the case of a 
     defined contribution plan or an IRA, or present value 
     determined under the qualified joint and survivor annuity 
     rules applicable to a defined benefit plan (sec. 417(e)).
     Deferral of payment of tax
       Under the Senate amendment, an individual is permitted to 
     elect to defer payment of the mark-to-market tax imposed on 
     the deemed sale of the property. Interest is charged for the 
     period the tax is deferred at a rate two percentage points 
     higher than the rate normally applicable to individual 
     underpayments. Under this election, the mark-to-market tax 
     attributable to a particular property is due when the 
     property is disposed of (or, if the property is disposed of 
     in whole or in part in a nonrecognition transaction, at such 
     other time as the Secretary may prescribe). The mark-to-
     market tax attributable to a particular property is an amount 
     that bears the same ratio to the total mark-to-market tax for 
     the year as the gain taken into account with respect to such 
     property bears to the total gain taken into account under 
     these rules for the year. The deferral of the mark-to-market 
     tax may not be extended beyond the individual's death.
       In order to elect deferral of the mark-to-market tax, the 
     individual is required to provide adequate security to the 
     Treasury to ensure that the deferred tax and interest will be 
     paid. Other security mechanisms are permitted provided that 
     the individual establishes to the satisfaction of the 
     Secretary that the security is adequate. In the event that 
     the security provided with respect to a particular property 
     subsequently becomes inadequate and the individual fails to 
     correct the situation, the deferred tax and the interest with 
     respect to such property will become due. As a further 
     condition to making the election, the individual is 
     required to consent to the waiver of any treaty rights 
     that would preclude the collection of the tax.
       The deferred amount (including any interest, penalties, and 
     certain other items) shall be a lien in favor of the United 
     States on all U.S.-situs property owned by the individual. 
     This lien shall arise on the expatriation date and shall 
     continue until the tax liability is satisfied, the tax 
     liability has become unenforceable by reason of lapse of 
     time, or the Secretary is satisfied that no further tax 
     liability may arise by reason of this provision. The rules of 
     section 6324A(d)(1), (3), and (4) (relating to liens arising 
     in connection with the deferral of estate tax under section 
     6166) apply to liens arising under this provision.
     Interests in trusts
       Under the Senate amendment, detailed rules apply to trust 
     interests held by an individual at the time of relinquishment 
     of citizenship or termination of residency. The treatment of 
     trust interests depends on whether the trust is a qualified 
     trust. A trust is a qualified trust if a court within the 
     United States is able to exercise primary supervision over 
     the administration of the trust and one or more U.S. persons 
     have the authority to control all substantial decisions of 
     the trust.
       Constructive ownership rules apply to a trust beneficiary 
     that is a corporation, partnership, trust, or estate. In such 
     cases, the shareholders, partners, or beneficiaries of the 
     entity are deemed to be the direct beneficiaries of the trust 
     for purposes of applying these provisions. In addition, an 
     individual who holds (or who is treated as holding) a trust 
     instrument at the time of relinquishment of citizenship or 
     termination of residency is required to disclose on his or 
     her tax return the methodology used to determine his or her 
     interest in the trust, and whether such individual knows (or 
     has reason to know) that any other beneficiary of the trust 
     uses a different method.
       Nonqualified trusts.--If an individual holds an interest in 
     a trust that is not a qualified trust, a special rule applies 
     for purposes of determining the amount of the mark-to-market 
     tax due with respect to such trust interest. The individual's 
     interest in the trust is treated as a separate trust 
     consisting of the trust assets allocable to such interest. 
     Such separate trust is treated as having sold its net assets 
     as of the date of relinquishment of citizenship or 
     termination of residency and having distributed the assets to 
     the individual, who then is treated as having recontributed 
     the assets to the trust. The individual is subject to the 
     mark-to-market tax with respect to any net income or gain 
     arising from the deemed distribution from the trust.
       The election to defer payment is available for the mark-to-
     market tax attributable to a nonqualified trust interest. 
     Interest is charged for the period the tax is deferred at a 
     rate two percentage points higher than the rate normally 
     applicable to individual underpayments. A beneficiary's 
     interest in a nonqualified trust is determined under all the 
     facts and circumstances, including the trust instrument, 
     letters of wishes, and historical patterns of trust 
     distributions.
       Qualified trusts.--If an individual has an interest in a 
     qualified trust, the amount of unrealized gain allocable to 
     the individual's trust interest is calculated at the time of 
     expatriation or residency termination. In determining this 
     amount, all contingencies and discretionary interests are 
     assumed to be resolved in the individual's favor (i.e., the 
     individual is allocated the maximum amount that he or she 
     could receive). The mark-to-market tax imposed on such gains 
     is collected when the individual receives distributions from 
     the trust, or if earlier, upon the individual's death. 
     Interest is charged for the period the tax is deferred at a 
     rate two percentage points higher than the rate normally 
     applicable to individual underpayments.
       If an individual has an interest in a qualified trust, the 
     individual is subject to the mark-to-market tax upon the 
     receipt of distributions from the trust. These distributions 
     also may be subject to other U.S. income taxes. If a 
     distribution from a qualified trust is made after the 
     individual relinquishes citizenship or terminates residency, 
     the mark-to-market tax is imposed in an amount equal to the 
     amount of the distribution multiplied by the highest tax rate 
     generally applicable to trusts and estates, but in no event 
     will the tax imposed exceed the deferred tax amount with 
     respect to the trust interest. For this purpose, the deferred 
     tax amount is equal to (1) the tax calculated with respect to 
     the unrealized gain allocable to the trust interest at the 
     time of expatriation or residency termination, (2) increased 
     by interest thereon, and (3) reduced by any mark-to-market 
     tax imposed on prior trust distributions to the individual.
       If any individual's interest in a trust is vested as of the 
     expatriation date (e.g., if the individual's interest in the 
     trust is non-contingent and non-discretionary), the gain 
     allocable to the individual's trust interest is determined 
     based on the trust assets allocable to his or her trust 
     interest. If the individual's interest in the trust is not 
     vested as of the expatriation date (e.g., if the individual's 
     trust interest is a contingent or discretionary interest), 
     the gain allocable to his or her trust interest is determined 
     based on all of the trust assets that could be allocable to 
     his or her trust interest, determined by resolving all 
     contingencies and discretionary powers in the individual's 
     favor. In the case where more than one trust beneficiary is 
     subject to the expatriation tax with respect to trust 
     interests that are not vested, the rules are intended to 
     apply so that the same unrealized gain with respect to assets 
     in the trust is not taxed to both individuals.
       Mark-to-market taxes become due if the trust ceases to be a 
     qualified trust, the individual disposes of his or her 
     qualified trust interest, or the individual dies. In such 
     cases, the amount of mark-to-market tax equals the lesser of 
     (1) the tax calculated under the rules for nonqualified trust 
     interests as of the date of the triggering event, or (2) the 
     deferred tax amount with respect to the trust interest as of 
     that date.
       The tax that is imposed on distributions from a qualified 
     trust generally is deducted and withheld by the trustees. If 
     the individual does not agree to waive treaty rights

[[Page H4655]]

     that would preclude collection of the tax, the tax with 
     respect to such distributions is imposed on the trust, the 
     trustee is personally liable for the tax, and any other 
     beneficiary has a right of contribution against such 
     individual with respect to the tax. Similar rules apply when 
     the qualified trust interest is disposed of, the trust ceases 
     to be a qualified trust, or the individual dies.
     Coordination with present-law alternative tax regime
       The Senate amendment provides a coordination rule with the 
     present-law alternative tax regime. Under the provision, the 
     expatriation income tax rules under section 877, and the 
     expatriation estate and gift tax rules under sections 2107 
     and 2501(a)(3) (described above), do not apply to a former 
     citizen or former long-term resident whose expatriation or 
     residency termination occurs on or after February 5, 2003.
     Treatment of gifts and inheritances from a former citizen or 
         former long-term resident
       Under the Senate amendment, the exclusion from income 
     provided in section 102 (relating to exclusions from income 
     for the value of property acquired by gift or inheritance) 
     does not apply to the value of any property received by gift 
     or inheritance from a former citizen or former long-term 
     resident (i.e., an individual who relinquished U.S. 
     citizenship or terminated U.S. residency), subject to the 
     exceptions described above relating to certain dual citizens 
     and minors. Accordingly, a U.S. taxpayer who receives a gift 
     or inheritance from such an individual is required to include 
     the value of such gift or inheritance in gross income and is 
     subject to U.S. tax on such amount. Having included the value 
     of the property in income, the recipient would then take a 
     basis in the property equal to that value. The tax does not 
     apply to property that is shown on a timely filed gift tax 
     return and that is a taxable gift by the former citizen or 
     former long-term resident, or property that is shown on a 
     timely filed estate tax return and included in the gross U.S. 
     estate of the former citizen or former long-term resident 
     (regardless of whether the tax liability shown on such a 
     return is reduced by credits, deductions, or exclusions 
     available under the estate and gift tax rules). In addition, 
     the tax does not apply to property in cases in which no 
     estate or gift tax return is required to be filed, where no 
     such return would have been required to be filed if the 
     former citizen or former long-term resident had not 
     relinquished citizenship or terminated residency, as the case 
     may be. Applicable gifts or bequests that are made in trust 
     are treated as made to the beneficiaries of the trust in 
     proportion to their respective interests in the trust.
     Information reporting
       The Senate amendment provides that certain information 
     reporting requirements under present law (sec. 6039G) 
     applicable to former citizens and former long-term residents 
     also apply for purposes of the provision.
     Immigration rules
       The Senate amendment amends the immigration rules that deny 
     tax-motivated expatriates reentry into the United States by 
     removing the requirement that the expatriation be tax-
     motivated, and instead denies former citizens reentry into 
     the United States if the individual is determined not to be 
     in compliance with his or her tax obligations under the 
     provision's expatriation tax provisions (regardless of the 
     subjective motive for expatriating). For this purpose, the 
     provision permits the IRS to disclose certain items of return 
     information of an individual, upon written request of the 
     Attorney General or his delegate, as is necessary for making 
     a determination under section 212(a)(10)(E) of the 
     Immigration and Nationality Act. Specifically, the provision 
     would permit the IRS to disclose to the agency administering 
     section 212(a)(10)(E) whether such taxpayer is in compliance 
     with section 877A and identify the items of noncompliance. 
     Recordkeeping requirements, safeguards, and civil and 
     criminal penalties for unauthorized disclosure or inspection 
     would apply to return information disclosed under this 
     provision.
     Effective date
       The Senate amendment generally is effective for U.S. 
     citizens who relinquish citizenship or long-term residents 
     who terminate their residency on or after February 5, 2003. 
     The provisions relating to gifts and inheritances are 
     effective for gifts and inheritances received from former 
     citizens and former long-term residents on or after February 
     5, 2003, whose expatriation or residency termination occurs 
     on or after such date. The provisions relating to former 
     citizens under U.S. immigration laws are effective on or 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Provisions to discourage corporate expatriation (secs. 
         341-343 of the Senate amendment and secs. 845(a) and 
         275(a) and new secs. 7874 and 5000A of the Code)
       (a) Tax treatment of inverted corporate entities


                              Present Law

     Determination of corporate residence
       The U.S. tax treatment of a multinational corporate group 
     depends significantly on whether the top-tier ``parent'' 
     corporation of the group is domestic or foreign. For purposes 
     of U.S. tax law, a corporation is treated as domestic if it 
     is incorporated under the law of the United States or of any 
     State. All other corporations (i.e., those incorporated under 
     the laws of foreign countries) are treated as foreign. Thus, 
     place of incorporation determines whether a corporation is 
     treated as domestic or foreign for purposes of U.S. tax law, 
     irrespective of other factors that might be thought to bear 
     on a corporation's ``nationality,'' such as the location of 
     the corporation's management activities, employees, business 
     assets, operations, or revenue sources, the exchanges on 
     which the corporation's stock is traded, or the residence of 
     the corporation's managers and shareholders.
     U.S. taxation of domestic corporations
       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. In 
     order to mitigate the double taxation that may arise from 
     taxing the foreign-source income of a domestic corporation, a 
     foreign tax credit for income taxes paid to foreign countries 
     is provided to reduce or eliminate the U.S. tax owed on such 
     income, subject to certain limitations.
       Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income is generally 
     deferred. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless of whether the income has been 
     distributed as a dividend to the domestic parent corporation. 
     The main anti-deferral regimes in this context are the 
     controlled foreign corporation rules of subpart F \212\ and 
     the passive foreign investment company rules.\213\ A foreign 
     tax credit is generally available to offset, in whole or in 
     part, the U.S. tax owed on this foreign-source income, 
     whether repatriated as an actual dividend or included under 
     one of the anti-deferral regimes.
---------------------------------------------------------------------------
     \212\ Secs. 951-964.
     \213\ Secs. 1291-1298.
---------------------------------------------------------------------------
     U.S. taxation of foreign corporations
       The United States taxes foreign corporations only on income 
     that has a sufficient nexus to the United States. Thus, a 
     foreign corporation is generally subject to U.S. tax only on 
     income that is ``effectively connected'' with the conduct of 
     a trade or business in the United States. Such ``effectively 
     connected income'' generally is taxed in the same manner and 
     at the same rates as the income of a U.S. corporation. An 
     applicable tax treaty may limit the imposition of U.S. tax on 
     business operations of a foreign corporation to cases in 
     which the business is conducted through a ``permanent 
     establishment'' in the United States.
       In addition, foreign corporations generally are subject to 
     a gross-basis U.S. tax at a flat 30-percent rate on the 
     receipt of interest, dividends, rents, royalties, and certain 
     similar types of income derived from U.S. sources, subject to 
     certain exceptions. The tax generally is collected by means 
     of withholding by the person making the payment. This tax may 
     be reduced or eliminated under an applicable tax treaty.
     U.S. tax treatment of inversion transactions
       Under present law, U.S. corporations may reincorporate in 
     foreign jurisdictions and thereby replace the U.S. parent 
     corporation of a multinational corporate group with a foreign 
     parent corporation. These transactions are commonly referred 
     to as ``inversion'' transactions. Inversion transactions may 
     take many different forms, including stock inversions, asset 
     inversions, and various combinations of and variations on the 
     two. Most of the known transactions to date have been stock 
     inversions. In one example of a stock inversion, a U.S. 
     corporation forms a foreign corporation, which in turn forms 
     a domestic merger subsidiary. The domestic merger subsidiary 
     then merges into the U.S. corporation, with the U.S. 
     corporation surviving, now as a subsidiary of the new foreign 
     corporation. The U.S. corporation's shareholders receive 
     shares of the foreign corporation and are treated as having 
     exchanged their U.S. corporation shares for the foreign 
     corporation shares. An asset inversion reaches a similar 
     result, but through a direct merger of the top-tier U.S. 
     corporation into a new foreign corporation, among other 
     possible forms. An inversion transaction may be accompanied 
     or followed by further restructuring of the corporate group. 
     For example, in the case of a stock inversion, in order to 
     remove income from foreign operations from the U.S. taxing 
     jurisdiction, the U.S. corporation may transfer some or all 
     of its foreign subsidiaries directly to the new foreign 
     parent corporation or other related foreign corporations.
       In addition to removing foreign operations from the U.S. 
     taxing jurisdiction, the corporate group may derive further 
     advantage from the inverted structure by reducing U.S. tax on 
     U.S.-source income through various ``earnings stripping'' 
     or other transactions. This may include earnings stripping 
     through payment by a U.S. corporation of deductible 
     amounts such as interest, royalties, rents, or management 
     service fees to the new foreign parent or other foreign 
     affiliates. In this respect, the post-inversion structure 
     enables

[[Page H4656]]

     the group to employ the same tax-reduction strategies that 
     are available to other multinational corporate groups with 
     foreign parents and U.S. subsidiaries, subject to the same 
     limitations. These limitations under present law include 
     section 163(j), which limits the deductibility of certain 
     interest paid to related parties, if the payor's debt-
     equity ratio exceeds 1.5 to 1 and the payor's net interest 
     expense exceeds 50 percent of its ``adjusted taxable 
     income.'' More generally, section 482 and the regulations 
     thereunder require that all transactions between related 
     parties be conducted on terms consistent with an ``arm's 
     length'' standard, and permit the Secretary of the 
     Treasury to reallocate income and deductions among such 
     parties if that standard is not met.
       Inversion transactions may give rise to immediate U.S. tax 
     consequences at the shareholder and/or the corporate level, 
     depending on the type of inversion. In stock inversions, the 
     U.S. shareholders generally recognize gain (but not loss) 
     under section 367(a), based on the difference between the 
     fair market value of the foreign corporation shares received 
     and the adjusted basis of the domestic corporation stock 
     exchanged. To the extent that a corporation's share value has 
     declined, and/or it has many foreign or tax-exempt 
     shareholders, the impact of this section 367(a) ``toll 
     charge'' is reduced. The transfer of foreign subsidiaries or 
     other assets to the foreign parent corporation also may give 
     rise to U.S. tax consequences at the corporate level (e.g., 
     gain recognition and earnings and profits inclusions under 
     sections 1001, 311(b), 304, 367, 1248 or other provisions). 
     The tax on any income recognized as a result of these 
     restructurings may be reduced or eliminated through the use 
     of net operating losses, foreign tax credits, and other tax 
     attributes.
       In asset inversions, the U.S. corporation generally 
     recognizes gain (but not loss) under section 367(a) as though 
     it had sold all of its assets, but the shareholders generally 
     do not recognize gain or loss, assuming the transaction meets 
     the requirements of a reorganization under section 368.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment defines two different types of 
     corporate inversion transactions and establishes a different 
     set of consequences for each type. Certain partnership 
     transactions also are covered.
     Transactions involving at least 80 percent identity of stock 
         ownership
       The first type of inversion is a transaction in which, 
     pursuant to a plan or a series of related transactions: (1) a 
     U.S. corporation becomes a subsidiary of a foreign-
     incorporated entity or otherwise transfers substantially all 
     of its properties to such an entity;\214\ (2) the former 
     shareholders of the U.S. corporation hold (by reason of 
     holding stock in the U.S. corporation) 80 percent or more (by 
     vote or value) of the stock of the foreign-incorporated 
     entity after the transaction; and (3) the foreign-
     incorporated entity, considered together with all companies 
     connected to it by a chain of greater than 50 percent 
     ownership (i.e., the ``expanded affiliated group''), does not 
     have substantial business activities in the entity's country 
     of incorporation, compared to the total worldwide business 
     activities of the expanded affiliated group. The provision 
     denies the intended tax benefits of this type of inversion by 
     deeming the top-tier foreign corporation to be a domestic 
     corporation for all purposes of the Code.\215\
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     \214\ It is expected that the Treasury Secretary will issue 
     regulations applying the term ``substantially all'' in this 
     context and will not be bound in this regard by 
     interpretations of the term in other contexts under the Code.
     \215\ Since the top-tier foreign corporation is treated for 
     all purposes of the Code as domestic, the shareholder-level 
     ``toll charge'' of sec. 367(a) does not apply to these 
     inversion transactions. However, with respect to inversion 
     transactions completed before 2004, regulated investment 
     companies and certain similar entities are allowed to elect 
     to recognize gain as if sec. 367(a) did apply.
---------------------------------------------------------------------------
       Except as otherwise provided in regulations, the provision 
     does not apply to a direct or indirect acquisition of the 
     properties of a U.S. corporation no class of the stock of 
     which was traded on an established securities market at any 
     time within the four-year period preceding the acquisition. 
     In determining whether a transaction would meet the 
     definition of an inversion under the provision, stock held by 
     members of the expanded affiliated group that includes the 
     foreign incorporated entity is disregarded. For example, if 
     the former top-tier U.S. corporation receives stock of the 
     foreign incorporated entity (e.g., so-called ``hook'' stock), 
     the stock would not be considered in determining whether the 
     transaction meets the definition. Stock sold in a public 
     offering (whether initial or secondary) or private placement 
     related to the transaction also is disregarded for these 
     purposes. Acquisitions with respect to a domestic corporation 
     or partnership are deemed to be ``pursuant to a plan'' if 
     they occur within the four-year period beginning on the date 
     which is two years before the ownership threshold under the 
     provision is met with respect to such corporation or 
     partnership.
       Transfers of properties or liabilities as part of a plan a 
     principal purpose of which is to avoid the purposes of the 
     provision are disregarded. In addition, the Treasury 
     Secretary is granted authority to prevent the avoidance of 
     the purposes of the provision, including avoidance through 
     the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, and through 
     transactions designed to qualify or disqualify a person as a 
     related person, a member of an expanded affiliated group, or 
     a publicly traded corporation. Similarly, the Treasury 
     Secretary is granted authority to treat certain non-stock 
     instruments as stock, and certain stock as not stock, where 
     necessary to carry out the purposes of the provision.
     Transactions involving greater than 50 percent but less than 
         80 percent identity of stock ownership
       The second type of inversion is a transaction that would 
     meet the definition of an inversion transaction described 
     above, except that the 80-percent ownership threshold is not 
     met. In such a case, if a greater-than-50-percent ownership 
     threshold is met, then a second set of rules applies to the 
     inversion. Under these rules, the inversion transaction is 
     respected (i.e., the foreign corporation is treated as 
     foreign), but: (1) any applicable corporate-level ``toll 
     charges'' for establishing the inverted structure may not be 
     offset by tax attributes such as net operating losses or 
     foreign tax credits; (2) the IRS is given expanded authority 
     to monitor related-party transactions that may be used to 
     reduce U.S. tax on U.S.-source income going forward; and (3) 
     section 163(j), relating to ``earnings stripping'' through 
     related-party debt, is strengthened. These measures generally 
     apply for a 10-year period following the inversion 
     transaction. In addition, inverting entities are required to 
     provide information to shareholders or partners and the IRS 
     with respect to the inversion transaction.
       With respect to ``toll charges,'' any applicable corporate-
     level income or gain required to be recognized under sections 
     304, 311(b), 367, 1001, 1248, or any other provision with 
     respect to the transfer of controlled foreign corporation 
     stock or other assets by a U.S. corporation as part of the 
     inversion transaction or after such transaction to a related 
     foreign person is taxable, without offset by any tax 
     attributes (e.g., net operating losses or foreign tax 
     credits). To the extent provided in regulations, this rule 
     will not apply to certain transfers of inventory and similar 
     transactions conducted in the ordinary course of the 
     taxpayer's business.
       In order to enhance IRS monitoring of related-party 
     transactions, the provision establishes a new pre-filing 
     procedure. Under this procedure, the taxpayer will be 
     required annually to submit an application to the IRS for an 
     agreement that all return positions to be taken by the 
     taxpayer with respect to related-party transactions comply 
     with all relevant provisions of the Code, including sections 
     163(j), 267(a)(3), 482, and 845. The Treasury Secretary is 
     given the authority to specify the form, content, and 
     supporting information required for this application, as well 
     as the timing for its submission.
       The IRS will be required to take one of the following three 
     actions within 90 days of receiving a complete application 
     from a taxpayer: (1) conclude an agreement with the taxpayer 
     that the return positions to be taken with respect to 
     related-party transactions comply with all relevant 
     provisions of the Code; (2) advise the taxpayer that the IRS 
     is satisfied that the application was made in good faith and 
     substantially complies with the requirements set forth by the 
     Treasury Secretary for such an application, but that the IRS 
     reserves substantive judgment as to the tax treatment of the 
     relevant transactions pending the normal audit process; or 
     (3) advise the taxpayer that the IRS has concluded that the 
     application was not made in good faith or does not 
     substantially comply with the requirements set forth by the 
     Treasury Secretary.
       In the case of a compliance failure described in (3) above 
     (and in cases in which the taxpayer fails to submit an 
     application), the following sanctions will apply for the 
     taxable year for which the application was required: (1) no 
     deductions or additions to basis or cost of goods sold for 
     payments to foreign related parties will be permitted; (2) 
     any transfers or licenses of intangible property to related 
     foreign parties will be disregarded; and (3) any cost-sharing 
     arrangements will not be respected. In such a case, the 
     taxpayer may seek direct review by the U.S. Tax Court of the 
     IRS's determination of compliance failure.
       If the IRS fails to act on the taxpayer's application 
     within 90 days of receipt, then the taxpayer will be treated 
     as having submitted in good faith an application that 
     substantially complies with the above-referenced 
     requirements. Thus, the deduction disallowance and other 
     sanctions described above will not apply, but the IRS will be 
     able to examine the transactions at issue under the normal 
     audit process. The IRS is authorized to request that the 
     taxpayer extend this 90-day deadline in cases in which the 
     IRS believes that such an extension might help the parties to 
     reach an agreement.
       The ``earnings stripping'' rules of section 163(j), which 
     deny or defer deductions for certain interest paid to foreign 
     related parties, are strengthened for inverted corporations. 
     With respect to such corporations, the provision eliminates 
     the debt-equity threshold generally applicable under section 
     163(j) and reduces the 50-percent thresholds for ``excess 
     interest expense'' and ``excess limitation'' to 25 percent.
       In cases in which a U.S. corporate group acquires 
     subsidiaries or other assets from an

[[Page H4657]]

     unrelated inverted corporate group, the provisions described 
     above generally do not apply to the acquiring U.S. corporate 
     group or its related parties (including the newly acquired 
     subsidiaries or assets) by reason of acquiring the 
     subsidiaries or assets that were connected with the inversion 
     transaction. The Treasury Secretary is given authority to 
     issue regulations appropriate to carry out the purposes of 
     this provision and to prevent its abuse.
     Partnership transactions
       Under the proposal, both types of inversion transactions 
     include certain partnership transactions. Specifically, both 
     parts of the provision apply to transactions in which a 
     foreign-incorporated entity acquires substantially all of the 
     properties constituting a trade or business of a domestic 
     partnership (whether or not publicly traded), if after the 
     acquisition at least 80 percent (or more than 50 percent but 
     less than 80 percent, as the case may be) of the stock of the 
     entity is held by former partners of the partnership (by 
     reason of holding their partnership interests), and the 
     ``substantial business activities'' test is not met. For 
     purposes of determining whether these tests are met, all 
     partnerships that are under common control within the meaning 
     of section 482 are treated as one partnership, except as 
     provided otherwise in regulations. In addition, the modified 
     ``toll charge'' provisions apply at the partner level.
     Effective date
       The regime applicable to transactions involving at least 80 
     percent identity of ownership applies to inversion 
     transactions completed after March 20, 2002. The rules for 
     inversion transactions involving greater-than-50-percent 
     identity of ownership apply to inversion transactions 
     completed after 1996 that meet the 50-percent test and to 
     inversion transactions completed after 1996 that would have 
     met the 80-percent test but for the March 20, 2002 date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       (b) Excise tax on stock compensation of insiders in 
           inverted corporations


                              present law

       The income taxation of a nonstatutory\216\ compensatory 
     stock option is determined under the rules that apply to 
     property transferred in connection with the performance of 
     services (sec. 83). If a nonstatutory stock option does not 
     have a readily ascertainable fair market value at the time of 
     grant, which is generally the case unless the option is 
     actively traded on an established market, no amount is 
     included in the gross income of the recipient with respect to 
     the option until the recipient exercises the option.\217\ 
     Upon exercise of such an option, the excess of the fair 
     market value of the stock purchased over the option price is 
     included in the recipient's gross income as ordinary income 
     in such taxable year.
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     \216\ Nonstatutory stock options refer to stock options other 
     than incentive stock options and employee stock purchase 
     plans, the taxation of which is determined under sections 
     421-424.
     \217\ If an individual receives a grant of a nonstatutory 
     option that has a readily ascertainable fair market value at 
     the time the option is granted, the excess of the fair market 
     value of the option over the amount paid for the option is 
     included in the recipient's gross income as ordinary income 
     in the first taxable year in which the option is either 
     transferable or not subject to a substantial risk of 
     forfeiture.
---------------------------------------------------------------------------
       The tax treatment of other forms of stock-based 
     compensation (e.g., restricted stock and stock appreciation 
     rights) is also determined under section 83. The excess of 
     the fair market value over the amount paid (if any) for such 
     property is generally includable in gross income in the first 
     taxable year in which the rights to the property are 
     transferable or are not subject to substantial risk of 
     forfeiture.
       Shareholders are generally required to recognize gain upon 
     stock inversion transactions. An inversion transaction is 
     generally not a taxable event for holders of stock options 
     and other stock-based compensation.


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, specified holders of stock 
     options and other stock-based compensation are subject to an 
     excise tax upon certain inversion transactions. The provision 
     imposes a 20 percent excise tax on the value of specified 
     stock compensation held (directly or indirectly) by or for 
     the benefit of a disqualified individual, or a member of such 
     individual's family, at any time during the 12-month period 
     beginning six months before the corporation's inversion date. 
     Specified stock compensation is treated as held for the 
     benefit of a disqualified individual if such compensation is 
     held by an entity, e.g., a partnership or trust, in which the 
     individual, or a member of the individual's family, has an 
     ownership interest.
       A disqualified individual is any individual who, with 
     respect to a corporation, is, at any time during the 12-month 
     period beginning on the date which is six months before the 
     inversion date, subject to the requirements of section 16(a) 
     of the Securities and Exchange Act of 1934 with respect to 
     the corporation, or any member of the corporation's expanded 
     affiliated group,\218\ or would be subject to such 
     requirements if the corporation (or member) were an issuer of 
     equity securities referred to in section 16(a). Disqualified 
     individuals generally include officers (as defined by section 
     16(a)),\219\ directors, and 10-percent owners of private and 
     publicly-held corporations.
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     \218\ An expanded affiliated group is an affiliated group 
     (under section 1504) except that such group is determined 
     without regard to the exceptions for certain corporations and 
     is determined applying a greater than 50 percent threshold, 
     in lieu of the 80 percent test.
     \219\ An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policy-making function, or any 
     other person who performs similar policy-making functions.
---------------------------------------------------------------------------
       The excise tax is imposed on a disqualified individual of 
     an inverted corporation only if gain (if any) is recognized 
     in whole or part by any shareholder by reason of either the 
     80 percent or 50 percent identity of stock ownership 
     corporate inversion transactions previously described in the 
     provision.
       Specified stock compensation subject to the excise tax 
     includes any payment\220\ (or right to payment) granted by 
     the inverted corporation (or any member of the corporation's 
     expanded affiliated group) to any person in connection with 
     the performance of services by a disqualified individual for 
     such corporation (or member of the corporation's expanded 
     affiliated group) if the value of the payment or right is 
     based on, or determined by reference to, the value or change 
     in value of stock of such corporation (or any member of the 
     corporation's expanded affiliated group). In determining 
     whether such compensation exists and valuing such 
     compensation, all restrictions, other than non-lapse 
     restrictions, are ignored. Thus, the excise tax applies, and 
     the value subject to the tax is determined, without regard to 
     whether such specified stock compensation is subject to a 
     substantial risk of forfeiture or is exercisable at the time 
     of the inversion transaction. Specified stock compensation 
     includes compensatory stock and restricted stock grants, 
     compensatory stock options, and other forms of stock-based 
     compensation, including stock appreciation rights, phantom 
     stock, and phantom stock options. Specified stock 
     compensation also includes nonqualified deferred compensation 
     that is treated as though it were invested in stock or stock 
     options of the inverting corporation (or member). For 
     example, the provision applies to a disqualified individual's 
     deferred compensation if company stock is one of the actual 
     or deemed investment options under the nonqualified deferred 
     compensation plan.
---------------------------------------------------------------------------
     \220\ Under the provision, any transfer of property is 
     treated as a payment and any right to a transfer of property 
     is treated as a right to a payment.
---------------------------------------------------------------------------
       Specified stock compensation includes a compensation 
     arrangement that gives the disqualified individual an 
     economic stake substantially similar to that of a corporate 
     shareholder. Thus, the excise tax does not apply where a 
     payment is simply triggered by a target value of the 
     corporation's stock or where a payment depends on a 
     performance measure other than the value of the corporation's 
     stock. Similarly, the tax does not apply if the amount of the 
     payment is not directly measured by the value of the stock or 
     an increase in the value of the stock. For example, an 
     arrangement under which a disqualified individual is paid a 
     cash bonus of $500,000 if the corporation's stock increased 
     in value by 25 percent over two years or $1,000,000 if the 
     stock increased by 33 percent over two years is not specified 
     stock compensation, even though the amount of the bonus 
     generally is keyed to an increase in the value of the stock. 
     By contrast, an arrangement under which a disqualified 
     individual is paid a cash bonus equal to $10,000 for every $1 
     increase in the share price of the corporation's stock is 
     subject to the provision because the direct connection 
     between the compensation amount and the value of the 
     corporation's stock gives the disqualified individual an 
     economic stake substantially similar to that of a 
     shareholder.
       The excise tax applies to any such specified stock 
     compensation previously granted to a disqualified individual 
     but cancelled or cashed-out within the six-month period 
     ending with the inversion transaction, and to any specified 
     stock compensation awarded in the six-month period beginning 
     with the inversion transaction. As a result, for example, if 
     a corporation were to cancel outstanding options three months 
     before the transaction and then reissue comparable options 
     three months after the transaction, the tax applies both to 
     the cancelled options and the newly granted options. It is 
     intended that the Treasury Secretary issue guidance to avoid 
     double counting with respect to specified stock compensation 
     that is cancelled and then regranted during the applicable 
     twelve-month period.
       Specified stock compensation subject to the tax does not 
     include a statutory stock option or any payment or right from 
     a qualified retirement plan or annuity, a tax-sheltered 
     annuity, a simplified employee pension, or a simple 
     retirement account. In addition, under the provision, the 
     excise tax does not apply to any stock option that is 
     exercised during the six-month period before the inversion or 
     to any stock acquired pursuant to such exercise. The excise 
     tax also does not apply to any specified stock compensation 
     which is sold, exchanged, distributed or cashed-out during 
     such period in a transaction in which gain or loss is 
     recognized in full.

[[Page H4658]]

       For specified stock compensation held on the inversion 
     date, the amount of the tax is determined based on the value 
     of the compensation on such date. The tax imposed on 
     specified stock compensation cancelled during the six-month 
     period before the inversion date is determined based on the 
     value of the compensation on the day before such 
     cancellation, while specified stock compensation granted 
     after the inversion date is valued on the date granted. Under 
     the provision, the cancellation of a non-lapse restriction is 
     treated as a grant.
       The value of the specified stock compensation on which the 
     excise tax is imposed is the fair value in the case of stock 
     options (including warrants and other similar rights to 
     acquire stock) and stock appreciation rights and the fair 
     market value for all other forms of compensation. For 
     purposes of the tax, the fair value of an option (or a 
     warrant or other similar right to acquire stock) or a stock 
     appreciation right is determined using an appropriate option-
     pricing model, as specified or permitted by the Treasury 
     Secretary, that takes into account the stock price at the 
     valuation date; the exercise price under the option; the 
     remaining term of the option; the volatility of the 
     underlying stock and the expected dividends on it; and the 
     risk-free interest rate over the remaining term of the 
     option. Options that have no intrinsic value (or ``spread'') 
     because the exercise price under the option equals or exceeds 
     the fair market value of the stock at valuation nevertheless 
     have a fair value and are subject to tax under the provision. 
     The value of other forms of compensation, such as phantom 
     stock or restricted stock, are the fair market value of the 
     stock as of the date of the inversion transaction. The value 
     of any deferred compensation that could be valued by 
     reference to stock is the amount that the disqualified 
     individual would receive if the plan were to distribute all 
     such deferred compensation in a single sum on the date of the 
     inversion transaction (or the date of cancellation or grant, 
     if applicable). It is expected that the Treasury Secretary 
     issue guidance on valuation of specified stock compensation, 
     including guidance similar to the revenue procedures issued 
     under section 280G, except that the guidance would not permit 
     the use of a term other than the full remaining term. Pending 
     the issuance of guidance, it is intended that taxpayers could 
     rely on the revenue procedures issued under section 280G 
     (except that the full remaining term must be used).
       The excise tax also applies to any payment by the inverted 
     corporation or any member of the expanded affiliated group 
     made to an individual, directly or indirectly, in respect of 
     the tax. Whether a payment is made in respect of the tax is 
     determined under all of the facts and circumstances. Any 
     payment made to keep the individual in the same after-tax 
     position that the individual would have been in had the tax 
     not applied is a payment made in respect of the tax. This 
     includes direct payments of the tax and payments to reimburse 
     the individual for payment of the tax. It is expected that 
     the Treasury Secretary issue guidance on determining when a 
     payment is made in respect of the tax and that such guidance 
     would include certain factors that give rise to a rebuttable 
     presumption that a payment is made in respect of the tax, 
     including a rebuttable presumption that if the payment is 
     contingent on the inversion transaction, it is made in 
     respect to the tax. Any payment made in respect of the tax is 
     includible in the income of the individual, but is not 
     deductible by the corporation.
       To the extent that a disqualified individual is also a 
     covered employee under section 162(m), the $1,000,000 limit 
     on the deduction allowed for employee remuneration for such 
     employee is reduced by the amount of any payment (including 
     reimbursements) made in respect of the tax under the 
     provision. As discussed above, this includes direct payments 
     of the tax and payments to reimburse the individual for 
     payment of the tax.
       The payment of the excise tax has no effect on the 
     subsequent tax treatment of any specified stock compensation. 
     Thus, the payment of the tax has no effect on the 
     individual's basis in any specified stock compensation and no 
     effect on the tax treatment for the individual at the time of 
     exercise of an option or payment of any specified stock 
     compensation, or at the time of any lapse or forfeiture of 
     such specified stock compensation. The payment of the tax is 
     not deductible and has no effect on any deduction that might 
     be allowed at the time of any future exercise or payment.
       Under the provision, the Treasury Secretary is authorized 
     to issue regulations as may be necessary or appropriate to 
     carry out the purposes of the section.
       Effective date.--The provision is effective as of July 11, 
     2002, except that periods before July 11, 2002, are not taken 
     into account in applying the tax to specified stock 
     compensation held or cancelled during the six-month period 
     before the inversion date.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
       (c) Reinsurance of United States risks in foreign 
           jurisdictions


                              present law

       In the case of a reinsurance agreement between two or more 
     related persons, present law provides the Treasury Secretary 
     with authority to allocate among the parties or 
     recharacterize income (whether investment income, premium or 
     otherwise), deductions, assets, reserves, credits and any 
     other items related to the reinsurance agreement, or make any 
     other adjustment, in order to reflect the proper source and 
     character of the items for each party.\221\ For this purpose, 
     related persons are defined as in section 482. Thus, persons 
     are related if they are organizations, trades or businesses 
     (whether or not incorporated, whether or not organized in the 
     United States, and whether or not affiliated) that are owned 
     or controlled directly or indirectly by the same interests. 
     The provision may apply to a contract even if one of the 
     related parties is not a domestic company.\222\ In addition, 
     the provision also permits such allocation, 
     recharacterization, or other adjustments in a case in which 
     one of the parties to a reinsurance agreement is, with 
     respect to any contract covered by the agreement, in effect 
     an agent of another party to the agreement, or a conduit 
     between related persons.
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     \221\ Sec. 845(a).
     \222\ See S. Rep. No. 97-494, ``Tax Equity and Fiscal 
     Responsibility Act of 1982,'' July 12, 1982, 337 (describing 
     provisions relating to the repeal of modified coinsurance 
     provisions).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            senate amendment

       The Senate amendment clarifies the rules of section 845, 
     relating to authority for the Treasury Secretary to allocate 
     items among the parties to a reinsurance agreement, 
     recharacterize items, or make any other adjustment, in order 
     to reflect the proper source and character of the items for 
     each party. The proposal authorizes such allocation, 
     recharacterization, or other adjustment, in order to reflect 
     the proper source, character or amount of the item. It is 
     intended that this authority\223\ be exercised in a manner 
     similar to the authority under section 482 for the Treasury 
     Secretary to make adjustments between related parties. It is 
     intended that this authority be applied in situations in 
     which the related persons (or agents or conduits) are engaged 
     in cross-border transactions that require allocation, 
     recharacterization, or other adjustments in order to reflect 
     the proper source, character or amount of the item or items. 
     No inference is intended that present law does not provide 
     this authority with respect to reinsurance agreements.
---------------------------------------------------------------------------
     \223\ The authority to allocate, recharacterize or make other 
     adjustments was granted in connection with the repeal of 
     provisions relating to modified coinsurance transactions.
---------------------------------------------------------------------------
       No regulations have been issued under section 845(a). It is 
     expected that the Treasury Secretary will issue regulations 
     under section 845(a) to address effectively the allocation of 
     income (whether investment income, premium or otherwise) and 
     other items, the recharacterization of such items, or any 
     other adjustment necessary to reflect the proper amount, 
     source or character of the item.
       Effective date.--The provision is effective for any risk 
     reinsured after April 11, 2002.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Doubling of certain penalties, fines, and interest on 
         underpayments related to certain offshore financial 
         arrangements (sec. 344 of the Senate amendment)


                              Present Law

     In general
       The Code contains numerous civil penalties, such as the 
     delinquency, accuracy-related and fraud penalties. These 
     civil penalties are in addition to any interest that may be 
     due as a result of an underpayment of tax. If all or any part 
     of a tax is not paid when due, the Code imposes interest on 
     the underpayment, which is assessed and collected in the same 
     manner as the underlying tax and is subject to the same 
     statute of limitations.
     Delinquency penalties
       Failure to file.--Under present law, a taxpayer who fails 
     to file a tax return on a timely basis is generally subject 
     to a penalty equal to 5 percent of the net amount of tax due 
     for each month that the return is not filed, up to a maximum 
     of five months or 25 percent. An exception from the penalty 
     applies if the failure is due to reasonable cause. The net 
     amount of tax due is the excess of the amount of the tax 
     required to be shown on the return over the amount of any tax 
     paid on or before the due date prescribed for the payment of 
     tax.
       Failure to pay.--Taxpayers who fail to pay their taxes are 
     subject to a penalty of 0.5 percent per month on the unpaid 
     amount, up to a maximum of 25 percent. If a penalty for 
     failure to file and a penalty for failure to pay tax shown on 
     a return both apply for the same month, the amount of the 
     penalty for failure to file for such month is reduced by the 
     amount of the penalty for failure to pay tax shown on a 
     return. If a return is filed more than 60 days after its due 
     date, then the penalty for failure to file tax shown on a 
     return may not reduce the penalty for failure to pay below 
     the lesser of $100 or 100 percent of the amount required to 
     be shown on the return. For any month in which an installment 
     payment agreement with the IRS is in effect, the rate of the 
     penalty is half the usual rate (0.25 percent instead of 
     0.5 percent), provided that the taxpayer filed the tax 
     return in a timely manner (including extensions).
       Failure to make timely deposits of tax.--The penalty for 
     the failure to make timely deposits of tax consists of a 
     four-tiered structure

[[Page H4659]]

     in which the amount of the penalty varies with the length of 
     time within which the taxpayer corrects the failure. A 
     depositor is subject to a penalty equal to 2 percent of the 
     amount of the underpayment if the failure is corrected on or 
     before the date that is five days after the prescribed due 
     date. A depositor is subject to a penalty equal to 5 percent 
     of the amount of the underpayment if the failure is corrected 
     after the date that is five days after the prescribed due 
     date but on or before the date that is 15 days after the 
     prescribed due date. A depositor is subject to a penalty 
     equal to 10 percent of the amount of the underpayment if the 
     failure is corrected after the date that is 15 days after the 
     due date but on or before the date that is 10 days after the 
     date of the first delinquency notice to the taxpayer (under 
     sec. 6303). Finally, a depositor is subject to a penalty 
     equal to 15 percent of the amount of the underpayment if the 
     failure is not corrected on or before the date that is 10 
     days after the date of the day on which notice and demand for 
     immediate payment of tax is given in cases of jeopardy.
       An exception from the penalty applies if the failure is due 
     to reasonable cause. In addition, the Secretary may waive the 
     penalty for an inadvertent failure to deposit any tax by 
     specified first-time depositors.
     Accuracy-related penalties
       The accuracy-related penalty is imposed at a rate of 20 
     percent of the portion of any underpayment that is 
     attributable, in relevant, to (1) negligence, (2) any 
     substantial understatement of income tax and (3) any 
     substantial valuation misstatement. In addition, the penalty 
     is doubled for certain gross valuation misstatements. These 
     consolidated penalties are also coordinated with the fraud 
     penalty. This statutory structure operates to eliminate any 
     stacking of the penalties.
       No penalty is to be imposed if it is shown that there was 
     reasonable cause for an underpayment and the taxpayer acted 
     in good faith. However, Treasury has issued proposed 
     regulations that limit the defenses available to the 
     imposition of an accuracy-related penalty in connection with 
     a reportable transaction when the transaction is not 
     disclosed.
       Negligence or disregard for the rules or regulations.--If 
     an underpayment of tax is attributable to negligence, the 
     negligence penalty applies only to the portion of the 
     underpayment that is attributable to negligence. Negligence 
     is any failure to make a reasonable attempt to comply with 
     the provisions of the Code. Disregard includes any careless, 
     reckless or intentional disregard of the rules or 
     regulations.
       Substantial understatement of income tax.--Generally, an 
     understatement is substantial if the understatement exceeds 
     the greater of (1) 10 percent of the tax required to be shown 
     on the return for the tax year or (2) $5,000. In determining 
     whether a substantial understatement exists, the amount of 
     the understatement is reduced by any portion attributable to 
     an item if (1) the treatment of the item on the return is or 
     was supported by substantial authority, or (2) facts relevant 
     to the tax treatment of the item were adequately disclosed on 
     the return or on a statement attached to the return.
       Substantial valuation misstatement.--A penalty applies to 
     the portion of an underpayment that is attributable to a 
     substantial valuation misstatement. Generally, a substantial 
     valuation misstatement exists if the value or adjusted basis 
     of any property claimed on a return is 200 percent or more of 
     the correct value or adjusted basis. The amount of the 
     penalty for a substantial valuation misstatement is 20 
     percent of the amount of the underpayment if the value or 
     adjusted basis claimed is 200 percent or more but less than 
     400 percent of the correct value or adjusted basis. If the 
     value or adjusted basis claimed is 400 percent or more of the 
     correct value or adjusted basis, then the overvaluation is a 
     gross valuation misstatement.
       Gross valuation misstatements.--The rate of the accuracy-
     related penalty is doubled (to 40 percent) in the case of 
     gross valuation misstatements.
     Fraud penalty
       The fraud penalty is imposed at a rate of 75 percent of the 
     portion of any underpayment that is attributable to fraud. 
     The accuracy-related penalty does not to apply to any portion 
     of an underpayment on which the fraud penalty is imposed.
     Interest provisions
       Taxpayers are required to pay interest to the IRS whenever 
     there is an underpayment of tax. An underpayment of tax 
     exists whenever the correct amount of tax is not paid by the 
     last date prescribed for the payment of the tax. The last 
     date prescribed for the payment of the income tax is the 
     original due date of the return.
       Different interest rates are provided for the payment of 
     interest depending upon the type of taxpayer, whether the 
     interest relates to an underpayment or overpayment, and the 
     size of the underpayment or overpayment. Interest on 
     underpayments is compounded daily.
     Offshore Voluntary Compliance Initiative
       In January 2003, Treasury announced the Offshore Voluntary 
     Compliance Initiative (``OVCI'') to encourage the voluntary 
     disclosure of previously unreported income placed by 
     taxpayers in offshore accounts and accessed through credit 
     card or other financial arrangements. A taxpayer had to 
     comply with various requirements in order to participate in 
     OVCI, including sending a written request to participate in 
     the program by April 15, 2003. This request had to include 
     information about the taxpayer, the taxpayer's introduction 
     to the credit card or other financial arrangements and the 
     names of parties that promoted the transaction. Taxpayers 
     eligible under OVCI will not be liable for civil fraud, the 
     fraudulent failure to file penalty or the civil information 
     return penalties. The taxpayer will pay back taxes, interest 
     and certain accuracy-related and delinquency penalties.
     Voluntary disclosure initiative
       A taxpayer's timely, voluntary disclosure of a substantial 
     unreported tax liability has long been an important factor in 
     deciding whether the taxpayer's case should ultimately be 
     referred for criminal prosecution. The voluntary disclosure 
     must be truthful, timely, and complete. The taxpayer must 
     show a willingness to cooperate (as well as actual 
     cooperation) with the IRS in determining the correct tax 
     liability. The taxpayer must make good-faith arrangements 
     with the IRS to pay in full the tax, interest, and any 
     penalties determined by the IRS to be applicable. A voluntary 
     disclosure does not guarantee immunity from prosecution. It 
     creates no substantive or procedural rights for taxpayers.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment would increase the total amount of 
     civil penalties, interest and fines applicable by a factor of 
     two for taxpayers who would have been eligible to participate 
     in either the OVCI or the Treasury Department's voluntary 
     disclosure initiative, which applies to the taxpayer by 
     reason of the taxpayer's underpayment of U.S. income tax 
     liability through certain financing arrangement, but did not 
     participate in either program.
       Effective date.--The Senate amendment generally is 
     effective with respect to a taxpayer's open tax years on or 
     after May 8, 2000.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Effectively connected income to include certain foreign 
         source income (sec. 345 of the Senate amendment and sec. 
         864 of the Code)


                              Present Law

       Nonresident alien individuals and foreign corporations 
     (collectively, foreign persons) are subject to U.S. tax on 
     income that is effectively connected with the conduct of a 
     U.S. trade or business; the U.S. tax on such income is 
     calculated in the same manner and at the same graduated rates 
     as the tax on U.S. persons.\224\ Foreign persons also are 
     subject to a 30-percent gross-basis tax, collected by 
     withholding, on certain U.S.-source income, such as interest, 
     dividends and other fixed or determinable annual or 
     periodical (``FDAP'') income, that is not effectively 
     connected with a U.S. trade or business. This 30-percent 
     withholding tax may be reduced or eliminated pursuant to an 
     applicable tax treaty. Foreign persons generally are not 
     subject to U.S. tax on foreign-source income that is not 
     effectively connected with a U.S. trade or business.
---------------------------------------------------------------------------
     \224\ Sections 871(b) and 882.
---------------------------------------------------------------------------
       Detailed rules apply for purposes of determining whether 
     income is treated as effectively connected with a U.S. trade 
     or business (so-called ``U.S.-effectively connected 
     income'').\225\ The rules differ depending on whether the 
     income at issue is U.S-source or foreign-source income. Under 
     these rules, U.S.-source FDAP income, such as U.S.-source 
     interest and dividends, and U.S.-source capital gains are 
     treated as U.S.-effectively connected income if such income 
     is derived from assets used in or held for use in the active 
     conduct of a U.S. trade or business, or from business 
     activities conducted in the United States. All other types of 
     U.S.-source income are treated as U.S.-effectively connected 
     income (sometimes referred to as the ``force of attraction 
     rule'').
---------------------------------------------------------------------------
     \225\ Section 864(c).
---------------------------------------------------------------------------
       In general, foreign-source income is not treated as U.S.-
     effectively connected income.\226\ However, foreign-source 
     income, gain, deduction, or loss generally is considered to 
     be effectively connected with a U.S. business only if the 
     person has an office or other fixed place of business within 
     the United States to which such income, gain, deduction, or 
     loss is attributable and such income falls into one of three 
     categories described below.\227\ For these purposes, income 
     generally is not considered attributable to an office or 
     other fixed place of business within the United States unless 
     such office or fixed place of business is a material factor 
     in the production of the income, and such office or fixed 
     place of business regularly carries on activities of the type 
     that generate such income.\228\
---------------------------------------------------------------------------
     \226\ Section 864(c)(4).
     \227\ Section 864(c)(4)(B).
     \228\ Section 864(c)(5).
---------------------------------------------------------------------------
       The first category consists of rents or royalties for the 
     use of patents, copyrights, secret processes, or formulas, 
     good will, trademarks, trade brands, franchises, or other 
     like intangible properties derived in the active conduct of 
     the U.S. trade or business.\229\ The second category consists 
     of interest or dividends derived in the active conduct of a 
     banking, financing, or similar business within the United 
     States, or received by a corporation whose principal business 
     is trading

[[Page H4660]]

     in stocks or securities for its own account.\230\ 
     Notwithstanding the foregoing, foreign-source income 
     consisting of dividends, interest, or royalties is not 
     treated as effectively connected if the items are paid by a 
     foreign corporation in which the recipient owns, directly, 
     indirectly, or constructively, more than 50 percent of the 
     total combined voting power of the stock.\231\ The third 
     category consists of income, gain, deduction, or loss derived 
     from the sale or exchange of inventory or property held by 
     the taxpayer primarily for sale to customers in the ordinary 
     course of the trade or business where the property is sold or 
     exchanged outside the United States through the foreign 
     person's U.S. office or other fixed place of business.\232\ 
     Such amounts are not treated as effectively connected if the 
     property is sold or exchanged for use, consumption, or 
     disposition outside the United States and an office or other 
     fixed place of business of the taxpayer in a foreign country 
     materially participated in the sale or exchange.
---------------------------------------------------------------------------
     \229\ Section 864(c)(4)(B)(i).
     \230\ Section 864(c)(4)(B)(ii).
     \231\ Section 864(c)(4)(D)(i).
     \232\ Section 864(c)(4)(B)(iii).
---------------------------------------------------------------------------
       The Code provides sourcing rules for enumerated types of 
     income, including interest, dividends, rents, royalties, and 
     personal services income.\233\ For example, interest income 
     generally is sourced based on the residence of the obligor. 
     Dividend income generally is sourced based on the residence 
     of the corporation paying the dividend. Thus, interest paid 
     on obligations of foreign persons and dividends paid by 
     foreign corporations generally are treated as foreign-source 
     income.
---------------------------------------------------------------------------
     \233\ Sections 861 through 865.
---------------------------------------------------------------------------
       Other types of income are not specifically covered by the 
     Code's sourcing rules. For example, fees for accepting or 
     confirming letters of credit have been sourced under 
     principles analogous to the interest sourcing rules.\234\ In 
     addition, under regulations, payments in lieu of dividends 
     and interest derived from securities lending transactions are 
     sourced in the same manner as interest and dividends, 
     including for purposes of determining whether such income is 
     effectively connected with a U.S. trade or business.\235\ 
     Moreover, income from notional principal contracts (such as 
     interest rate swaps) generally is sourced based on the 
     residence of the recipient of the income.\236\
---------------------------------------------------------------------------
     \234\ See Bank of America v. United States, 680 F.2d 142 (Ct. 
     Cl. 1982).
     \235\ Treas. Reg. sec. 1.864-5(b)(2)(ii).
     \236\ Treas. Reg. sec. 1.863-7.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Each category of foreign-source income that is treated as 
     effectively connected with a U.S. trade or business is 
     expanded to include economic equivalents of such income 
     (i.e., economic equivalents of certain foreign-source (1) 
     rents and royalties, (2) dividends and interest, and (3) 
     income on sales or exchanges of goods in the ordinary course 
     of business). Thus, such economic equivalents are treated as 
     U.S.-effectively connected income in the same circumstances 
     that foreign-source rents, royalties, dividends, interest, or 
     certain inventory sales are treated as U.S.-effectively 
     connected income. For example, foreign-source interest and 
     dividend equivalents are treated as U.S.-effectively 
     connected income if the income is attributable to a U.S. 
     office of the foreign person, and such income is derived by 
     such foreign person in the active conduct of a banking, 
     financing, or similar business within the United States, or 
     the foreign person is a corporation whose principal business 
     is trading in stocks or securities for its own account.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Determination of basis amounts paid from foreign pension 
         plans (sec. 346 of the Senate amendment and sec. 72 of 
         the Code)


                              Present Law

       Distributions from retirement plans are includible in gross 
     income under the rules relating to annuities \237\ and, thus, 
     are generally includible in income, except to the extent the 
     amount received represents investment in the contract (i.e., 
     the participant's basis). The participant's basis includes 
     amounts contributed by the participant, together with certain 
     amounts contributed by the employer, minus the aggregate 
     amount (if any) previously distributed to the extent that 
     such amount was excludable from gross income. Amounts 
     contributed by the employer are included in the calculation 
     of the participant's basis to the extent that such amounts 
     were includible in the gross income of the participant, or to 
     the extent that such amounts would have been excludable from 
     the participant's gross income if they had been paid directly 
     to the participant at the time they were contributed.
---------------------------------------------------------------------------
     \237\ Sections 72 and 402.
---------------------------------------------------------------------------
       Distributions received by nonresidents from U.S. qualified 
     plans and similar arrangements are generally subject to tax 
     to the extent that the amount received is otherwise 
     includible in gross income (i.e., is in excess of the basis) 
     and is from a U.S. source. Employer contributions to 
     qualified plans and other payments for services performed 
     outside the United States generally are not treated as income 
     from a U.S. source, and therefore generally are not subject 
     to U.S. tax.
       Under the 1996 U.S. model income tax treaty and many U.S. 
     income tax treaties in force, pension distributions 
     beneficially owned by a resident of a treaty country in 
     consideration for past employment generally are taxable only 
     by the individual recipient's country of residence.\238\ 
     Under the 1996 U.S. model income tax treaty and some U.S. 
     income tax treaties, this exclusive residence-based taxation 
     rule is limited to the taxation of amounts that were not 
     previously included in taxable income in the other country. 
     For example, if a treaty country had imposed tax on a 
     resident individual with respect to some portion of a pension 
     plan's earnings, subsequent distributions to a resident of 
     the other country would not be taxable in that country to the 
     extent the distributions were attributable to such amounts.
---------------------------------------------------------------------------
     \238\ Some treaties permit source-country taxation but merely 
     reduce the rate of tax imposed on pension benefits.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       An amount distributed from a foreign pension plan is 
     included in the calculation of the recipient's basis only to 
     the extent that the recipient previously has been subject to 
     taxation, either in the United States or the foreign 
     jurisdiction, on such amount.
       Effective date.--The Senate amendment provision is 
     effective for distributions occurring on or after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Recapture of overall foreign losses on sale of controlled 
         foreign corporation stock (sec. 347 of the Senate 
         amendment and sec. 904 of the Code)


                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. The amount of foreign tax credits that 
     may be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S.-source income. The amount of foreign tax 
     credits generally is limited to the portion of the taxpayer's 
     U.S. tax which the taxpayer's foreign-source taxable income 
     (i.e., foreign-source gross income less allocable expenses or 
     deductions) bears to the taxpayer's worldwide taxable income 
     for the year.\239\ Separate limitations are applied to 
     specific categories of income.
---------------------------------------------------------------------------
     \239\ Section 904(a).
---------------------------------------------------------------------------
       Special recapture rules apply in the case of foreign losses 
     for purposes of applying the foreign tax credit 
     limitation.\240\ Under these rules, losses for any taxable 
     year in a limitation category which exceed the aggregate 
     amount of foreign income earned in other limitation 
     categories (a so-called ``overall foreign loss'') are 
     recaptured by resourcing foreign-source income earned in a 
     subsequent year as U.S.-source income.\241\ The amount 
     resourced as U.S.-source income generally is limited to the 
     lesser of the amount of the overall foreign losses not 
     previously recaptured, or 50 percent of the taxpayer's 
     foreign-source income in a given year (the ``50-percent 
     limit''). Taxpayers may elect to recapture a larger 
     percentage of such losses.
---------------------------------------------------------------------------
     \240\ Section 904(f).
     \241\ Section 904(f)(1).
---------------------------------------------------------------------------
       A special recapture rule applies to ensure the recapture of 
     an overall foreign loss where property which was used in a 
     trade or business predominantly outside the United States is 
     disposed of prior to the time the loss has been 
     recaptured.\242\ In this regard, dispositions of trade or 
     business property used predominantly outside the United 
     States are treated as having been recognized as foreign-
     source income (regardless of whether gain would otherwise be 
     recognized upon disposition of the assets), in an amount 
     equal to the lesser of the excess of the fair market value of 
     such property over its adjusted basis, or the amount of 
     unrecaptured overall foreign losses. Such foreign-source 
     income is resourced as U.S.-source income without regard to 
     the 50-percent limit. For example, if a U.S. corporation 
     transfers its foreign branch business assets to a foreign 
     corporation in a nontaxable section 351 transaction, the 
     taxpayer would be treated for purposes of the recapture rules 
     as having recognized foreign-source income in the year of the 
     transfer in an amount equal to the excess of the fair market 
     value of the property disposed over its adjusted basis (or 
     the amount of unrecaptured foreign losses, if smaller). Such 
     income would be recaptured as U.S.-source income to the 
     extent of any prior unrecaptured overall foreign losses.\243\
---------------------------------------------------------------------------
     \242\ Section 904(f)(3).
     \243\ Coordination rules apply in the case of losses 
     recaptured under the branch loss recapture rules. Section 
     367(a)(3)(C).
---------------------------------------------------------------------------
       Detailed rules apply in allocating and apportioning 
     deductions and losses for foreign tax credit limitation 
     purposes. In the case of interest expense, such amounts 
     generally are apportioned to all gross income under an asset 
     method, under which the taxpayer's assets are characterized 
     as producing income in statutory or residual groupings (i.e., 
     foreign-source income in the various limitation categories or 
     U.S.-source income).\244\ Interest

[[Page H4661]]

     expense is apportioned among these groupings based on the 
     relative asset values in each. Taxpayers may elect to value 
     assets based on either tax book value or fair market value.
---------------------------------------------------------------------------
     \244\ Section 864(e) and Temp. Treas. Reg. sec. 1.861-9T.
---------------------------------------------------------------------------
       Each corporation that is a member of an affiliated group is 
     required to apportion its interest expense using 
     apportionment fractions determined by reference to all assets 
     of the affiliated group. For this purpose, an affiliated 
     group generally is defined to include only domestic 
     corporations. Stock in a foreign subsidiary, however, is 
     treated as a foreign asset that may attract the allocation of 
     U.S. interest expense for these purposes. If tax basis is 
     used to value assets, the adjusted basis of the stock of 
     certain 10-percent or greater owned foreign corporations or 
     other non-affiliated corporations must be increased by the 
     amount of earnings and profits of such corporation 
     accumulated during the period the U.S. shareholder held the 
     stock.


                               House Bill

       No provision.


                            Senate Amendment

       The special recapture rule for overall foreign losses that 
     currently applies to dispositions of foreign trade or 
     business assets is to apply to the disposition of controlled 
     foreign corporation stock. Thus, dispositions of controlled 
     foreign corporation stock are recognized as foreign-source 
     income in an amount equal to the lesser of the fair market 
     value of the stock over its adjusted basis, or the amount of 
     prior unrecaptured overall foreign losses. Such income is 
     resourced as U.S.-source income for foreign tax credit 
     limitation purposes without regard to the 50-percent limit.
       Effective date.--The Senate amendment provision is 
     effective as of the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Prevention of mismatching of interest and original issue 
         discount deductions and income inclusions in transactions 
         with related foreign persons (sec. 348 of the Senate 
         amendment and secs. 163 and 267 of the Code)


                              Present Law

       Income earned by a foreign corporation from its foreign 
     operations generally is subject to U.S. tax only when such 
     income is distributed to any U.S. person that holds stock in 
     such corporation. Accordingly, a U.S. person that conducts 
     foreign operations through a foreign corporation generally is 
     subject to U.S. tax on the income from such operations when 
     the income is repatriated to the United States through a 
     dividend distribution to the U.S. person. The income is 
     reported on the U.S. person's tax return for the year the 
     distribution is received, and the United States imposes tax 
     on such income at that time. However, certain anti-deferral 
     regimes may cause the U.S. person to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by the foreign 
     corporations in which the U.S. person holds stock. The main 
     anti-deferral regimes are the controlled foreign corporation 
     rules of subpart F (sections 951-964), the passive foreign 
     investment company rules (sections 1291-1298), and the 
     foreign personal holding company rules (sections 551-558).
       As a general rule, there is allowed as a deduction all 
     interest paid or accrued within the taxable year with respect 
     to indebtedness, including the aggregate daily portions of 
     original issue discount (``OID'') of the issuer for the days 
     during such taxable year. However, if a debt instrument is 
     held by a related foreign person, any portion of such OID is 
     not allowable as a deduction to the payor of such instrument 
     until paid (``related-foreign-person rule''). This related-
     foreign-person rule does not apply to the extent that the OID 
     is effectively connected with the conduct by such foreign 
     related person of a trade or business within the United 
     States (unless such OID is exempt from taxation or is subject 
     to a reduced rate of taxation under a treaty obligation). 
     Treasury regulations further modify the related-foreign-
     person rule by providing that in the case of a debt owed to a 
     foreign personal holding company (``FPHC''), controlled 
     foreign corporation (``CFC'') or passive foreign investment 
     company (``PFIC''), a deduction is allowed for OID as of the 
     day on which the amount is includible in the income of the 
     FPHC, CFC or PFIC, respectively.
       In the case of unpaid stated interest and expenses of 
     related persons, where, by reason of a payee's method of 
     accounting, an amount is not includible in the payee's gross 
     income until it is paid but the unpaid amounts are deductible 
     currently by the payor, the amount generally is allowable as 
     a deduction when such amount is includible in the gross 
     income of the payee. With respect to stated interest and 
     other expenses owed to related foreign corporations, Treasury 
     regulations provide a general rule that requires a taxpayer 
     to use the cash method of accounting with respect to the 
     deduction of amounts owed to such related foreign persons 
     (with an exception for income of a related foreign person 
     that is effectively connected with the conduct of a U.S. 
     trade or business and that is not exempt from taxation or 
     subject to a reduced rate of taxation under a treaty 
     obligation). As in the case of OID, the Treasury regulations 
     additionally provide that in the case of states interest owed 
     to a FPHC, CFC, or PFIC, a deduction is allowed as of the day 
     on which the amount is includible in the income of the FPHC, 
     CFC or PFIC.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment generally provides that deductions for 
     amounts accrued but unpaid (whether by U.S. or foreign 
     persons) to related FPHCs, CFCs, or PFICs are allowable only 
     to the extent that the amounts accrued by the payor are, for 
     U.S. tax purposes, currently included in the income of the 
     direct or indirect U.S. owners of the related foreign person. 
     Deductions that have accrued but are not allowable under this 
     provision are allowed when the amounts are paid.
       Effective date.--The Senate amendment provision is 
     effective for payments accrued on or after May 8, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Sale of gasoline and diesel fuel at duty-free sales 
         enterprises (Sec. 349 of the Senate amendment)


                              Present Law

       A duty-free sales enterprise that meets certain conditions 
     may sell and deliver for export from the customs territory of 
     the United States duty-free merchandise. Duty-free 
     merchandise is merchandise sold by a duty-free sales 
     enterprise on which neither federal duty nor federal tax has 
     been assessed pending exportation from the customs territory 
     of the United States. The duty-free statute does not contain 
     any limitation on what goods may qualify for duty-free 
     treatment.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment amends Section 555(b) of the Tariff 
     Act of 1930 (19 U.S.C. 1555(b)) to provide that gasoline or 
     diesel fuel sold at duty-free enterprises shall be considered 
     to entered for consumption into the United States and thus 
     ineligible for classification as duty-free merchandise.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Repeal of earned income exclusion for citizens or 
         residents living abroad (sec. 350 of the Senate amendment 
         and sec. 911 of the Code)


                              Present Law

       U.S. citizens generally are subject to U.S. income tax on 
     all their income, whether derived in the United States or 
     elsewhere. A U.S. citizen who earns income in a foreign 
     country also may be taxed on such income by that foreign 
     country. However, the United States generally cedes the 
     primary right to tax income derived by a U.S. citizen from 
     sources outside the United States to the foreign country 
     where such income is derived. Accordingly, a credit against 
     the U.S. income tax imposed on foreign source taxable income 
     is provided for foreign taxes paid on that income.
       U.S. citizens living abroad may be eligible to exclude from 
     their income for U.S. tax purposes certain foreign earned 
     income and foreign housing costs. In order to qualify for 
     these exclusions, a U.S. citizen must be either: (1) a bona 
     fide resident of a foreign country for an uninterrupted 
     period that includes an entire taxable year; or (2) present 
     overseas for 330 days out of any 12-consecutive-month period. 
     In addition, the taxpayer must have his or her tax home in a 
     foreign country.
       The exclusion for foreign earned income generally applies 
     to income earned from sources outside the United States as 
     compensation for personal services actually rendered by the 
     taxpayer. The maximum exclusion for foreign earned income for 
     a taxable year is $80,000 (for 2002 and thereafter). For 
     taxable years beginning after 2007, the maximum exclusion 
     amount is indexed for inflation.
       The exclusion for housing costs applies to reasonable 
     expenses, other than deductible interest and taxes, paid or 
     incurred by or on behalf of the taxpayer for housing for the 
     taxpayer and his or her spouse and dependents in a foreign 
     country. The exclusion amount for housing costs for a taxable 
     year is equal to the excess of such housing costs for the 
     taxable year over an amount computed pursuant to a specified 
     formula. In the case of housing costs that are not paid or 
     reimbursed by the taxpayer's employer, the amount that would 
     be excludible is treated instead as a deduction.
       The combined earned income exclusion and housing cost 
     exclusion may not exceed the taxpayer's total foreign earned 
     income. The taxpayer's foreign tax credit is reduced by the 
     amount of such credit that is attributable to excluded 
     income.
       Special exclusions apply in the case of taxpayers who 
     reside in one of the U.S. possessions.


                               House Bill

       No provision.


                            Senate Amendment

       The exclusion for foreign earned income and the exclusion 
     or deduction for housing expenses is repealed.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2003.

[[Page H4662]]

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                      E. Other Revenue Provisions

     1. Extension of IRS user fees (sec. 351 of the Senate 
         amendment and new sec. 7529 of the Code)


                              Present Law

       The IRS provides written responses to questions of 
     individuals, corporations, and organizations relating to 
     their tax status or the effects of particular transactions 
     for tax purposes. The IRS generally charges a fee for 
     requests for a letter ruling, determination letter, opinion 
     letter, or other similar ruling or determination. Public Law 
     104-117 \245\ extended the statutory authorization for these 
     user fees \246\ through September 30, 2003.
---------------------------------------------------------------------------
     \245\ An Act to provide that members of the Armed Forces 
     performing services for the peacekeeping efforts in Bosnia 
     and Herzegovina, Croatia, and Macedonia shall be entitled to 
     tax benefits in the same manner as if such services were 
     performed in a combat zone, and for other purposes (March 20, 
     1996).
     \246\ These user fees were originally enacted in section 
     10511 of the Revenue Act of 1987 (Pub. Law No. 100-203, 
     December 22, 1987).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the statutory authorization 
     for these user fees through September 30, 2013. The Senate 
     amendment also moves the statutory authorization for these 
     fees into the Code.\247\
---------------------------------------------------------------------------
     \247\ The provision also moves into the Code the user fee 
     provision relating to pension plans that was enacted in 
     section 620 of the Economic Growth and Tax Relief 
     Reconciliation Act of 2001 (Pub. L. 107-16, June 7, 2001).
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision, including 
     moving the statutory authorization for these fees into the 
     Code and repealing the off-Code statutory authorization for 
     these fees, is effective for requests made after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Add vaccines against hepatitis A to the list of taxable 
         vaccines (sec. 352 of the Senate amendment and sec. 4132 
         of the Code)


                              Present Law

       A manufacturer's excise tax is imposed at the rate of 75 
     cents per dose \248\ on the following vaccines routinely 
     recommended for administration to children: diphtheria, 
     pertussis, tetanus, measles, mumps, rubella, polio, HIB 
     (haemophilus influenza type B), hepatitis B, varicella 
     (chicken pox), rotavirus gastroenteritis, and streptococcus 
     pneumoniae. The tax applied to any vaccine that is a 
     combination of vaccine components equals 75 cents times the 
     number of components in the combined vaccine.
---------------------------------------------------------------------------
     \248\ Sec. 4131.
---------------------------------------------------------------------------
       Amounts equal to net revenues from this excise tax are 
     deposited in the Vaccine Injury Compensation Trust Fund to 
     finance compensation awards under the Federal Vaccine Injury 
     Compensation Program for individuals who suffer certain 
     injuries following administration of the taxable vaccines.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment adds any vaccine against hepatitis A 
     to the list of taxable vaccines. The Senate amendment also 
     makes a conforming amendment to the trust fund expenditure 
     purposes.
       Effective date.--The Senate amendment provision is 
     effective for vaccines sold beginning on the first day of the 
     first month beginning more than four weeks after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Disallowance of certain partnership loss transfers (sec. 
         353 of the Senate Amendment and secs. 704, 734, and 743 
         of the Code)


                              Present Law

     Contributions of property
       Under present law, if a partner contributes property to a 
     partnership, no gain or loss generally is recognized to the 
     contributing partner at the time of contribution.\249\ The 
     partnership takes the property at an adjusted basis equal to 
     the contributing partner's adjusted basis in the 
     property.\250\ The contributing partner increases its basis 
     in its partnership interest by the adjusted basis of the 
     contributed property.\251\ Any items of partnership income, 
     gain, loss, and deduction with respect to the contributed 
     property is allocated among the partners to take into account 
     any built-in gain or loss at the time of the 
     contribution.\252\ This rule is intended to prevent the 
     transfer of built-in gain or loss from the contributing 
     partner to the other partners by generally allocating items 
     to the noncontributing partners based on the value of their 
     contributions and by allocating to the contributing partner 
     the remainder of each item.\253\
---------------------------------------------------------------------------
     \249\ Sec. 721.
     \250\ Sec. 723.
     \251\ Sec. 722.
     \252\  Sec. 704(c)(1)(A).
     \253\ Where there is an insufficient amount of an item to 
     allocate to the noncontributing partners, Treasury 
     regulations allow for reasonable allocations to remedy this 
     insufficiency. Treas. Reg. sec. 1-704(c) and (d).
---------------------------------------------------------------------------
       If the contributing partner transfers its partnership 
     interest, the built-in gain or loss will be allocated to the 
     transferee partner as it would have been allocated to the 
     contributing partner.\254\ If the contributing partner's 
     interest is liquidated, there is no specific guidance 
     preventing the allocation of the built-in loss to the 
     remaining partners. Thus, it appears that losses can be 
     ``transferred'' to other partners where the contributing 
     partner no longer remains a partner.
---------------------------------------------------------------------------
     \254\ Treas. Reg. 1.704-3(a)(7).
---------------------------------------------------------------------------
     Transfers of partnership interests
       Under present law, a partnership does not adjust the basis 
     of partnership property following the transfer of a 
     partnership interest unless the partnership has made a one-
     time election under section 754 to make basis 
     adjustments.\255\ If an election is in effect, adjustments 
     are made with respect to the transferee partner in order to 
     account for the difference between the transferee partner's 
     proportionate share of the adjusted basis of the partnership 
     property and the transferee's basis in its partnership 
     interest.\256\ These adjustments are intended to adjust the 
     basis of partnership property to approximate the result of a 
     direct purchase of the property by the transferee partner. 
     Under these rules, if a partner purchases an interest in a 
     partnership with an existing built-in loss and no election 
     under section 754 in effect, the transferee partner may be 
     allocated a share of the loss when the partnership disposes 
     of the property (or depreciates the property).
---------------------------------------------------------------------------
     \255\ Sec. 743(a).
     \256\ 256 Sec. 743(b).
---------------------------------------------------------------------------
     Distributions of partnership property
       With certain exceptions, partners may receive distributions 
     of certain partnership property without recognition of gain 
     or loss by either the partner or the partnership.\257\ In the 
     case of a distribution in liquidation of a partner's 
     interest, the basis of the property distributed in the 
     liquidation is equal to the partner's adjusted basis in its 
     partnership interest (reduced by any money distributed in the 
     transaction).\258\ In a distribution other than in 
     liquidation of a partner's interest, the distributee 
     partner's basis in the distributed property is equal to the 
     partnership's adjusted basis in the property immediately 
     before the distribution, but not to exceed the partner's 
     adjusted basis in the partnership interest (reduced by any 
     money distributed in the same transaction).\259\
---------------------------------------------------------------------------
     \257\ Sec. 731(a) and (b).
     \258\ Sec. 732(b).
     \259\ Sec. 732(a).
---------------------------------------------------------------------------
       Adjustments to the basis of the partnership's undistributed 
     properties are not required unless the partnership has made 
     the election under section 754 to make basis 
     adjustments.\260\ If an election is in effect under section 
     754, adjustments are made by a partnership to increase or 
     decrease the remaining partnership assets to reflect any 
     increase or decrease in the adjusted basis of the distributed 
     properties in the hands of the distributee partner (or gain 
     or loss recognized by the disributee partner).\261\ To the 
     extent the adjusted basis of the distributed properties 
     increases (or loss is recognized), the partnership's adjusted 
     basis in its properties is decreased by a like amount; 
     likewise, to the extent the adjusted basis of the distributed 
     properties decrease (or gain is recognized), the 
     partnership's adjusted basis in its properties is increased 
     by a like amount. Under these rules, a partnership with no 
     election in effect under section 754 may distribute property 
     with an adjusted basis lower than the distributee partner's 
     proportionate share of the adjusted basis of all partnership 
     property and leave the remaining partners with a smaller net 
     built-in gain or a larger net built-in loss than before the 
     distribution.
---------------------------------------------------------------------------
     \260\ Sec. 734(a).
     \261\ Sec. 734(b).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Contributions of property
       Under the Senate amendment, a built-in loss may be taken 
     into account only by the contributing partner and not by 
     other partners. Except as provided in regulations, in 
     determining the amount of items allocated to partners other 
     than the contributing partner, the basis of the contributed 
     property is treated as the fair market value on the date of 
     contribution. Thus, if the contributing partner's partnership 
     interest is transferred or liquidated, the partnership's 
     adjusted basis in the property is based on its fair market 
     value at the date of contribution, and the built-in loss will 
     be eliminated.\262\
---------------------------------------------------------------------------
     \262\ It is intended that a corporation succeeding to 
     attributes of the contributing corporate partner under 
     section 381 shall be treated in the same manner as the 
     contributing partner.
---------------------------------------------------------------------------
     Transfers of partnership interests
       The Senate amendment provides that the basis adjustment 
     rules under section 743 are mandatory in the case of the 
     transfer of a partnership interest with respect to which 
     there is a substantial built-in loss (rather than being 
     elective as under present law). For this purpose, a 
     substantial built-in loss exists if the transferee partner's 
     proportionate share of the adjusted basis of the partnership 
     property exceeds by more than $250,000 the transferee 
     partner's basis in the partnership interest.
       Thus, for example, assume that partner A sells his 
     partnership interest to B for its fair market value of $1 
     million. Also assume that

[[Page H4663]]

     B's proportionate share of the adjusted basis of the 
     partnership assets is $1.3 million. Under the bill, section 
     743(b) applies, so that a $300,000 decrease is required to 
     the adjusted basis of the partnership assets with respect to 
     B. As a result, B would recognize no gain or loss if the 
     partnership immediately sold all its assets for their fair 
     market values.
     Distribution of partnership property
       The Senate amendment provides that a basis adjustment under 
     section 734(b) is required in the case of a distribution with 
     respect to which there is a substantial basis reduction. A 
     substantial basis reduction means a downward adjustment of 
     more than $250,000 that would be made to the basis of 
     partnership assets if a section 754 election were in effect.
       Thus, for example, assume that A and B each contributed 
     $2.5 million to a newly formed partnership and C contributed 
     $5 million, and that the partnership purchased LMN stock for 
     $3 million and XYZ stock for $7 million. Assume that the 
     value of each stock declined to $1 million. Assume LMN stock 
     is distributed to C in liquidation of its partnership 
     interest. Under present law, the basis of LMN stock in C's 
     hands is $5 million. Under present law, C would recognize 
     a loss of $4 million if the LMN stock were sold for $1 
     million.
       Under the Senate amendment, however, there is a substantial 
     basis adjustment because the $2 million increase in the 
     adjusted basis of LMN stock (sec. 734(b)(2)(B)) is greater 
     than $250,000. Thus, the partnership is required to decrease 
     the basis of XYZ stock (under section 734(b)(2)) by $2 
     million (the amount by which the basis LMN stock was 
     increased), leaving a basis of $5 million. If the XYZ stock 
     were then sold by the partnership for $1 million, A and B 
     would each recognize a loss of $2 million.
       Effective date.--The provision applies to contributions, 
     transfers, and distributions (as the case may be) after the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not contain the provision in 
     the Senate amendment.
     4. Treatment of stripped bonds to apply to stripped interests 
         in bond and preferred stock funds (sec. 354 of the Senate 
         amendment and secs. 305 and 1286 of the Code)


                              Present Law

     Assignment of income in general
       In general, an ``income stripping'' transaction involves a 
     transaction in which the right to receive future income from 
     income-producing property is separated from the property 
     itself. In such transactions, it may be possible to generate 
     artificial losses from the disposition of certain property or 
     to defer the recognition of taxable income associated with 
     such property.
       Common law has developed a rule (referred to as the 
     ``assignment of income'' doctrine) that income may not be 
     transferred without also transferring the underlying 
     property. A leading judicial decision relating to the 
     assignment of income doctrine involved a case in which a 
     taxpayer made a gift of detachable interest coupons before 
     their due date while retaining the bearer bond. The U.S. 
     Supreme Court ruled that the donor was taxable on the entire 
     amount of interest when paid to the donee on the grounds that 
     the transferor had ``assigned'' to the donee the right to 
     receive the income.\263\
---------------------------------------------------------------------------
     \263\ Helvering v. Horst, 311 U.S. 112 (1940).
---------------------------------------------------------------------------
       In addition to general common law assignment of income 
     principles, specific statutory rules have been enacted to 
     address certain specific types of stripping transactions, 
     such as transactions involving stripped bonds and stripped 
     preferred stock (which are discussed below).\264\ However, 
     there are no specific statutory rules that address stripping 
     transactions with respect to common stock or other equity 
     interests (other than preferred stock).\265\
---------------------------------------------------------------------------
     \264\ Depending on the facts, the IRS also could determine 
     that a variety of other Code-based and common law-based 
     authorities could apply to income stripping transactions, 
     including: (1) sections 269, 382, 446(b), 482, 701, or 704 
     and the regulations thereunder; (2) authorities that 
     recharacterize certain assignments or accelerations of future 
     payments as financings; (3) business purpose, economic 
     substance, and sham transaction doctrines; (4) the step 
     transaction doctrine; and (5) the substance-over-form 
     doctrine. See Notice 95-53, 1995-2 C.B. 334 (accounting for 
     lease strips and other stripping transactions).
     \265\ However, in Estate of Stranahan v. Commissioner, 472 
     F.2d 867 (6th Cir. 1973), the court held that where a 
     taxpayer sold an interest in stock dividends, with no 
     personal obligation to produce the income supporting the 
     dividends, the transaction was treated as a sale of an income 
     interest.
---------------------------------------------------------------------------
     Stripped bonds
       Special rules are provided with respect to the purchaser 
     and ``stripper'' of stripped bonds.\266\ A ``stripped bond'' 
     is defined as a debt instrument in which there has been a 
     separation in ownership between the underlying debt 
     instrument and any interest coupon that has not yet become 
     payable.\267\ In general, upon the disposition of either the 
     stripped bond or the detached interest coupons, the retained 
     portion and the portion that is disposed of each is treated 
     as a new bond that is purchased at a discount and is payable 
     at a fixed amount on a future date. Accordingly, section 1286 
     treats both the stripped bond and the detached interest 
     coupons as individual bonds that are newly issued with 
     original issue discount (``OID'') on the date of disposition. 
     Consequently, section 1286 effectively subjects the stripped 
     bond and the detached interest coupons to the general OID 
     periodic income inclusion rules.
---------------------------------------------------------------------------
     \266\ Sec. 1286.
     \267\ Sec. 1286(e).
---------------------------------------------------------------------------
       A taxpayer who purchases a stripped bond or one or more 
     stripped coupons is treated as holding a new bond that is 
     issued on the purchase date with OID in an amount that is 
     equal to the excess of the stated redemption price at 
     maturity (or in the case of a coupon, the amount payable on 
     the due date) over the ratable share of the purchase price of 
     the stripped bond or coupon, determined on the basis of the 
     respective fair market values of the stripped bond and 
     coupons on the purchase date.\268\ The OID on the stripped 
     bond or coupon is includible in gross income under the 
     general OID periodic income inclusion rules.
---------------------------------------------------------------------------
     \268\ Sec. 1286(a).
---------------------------------------------------------------------------
       A taxpayer who strips a bond and disposes of either the 
     stripped bond or one or more stripped coupons must allocate 
     his basis, immediately before the disposition, in the bond 
     (with the coupons attached) between the retained and disposed 
     items.\269\ Special rules apply to require that interest or 
     market discount accrued on the bond prior to such disposition 
     must be included in the taxpayer's gross income (to the 
     extent that it had not been previously included in income) at 
     the time the stripping occurs, and the taxpayer increases his 
     basis in the bond by the amount of such accrued interest or 
     market discount. The adjusted basis (as increased by any 
     accrued interest or market discount) is then allocated 
     between the stripped bond and the stripped interest coupons 
     in relation to their respective fair market values. Amounts 
     realized from the sale of stripped coupons or bonds 
     constitute income to the taxpayer only to the extent such 
     amounts exceed the basis allocated to the stripped coupons or 
     bond. With respect to retained items (either the detached 
     coupons or stripped bond), to the extent that the price 
     payable on maturity, or on the due date of the coupons, 
     exceeds the portion of the taxpayer's basis allocable to such 
     retained items, the difference is treated as OID that is 
     required to be included under the general OID periodic income 
     inclusion rules.\270\
---------------------------------------------------------------------------
     \269\ Sec. 1286(b). Similar rules apply in the case of any 
     person whose basis in any bond or coupon is determined by 
     reference to the basis in the hands of a person who strips 
     the bond.
     \270\ Special rules are provided with respect to stripping 
     transactions involving tax-exempt obligations that treat OID 
     (computed under the stripping rules) in excess of OID 
     computed on the basis of the bond's coupon rate (or higher 
     rate if originally issued at a discount) as income from a 
     non-tax-exempt debt instrument (sec. 1286(d)).
---------------------------------------------------------------------------
     Stripped preferred stock
       ``Stripped preferred stock'' is defined as preferred stock 
     in which there has been a separation in ownership between 
     such stock and any dividend on such stock that has not become 
     payable.\271\ A taxpayer who purchases stripped preferred 
     stock is required to include in gross income, as ordinary 
     income, the amounts that would have been includible if the 
     stripped preferred stock was a bond issued on the purchase 
     date with OID equal to the excess of the redemption price of 
     the stock over the purchase price.\272\ This treatment is 
     extended to any taxpayer whose basis in the stock is 
     determined by reference to the basis in the hands of the 
     purchaser. A taxpayer who strips and disposes the future 
     dividends is treated as having purchased the stripped 
     preferred stock on the date of such disposition for a 
     purchase price equal to the taxpayer's adjusted basis in the 
     stripped preferred stock.\273\
---------------------------------------------------------------------------
     \271\ Sec. 305(e)(5).
     \272\ Sec. 305(e)(1).
     \273\ Sec. 305(e)(3).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment authorizes the Treasury Department to 
     promulgate regulations that, in appropriate cases, apply 
     rules that are similar to the present-law rules for stripped 
     bonds and stripped preferred stock to direct or indirect 
     interests in an entity or account substantially all of the 
     assets of which consist of bonds (as defined in section 
     1286(e)(1)), preferred stock (as defined in section 
     305(e)(5)(B)), or any combination thereof. The Senate 
     amendment applies only to cases in which the present-law 
     rules for stripped bonds and stripped preferred stock do not 
     already apply to such interests.
       For example, such Treasury regulations could apply to a 
     transaction in which a person effectively strips future 
     dividends from shares in a money market mutual fund (and 
     disposes either the stripped shares or stripped future 
     dividends) by contributing the shares (with the future 
     dividends) to a custodial account through which another 
     person purchases rights to either the stripped shares or the 
     stripped future dividends. However, it is intended that 
     Treasury regulations issued under the Senate amendment would 
     not apply to certain transactions involving direct or 
     indirect interests in an entity or account substantially all 
     the assets of which consist of tax-exempt obligations (as 
     defined in section 1275(a)(3)), such as a tax-exempt bond 
     partnership described in Rev. Proc. 2002-68,\274\ modifying 
     and superceding Rev. Proc. 2002-16.\275\
---------------------------------------------------------------------------
     \274\ 2002-43 I.R.B. 753.
     \275\ 2002-9 I.R.B. 572.

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

[[Page H4664]]

       No inference is intended as to the treatment under the 
     present-law rules for stripped bonds and stripped preferred 
     stock, or under any other provisions or doctrines of present 
     law, of interests in an entity or account substantially all 
     of the assets of which consist of bonds, preferred stock, or 
     any combination thereof. The Treasury regulations, when 
     issued, would be applied prospectively, except in cases to 
     prevent abuse.
       Effective date.--The Senate amendment provision is 
     effective for purchases and dispositions occurring after the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Reporting of taxable mergers and acquisitions (sec. 355 of 
         the Senate amendment and new sec. 6043A of the Code)


                              Present Law

       Under section 6045 and the regulations thereunder, brokers 
     (defined to include stock transfer agents) are required to 
     make information returns and to provide corresponding payee 
     statements as to sales made on behalf of their customers, 
     subject to the penalty provisions of sections 6721-6724. 
     Under the regulations issued under section 6045, this 
     requirement generally does not apply with respect to taxable 
     transactions other than exchanges for cash (e.g., stock 
     inversion transactions taxable to shareholders by reason of 
     section 367(a)).


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, if gain or loss is recognized 
     in whole or in part by shareholders of a corporation by 
     reason of a second corporation's acquisition of the stock or 
     assets of the first corporation, then the acquiring 
     corporation (or the acquired corporation, if so prescribed by 
     the Treasury Secretary) is required to make a return 
     containing:
       (1) A description of the transaction;
       (2) The name and address of each shareholder of the 
     acquired corporation that recognizes gain as a result of the 
     transaction (or would recognize gain, if there was a built-in 
     gain on the shareholder's shares);
       (3) The amount of money and the value of stock or other 
     consideration paid to each shareholder described above; and
       (4) Such other information as the Treasury Secretary may 
     prescribe.
       Alternatively, a stock transfer agent who records transfers 
     of stock in such transaction may make the return described 
     above in lieu of the second corporation.
       In addition, every person required to make a return 
     described above is required to furnish to each shareholder 
     whose name is required to be set forth in such return a 
     written statement showing:
       (1) The name, address, and phone number of the information 
     contact of the person required to make such return;
       (2) The information required to be shown on that return; 
     and
       (3) Such other information as the Treasury Secretary may 
     prescribe.
       This written statement is required to be furnished to the 
     shareholder on or before January 31 of the year following the 
     calendar year during which the transaction occurred.
       The present-law penalties for failure to comply with 
     information reporting requirements are extended to failures 
     to comply with the requirements set forth under this 
     proposal.
       Effective date.--The Senate amendment provision is 
     effective for acquisitions after the date of enactment of the 
     proposal.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Minimum holding period for foreign tax credit with respect 
         to withholding taxes on income other than dividends (sec. 
         356 of the Senate amendment and sec. 901 of the Code)


                              Present Law

       In general, U.S. persons may credit foreign taxes against 
     U.S. tax on foreign-source income. The amount of foreign tax 
     credits that may be claimed in a year is subject to a 
     limitation that prevents taxpayers from using foreign tax 
     credits to offset U.S. tax on U.S.-source income. Separate 
     limitations are applied to specific categories of income.
       Present law denies a U.S. shareholder the foreign tax 
     credits normally available with respect to a dividend from a 
     corporation or a regulated investment company (``RIC'') if 
     the shareholder has not held the stock for more than 15 days 
     (within a 30-day testing period) in the case of common stock 
     or more than 45 days (within a 90-day testing period) in the 
     case of preferred stock.\276\ The disallowance applies both 
     to foreign tax credits for foreign withholding taxes that are 
     paid on the dividend where the dividend-paying stock is held 
     for less than these holding periods, and to indirect foreign 
     tax credits for taxes paid by a lower-tier foreign 
     corporation or a RIC where any of the required stock in the 
     chain of ownership is held for less than these holding 
     periods. Periods during which a taxpayer is protected from 
     risk of loss (e.g., by purchasing a put option or entering 
     into a short sale with respect to the stock) generally are 
     not counted toward the holding period requirement. In the 
     case of a bona fide contract to sell stock, a special rule 
     applies for purposes of indirect foreign tax credits. The 
     disallowance does not apply to foreign tax credits with 
     respect to certain dividends received by active dealers in 
     securities. If a taxpayer is denied foreign tax credits 
     because the applicable holding period is not satisfied, the 
     taxpayer is entitled to a deduction for the foreign taxes for 
     which the credit is disallowed.
---------------------------------------------------------------------------
     \276\ Sec. 901(k).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment expands the present-law disallowance 
     of foreign tax credits to include credits for gross-basis 
     foreign withholding taxes with respect to any item of income 
     or gain from property if the taxpayer who receives the income 
     or gain has not held the property for more than 15 days 
     (within a 30-day testing period), exclusive of periods during 
     which the taxpayer is protected from risk of loss. The Senate 
     amendment does not apply to foreign tax credits that are 
     subject to the present-law disallowance with respect to 
     dividends. The Senate amendment also does not apply to 
     certain income or gain that is received with respect to 
     property held by active dealers. Rules similar to the 
     present-law disallowance for foreign tax credits with respect 
     to dividends apply to foreign tax credits that are subject to 
     the Senate amendment. In addition, the Senate amendment 
     authorizes the Treasury Department to issue regulations 
     providing that the Senate amendment does not apply in 
     appropriate cases.
       Effective date.--The Senate amendment provision is 
     effective for amounts that are paid or accrued more than 30 
     days after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Qualified tax collection contracts (sec. 357 of the Senate 
         amendment and new sec. 6306 of the Code)


                              Present Law

       In fiscal years 1996 and 1997, the Congress earmarked $13 
     million for IRS to test the use of private debt collection 
     companies. There were several constraints on this pilot 
     project. First, because both IRS and OMB considered the 
     collection of taxes to be an inherently governmental 
     function, only government employees were permitted to collect 
     the taxes.\277\ The private debt collection companies were 
     utilized to assist the IRS in locating and contacting 
     taxpayers, reminding them of their outstanding tax liability, 
     and suggesting payment options. If the taxpayer agreed at 
     that point to make a payment, the taxpayer was transferred 
     from the private debt collection company to the IRS. Second, 
     the private debt collection companies were paid a flat fee 
     for services rendered; the amount that was ultimately 
     collected by the IRS was not taken into account in the 
     payment mechanism.
---------------------------------------------------------------------------
     \277\ Sec. 7801(a).
---------------------------------------------------------------------------
       The pilot program was discontinued because of disappointing 
     results. GAO reported \278\ that IRS collected $3.1 million 
     attributable to the private debt collection company efforts; 
     expenses were also $3.1 million. In addition, there were lost 
     opportunity costs of $17 million to the IRS because 
     collection personnel were diverted from their usual 
     collection responsibilities to work on the pilot.
---------------------------------------------------------------------------
     \278\ GAO/GGD-97-129R Issues Affecting IRS' Collection Pilot 
     (July 18, 1997).
---------------------------------------------------------------------------
       The IRS has in the last several years expressed renewed 
     interest in the possible use of private debt collection 
     companies; for example, IRS recently revised its extensive 
     Request for Information concerning its possible use of 
     private debt collection companies.\279\
---------------------------------------------------------------------------
     \279\ TIRNO-03-H-0001 (February 14, 2003), at 
     www.procurement.irs.treas.gov. The basic request for 
     information is 104 pages, and there are 16 additional 
     attachments.
---------------------------------------------------------------------------
       In general, Federal agencies are permitted to enter into 
     contracts with private debt collection companies for 
     collection services to recover indebtedness owed to the 
     United States.\280\ That provision does not apply to the 
     collection of debts under the Internal Revenue Code.\281\
---------------------------------------------------------------------------
     \280\ 31 U.S.C. sec. 3718.
     \281\ 31 U.S.C. sec. 3718(f).
---------------------------------------------------------------------------
       On February 3, 2003, the President submitted to the 
     Congress his fiscal year 2004 budget proposal,\282\ which 
     proposed the use of private debt collection companies to 
     collect Federal tax debts.
---------------------------------------------------------------------------
     \282\ See Office of Management and Budget, Budget of the 
     United States Government, Fiscal Year 2004 (H. Doc. 108-3, 
     Vol. I), p. 274.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits the IRS to use private debt 
     collection companies to locate and contact taxpayers owing 
     outstanding tax liabilities \283\ of any type \284\ and to 
     arrange payment of those taxes by the taxpayers. Several 
     steps are involved. First,

[[Page H4665]]

     the private debt collection company contacts the taxpayer by 
     letter.\285\ If the taxpayer's last known address is 
     incorrect, the private debt collection company searches for 
     the correct address. The private debt collection company is 
     not permitted to contact either individuals or employers to 
     locate a taxpayer. Second, the private debt collection 
     company telephones the taxpayer to request full payment.\286\ 
     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 three years. If the taxpayer is unable 
     to pay the outstanding tax liability in full over a three-
     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.
---------------------------------------------------------------------------
     \283\ There must be an assessment pursuant to section 6201 in 
     order for there to be an outstanding tax liability.
     \284\ The Senate amendment generally applies to any type of 
     tax imposed under the Internal Revenue Code. It is 
     anticipated that the focus in implementing the provision will 
     be: (a) taxpayers who have filed a return showing a balance 
     due but who have failed to pay that balance in full; and (b) 
     taxpayers who have been assessed additional tax by the IRS 
     and who have made several voluntary payments toward 
     satisfying their obligation but have not paid in full.
     \285\ Several portions of the provision require that the IRS 
     disclose confidential taxpayer information to the private 
     debt collection company. Section 6103(n) permits disclosure 
     for ``the providing of other services * * * for purposes of 
     tax administration.'' Accordingly, no amendment to 6103 is 
     necessary to implement the provision. It is intended, 
     however, that the IRS vigorously protect the privacy of 
     confidential taxpayer information by disclosing the least 
     amount of information possible to contractors consistent with 
     the effective operation of the provision.
     \286\ The private debt collection company is not permitted to 
     accept payment directly. Payments are required to be 
     processed by IRS employees.
---------------------------------------------------------------------------
       The Senate amendment 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, taxpayer 
     protections that are statutorily applicable to the IRS are 
     also made statutorily applicable to the private sector debt 
     collection companies. Third, the private sector debt 
     collection companies are required to inform taxpayers of the 
     availability of assistance from the Taxpayer Advocate.
       The Senate amendment provides that the United States shall 
     not be liable for any act or omission of any person 
     performing services under a qualified debt collection 
     contract. This is designed to encourage these persons to 
     protect taxpayers' rights to the maximum extent possible, 
     since they and their employers will be liable for violations; 
     they will not be able to transfer liability for violations to 
     the United States, which might cause them to be more lax in 
     preventing violations.
       The Senate amendment creates a revolving fund from the 
     amounts collected by the private debt collection companies. 
     The private debt collection companies would be paid out of 
     this fund. The provision prohibits the payment of fees for 
     all services in excess of 25 percent of the amount collected 
     under a tax collection contract.\287\
---------------------------------------------------------------------------
     \287\ It is assumed that there will be competitive bidding 
     for these contracts by private sector tax collection agencies 
     and that vigorous bidding will drive the overhead costs down.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Extension of customs user fees (sec. 358 of the Senate 
         amendment)


                              Present Law

       Section 13031 of the Consolidated Omnibus Budget 
     Reconciliation Act of 1985 (COBRA) (P.L. 99-272), authorized 
     the Secretary of the Treasury to collect certain service 
     fees. Section 412 (P.L 107-296) of the Homeland Security Act 
     of 2002 authorized the Secretary of the Treasury to delegate 
     such authority to the Secretary of Homeland Security. 
     Provided for under 19 U.S.C. 58c, these fees include: 
     processing fees for air and sea passengers, commercial 
     trucks, rail cars, private aircraft and vessels, commercial 
     vessels, dutiable mail packages, barges and bulk carriers, 
     merchandise, and Customs broker permits. COBRA was amended on 
     several occasions but most recently by P.L. 103-182 which 
     extended authorization for the collection of these fees 
     through fiscal year 2003.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the fees authorized under the 
     Consolidated Omnibus Budget Reconciliation Act of 1985 
     through December 31, 2013.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Modify qualification rules for tax-exempt property and 
         casualty insurance companies (sec. 359 of the Senate 
         amendment and secs. 501 and 831 of the Code)


                              Present Law

       A property and casualty insurance company is eligible to be 
     exempt from Federal income tax if its net written premiums or 
     direct written premiums (whichever is greater) for the 
     taxable year do not exceed $350,000 (sec. 501(c)(15)).
       A property and casualty insurance company may elect to be 
     taxed only on taxable investment income if its net written 
     premiums or direct written premiums (whichever is greater) 
     for the taxable year exceed $350,000, but do not exceed $1.2 
     million (sec. 831(b)).
       For purposes of determining the amount of a company's net 
     written premiums or direct written premiums under these 
     rules, premiums received by all members of a controlled group 
     of corporations of which the company is a part are taken into 
     account. For this purpose, a more-than-50-percent threshhold 
     applies under the vote and value requirements with respect to 
     stock ownership for determining a controlled group, and rules 
     treating a life insurance company as part of a separate 
     controlled group or as an excluded member of a group do not 
     apply (secs. 501(c)(15), 831(b)(2)(B) and 1563).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision modifies the requirements 
     for a property and casualty insurance company to be eligible 
     for tax-exempt status, and to elect to be taxed only on 
     taxable investment income.
       Under the Senate amendment provision, a property and 
     casualty insurance company is eligible to be exempt from 
     Federal income tax if (a) its gross receipts for the taxable 
     year do not exceed $600,000, and (b) the premiums received 
     for the taxable year are greater than 50 percent of the gross 
     receipts. For purposes of determining gross receipts, the 
     gross receipts of all members of a controlled group of 
     corporations of which the company is a part are taken into 
     account. The provision expands the present-law controlled 
     group rule so that it also takes into account gross receipts 
     of foreign and tax-exempt corporations.
       The Senate amendment provision also provides that a 
     property and casualty insurance company may elect to be taxed 
     only on taxable investment income if its net written premiums 
     or direct written premiums (whichever is greater) do not 
     exceed $1.2 million (without regard to whether such premiums 
     exceed $350,000) (sec. 831(b)). The provision retains the 
     present-law rule that, for purposes of determining the amount 
     of a company's net written premiums or direct written 
     premiums under this rule, premiums received by all members of 
     a controlled group of corporations of which the company is a 
     part are taken into account.
       No inference is intended that any company that is not an 
     insurance company (i.e., any company that is not a company 
     whose primary and predominant business activity during the 
     taxable year is the issuing of insurance or annuity contracts 
     or the reinsuring of risks underwritten by insurance 
     companies) can be eligible for tax-exempt status under 
     present-law section 501(c)(15), or under the provision. It is 
     intended that IRS enforcement activities address the misuse 
     of present-law section 501(c)(15).
       Further, it is not intended that the provision permitting a 
     property and casualty insurance company to elect to be taxed 
     only on taxable investment income become an area of abuse. 
     While the bill retains the eligibility test based on premiums 
     (rather than gross receipts), it is intended that regulations 
     or other Treasury guidance provide for anti-abuse rules so as 
     to prevent improper use of the provision, including by 
     characterizing as premiums income that is other than premium 
     income.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Authorize IRS to enter into installment agreements that 
         provide for partial payment (sec. 360 of the Senate 
         amendment and sec. 6159 of the Code)


                              Present Law

       The Code authorizes the IRS to enter into written 
     agreements with any taxpayer under which the taxpayer is 
     allowed to pay taxes owed, as well as interest and penalties, 
     in installment payments if the IRS determines that doing so 
     will facilitate collection of the amounts owed (sec. 6159). 
     An installment agreement does not reduce the amount of taxes, 
     interest, or penalties owed. Generally, during the period 
     installment payments are being made, other IRS enforcement 
     actions (such as levies or seizures) with respect to the 
     taxes included in that agreement are held in abeyance.
       Prior to 1998, the IRS administratively entered into 
     installment agreements that provided for partial payment 
     (rather than full payment) of the total amount owed over the 
     period of the agreement. In that year, the IRS Chief Counsel 
     issued a memorandum concluding that partial payment 
     installment agreements were not permitted.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision clarifies that the IRS is 
     authorized to enter into installment agreements with 
     taxpayers that do not provide for full payment of the 
     taxpayer's liability over the life of the agreement. The 
     Senate amendment provision also requires the IRS to review 
     partial payment installment agreements at least every two 
     years. The primary purpose of this review is to determine 
     whether the financial condition of the taxpayer has 
     significantly changed so as to warrant an increase in the 
     value of the payments being made.
       Effective date.--The Senate amendment provision is 
     effective for installment agreements entered into on or after 
     the date of enactment.

[[Page H4666]]

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Extend intangible amortization provisions to sports 
         franchises (sec. 361 of the Senate amendment and sec. 197 
         of the Code)


                              Present Law

       The purchase price allocated to intangible assets 
     (including franchise rights) acquired in connection with the 
     acquisition of a trade or business generally must be 
     capitalized and amortized over a 15-year period.\288\ These 
     rules were enacted in 1993 to minimize disputes regarding the 
     proper treatment of acquired intangible assets. The rules do 
     not apply to a franchise to engage in professional sports and 
     any intangible asset acquired in connection with such a 
     franchise.\289\ However, other special rules apply to certain 
     of these intangible assets.
---------------------------------------------------------------------------
     \288\ Sec. 197.
     \289\ Sec. 197(e)(6).
---------------------------------------------------------------------------
       Under section 1056, when a franchise to conduct a sports 
     enterprise is sold or exchanged, the basis of a player 
     contract acquired as part of the transaction is generally 
     limited to the adjusted basis of such contract in the hands 
     of the transferor, increased by the amount of gain, if any, 
     recognized by the transferor on the transfer of the contract. 
     Moreover, not more than 50 percent of the consideration from 
     the transaction may be allocated to player contracts unless 
     the transferee establishes to the satisfaction of the 
     Commissioner that a specific allocation in excess of 50 
     percent is proper. However, these basis rules may not apply 
     if a sale or exchange of a franchise to conduct a sports 
     enterprise is effected through a partnership.\290\ Basis 
     allocated to the franchise or to other valuable intangible 
     assets acquired with the franchise may not be amortizable if 
     these assets lack a determinable useful life.
---------------------------------------------------------------------------
     \290\ P.D.B. Sports, Ltd. v. Comm., 109 T.C. 423 (1997).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the 15-year recovery period 
     for intangible assets to franchises to engage in professional 
     sports and any intangible asset acquired in connection with 
     such a franchise acquisitions of sports franchises (including 
     player contracts). Thus, the same rules for amortization of 
     intangibles that apply to other acquisitions under present 
     law will apply to acquisitions of sports franchises.
       Effective date.--The Senate amendment provision is 
     effective for acquisitions occurring after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Deposits made to suspend the running of interest on 
         potential underpayments (sec. 362 of the Senate amendment 
         and new sec. 6603 of the Code)


                              Present Law

       Generally, interest on underpayments and overpayments 
     continues to accrue during the period that a taxpayer and the 
     IRS dispute a liability. The accrual of interest on an 
     underpayment is suspended if the IRS fails to notify an 
     individual taxpayer in a timely manner, but interest will 
     begin to accrue once the taxpayer is properly notified. No 
     similar suspension is available for other taxpayers.
       A taxpayer that wants to limit its exposure to underpayment 
     interest has a limited number of options. The taxpayer can 
     continue to dispute the amount owed and risk paying a 
     significant amount of interest. If the taxpayer continues to 
     dispute the amount and ultimately loses, the taxpayer will be 
     required to pay interest on the underpayment from the 
     original due date of the return until the date of payment.
       In order to avoid the accrual of underpayment interest, the 
     taxpayer may choose to pay the disputed amount and 
     immediately file a claim for refund. Payment of the disputed 
     amount will prevent further interest from accruing if the 
     taxpayer loses (since there is no longer any underpayment) 
     and the taxpayer will earn interest on the resultant 
     overpayment if the taxpayer wins. However, the taxpayer will 
     generally lose access to the Tax Court if it follows this 
     alternative. Amounts paid generally cannot be recovered by 
     the taxpayer on demand, but must await final determination 
     of the taxpayer's liability. Even if an overpayment is 
     ultimately determined, overpaid amounts may not be 
     refunded if they are eligible to be offset against other 
     liabilities of the taxpayer.
       The taxpayer may also make a deposit in the nature of a 
     cash bond. The procedures for making a deposit in the nature 
     of a cash bond are provided in Rev. Proc. 84-58.
       A deposit in the nature of a cash bond will stop the 
     running of interest on an amount of underpayment equal to the 
     deposit, but the deposit does not itself earn interest. A 
     deposit in the nature of a cash bond is not a payment of tax 
     and is not subject to a claim for credit or refund. A deposit 
     in the nature of a cash bond may be made for all or part of 
     the disputed liability and generally may be recovered by the 
     taxpayer prior to a final determination. However, a deposit 
     in the nature of a cash bond need not be refunded to the 
     extent the Secretary determines that the assessment or 
     collection of the tax determined would be in jeopardy, or 
     that the deposit should be applied against another liability 
     of the taxpayer in the same manner as an overpayment of tax. 
     If the taxpayer recovers the deposit prior to final 
     determination and a deficiency is later determined, the 
     taxpayer will not receive credit for the period in which the 
     funds were held as a deposit. The taxable year to which the 
     deposit in the nature of a cash bond relates must be 
     designated, but the taxpayer may request that the deposit be 
     applied to a different year under certain circumstances.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment allows a taxpayer to deposit cash with 
     the IRS that the may subsequently be used to pay an 
     underpayment of income, gift, estate, generation-skipping, or 
     certain excise taxes. Interest will not be charged on the 
     portion of the underpayment that is paid by the deposited 
     amount for the period the amount is on deposit. Generally, 
     deposited amounts that have not been used to pay a tax may be 
     withdrawn at any time if the taxpayer so requests in writing. 
     The withdrawn amounts will earn interest at the applicable 
     Federal rate to the extent they are attributable to a 
     disputable tax.
       The Secretary may issue rules relating to the making, use, 
     and return of the deposits.
     Use of a deposit to offset underpayments of tax
       Any amount on deposit may be used to pay an underpayment of 
     tax that is ultimately assessed. If an underpayment is paid 
     in this manner, the taxpayer will not be charged underpayment 
     interest on the portion of the underpayment that is so paid 
     for the period the funds were on deposit.
       For example, assume a calendar year individual taxpayer 
     deposits $20,000 on May 15, 2005, with respect to a 
     disputable item on its 2004 income tax return. On April 15, 
     2007, an examination of the taxpayer's year 2004 income tax 
     return is completed, and the taxpayer and the IRS agree that 
     the taxable year 2004 taxes were underpaid by $25,000. The 
     $20,000 on deposit is used to pay $20,000 of the 
     underpayment, and the taxpayer also pays the remaining 
     $5,000. In this case, the taxpayer will owe underpayment 
     interest from April 15, 2005 (the original due date of the 
     return) to the date of payment (April 15, 2007) only with 
     respect to the $5,000 of the underpayment that is not paid by 
     the deposit. The taxpayer will owe underpayment interest on 
     the remaining $20,000 of the underpayment only from April 15, 
     2005, to May 15, 2005, the date the $20,000 was deposited.
     Withdrawal of amounts
       A taxpayer may request the withdrawal of any amount of 
     deposit at any time. The Secretary must comply with the 
     withdrawal request unless the amount has already been used to 
     pay tax or the Secretary properly determines that collection 
     of tax is in jeopardy. Interest will be paid on deposited 
     amounts that are withdrawn at a rate equal to the short-term 
     applicable Federal rate for the period from the date of 
     deposit to a date not more than 30 days preceding the date of 
     the check paying the withdrawal. Interest is not payable to 
     the extent the deposit was not attributable to a disputable 
     tax.
       For example, assume a calendar year individual taxpayer 
     receives a 30-day letter showing a deficiency of $20,000 for 
     taxable year 2004 and deposits $20,000 on May 15, 2006. On 
     April 15, 2007, an administrative appeal is completed, and 
     the taxpayer and the IRS agree that the 2004 taxes were 
     underpaid by $15,000. $15,000 of the deposit is used to pay 
     the underpayment. In this case, the taxpayer will owe 
     underpayment interest from April 15, 2005 (the original due 
     date of the return) to May 15, 2006, the date the $20,000 was 
     deposited. Simultaneously with the use of the $15,000 to 
     offset the underpayment, the taxpayer requests the return of 
     the remaining amount of the deposit (after reduction for the 
     underpayment interest owed by the taxpayer from April 15, 
     2005, to May 15, 2006). This amount must be returned to the 
     taxpayer with interest determined at the short-term 
     applicable Federal rate from the May 15, 2006, to a date not 
     more than 30 days preceding the date of the check repaying 
     the deposit to the taxpayer.
     Limitation on amounts for which interest may be allowed
       Interest on a deposit that is returned to a taxpayer shall 
     be allowed for any period only to the extent attributable to 
     a disputable item for that period. A disputable item is any 
     item for which the taxpayer 1) has a reasonable basis for the 
     treatment used on its return and 2) reasonably believes that 
     the Secretary also has a reasonable basis for disallowing the 
     taxpayer's treatment of such item.
       All items included in a 30-day letter to a taxpayer are 
     deemed disputable for this purpose. Thus, once a 30-day 
     letter has been issued, the disputable amount cannot be less 
     than the amount of the deficiency shown in the 30-day letter. 
     A 30-day letter is the first letter of proposed deficiency 
     that allows the taxpayer an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals.
     Deposits are not payments of tax
       A deposit is not a payment of tax prior to the time the 
     deposited amount is used to pay a tax. Thus, the interest 
     received on withdrawn deposits will not be eligible for the

[[Page H4667]]

     proposed exclusion from income of an individual. Similarly, 
     withdrawal of a deposit will not establish a period for which 
     interest was allowable at the short-term applicable Federal 
     rate for the purpose of establishing a net zero interest rate 
     on a similar amount of underpayment for the same period.
     Effective date
       The Senate amendment provision applies to deposits made 
     after the date of enactment. Amounts already on deposit as of 
     the date of enactment are treated as deposited (for purposes 
     of applying this provision) on the date the taxpayer 
     identifies the amount as a deposit made pursuant to this 
     provision.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     13. Clarification of rules for payment of estimated tax for 
         certain deemed asset sales (sec. 363 of the Senate 
         amendment and sec. 338 of the Code)


                              Present Law

       In certain circumstances, taxpayers can make an election 
     under section 338(h)(10) to treat a qualifying purchase of 80 
     percent of the stock of a target corporation by a corporation 
     from a corporation that is a member of an affiliated group 
     (or a qualifying purchase of 80 percent of the stock of an S 
     corporation by a corporation from S corporation shareholders) 
     as a sale of the assets of the target corporation, rather 
     than as a stock sale. The election must be made jointly by 
     the buyer and seller of the stock and is due by the 15th day 
     of the ninth month beginning after the month in which the 
     acquisition date occurs. An agreement for the purchase and 
     sale of stock often may contain an agreement of the parties 
     to make a section 338(h)(10) election.
       Section 338(a) also permits a unilateral election by a 
     buyer corporation to treat a qualified stock purchase of a 
     corporation as a deemed asset acquisition, whether or not the 
     seller of the stock is a corporation (or an S corporation is 
     the target). In such a case, the seller or sellers recognize 
     gain or loss on the stock sale (including any estimated taxes 
     with respect to the stock sale), and the target corporation 
     recognizes gain or loss on the deemed asset sale.
       Section 338(h)(13) provides that, for purposes of section 
     6655 (relating to additions to tax for failure by a 
     corporation to pay estimated income tax), tax attributable to 
     a deemed asset sale under section 338(a)(1) shall not be 
     taken into account.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies section 338(h)(13) to 
     provide that the exception for estimated tax purposes with 
     respect to tax attributable to a deemed asset sale does not 
     apply with respect to a qualified stock purchase for which an 
     election is made under section 338(h)(10).
       Under the Senate amendment, if a transaction eligible for 
     the election under section 338(h)(10) occurs, estimated tax 
     would be determined based on the stock sale unless and until 
     there is an agreement of the parties to make a section 
     338(h)(10) election.
       If at the time of the sale there is an agreement of the 
     parties to make a section 338(h)(10) election, then estimated 
     tax is computed based on an asset sale. If the agreement to 
     make a section 338(h)(10) election is concluded after the 
     stock sale, such that the original computation was based on a 
     stock sale, estimated tax is recomputed based on the asset 
     sale election.
       No inference is intended as to present law.
       Effective date.--The Senate amendment is effective for 
     transactions that occur after the date of enactment of the 
     provision.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Limit deduction for charitable contributions of patents 
         and similar property (sec. 364 of the Senate amendment 
         and sec. 170 of the Code)


                              Present Law

       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.\291\ The amount of deduction generally equals 
     the fair market value of the contributed cash or property on 
     the date of the contribution.
---------------------------------------------------------------------------
     \291\ Charitable deductions are provided for income, estate, 
     and gift tax purposes. Secs. 170, 2055, and 2522, 
     respectively.
---------------------------------------------------------------------------
       For certain contributions of property, the taxpayer is 
     required to reduce the deduction amount by any gain, 
     generally resulting in a deduction equal to the taxpayer's 
     basis. This rule applies to contributions of: (1) property 
     that, at the time of contribution, would have resulted in 
     short-term capital gain if the property was sold by the 
     taxpayer on the contribution date; (2) tangible personal 
     property that is used by the donee in a manner unrelated to 
     the donee's exempt (or governmental) purpose; and (3) 
     property to or for the use of a private foundation (other 
     than a foundation defined in section 170(b)(1)(E)).
       Charitable contributions of capital gain property generally 
     are deductible at fair market value. 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 are subject to different 
     percentage limitations than other contributions of 
     property.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision provides that the amount of 
     the deduction for charitable contributions of patents, 
     copyrights, trademarks, trade names, trade secrets, know-how, 
     software, similar property, or applications or registrations 
     of such property may not exceed the taxpayer's basis in the 
     contributed property.
       The Senate amendment provision provides the Secretary of 
     the Treasury with the authority to issue regulations or other 
     guidance to prevent avoidance of the purposes of the 
     provision. In general, the provision is intended to prevent 
     taxpayers from claiming a deduction in excess of basis with 
     respect to charitable contributions of patents or similar 
     property. A taxpayer would contravene the purposes of the 
     provision, for example, by engaging in transactions or other 
     activity that manipulated the basis of the contributed 
     property or changed the form of the contributed property in 
     order to increase the amount of the deduction. This might 
     occur, for instance, if a taxpayer, for the purpose of 
     claiming a larger deduction, engaged in activity that 
     increased the basis of the contributed property by using 
     related parties, pass-thru entities, or other intermediaries 
     or means. The purpose of the provision also would be abused 
     if a taxpayer changed the form of the property by, for 
     example, embedding the property into a product, contributing 
     the product, and claiming a fair market value deduction based 
     in part on the fair market value of the embedded property. In 
     such a case, any guidance issued by the Secretary of the 
     Treasury may provide that the taxpayer is required to 
     separate the embedded property from the related product and 
     treat the charitable contribution as contributions of 
     distinct properties, with each property subject to the 
     applicable deduction rules.
       Effective date.--The Senate amendment provision is 
     effective for contributions made after May 7, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     15. Extension of provision permitting qualified transfers of 
         excess pension assets to retiree health accounts (sec. 
         365 of the Senate amendment, sec. 420 of the Code, and 
         secs. 101, 403, and 408 of ERISA)


                              Present Law

       Defined benefit plan assets generally may not revert to an 
     employer prior to termination of the plan and satisfaction of 
     all plan liabilities. In addition, a reversion may occur only 
     if the plan so provides. A reversion prior to plan 
     termination may constitute a prohibited transaction and may 
     result in plan disqualification. Any assets that revert to 
     the employer upon plan termination are includible in the 
     gross income of the employer and subject to an excise tax. 
     The excise tax rate is 20 percent if the employer maintains a 
     replacement plan or makes certain benefit increases in 
     connection with the termination; if not, the excise tax rate 
     is 50 percent. Upon plan termination, the accrued benefits of 
     all plan participants are required to be 100-percent vested.
       A pension plan may provide medical benefits to retired 
     employees through a separate account that is part of such 
     plan. A qualified transfer of excess assets of a defined 
     benefit plan to such a separate account within the plan may 
     be made in order to fund retiree health benefits.\292\ A 
     qualified transfer does not result in plan disqualification, 
     is not a prohibited transaction, and is not treated as a 
     reversion. Thus, transferred assets are not includible in the 
     gross income of the employer and are not subject to the 
     excise tax on reversions. No more than one qualified transfer 
     may be made in any taxable year.
---------------------------------------------------------------------------
     \292\ Sec. 420.
---------------------------------------------------------------------------
       Excess assets generally means the excess, if any, of the 
     value of the plan's assets \293\ over the greater of (1) the 
     plan's full funding limit \294\ or (2) 125 percent of the 
     plan's current liability. In addition, excess assets 
     transferred in a qualified transfer may not exceed the amount 
     reasonably estimated to be the amount that the employer will 
     pay out of such account during the taxable year of the 
     transfer for qualified current retiree health liabilities. No 
     deduction is allowed to the employer for (1) a qualified 
     transfer or (2) the payment of qualified current retiree 
     health liabilities out of transferred funds (and any income 
     thereon).
---------------------------------------------------------------------------
     \293\ The value of plan assets for this purpose is the lesser 
     of fair market value or actuarial value.
     \294\ A plan's full funding limit is the lesser of (1) for 
     years beginning before January 1, 2004, the applicable 
     percentage of current liability and (2) the plan's accrued 
     liability. The applicable percentage of current liability is 
     170 percent for 2003. The current liability full funding 
     limit is repealed for years beginning after 2003. Under the 
     general sunset provision of EGTRRA, the limit is reinstated 
     for years after 2010.
---------------------------------------------------------------------------
       Transferred assets (and any income thereon) must be used to 
     pay qualified current retiree health liabilities for the 
     taxable year of the transfer. Transferred amounts generally 
     must benefit pension plan participants, other than key 
     employees, who are entitled upon retirement to 
     receive retiree medical benefits through the separate 
     account. Retiree health benefits of key employees may not 
     be paid out of transferred assets.

[[Page H4668]]

       Amounts not used to pay qualified current retiree health 
     liabilities for the taxable year of the transfer are to be 
     returned to the general assets of the plan. These amounts are 
     not includible in the gross income of the employer, but are 
     treated as an employer reversion and are subject to the 20-
     percent reversion tax.
       In order for the transfer to be qualified, accrued 
     retirement benefits under the pension plan generally must be 
     100-percent vested as if the plan terminated immediately 
     before the transfer (or in the case of a participant who 
     separated in the one-year period ending on the date of the 
     transfer, immediately before the separation).
       In order for a transfer to be qualified, the employer 
     generally must maintain retiree health benefit costs at the 
     same level for the taxable year of the transfer and the 
     following four years.
       In addition, the Employee Retirement Income Security Act of 
     1974 (``ERISA'') provides that, at least 60 days before the 
     date of a qualified transfer, the employer must notify the 
     Secretary of Labor, the Secretary of the Treasury, employee 
     representatives, and the plan administrator of the transfer, 
     and the plan administrator must notify each plan participant 
     and beneficiary of the transfer.\295\
---------------------------------------------------------------------------
     \295\ ERISA sec. 101(e). ERISA also provides that a qualified 
     transfer is not a prohibited transaction under ERISA or a 
     prohibited reversion.
---------------------------------------------------------------------------
       No qualified transfer may be made after December 31, 2005.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment allows qualified transfers of excess 
     defined benefit plan assets through December 31, 2013.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     16. Proration rules for life insurance business of property 
         and casualty insurance companies (sec. 366 of the Senate 
         amendment and sec. 832 of the Code)


                              Present Law

     Life insurance company proration rules
       A life insurance company is subject to tax on its life 
     insurance company taxable income (LICTI) (sec. 801). LICTI is 
     life insurance gross income reduced by life insurance 
     deductions. For this purpose, a life insurance company 
     includes in gross income any net decrease in reserves, and 
     deducts a net increase in reserves. Because deductible 
     reserve increases might be viewed as being funded 
     proportionately out of taxable and tax-exempt income, the net 
     increase and net decrease in reserves are computed by 
     reducing the ending balance of the reserve items by the 
     policyholders' share of tax-exempt interest (secs. 
     807(b)(2)(B) and (b)(1)(B)). Similarly, a life insurance 
     company is allowed a dividends-received deduction for 
     intercorporate dividends from nonaffiliates only in 
     proportion to the company's share of such dividends (secs. 
     805(a)(4), 812). Fully deductible dividends from affiliates 
     are excluded from the application of this proration formula, 
     if such dividends are not themselves distributions from tax-
     exempt interest or from dividend income that would not be 
     fully deductible if received directly by the taxpayer. In 
     addition, the proration rule includes in prorated amounts the 
     increase for the taxable year in policy cash values of life 
     insurance policies and annuity and endowment contracts.
     Property and casualty insurance company proration rules
       The taxable income of a property and casualty insurance 
     company is determined as the sum of its underwriting income 
     and investment income (as well as gains and other income 
     items), reduced by allowable deductions (sec. 832). 
     Underwriting income means premiums earned during the taxable 
     year less losses incurred and expenses incurred. In 
     calculating its reserve for losses incurred, a property and 
     casualty insurance company must reduce the amount of losses 
     incurred by 15 percent of (1) the insurer's tax-exempt 
     interest, (2) the deductible portion of dividends received 
     (with special rules for dividends from affiliates), and (3) 
     the increase for the taxable year in the cash value of life 
     insurance, endowment or annuity contract (sec. 832(b)(5)(B)).
       This 15-percent proration requirement was enacted in 1986. 
     The reason the provision was adopted was Congress' belief 
     that ``it is not appropriate to fund loss reserves on a fully 
     deductible basis out of income which may be, in whole or in 
     part, exempt from tax. The amount of the reserves that is 
     deductible should be reduced by a portion of such tax-exempt 
     income to reflect the fact that reserves are generally funded 
     in part from tax-exempt interest or from wholly or partially 
     deductible dividends.'' \296\
---------------------------------------------------------------------------
     \296\ H. R. Rep. No. 99-426, Report of the Committee on Ways 
     and Means on H.R. 3838, The Tax Reform Act of 1985 (99th 
     Cong., 1st Sess.,), 670.
---------------------------------------------------------------------------
     Property and casualty insurance companies with life insurance 
         reserves
       Present law provides that a life insurance company means an 
     insurance company engaged in the business of issuing life 
     insurance, annuity, or noncancellable accident and health 
     insurance, provided its reserves meet a 50-percent threshhold 
     for its reserves (sec. 816). More than 50 percent of its 
     reserves must constitute life insurance reserves or reserves 
     for noncancellable accident and health policies. An insurance 
     company that does not meet this 50-percent threshhold for 
     reserves generally is subject to tax as a property and 
     casualty insurance company. In determining the amount of 
     premiums earned for purposes of calculating its taxable 
     income, a property and casualty insurance company includes in 
     unearned premiums the amount of life insurance reserves 
     determined under the rules applicable to life insurance 
     companies (secs. 832(b)(4), 807).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provision provides that the life 
     insurance company proration rules, rather than the property 
     and casualty insurance proration rules, apply with respect to 
     life insurance reserves of a property and casualty company.
       Specifically, the Senate amendment provision provides that 
     any deduction attributable to life insurance reserves 
     included in unearned premiums of a property and casualty 
     company under section 832(b)(4) is reduced in the same manner 
     as dividends received deductions of a life insurance company 
     are reduced under the proration rules of section 
     805(a)(4).\297\ In applying the policyholder's share and the 
     company's share under this reduction, section 812 applies 
     with respect to the life insurance business of the property 
     and casualty company. For purposes of applying section 
     812(d), only the gross investment income attributable to the 
     life insurance reserves referred to in section 832(b)(4) are 
     taken into account. It is expected that Treasury will provide 
     guidance as to reasonable methods of attributing gross 
     investment income to such life insurance reserves.
---------------------------------------------------------------------------
     \297\ As under present law, the reserve deduction determined 
     under section 807 for life insurance reserves included in 
     unearned premiums is reduced by the policyholder's share of 
     tax-exempt interest and of the increase in policy cash values 
     (sec. 807 (b)(1)(B)).
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     17. Modify treatment of transfers to creditors in divisive 
         reorganizations (sec. 367 of the Senate amendment and 
         secs. 357 and 361 of the Code)


                              present law

       Section 355 of the Code permits a corporation 
     (``distributing'') to separate its businesses by distributing 
     a subsidiary tax-free, if certain conditions are met. In 
     cases where the distributing corporation contributes property 
     to the corporation (``controlled') that is to be distributed, 
     no gain or loss is recognized if the property is contributed 
     solely in exchange for stock or securities of the controlled 
     corporation (which are subsequently distributed to 
     distributing's shareholders). The contribution of property to 
     a controlled corporation that is followed by a distribution 
     of its stock and securities may qualify as a reorganization 
     described in section 368(a)(1)(D). That section also applies 
     to certain transactions that do not involve a distribution 
     under section 355 and that are considered 'acquisitive'' 
     rather than ``divisive'' reorganizations.
       The contribution in the course of a divisive section 
     368(a)(1)(D) reorganization is also subject to the rules of 
     section 357(c). That section provides that the transferor 
     corporation will recognize gain if the amount of liabilities 
     assumed by controlled exceeds the basis of the property 
     transferred to it.
       Because the contribution transaction in connection with a 
     section 355 distribution is a reorganization under section 
     368(a)(1)(D), it is also subject to certain rules applicable 
     to both divisive and acquisitive reorganizations. One such 
     rule, in section 361(b), states that a transferor corporation 
     will not recognize gain if it receives money or other 
     property and distributes that money or other property to its 
     shareholders or creditors. The amount of property that may be 
     distributed to creditors without gain recognition is 
     unlimited under this provision.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment limits the amount of money or other 
     property that a distributing corporation can distribute to 
     its creditors without gain recognition under section 361(b) 
     to the amount of the basis of the assets contributed to a 
     controlled corporation in a divisive reorganization. In 
     addition, the Senate amendment provides that acquisitive 
     reorganizations under section 368(a)(1)(D) are no longer 
     subject to the liabilities assumption rules of section 
     357(c).
       Effective date.--The Senate amendment provision is 
     effective for transactions on or after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     18. Taxation of minor children (sec. 368 of the Senate 
         amendment and sec. 1 of the Code)


                              present law

     Filing requirements for children
       Single unmarried individuals eligible to be claimed as a 
     dependent on another taxpayer's return generally must file an 
     individual income tax return if he or she has (1)

[[Page H4669]]

     earned income only over $4,750 (for 2003), (2) unearned 
     income only over the minimum standard deduction amount for 
     dependents ($750 in 2003), or (3) both earned income and 
     unearned income totaling more than the smaller of (a) $4,750 
     (for 2003) or (b) the larger of (i) $750 (for 2003), or (ii) 
     earned income plus $250.\298\ Thus, if a dependent child has 
     less than $750 in gross income, the child does not have to 
     file an individual income tax return for 2003.
---------------------------------------------------------------------------
     \298\ Sec. 6012(a)(1)(C). Other filing requirements apply to 
     dependents who are married, elderly, or blind. See, Internal 
     Revenue Service, Publication 929, Tax Rules for Children and 
     Dependents, at 3, Table 1 (2002).
---------------------------------------------------------------------------
       A child who cannot be claimed as a dependent on another 
     person's tax return (e.g., because the support test is not 
     satisfied by any other person) is subject to the generally 
     applicable filing requirements. That is, such an individual 
     generally must file a return if the individual's gross income 
     exceeds the sum of the standard deduction and the personal 
     exemption amounts applicable to the individual.
     Taxation of unearned income of minor children
       Special rules apply to the unearned income of a child under 
     age 14. These rules, generally referred to as the ``kiddie 
     tax,'' tax certain unearned income of a child at the parent's 
     rate, regardless of whether the child can be claimed as a 
     dependent on the parent's return.\299\ The kiddie tax applies 
     if: (1) the child has not reached the age of 14 by the close 
     of the taxable year, (2) the child's investment income was 
     more than $1,500 (for 2003) and (3) the child is required to 
     file a return for the year. The kiddie tax applies regardless 
     of the source of the property generating the income or when 
     the property giving rise to the income was transferred to or 
     otherwise acquired by the child. Thus, for example, the 
     kiddie tax may apply to income from property acquired by the 
     child with compensation derived from the child's personal 
     services or from property given to the child by someone other 
     than the child's parent.
---------------------------------------------------------------------------
     \299\ Sec. 1(g).
---------------------------------------------------------------------------
       The kiddie tax is calculated by computing the ``allocable 
     parental tax.'' This involves adding the net unearned income 
     of the child to the parent's income and then applying the 
     parent's tax rate. A child's ``net unearned income'' is the 
     child's unearned income less the sum of (1) the minimum 
     standard deduction allowed to dependents ($750 for 2003), and 
     (2) the greater of (a) such minimum standard deduction amount 
     or (b) the amount of allowable itemized deductions that are 
     directly connected with the production of the unearned 
     income.\300\ A child's net unearned income cannot exceed the 
     child's taxable income.
---------------------------------------------------------------------------
     \300\ Sec. 1(g)(4).
---------------------------------------------------------------------------
       The allocable parental tax equals the hypothetical increase 
     in tax to the parent that results from adding the child's net 
     unearned income to the parent's taxable income. If a parent 
     has more than one child subject to the kiddie tax, the net 
     unearned income of all children is combined, and a single 
     kiddie tax is calculated. Each child is then allocated a 
     proportionate share of the hypothetical increase.
       If the parents file a joint return, the allocable parental 
     tax is calculated using the income reported on the joint 
     return. In the case of parents who are married but file 
     separate returns, the allocable parental tax is calculated 
     using the income of the parent with the greater amount of 
     taxable income. In the case of unmarried parents, the child's 
     custodial parent is the parent whose taxable income is taken 
     into account in determining the child's liability. If the 
     custodial parent has remarried, the stepparent is treated as 
     the child's other parent. Thus, if the custodial parent and 
     stepparent file a joint return, the kiddie tax is calculated 
     using that joint return. If the custodial parent and 
     stepparent file separate returns, the return of the one with 
     the greater taxable income is used. If the parents are 
     unmarried but lived together all year, the return of the 
     parent with the greater taxable income is used.\301\
---------------------------------------------------------------------------
     \301\ Sec. 1(g)(5); Internal Revenue Service, Publication 
     929, Tax Rules for Children and Dependents, at 6 (2002).
---------------------------------------------------------------------------
       Unless the parent elects to include the child's income on 
     the parent's return (as described below) the child files a 
     separate return. In this case, items on the parent's return 
     are not affected by the child's income. The total tax due 
     from a child is the greater of:
       (1) the sum of (a) the tax payable by the child on the 
     child's earned income plus (b) the allocable parental tax or;
       (2) the tax on the child's income without regard to the 
     kiddie tax provisions.
     Parental election to include child's unearned income
       Under certain circumstances, a parent may elect to report a 
     child's unearned income on the parent's return. If the 
     election is made, the child is treated as having no income 
     for the year and the child does not have to file a return. 
     The requirements for the election are that:
      (1) the child has gross income only from interest and 
     dividends (including capital gains distributions and Alaska 
     Permanent Fund Dividends); \302\
---------------------------------------------------------------------------
     \302\ Internal Revenue Service, Publication 929, Tax Rules 
     for children andDependents, at 7 (2002).
---------------------------------------------------------------------------
       (2) such income is more than the minimum standard deduction 
     amount for dependents ($750 in 2003) and less than 10 times 
     that amount;
       (3) no estimated tax payments for the year were made in the 
     child's name and taxpayer identification number;
       (4) no backup withholding occurred; and
       (5) the child is required to file a return if the parent 
     does not make the election.
       Only the parent whose return must be used when calculating 
     the kiddie tax may make the election. The parent includes in 
     income the child's gross income in excess of twice the 
     minimum standard deduction amount for dependents (i.e., the 
     child's gross income in excess of $1,500 for 2003). This 
     amount is taxed at the parent's rate. The parent also must 
     report an additional tax liability equal to the lesser of: 
     (1) $75 (in 2003), or (2) 10 percent of the child's gross 
     income exceeding the child's standard deduction ($750 in 
     2003).
       Including the child's income on the parent's return can 
     affect the parent's deductions and credits that are based on 
     adjusted gross income, as well as income-based phaseouts, 
     limitations, and floors.\303\ In addition, certain deductions 
     that the child would have been entitled to take on his or her 
     own return are lost.\304\ Further, if the child received tax-
     exempt interest from a private activity bond, that item is 
     considered a tax preference of the parent for alternative 
     minimum tax purposes.\305\
---------------------------------------------------------------------------
     \303\ Internal Revenue Service, Publication 929, Tax Rules 
     for Children and Dependents, at 8 (2002).
     \304\ Internal Revenue Service, Publication 929, Tax Rules 
     for Children and Dependents, at 7 (2002).
     \305\ Sec. 1(g)(7)(B).
---------------------------------------------------------------------------
     Taxation of child's compensation for services
       Compensation for a child's services, even though not 
     retained by the child, is considered the gross income of the 
     child, not the parent, even if the compensation is not 
     received by the child (e.g. is the parent's income under 
     local law).\306\ If the child's income tax is not paid, 
     however, an assessment against the child will be considered 
     as also made against the parent to the extent the assessment 
     is attributable to amounts received for the child's 
     services.\307\
---------------------------------------------------------------------------
     \306\ Sec. 73(a).
     \307\ Sec. 6201(c).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provision increases the age of minors 
     to which the kiddie tax provisions apply from under 14 to 
     under 18.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     19. Provide consistent amortization period for intangibles 
         (sec. 369 of the Senate amendment and secs. 195, 248, and 
         709 of the Code)


                              present law

       At the election of the taxpayer, start-up expenditures\308\ 
     and organizational expenditures\309\ may be amortized over a 
     period of not less than 60 months, beginning with the month 
     in which the trade or business begins. Start-up expenditures 
     are amounts that would have been deductible as trade or 
     business expenses, had they not been paid or incurred before 
     business began. Organizational expenditures are expenditures 
     that are incident to the creation of a corporation (sec. 248) 
     or the organization of a partnership (sec. 709), are 
     chargeable to capital, and that would be eligible for 
     amortization had they been paid or incurred in connection 
     with the organization of a corporation or partnership with a 
     limited or ascertainable life.
---------------------------------------------------------------------------
     \308\ Sec. 195
     \309\ Secs. 248 and 709.
---------------------------------------------------------------------------
       Treasury regulations\310\ require that a taxpayer file an 
     election to amortize start-up expenditures no later than the 
     due date for the taxable year in which the trade or business 
     begins. The election must describe the trade or business, 
     indicate the period of amortization (not less than 60 
     months), describe each start-up expenditure incurred, and 
     indicate the month in which the trade or business began. 
     Similar requirements apply to the election to amortize 
     organizational expenditures. A revised statement may be filed 
     to include start-up and organizational expenditures that were 
     not included on the original statement, but a taxpayer may 
     not include as a start-up expenditure any amount that was 
     previously claimed as a deduction.
---------------------------------------------------------------------------
     \310\ Treas. Reg. sec. 1.195-1.
---------------------------------------------------------------------------
       Section 197 requires most acquired intangible assets (such 
     as goodwill, trademarks, franchises, and patents) that are 
     held in connection with the conduct of a trade or business or 
     an activity for the production of income to be amortized over 
     15 years beginning with the month in which the intangible was 
     acquired.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment modifies the treatment of start-up and 
     organizational expeditures. A taxpayer would be allowed to 
     elect to deduct up to $5,000 each of start-up and 
     organizational expenditures in the taxable year in which the 
     trade or business begins. However, each $5,000 amount is 
     reduced (but not below zero) by the amount by which the 
     cumulative cost of start-up or organizational expenditures 
     exceeds $50,000, respectively. Start-up and organizational 
     expenditures that are not deductible in the year in

[[Page H4670]]

     which the trade or business begins would be amortized over a 
     15-year period consistent with the amortization period for 
     section 197 intangibles.
       Effective date.--The Senate amendment provision is 
     effective for start-up and organizational expenditures 
     incurred after the date of enactment. Start-up and 
     organizational expenditures that are incurred on or before 
     the date of enactment would continue to be eligible to be 
     amortized over a period not to exceed 60 months. However, all 
     start-up and organizational expenditures related to a 
     particular trade or business, whether incurred before or 
     after the date of enactment, would be considered in 
     determining whether the cumulative cost of start-up or 
     organizational expenditures exceeds $50,000.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     20. Clarify definition of nonqualified preferred stock (sec. 
         370 of the Senate amendment and sec. 351 of the Code)


                              present law

       The Taxpayer Relief Act of 1997 amended sections 351, 354, 
     355, 356, and 1036 to treat ``nonqualified preferred stock'' 
     as boot in corporate transactions, subject to certain 
     exceptions. For this purpose, preferred stock is defined as 
     stock that is ``limited and preferred as to dividends and 
     does not participate in corporate growth to any significant 
     extent.'' Nonqualified preferred stock is defined as any 
     preferred stock if (1) the holder has the right to require 
     the issuer or a related person to redeem or purchase the 
     stock, (2) the issuer or a related person is required to 
     redeem or purchase, (3) the issuer or a related person has 
     the right to redeem or repurchase, and, as of the issue date, 
     it is more likely than nor that such right will be exercised, 
     or (4) the dividend rate varies in whole or in part (directly 
     or indirectly) with reference to interest rates, commodity 
     prices, or similar indices, regardless of whether such 
     varying rate is provided as an express term of the stock (as 
     in the case of an adjustable rate stock) or as a practical 
     result of other aspects of the stock (as in the case of 
     auction stock). For this purpose, clauses (1), (2), and (3) 
     apply if the right or obligation may be exercised within 20 
     years of the issue date and is not subject to a contingency 
     which, as of the issue date, makes remote the likelihood of 
     the redemption or purchase.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision clarifies the definition of 
     nonqualified preferred stock to ensure that stock for which 
     there is not a real and meaningful likelihood of actually 
     participating in the earnings and profits of the corporation 
     is not considered to be outside the definition of stock that 
     is limited and preferred as to dividends and does not 
     participate in corporate growth to any significant extent.
       As one example, instruments that are preferred on 
     liquidation and that are entitled to the same dividends as 
     may be declared on common stock do not escape being 
     nonqualified preferred stock by reason of that right if the 
     corporation does not in fact pay dividends either to its 
     common or preferred stockholders. As another example, stock 
     that entitles the holder to a dividend that is the greater of 
     7 percent or the dividends common shareholders receive does 
     not avoid being preferred stock if the common shareholders 
     are not expected to receive dividends greater than 7 percent.
       No inference is intended as to the characterization of 
     stock under present law that has terms providing for 
     unlimited dividends or participation rights but, based on all 
     the facts and circumstances, is limited and preferred as to 
     dividends and does not participate in corporate growth to any 
     significant extent.
       Effective date.--The Senate amendment provision is 
     effective for transactions after May 14, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     21. Establish specific class lives for utility grading costs 
         (sec. 371 of the Senate amendment and sec. 168 of the 
         Code)


                              Present Law

       A taxpayer is allowed a depreciation deduction for the 
     exhaustion, wear and tear, and obsolescence of property that 
     is used in a trade or business or held for the production of 
     income. For most tangible property placed in service after 
     1986, the amount of the depreciation deduction is determined 
     under the modified accelerated cost recovery system (MACRS) 
     using a statutorily prescribed depreciation method, recovery 
     period, and placed in service convention. For some assets, 
     the recovery period for the asset is provided in section 168. 
     In other cases, the recovery period of an asset is determined 
     by reference to its class life. The class lives of assets 
     placed in service after 1986 are generally set forth in 
     Revenue Procedure 87-56.\311\ If no class life is provided, 
     the asset is allowed a 7-year recovery period under MACRS.
---------------------------------------------------------------------------
     \311\ 1987-2 C.B. 674 (as clarified and modified by Rev. 
     Proc. 88-22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
       Assets that are used in the transmission and distribution 
     of electricity for sale are included in asset class 49.14, 
     with a class life of 30 years and a MACRS recovery period of 
     20 years. The cost of initially clearing and grading land 
     improvements are specifically excluded from asset class 
     49.14. Prior to adoption of the accelerated cost recovery 
     system, the IRS ruled that an average useful life of 84 years 
     for the initial clearing and grading relating to electric 
     transmission lines and 46 years for the initial clearing and 
     grading relating to electric distribution lines, would be 
     accepted. However, the result in this ruling was not 
     incorporated in the asset classes included in Rev. Proc. 87-
     56 or its predecessors. Accordingly such costs are 
     depreciated over a 7-year recovery period under MACRS as 
     assets for which no class life is provided.
       A similar situation exists with regard to gas utility trunk 
     pipelines and related storage facilities. Such assets are 
     included in asset class 49.24, with a class life of 22 years 
     and a MACRS recovery period of 15 years. Initial clearing and 
     grade improvements are specifically excluded from the asset 
     class, and no separate asset class is provided for such 
     costs. Accordingly, such costs are depreciated over a 7-year 
     recovery period under MACRS as assets for which no class life 
     is provided.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment assigns a class life to depreciable 
     electric and gas utility clearing and grading costs incurred 
     to locate transmission and distribution lines and pipelines. 
     The provision includes these assets in the asset classes of 
     the property to which the clearing and grading costs relate 
     (generally, asset class 49.14 for electric utilities and 
     asset class 49.24 for gas utilities, giving these assets a 
     recovery period of 20 years and 15 years, respectively).
       Effective date.--The Senate amendment provision is 
     effective for electric and gas utility clearing and grading 
     costs incurred after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     22. Prohibition on nonrecognition of gain through complete 
         liquidation of holding company (sec. 372 of the Senate 
         amendment and secs. 331 and 332 of the Code)


                              Present Law

       A U.S. corporation owned by foreign persons is subject to 
     U.S. income tax on its net income. In addition, the earnings 
     of the U.S. corporation are subject to a second tax, when 
     dividends are paid to the corporation's shareholders.
       In general, dividends paid by a U.S. corporation to 
     nonresident alien individuals and foreign corporations that 
     are not effectively connected with a U.S. trade or business 
     are subject to a U.S. withholding tax on the gross amount of 
     such income at a rate of 30 percent. The 30-percent 
     withholding tax may be reduced pursuant to an income tax 
     treaty between the United States and the foreign country 
     where the foreign person is resident.
       In addition, the United States imposes a branch profits tax 
     on U.S. earnings of a foreign corporation that are shifted 
     out of a U.S. branch of the foreign corporation. The branch 
     profits tax is comparable to the second-level taxes imposed 
     on dividends paid by a U.S. corporation to foreign 
     shareholders. The branch profits tax is 30 percent (subject 
     to possible income tax treaty reduction) of a foreign 
     corporation's dividend equivalent amount. The ``dividend 
     equivalent amount'' generally is the earnings and profits of 
     a U.S. branch of a foreign corporation attributable to its 
     income effectively connected with a U.S. trade or business.
       In general, U.S. withholding tax is not imposed with 
     respect to a distribution of a U.S. corporation's earnings to 
     a foreign corporation in complete liquidation of the 
     subsidiary, because the distribution is treated as made in 
     exchange for stock and not as a dividend. In addition, 
     detailed rules apply for purposes of exempting foreign 
     corporations from the branch profits tax for the year in 
     which it completely terminates its U.S. business conducted in 
     branch form. The exemption from the branch profits tax 
     generally applies if, among other things, for three years 
     after the termination of the U.S. branch, the foreign 
     corporation has no income effectively connected with a U.S. 
     trade or business, and the U.S. assets of the terminated 
     branch are not used by the foreign corporation or a related 
     corporation in a U.S. trade or business.
       Regulations under section 367(e) provide that the 
     Commissioner may require a domestic liquidating corporation 
     to recognize gain on distributions in liquidation made to a 
     foreign corporation if a principal purpose of the liquidation 
     is the avoidance of U.S. tax. Avoidance of U.S. tax for this 
     purpose includes, but is not limited to, the distribution of 
     a liquidating corporation's earnings and profits with a 
     principal purpose of avoiding U.S. tax.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment generally would treat as a dividend 
     any distribution of earnings by a U.S. holding company to a 
     foreign corporation in a complete liquidation, if the U.S. 
     holding company was in existence for less than five years
       Effective date.--The Senate amendment would be effective 
     for liquidations and terminations occurring on or after the 
     date of enactment.

[[Page H4671]]

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     23. Lease term to include certain service contracts (sec. 373 
         of the Senate amendment and sec. 168 of the Code)


                              Present Law

       Under present law, ``tax-exempt use property'' must be 
     depreciated on a straight-line basis over a recovery period 
     equal to the longer of the property's class life or 125 
     percent of the lease term.\312\ For purposes of this rule, 
     ``tax-exempt use property'' is property that is leased (other 
     than under a short-term lease) to a tax-exempt entity.\313\ 
     For this purpose, the term ``tax-exempt entity'' includes 
     Federal, state and local governmental units, charities, and, 
     foreign entities or persons.\314\
---------------------------------------------------------------------------
     \312\ Sec. 168(g)(3)(A).
     \313\ Sec. 168(h)(1).
     \314\ Sec. 168(h)(2).
---------------------------------------------------------------------------
       In determining the length of the lease term for purposes of 
     the 125 percent calculation, a number of special rules apply. 
     In addition to the stated term of the lease, the lease term 
     includes: (1) Any additional period of time in the realistic 
     contemplation of the parties at the time the property is 
     first put in service; (2) any additional period of time for 
     which either the lessor or lessee has the option to renew the 
     lease (whether or not it is expected that the option will be 
     exercised); (3) any additional period of any successive 
     leases which are part of the same transaction (or series of 
     related transactions) with respect to the same or 
     substantially similar property; and (4) any additional period 
     of time (even if the lessee may not continue to be the lessee 
     during that period), if the lessee (a) has agreed to make a 
     payment in the nature of rent with respect to such period or 
     (b) has assumed or retained any risk of loss with respect to 
     such property for such period.
       Tax-exempt use property does not include property that is 
     used by a taxpayer to provide a service to a tax-exempt 
     entity. So long as the relationship between the parties is a 
     bona fide service contract, the taxpayer will be allowed to 
     depreciate the property used in satisfying the contract under 
     normal MACRS rules, rather than the rules applicable to tax-
     exempt use property.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment requires lessors of tax-exempt use 
     property to include the term of optional service contracts 
     and other similar arrangements in the lease term for purposes 
     of determining the recovery period.
       Effective date.--The Senate amendment provision is 
     effective for leases and other similar arrangements entered 
     into after the date of enactment. No inference is intended 
     with respect to the tax treatment of leases and other similar 
     arrangements entered into before such date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     24. Exclusion of like-kind exchange property from 
         nonrecognition treatment on the sale or exchange of a 
         principal residence (sec. 374 of the Senate amendment and 
         sec. 121 of the Code)


                              Present Law

       Under present law, a taxpayer may exclude up to $250,000 
     ($500,000 if married filing a joint return) of gain realized 
     on the sale or exchange of a principal residence.\315\ To be 
     eligible for the exclusion, the taxpayer must have owned and 
     used the residence as a principal residence for at least two 
     of the five years prior to the sale or exchange. A taxpayer 
     who fails to meet these requirements by reason of a change of 
     place of employment, health, or, to the extent provided under 
     regulations, unforeseen circumstances is able to exclude an 
     amount equal to the fraction of the $250,000 ($500,000 if 
     married filing a joint return) that is equal to the fraction 
     of the two years that the ownership and use requirements are 
     met. There are no special rules relating to the sale or 
     exchange of a principal residence that was acquired in a 
     like-kind exchange within the prior five years.
---------------------------------------------------------------------------
     \315\ Sec. 121.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that the exclusion for gain 
     on the sale or exchange of a principal residence does not 
     apply if the principal residence was acquired in a like-kind 
     exchange in which any gain was not recognized within the 
     prior five years.
       Effective date.--The Senate amendment provision is 
     effective for sales or exchanges of principal residences 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                          F. Other Provisions

     1. Temporary State and local fiscal relief (sec. 381 of the 
         Senate amendment)


                              Present Law

       No provision.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends relief to States by 
     establishing a temporary fund to provide $10 billion, divided 
     among State and local governments, to be used for health 
     care, education or job training; transportation or 
     infrastructure; law enforcement or public safety; and other 
     essential governmental services, and $10 billion for Medicaid 
     (FMAP).
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement provides relief to States by 
     establishing a temporary fund to provide $10 billion divided 
     among the States to be used for essential government 
     services, and $10 billion for Medicaid (FMAP). Nothing in 
     this subsection shall be construed to preclude consideration 
     of reforms to improve the Medicaid program.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.
     2. Review of State agency blindness and disability 
         determinations (sec. 382 of the Senate amendment)


                              Present Law

       State agencies are required to conduct blindness and 
     disability determinations to establish an individual's 
     eligibility for: (1) Title II (Federal Old-Age, Survivors, 
     and Disability Insurance (OASDI) benefits); and (2) Title XVI 
     (Supplemental Security Income (SSI)). Disability 
     determinations are made in accordance with disability 
     criteria defined in statute as well as standards promulgated 
     under regulations or other guidance.
       Under present law, the Commissioner of Social Security is 
     required to review the State agencies' Title II initial 
     blindness and disability determinations in advance of 
     awarding payment to individuals determined eligible. This 
     requirement for review is met when: (1) at least 50 percent 
     of all such determinations have been reviewed, or (2) other 
     such determinations have been reviewed as necessary to ensure 
     a high level of accuracy. Under present law, there is no 
     similar review for Title XVI.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the initial review 
     requirements for Title XVI SSI blindness and disability 
     determinations with those currently required under Title II.
       Effective date.-The Senate amendment provision is effective 
     on effective on October 1, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Prohibition on use of SCHIP funds to provide coverage for 
         childless adults (sec. 383 of the Senate amendment)


                              Present Law

       Title XXI of the Social Security Act provides states with 
     allocations to provide health insurance for children through 
     State Children Health Insurance Program (SCHIP). In this 
     statute, Congress specified that SCHIP allocations could only 
     be used ``to enable [States] to initiate and expand the 
     provision of child health assistance to uninsured, low-income 
     children in an effective and efficient manner.'' \316\
---------------------------------------------------------------------------
     \316\ Social Security Act section 2101(a).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies that SCHIP funds cannot be 
     used for childless adults.
       Effective date.-The Senate amendment provision is effective 
     on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Increase Medicaid payments to states with extremely low 
         disproportionate share hospitals (sec. 384 of the Senate 
         amendment)


                              Present Law

       Since 1981, States have been required to recognize, in 
     establishing their Medicaid payment rates, the situation of 
     hospitals that serve a disproportionate number of Medicaid 
     beneficiaries and low-income patients. These hospitals are 
     known as Disproportionate Share Hospitals (``DSH''). In State 
     defined as extremely low DSH States, DSH payments are 
     statutorily capped at one percent.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the one percent cap on 
     Medicaid payments to States defined as extremely low DSH 
     States. The amendment increases that cap to three percent for 
     fiscal year 2004. Twenty states benefit from this provision.
       Effective date.-The Senate amendment provision is effective 
     on the date of enactment for payments made in fiscal year 
     2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page H4672]]

             VI. Small Business and Agricultural Provisions

                      A. Small Business Provisions

     1. Exclusion of certain indebtedness of small business 
         investment companies from acquisition indebtedness (sec. 
         401 of the bill and sec. 514 of the Code)


                              Present Law

       In general, an organization that is otherwise exempt from 
     Federal income tax is taxed on income from a trade or 
     business that is unrelated to the organization's exempt 
     purposes. Certain types of income, such as rents, royalties, 
     dividends, and interest, generally are excluded from 
     unrelated business taxable income except when such income is 
     derived from ``debt-financed property.'' Debt-financed 
     property generally means any property that is held to produce 
     income and with respect to which there is acquisition 
     indebtedness at any time during the taxable year.
       In general, income of a tax-exempt organization that is 
     produced by debt-financed property is treated as unrelated 
     business income in proportion to the acquisition indebtedness 
     on the income-producing property. Acquisition indebtedness 
     generally means the amount of unpaid indebtedness incurred by 
     an organization to acquire or improve the property and 
     indebtedness that would not have been incurred but for the 
     acquisition or improvement of the property.\317\ Acquisition 
     indebtedness does not include, however, (1) certain 
     indebtedness incurred in the performance or exercise of a 
     purpose or function constituting the basis of the 
     organization's exemption, (2) obligations to pay certain 
     types of annuities, (3) an obligation, to the extent it is 
     insured by the Federal Housing Administration, to finance the 
     purchase, rehabilitation, or construction of housing for low 
     and moderate income persons, or (4) indebtedness incurred by 
     certain qualified organizations to acquire or improve real 
     property. An extension, renewal, or refinancing of an 
     obligation evidencing a pre-existing indebtedness is not 
     treated as the creation of a new indebtedness.
---------------------------------------------------------------------------
     \317\ Special rules apply in the case of an exempt 
     organization that owns a partnership interest in a 
     partnership that holds debt-financed income-producing 
     property. An exempt organization's share of partnership 
     income that is derived from such debt-financed property 
     generally is taxed as debt-financed income unless an 
     exception provides otherwise.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision modifies the debt-financed 
     property provisions by excluding from the definition of 
     acquisition indebtedness any indebtedness incurred by a small 
     business investment company licensed under the Small Business 
     Investment Act of 1958 that is evidenced by a debenture (1) 
     issued by such company under section 303(a) of said Act, or 
     (2) held or guaranteed by the Small Business Administration.
       Effective date.--The Senate amendment provision applies to 
     debt incurred after December 31, 2002, by a small business 
     investment company described in the provision, with respect 
     to property acquired by such company after such date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Repeal of occupational taxes relating to distilled 
         spirits, wine, and beer (sec. 402 of the Senate amendment 
         and secs. 5081, 5091, 5111, 5121, 5131, and 5276 of the 
         Code)


                              Present Law

       Under present law, special occupational taxes are imposed 
     on producers and others engaged in the marketing of distilled 
     spirits, wine, and beer. These excise taxes are imposed as 
     part of a broader Federal tax and regulatory engine governing 
     the production and marketing of alcoholic beverages. The 
     special occupational taxes are payable annually, on July 1 of 
     each year. The present tax rates are as follows:

     Producers \318\:
---------------------------------------------------------------------------
     \318\ A reduced rate of tax in the amount of $500.00 is 
     imposed on small proprietors (secs. 5081(b) and 5091(b)).
---------------------------------------------------------------------------
       Distilled spirits and wines (sec. 5081)--$1,000 per year, 
     per premise.
       Brewers (sec. 5091)--$1,000 per year, per premise.
     Wholesale dealers (sec. 5111): Liquors, wines, or beer--$500 
     per year.
     Retail dealers (sec. 5121): Liquors, wines, or beer--$250 per 
     year.
     Nonbeverage use of distilled spirits (sec. 5131)--$500 per 
     year.
     Industrial use of distilled spirits (sec. 5276)--$250 per 
     year.


                               House Bill

       No provision.


                            Senate Amendment

       The special occupational taxes on producers and marketers 
     of alcoholic beverages are repealed. The recordkeeping and 
     inspection authorities applicable to wholesalers and 
     retailers are retained. For purposes of the recordkeeping 
     requirements for wholesale and retail liquor dealers, the 
     provision provides a rebuttable presumption that a person 
     who sells, or offers for sale, distilled spirits, wine, or 
     beer, in quantities of 20 wine gallons or more to the same 
     person at the same time is engaged in the business of a 
     wholesale dealer in liquors or a wholesale dealer in beer. 
     In addition, the provision retains present-law in that it 
     continues to make it unlawful for any liquor dealer to 
     purchase distilled spirits for resale from any person 
     other than a wholesale liquor dealer subject to the 
     recordkeeping requirements. Existing general criminal 
     penalties relating to records and reports apply to 
     wholesalers and retailers who fail to comply with these 
     requirements.
       Effective date.--The Senate amendment provision is 
     effective on July 1, 2003. The provision does not affect 
     liability for taxes imposed with respect to periods before 
     July 1, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Custom gunsmiths (sec. 403 of the Senate amendment and 
         sec. 4182 of the Code)


                              Present Law

       The Code imposes an excise tax upon the sale by the 
     manufacturer, producer or importer of certain firearms and 
     ammunition (sec. 4181). Pistols and revolvers are taxable at 
     10 percent. Firearms (other than pistols and revolvers), 
     shells, and cartridges are taxable at 11 percent. The excise 
     tax for firearms imposed on manufacturers, producers, and 
     importers does not apply to machine guns and short barreled 
     firearms (sec. 4182(a)). Sales of firearms, pistols, 
     revolvers, shells and cartridges to the Department of Defense 
     also are exempt from the tax (sec. 4182(b)).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment exempts from the firearms excise tax 
     articles manufactured, produced, or imported by a person who 
     manufactures, produces, and imports less than 50 of such 
     articles during the calendar year. Controlled groups are 
     treated as a single person in determining the 50-article 
     limit.
       Effective date.--The Senate amendment provision is 
     effective for articles sold by the manufacturer, producer, or 
     importer on or before the date the first day of the month 
     beginning at least two weeks after the date of enactment. No 
     inference is intended from the prospective effective date of 
     this provision as to the proper treatment of pre-effective 
     date sales.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Simplification of excise tax imposed on bows and arrows 
         (sec. 404 of the Senate amendment and sec. 4161 of the 
         Code)


                              Present Law

       The Code imposes an excise tax of 11 percent on the sale by 
     a manufacturer, producer or importer of any bow with a draw 
     rate of 10 pounds or more (sec. 4161(b)(1)(A)). An excise tax 
     of 12.4 percent is imposed on the sale by a manufacturer or 
     importer of any shaft, point, nock, or vane designed for use 
     as part of an arrow which after its assembly (1) is over 18 
     inches long, or (2) is designed for use with a taxable bow 
     (if shorter than 18 inches) (sec. 4161(b)(2)). No tax is 
     imposed on finished arrows. An 11-percent excise tax also is 
     imposed on any part of an accessory for taxable bows and on 
     quivers for use with arrows (1) over 18 inches long or (2) 
     designed for use with a taxable bow (if shorter than 18 
     inches) (sec. 4161(b)(1)(B)).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the minimum draw weight for 
     a taxable bow from 10 pounds to 30 pounds. The Senate 
     amendment also imposes an excise tax of 12 percent on arrows 
     generally. An arrow for this purpose is defined as an arrow 
     shaft to which additional components are attached. The 
     present law 12.4-percent excise tax on certain arrow 
     components is unchanged by the provision. The Senate 
     amendment provides that the 12-percent excise tax on arrows 
     does not apply if the arrow contains an arrow shaft that was 
     subject to the tax on arrow components. Finally, the Senate 
     amendment subjects certain broadheads (a type of arrow point) 
     to an excise tax equal to 11 percent of the sales price 
     instead of 12.4 percent.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment for articles sold by the 
     manufacturer, producer, or importer.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                       B. Agricultural Provisions

     1. Capital gains treatment to apply to outright sales of 
         timber by landowner (sec. 411 of the Senate Amendment and 
         sec. 631 of the Code)


                              Present Law

       Under present law, a taxpayer disposing of timber held for 
     more than one year is eligible for capital gains treatment in 
     three situations. First, if the taxpayer sells or exchanges 
     timber that is a capital asset (sec. 1221) or property used 
     in the trade or business (sec. 1231), the gain generally is 
     long-term capital gain; however, if the timber is held for 
     sale to customers in the taxpayer's business, the gain will 
     be ordinary income. Second, if the taxpayer disposes of the 
     timber with a retained economic interest, the gain is 
     eligible for capital gain treatment (sec. 631(b)). Third, if 
     the 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)).

[[Page H4673]]

                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, in the case of a sale of timber 
     by the owner of the land from which the timber is cut, the 
     requirement that a taxpayer retain an economic interest in 
     the timber in order to treat gains as capital gain under 
     section 631(b) does not apply. Outright sales of timber by 
     the landowner will qualify for capital gains treatment in the 
     same manner as sales with a retained economic interest 
     qualify under present law, except that the usual tax rules 
     relating to the timing of the income from the sale of the 
     timber will apply (rather than the special rule of section 
     631(b) treating the disposal as occurring on the date the 
     timber is cut).
       Effective date.--The Senate amendment provision is 
     effective for sales of timber after the date of enactment.


                          Conference Agreement

       The conference agreement does not contain the provision in 
     the Senate amendment.
     2. Special rules for livestock sold on account of weather-
         related conditions (sec. 412 of the Senate amendment and 
         secs. 1033 and 451 of the Code)


                              Present Law

       A taxpayer generally recognizes gain on the sale of 
     property to the extent the sales price (and any other 
     consideration received) exceeds the seller's basis in the 
     property. The recognized gain is subject to current income 
     tax unless the gain is deferred or not recognized under a 
     special tax provision.
       Under section 1033, gain realized by a taxpayer from an 
     involuntary conversion of property is deferred to the extent 
     the taxpayer purchases property similar or related in service 
     or use to the converted property within the applicable 
     period. The taxpayer's basis in the replacement property 
     generally is the same as the taxpayer's basis in the 
     converted property, decreased by the amount of any money or 
     loss recognized on the conversion, and increased by the 
     amount of any gain recognized on the conversion.
       The applicable period for the taxpayer to replace the 
     converted property begins with the date of the disposition of 
     the converted property (or if earlier, the earliest date of 
     the threat or imminence of requisition or condemnation of the 
     converted property) and ends two years after the close of the 
     first taxable year in which any part of the gain upon 
     conversion is realized (the ``replacement period''). Special 
     rules extend the replacement period for certain real property 
     and principal residences damaged by a Presidentially declared 
     disaster to three years and four years, respectively, after 
     the close of the first taxable year in which gain is 
     realized.
       Section 1033(e) provides that the sale of livestock (other 
     than poultry) that is held for draft, breeding, or dairy 
     purposes in excess of the number of livestock that would have 
     been sold but for drought, flood, or other weather-related 
     conditions is treated as an involuntary conversion. 
     Consequently, gain from the sale of such livestock could be 
     deferred by reinvesting the proceeds of the sale in similar 
     property within a two-year period.
       In general, cash-method taxpayers report income in the year 
     it is actually or constructively received. However, section 
     451(e) provides that a cash-method taxpayer whose principal 
     trade or business is farming who is forced to sell livestock 
     due to drought, flood, or other weather-related conditions 
     may elect to include income from the sale of the livestock in 
     the taxable year following the taxable year of the sale. This 
     elective deferral of income is available only if the taxpayer 
     establishes that, under the taxpayer's usual business 
     practices, the sale would not have occurred but for drought, 
     flood, or weather-related conditions that resulted in the 
     area being designated as eligible for Federal assistance. 
     This exception is generally intended to put taxpayers who 
     receive an unusually high amount of income in one year in the 
     position they would have been in absent the weather-related 
     condition.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the applicable period for a 
     taxpayer to replace livestock sold on account of drought, 
     flood, or other weather-related conditions from two years to 
     four years after the close of the first taxable year in which 
     any part of the gain on conversion is realized. The extension 
     is only available if the taxpayer establishes that, under the 
     taxpayer's usual business practices, the sale would not have 
     occurred but for drought, flood, or weather-related 
     conditions that resulted in the area being designated as 
     eligible for Federal assistance. In addition, the Secretary 
     of the Treasury is granted authority to further extend the 
     replacement period on a regional basis should the weather-
     related conditions continue longer than three years. For 
     property eligible for the provision's extended replacement 
     period, the provision provides that the taxpayer can make an 
     election under section 451(e) until the period for 
     reinvestment of such property under section 1033 expires.
       Effective date.--The Senate amendment provision is 
     effective for any taxable year with respect to which the due 
     date (without regard to extensions) for the return is after 
     December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Exclusion from gross income for amounts paid under 
         National Health Service Corps loan repayment program 
         (sec. 413 of the of the Senate amendment and sec. 108 of 
         the Code)


                              Present Law

       The National Health Service Corps Loan Repayment Program 
     (the ``NHSC Loan Repayment Program'') provides loan 
     repayments to participants on condition that the participants 
     provide certain services. In the case of the NHSC Loan 
     Repayment Program, the recipient of the loan repayment is 
     obligated to provide medical services in a geographic area 
     identified by the Public Health Service as having a shortage 
     of health-care professionals. Loan repayments may be as much 
     as $35,000 per year of service plus a tax assistance payment 
     of 39 percent of the repayment amount.
       Generally, gross income means all income from whatever 
     source derived including income for the discharge of 
     indebtedness. However, gross income does not include 
     discharge of indebtedness income if: (1) the discharge occurs 
     in a Title 11 case; (2) the discharge occurs when the 
     taxpayer is insolvent; (3) the indebtedness discharged is 
     qualified farm indebtedness; or (4) except in the case of a C 
     corporation, the indebtedness discharged is qualified real 
     property business indebtedness.
       Because the loan repayments provided under the NHSC Loan 
     Repayment Program are not specifically excluded from gross 
     income, they are gross income to the recipient.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision excludes from gross income 
     loan repayments provided under the NHSC Loan Repayment 
     Program.
       Effective date.--The Senate amendment provision is 
     effective with respect to amounts received by an individual 
     in taxable years beginning after December 31, 2002.


                          Conference Agreement

       The Conference agreement does not include the Senate 
     amendment provision.
     4. Payment of dividends on stock of cooperatives without 
         reducing patronage dividends (sec. 414 of the Senate 
         amendment and sec. 1388 of the Code)


                              Present Law

       Under present law, cooperatives generally are entitled to 
     deduct or exclude amounts distributed as patronage dividends 
     in accordance with Subchapter T of the Code. In general, 
     patronage dividends are comprised of amounts that are paid to 
     patrons (1) on the basis of the quantity or value of business 
     done with or for patrons, (2) under a valid and enforceable 
     obligation to pay such amounts that was in existence before 
     the cooperative received the amounts paid, and (3) which are 
     determined by reference to the net earnings of the 
     cooperative from business done with or for patrons.
       Treasury Regulations provide that net earnings are reduced 
     by dividends paid on capital stock or other proprietary 
     capital interests (referred to as the ``dividend allocation 
     rule'').\319\ The dividend allocation rule has been 
     interpreted to require that such dividends be allocated 
     between a cooperative's patronage and nonpatronage 
     operations, with the amount allocated to the patronage 
     operations reducing the net earnings available for the 
     payment of patronage dividends.
---------------------------------------------------------------------------
     \319\ Treas. Reg. sec. 1.1388-1(a)(1).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a special rule for dividends 
     on capital stock of a cooperative. To the extent provided in 
     organizational documents of the cooperative, dividends on 
     capital stock do not reduce patronage income and do not 
     prevent the cooperative from being treated as operating on a 
     cooperative basis.
       Effective date.--The Senate amendment provision is 
     effective for distributions made in taxable years ending 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                VII. Simplification and Other Provisions

   A. Establish Uniform Definition of a Qualifying Child (Secs. 501 
 Through 508 of the Senate Amendment and Secs. 2, 21, 24, 32, 151, and 
                            152 of the Code)


                              Present Law

     In general
       Present law contains five commonly used provisions that 
     provide benefits to taxpayers with children: (1) the 
     dependency exemption; (2) the child credit; (3) the earned 
     income credit; (4) the dependent care credit; and (5) head of 
     household filing status. Each provision has separate criteria 
     for determining whether the taxpayer qualifies for the 
     applicable tax benefit with respect to a particular child. 
     The separate criteria include factors such as the 
     relationship (if any) the child must bear to the taxpayer, 
     the age of the child, and whether the child must live with 
     the taxpayer. Thus, a taxpayer is required to apply different 
     definitions to the same individual when determining 
     eligibility for these provisions, and an individual who 
     qualifies a taxpayer for one provision does not automatically 
     qualify the taxpayer for another provision.

[[Page H4674]]

     Dependency exemption \320\
---------------------------------------------------------------------------
     \320\ Secs. 151 and 152. Under the statutory structure, 
     section 151 provides for the deduction for personal 
     exemptions with respect to ``dependents.'' The term 
     ``dependent'' is defined in section 152. Most of the 
     requirements regarding dependents are contained in section 
     152; section 151 contains additional requirements that must 
     be satisfied in order to obtain a dependency exemption with 
     respect to a dependent (as so defined). In particular, 
     section 151 contains the gross income test, the rules 
     relating to married dependents filing a joint return, and the 
     requirement for a taxpayer identification number. The other 
     rules discussed here are contained in section 151.
---------------------------------------------------------------------------
       In general
       Taxpayers are entitled to a personal exemption deduction 
     for the taxpayer, his or her spouse, and each dependent. For 
     2003, the amount deductible for each personal exemption is 
     $3,050. The deduction for personal exemptions is phased out 
     for taxpayers with incomes above certain thresholds.\321\
---------------------------------------------------------------------------
     \321\ Sec. 151(d)(3).
---------------------------------------------------------------------------
       In general, a taxpayer is entitled to a dependency 
     exemption for an individual if the individual: (1) satisfies 
     a relationship test or is a member of the taxpayer's 
     household for the entire taxable year; (2) satisfies a 
     support test; (3) satisfies a gross income test or is a child 
     of the taxpayer under a certain age; (4) is a citizen or 
     resident of the U.S. or resident of Canada or Mexico; \322\ 
     and (5) did not file a joint return with his or her spouse 
     for the year.\323\ In addition, the taxpayer identification 
     number of the individual must be included on the taxpayer's 
     return.
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     \322\ A legally adopted child who does not satisfy the 
     residency or citizenship requirement may nevertheless qualify 
     as a dependent (provided other applicable requirements are 
     met) if (1) the child's principal place of abode is the 
     taxpayer's home and (2) the taxpayer is a citizen or national 
     of the United States. Sec. 152(b)(3).
     \323\ This restriction does not apply if the return was filed 
     solely to obtain a refund and no tax liability would exist 
     for either spouse if they filed separate returns. Rev. Rul. 
     54-567, 1954-2 C.B. 108.
---------------------------------------------------------------------------
       Relationship or member of household test
       Relationship test.--The relationship test is satisfied if 
     an individual is the taxpayer's (1) son or daughter or a 
     descendant of either (e.g., grandchild or great-grandchild); 
     (2) stepson or stepdaughter; (3) brother or sister (including 
     half brother, half sister, stepbrother, or stepsister); (4) 
     parent, grandparent, or other direct ancestor (but not foster 
     parent); (5) stepfather or stepmother; (6) brother or sister 
     of the taxpayer's father or mother; (7) son or daughter of 
     the taxpayer's brother or sister; or (8) the taxpayer's 
     father-in-law, mother-in-law, son-in-law, daughter-in-law, 
     brother-in-law, or sister-in-law.
       An adopted child (or a child who is a member of the 
     taxpayer's household and who has been placed with the 
     taxpayer for adoption) is treated as a child of the taxpayer. 
     A foster child is treated as a child of the taxpayer if the 
     foster child is a member of the taxpayer's household for the 
     entire taxable year.
       Member of household test.--If the relationship test is not 
     satisfied, then the individual may be considered the 
     dependent of the taxpayer if the individual is a member of 
     the taxpayer's household for the entire year. Thus, a 
     taxpayer may be eligible to claim a dependency exemption with 
     respect to an unrelated child who lives with the taxpayer for 
     the entire year.
       For the member of household test to be satisfied, the 
     taxpayer must both maintain the household and occupy the 
     household with the individual.\324\ A taxpayer or other 
     individual does not fail to be considered a member of a 
     household because of ``temporary'' absences due to special 
     circumstances, including absences due to illness, education, 
     business, vacation, and military service.\325\ Similarly, an 
     individual does not fail to be considered a member of the 
     taxpayer's household due to a custody agreement under which 
     the individual is absent for less than six months.\326\ 
     Indefinite absences that last for more than the taxable year 
     may be considered ``temporary.'' For example, the IRS has 
     ruled that an elderly woman who was indefinitely confined to 
     a nursing home was temporarily absent from a taxpayer's 
     household. Under the facts of the ruling, the woman had been 
     an occupant of the household before being confined to a 
     nursing home, the confinement had extended for several years, 
     and it was possible that the woman would die before becoming 
     well enough to return to the taxpayer's household. There was 
     no intent on the part of the taxpayer or the woman to change 
     her principal place of abode.\327\
---------------------------------------------------------------------------
     \324\ Treas. Reg. sec. 1.152-1(b).
     \325\ Id.
     \326\ Id.
     \327\ Rev. Rul. 66-28, 1966-1 C.B. 31.
---------------------------------------------------------------------------
       Support test
       In general.--The support test is satisfied if the taxpayer 
     provides over one half of the support of the individual for 
     the taxable year. To determine whether a taxpayer has 
     provided more than one half of an individual's support, the 
     amount the taxpayer contributed to the individual's support 
     is compared with the entire amount of support the individual 
     received from all sources, including the individual's own 
     funds.\328\ Governmental payments and subsidies (e.g., 
     Temporary Assistance to Needy Families, food stamps, and 
     housing) generally are treated as support provided by a third 
     party. Expenses that are not directly related to any one 
     member of a household, such as the cost of food for the 
     household, must be divided among the members of the 
     household. If any person furnishes support in kind (e.g., in 
     the form of housing), then the fair market value of that 
     support must be determined.
---------------------------------------------------------------------------
     \328\ In the case of a son, daughter, stepson, or 
     stepdaughter of the taxpayer who is a full-time student, 
     scholarships are not taken into account for purpose of the 
     support test. Sec. 152(d).
---------------------------------------------------------------------------
       Multiple support agreements.--In some cases, no one 
     taxpayer provides more than one half of the support of an 
     individual. Instead, two or more taxpayers, each of whom 
     would be able to claim a dependency exemption but for the 
     support test, together provide more than one half of the 
     individual's support. If this occurs, the taxpayers may agree 
     to designate that one of the taxpayers who individually 
     provides more than 10 percent of the individual's support can 
     claim a dependency exemption for the child. Each of the 
     others must sign a written statement agreeing not to claim 
     the exemption for that year. The statements must be filed 
     with the income tax return of the taxpayer who claims the 
     exemption.
       Special rules for divorced or legally separated parents.--
     Special rules apply in the case of a child of divorced or 
     legally separated parents (or parents who live apart at all 
     times during the last six months of the year) who provide 
     over one half the child's support during the calendar 
     year.\329\ If such a child is in the custody of one or both 
     of the parents for more than one half of the year, then the 
     parent having custody for the greater portion of the year is 
     deemed to satisfy the support test; however, the custodial 
     parent may release the dependency exemption to the 
     noncustodial parent by filing a written declaration with the 
     IRS.\330\
---------------------------------------------------------------------------
     \329\ For purposes of this rule, a ``child'' means a son, 
     daughter, stepson, or stepdaughter (including an adopted 
     child or foster child, or child placed with the taxpayer for 
     adoption). Sec. 152(e)(1)(A).
     \330\ Special support rules also apply in the case of certain 
     pre-1985 agreements between divorced or legally separated 
     parents. Sec. 152(e)(4).
---------------------------------------------------------------------------
         Gross income test
       In general, an individual may not be claimed as a dependent 
     of a taxpayer if the individual has gross income that is at 
     least equal to the personal exemption amount for the taxable 
     year.\331\ If the individual is the child of the taxpayer and 
     under age 19 (or under age 24, if a full-time student), the 
     gross income test does not apply.\332\ For purposes of this 
     rule, a ``child'' means a son, daughter, stepson, or 
     stepdaughter (including an adopted child of the taxpayer, a 
     foster child who resides with the taxpayer for the entire 
     year, or a child placed with the taxpayer for adoption by an 
     authorized adoption agency).
---------------------------------------------------------------------------
     \331\ Certain income from sheltered workshops is not taken 
     into account in determining the gross income of permanently 
     and totally disabled individuals. Sec. 151(c)(5).
     \332\ Sec. 151(c).
---------------------------------------------------------------------------
     Earned income credit \333\
---------------------------------------------------------------------------
     \333\ Sec. 32.
---------------------------------------------------------------------------
       In general
       In general, the earned income credit is a refundable credit 
     for low-income workers. The amount of the credit depends on 
     the earned income of the taxpayer and whether the taxpayer 
     has one, more than one, or no ``qualifying children.'' In 
     order to be a qualifying child for the earned income credit, 
     an individual must satisfy a relationship test, a residency 
     test, and an age test. In addition, the name, age, and 
     taxpayer identification number of the qualifying child must 
     be included on the return.
         Relationship test
       An individual satisfies the relationship test under the 
     earned income credit if the individual is the taxpayer's: (1) 
     son, daughter, stepson, or stepdaughter, or a descendant of 
     any such individual;\334\ (2) brother, sister, stepbrother, 
     or stepsister, or a descendant of any such individual, who 
     the taxpayer cares for as the taxpayer's own child; or (3) 
     eligible foster child. An eligible foster child is an 
     individual (1) who is placed with the taxpayer by an 
     authorized placement agency, and (2) who the taxpayer cares 
     for as her or his own child. A married child of the taxpayer 
     is not treated as meeting the relationship test unless the 
     taxpayer is entitled to a dependency exemption with respect 
     to the married child (e.g., the support test is satisfied) or 
     would be entitled to the exemption if the taxpayer had not 
     waived the exemption to the noncustodial parent.\335\
---------------------------------------------------------------------------
     \334\ A child who is legally adopted or placed with the 
     taxpayer for adoption by an authorized adoption agency is 
     treated as the taxpayer's own child. Sec. 32(c)(3)(B)(iv).
     \335\ Sec. 32(c)(3)(B)(ii).
---------------------------------------------------------------------------
       Residency test
       The residency test is satisfied if the individual has the 
     same principal place of abode as the taxpayer for more than 
     one half of the taxable year. The residence must be in the 
     United States.\336\ As under the dependency exemption (and 
     head of household filing status), temporary absences due to 
     special circumstances, including absences due to illness, 
     education, business, vacation, and military service are not 
     treated as absences for purposes of determining whether the 
     residency test is satisfied.\337\ Under the earned income 
     credit, there is no requirement that the taxpayer maintain 
     the household in which the taxpayer and the qualifying 
     individual reside.
---------------------------------------------------------------------------
     \336\ The principal place of abode of a member of the Armed 
     Services is treated as in the United States during any period 
     during which the individual is stationed outside the United 
     States on active duty. Sec. 32(c)(4).
     \337\ IRS Publication 596, Earned Income Credit (EIC), at 13. 
     H. Rep. 101-964 (October 27, 1990), at 1037.

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

[[Page H4675]]

       Age test
       In general, the age test is satisfied if the individual has 
     not attained age 19 as of the close of the calendar year. In 
     the case of a full-time student, the age test is satisfied if 
     the individual has not attained age 24 as of the close of the 
     calendar year. In the case of an individual who is 
     permanently and totally disabled, no age limit applies.
     Child credit \338\
---------------------------------------------------------------------------
     \338\ Sec. 24.
---------------------------------------------------------------------------
       Taxpayers with incomes below certain amounts are eligible 
     for a child credit for each qualifying child of the taxpayer. 
     The amount of the child credit is up to $600, in the case of 
     taxable years beginning in 2003 or 2004. The child credit 
     increases to $700 for taxable years beginning in 2005 through 
     2008, $800 for taxable years beginning in 2009, and $1,000 
     for taxable years beginning in 2010. The credit declines to 
     $500 in taxable year 2011.\339\ For purposes of this credit, 
     a qualifying child is an individual: (1) with respect to whom 
     the taxpayer is entitled to a dependency exemption for the 
     year; (2) who satisfies the same relationship test applicable 
     to the earned income credit; and (3) who has not attained age 
     17 as of the close of the calendar year. In addition, the 
     child must be a citizen or resident of the United 
     States.\340\ A portion of the child credit is refundable 
     under certain circumstances.\341\
---------------------------------------------------------------------------
     \339\ Economic Growth and Tax Relief Reconciliation Act of 
     2001 (``EGTRRA''), Pub. L. No. 107-16, sec. 901(a) (2001) 
     (making, by way of the EGTRRA sunset provision, the increase 
     in the child credit inapplicable to taxable years beginning 
     after December 31, 2010).
     \340\ 340 The child credit does not apply with respect to a 
     child who is a resident of Canada or Mexico and is not a U.S. 
     citizen, even if a dependency exemption is available with 
     respect to the child. Sec. 24(c)(2). The child credit is, 
     however, available with respect to a child dependent who is 
     not a resident or citizen of the United States if: (1) the 
     child has been legally adopted by the taxpayer; (2) the 
     child's principal place of abode is the taxpayer's home; and 
     (3) the taxpayer is a U.S. citizen or national. See sec. 
     24(c)(2) and sec. 152(b)(3).
     \341\ Sec. 24(d).
---------------------------------------------------------------------------
     Dependent care credit \342\
---------------------------------------------------------------------------
     \342\ 342 Sec. 21.
---------------------------------------------------------------------------
       The dependent care credit may be claimed by a taxpayer who 
     maintains a household that includes one or more qualifying 
     individuals and who has employment-related expenses. A 
     qualifying individual means (1) a dependent of the taxpayer 
     under age 13 for whom the taxpayer is entitled to a 
     dependency exemption, (2) a dependent of the taxpayer who is 
     physically or mentally incapable of caring for himself or 
     herself,\343\ or (3) the spouse of the taxpayer, if the 
     spouse is physically or mentally incapable of caring for 
     himself or herself. In addition, a taxpayer identification 
     number for the qualifying individual must be included on the 
     return.
---------------------------------------------------------------------------
     \343\ Although such an individual must be a dependent of the 
     taxpayer as defined in section 152, it is not required that 
     the taxpayer be entitled to a dependency exemption with 
     respect to the individual under section 151. Thus, such an 
     individual may be a qualifying individual for purposes of the 
     dependent care credit, even though the taxpayer is not 
     entitled to a dependency exemption because the individual 
     does not meet the gross income test.
---------------------------------------------------------------------------
       A taxpayer is considered to maintain a household for a 
     period if over one half the cost of maintaining the household 
     for the period is furnished by the taxpayer (or, if married, 
     the taxpayer and his or her spouse). Costs of maintaining the 
     household include expenses such as rent, mortgage interest 
     (but not principal), real estate taxes, insurance on the 
     home, repairs (but not home improvements), utilities, and 
     food eaten in the home.
       A special rule applies in the case of a child who is under 
     age 13 or is physically or mentally incapable of caring for 
     himself or herself if the custodial parent has waived his or 
     her dependency exemption to the noncustodial parent.\344\ For 
     the dependent care credit, the child is treated as a 
     qualifying individual with respect to the custodial parent, 
     not the parent entitled to claim the dependency exemption.
---------------------------------------------------------------------------
     \344\ Sec. 21(e)(5).
---------------------------------------------------------------------------
     Head of household filing status \345\
---------------------------------------------------------------------------
     \345\ Sec. 2(b).
---------------------------------------------------------------------------
       A taxpayer may claim head of household filing status if the 
     taxpayer is unmarried (and not a surviving spouse) and pays 
     more than one half of the cost of maintaining as his or her 
     home a household which is the principal place of abode for 
     more than one half of the year of (1) an unmarried son, 
     daughter, stepson or stepdaughter of the taxpayer or an 
     unmarried descendant of the taxpayer's son or daughter, (2) 
     an individual described in (1) who is married, if the 
     taxpayer may claim a dependency exemption with respect to the 
     individual (or could claim the exemption if the taxpayer had 
     not waived the exemption to the noncustodial parent), or (3) 
     a relative with respect to whom the taxpayer may claim a 
     dependency exemption.\346\ If certain other requirements are 
     satisfied, head of household filing status also may be 
     claimed if the taxpayer is entitled to a dependency exemption 
     with respect to one of the taxpayer's parents.
---------------------------------------------------------------------------
     \346\ Sec. 2(b)(1)(A)(ii), as qualified by sec. 2(b)(3)(B). 
     An individual for whom the taxpayer is entitled to claim a 
     dependency exemption by reason of a multiple support 
     agreement does not qualify the taxpayer for head of household 
     filing status.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Description of provision
       In general
       The Senate amendment provision establishes a uniform 
     definition of qualifying child for purposes of the dependency 
     exemption, the child credit, the earned income credit, the 
     dependent care credit, and head of household filing status. A 
     taxpayer may claim an individual who does not meet the 
     uniform definition of qualifying child (with respect to any 
     taxpayer) as a dependent if the present-law dependency 
     requirements are satisfied. The Senate amendment provision 
     does not modify other parameters of each tax benefit (e.g., 
     the earned income requirements of the earned income credit) 
     or the rules for determining whether individuals other than 
     children qualify for each tax benefit.
       Under the uniform definition, in general, a child is a 
     qualifying child of a taxpayer if the child satisfies each of 
     three tests: (1) the child has the same principal place of 
     abode as the taxpayer for more than one half the taxable 
     year; (2) the child has a specified relationship to the 
     taxpayer; and (3) the child has not yet attained a specified 
     age. A tie-breaking rule applies if more than one taxpayer 
     claims a child as a qualifying child.
       Under the Senate amendment provision, the present-law 
     support and gross income tests for determining whether an 
     individual is a dependent generally do not apply to a child 
     who meets the requirements of the uniform definition of 
     qualifying child.
       Residency test
       Under the uniform definition's residency test, a child must 
     have the same principal place of abode as the taxpayer for 
     more than one half of the taxable year. It is intended that, 
     as is the case under present law, temporary absences due to 
     special circumstances, including absences due to illness, 
     education, business, vacation, or military service, would not 
     be treated as absences.
       Relationship test
       In order to be a qualifying child under the Senate 
     amendment provision, the child must be the taxpayer's son, 
     daughter, stepson, stepdaughter, brother, sister, 
     stepbrother, stepsister, or a descendant of any such 
     individual. A legally adopted individual of the taxpayer, or 
     an individual who is placed with the taxpayer by an 
     authorized placement agency for adoption by the taxpayer, is 
     treated as a child of such taxpayer by blood. A foster child 
     who is placed with the taxpayer by an authorized placement 
     agency or by judgment, decree, or other order of any court of 
     competent jurisdiction is treated as the taxpayer's 
     child.\347\
---------------------------------------------------------------------------
     \347\ The provision eliminates the present-law rule requiring 
     that if a child is the taxpayer's sibling or stepsibling or a 
     descendant of any such individual, the taxpayer must care for 
     the child as if the child were his or her own child.
---------------------------------------------------------------------------
       Age test
       Under the Senate amendment provision, the age test varies 
     depending upon the tax benefit involved. In general, a child 
     must be under age 19 (or under age 24 in the case of a full-
     time student) in order to be a qualifying child.\348\ In 
     general, no age limit applies with respect to individuals who 
     are totally and permanently disabled within the meaning of 
     section 22(e)(3) at any time during the calendar year. The 
     Senate amendment provision retains the present-law 
     requirements that a child must be under age 13 (if he or she 
     is not disabled) for purposes of the dependent care credit, 
     and under age 17 (whether or not disabled) for purposes of 
     the child credit.
---------------------------------------------------------------------------
     \348\ The provision retains the present-law definition of 
     full-time student set forth in section 151(c)(4).
---------------------------------------------------------------------------
       Children who support themselves
       Under the Senate amendment provision, a child who provides 
     over one half of his or her own support generally is not 
     considered a qualifying child of another taxpayer. The Senate 
     amendment provision retains the present-law rule, however, 
     that a child who provides over one half of his or her own 
     support may constitute a qualifying child of another taxpayer 
     for purposes of the earned income credit.
       Tie-breaking rules
       If a child would be a qualifying child with respect to more 
     than one individual (e.g., a child lives with his or her 
     mother and grandmother in the same residence) and more than 
     one person claims a benefit with respect to that child, then 
     the following ``tie-breaking'' rules apply. First, if only 
     one of the individuals claiming the child as a qualifying 
     child is the child's parent, the child is deemed the 
     qualifying child of the parent. Second, if both parents claim 
     the child and the parents do not file a joint return, then 
     the child is deemed a qualifying child first with respect to 
     the parent with whom the child resides for the longest period 
     of time, and second with respect to the parent with the 
     highest adjusted gross income. Third, if the child's parents 
     do not claim the child, then the child is deemed a qualifying 
     child with respect to the claimant with the highest adjusted 
     gross income.
       Interaction with present-law rules
       Taxpayers may claim an individual who does not meet the 
     uniform definition of qualifying child with respect to any 
     taxpayer as a dependent if the present-law dependency 
     requirements (including the gross income and support tests) 
     are satisfied.\349\ Thus, for

[[Page H4676]]

     example, a taxpayer may claim a parent as a dependent if the 
     taxpayer provides more than one half of the support of the 
     parent and the parent's gross income is less than the 
     exemption amount.
---------------------------------------------------------------------------
     \349\ Individuals who satisfy the present-law dependency 
     tests and who are not qualifying children are referred to as 
     ``qualifying relatives'' under the provision.
---------------------------------------------------------------------------
       Children who are U.S. citizens living abroad or non-U.S. 
     citizens living in Canada or Mexico may qualify as a 
     qualifying child, as is the case under the present-law 
     dependency tests. A legally adopted child who does not 
     satisfy the residency or citizenship requirement may 
     nevertheless qualify as a qualifying child (provided other 
     applicable requirements are met) if (1) the child's principal 
     place of abode is the taxpayer's home and (2) the taxpayer is 
     a citizen or national of the United States.
       Children of divorced or legally separated parents
       The Senate amendment provision generally retains the 
     present-law rule that allows a custodial parent to release 
     the claim to a dependency exemption and the child credit to a 
     noncustodial parent. Thus, the Senate amendment provision 
     generally grandfathers those custodial waivers that are in 
     place and effective on the date of enactment, and generally 
     retains the custodial waiver rule for purposes of the 
     dependency exemption and the child credit for decrees of 
     divorce or separate maintenance or written separation 
     agreements that become effective after the date of enactment. 
     Under the Senate amendment provision, the custodial waiver 
     rules do not affect eligibility with respect to children of 
     divorced or legally separated parents for purposes of the 
     earned income credit, the dependent care credit, and head of 
     household filing status.
       Other provisions
       The Senate amendment provision retains the applicable 
     present-law requirements that a taxpayer identification 
     number for a child be provided on the taxpayer's return. For 
     purposes of the earned income credit, a qualifying child is 
     required to have a social security number that is valid for 
     employment in the United States (that is, the child must be a 
     U.S. citizen, permanent resident, or have a certain type of 
     temporary visa).
     Effect of Senate amendment provision on particular tax 
         benefits
       Dependency exemption
       For purposes of the dependency exemption, the Senate 
     amendment provision defines a dependent as a qualifying child 
     or a qualifying relative. The qualifying child test 
     eliminates the support test (other than in the case of a 
     child who provides more than one half of his or her own 
     support), and replaces it with the residency requirement 
     described above. Further, the present-law gross income test 
     does not apply to a qualifying child. The rules relating to 
     multiple support agreements do not apply with respect to 
     qualifying children because the support test does not apply 
     to them. Special tie-breaking rules (described above) apply 
     if more than one taxpayer claims a qualifying child under the 
     Senate amendment provision. These tie-breaking rules do not 
     apply if a child constitutes a qualifying child with respect 
     to multiple taxpayers, but only one eligible taxpayer 
     actually claims the qualifying child.
       The Senate amendment provision permits taxpayers to 
     continue to apply the present-law dependency exemption rules 
     to claim a dependency exemption for a qualifying relative who 
     does not satisfy the qualifying child definition. In such 
     cases, the present-law gross income and support tests, 
     including the special rules for multiple support agreements, 
     the special rules relating to income of handicapped 
     dependents, and the special support test in case of students, 
     continue to apply for purposes of the dependency exemption.
       As is the case under present law, a child who provides over 
     half of his or her own support is not considered a dependent 
     of another taxpayer under the Senate amendment provision. 
     Further, an individual shall not be treated as a dependent of 
     a taxpayer if such individual has filed a joint return with 
     the individual's spouse for the taxable year.
       Earned income credit
       In general, the Senate amendment provision adopts a 
     definition of qualifying child that is similar to the 
     present-law definition under the earned income credit. The 
     present-law requirement that a foster child and certain other 
     children be cared for as the taxpayer's own child is 
     eliminated. The present-law tie-breaker rule applicable to 
     the earned income credit is used for purposes of the uniform 
     definition of qualifying child. The Senate amendment 
     provision retains the present-law requirement that the 
     taxpayer's principal place of abode must be in the United 
     States.
       Child credit
       The present-law child credit generally uses the same 
     relationships to define an eligible child as the uniform 
     definition. The present-law requirement that a foster child 
     and certain other children be cared for as the taxpayer's own 
     child is eliminated. The age limitation under the Senate 
     amendment provision retains the present-law requirement that 
     the child must be under age 17, regardless of whether the 
     child is disabled.
       Dependent care credit
       The present-law requirement that a taxpayer maintain a 
     household in order to claim the dependent care credit is 
     eliminated. Thus, if other applicable requirements are 
     satisfied, a taxpayer may claim the dependent care credit 
     with respect to a child who lives with the taxpayer for more 
     than one half the year, even if the taxpayer does not provide 
     more than one half of the cost of maintaining the household.
       The rules for determining eligibility for the credit with 
     respect to an individual who is physically or mentally 
     incapable of caring for himself or herself are amended to 
     include a requirement that the taxpayer and the dependent 
     have the same principal place of abode for more than one half 
     the taxable year.
       Head of household filing status
       Under the Senate amendment provision, a taxpayer qualifies 
     for head of household filing status with respect to a child 
     who is a qualifying child as defined under the Senate 
     amendment provision. An individual who is not a qualifying 
     child will qualify the taxpayer for head of household status 
     only if, as is the case under present law, the individual is 
     a dependent of the taxpayer and the taxpayer is entitled to a 
     dependency exemption for such individual, or the individual 
     is the taxpayer's father or mother and certain other 
     requirements are satisfied. Thus, under the Senate amendment 
     provision a taxpayer is eligible for head of household filing 
     status only with respect to a qualifying child or an 
     individual for whom the taxpayer is entitled to a dependency 
     exemption.
       The Senate amendment provision retains the present-law 
     requirement that the taxpayer provide over one half the cost 
     of maintaining the household.
     Effective date
       The Senate amendment provision is effective for taxable 
     years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                   B. Other Simplification Provisions

     1. Consolidation of life insurance and nonlife companies 
         (sec. 511 of the Senate amendment and sec. 1504 of the 
         Code)


                              present Law

       Under present law, an affiliated group of corporations 
     means one or more chains of includible corporations connected 
     through stock ownership with a common parent corporation 
     (sec. 1504(a)(1)). The stock ownership requirement consists 
     of an 80-percent voting and value test. In general, an 
     affiliated group of corporations may file a consolidated tax 
     return for Federal income tax purposes.
       Life insurance companies (subject to tax under section 801) 
     generally are not treated as includible corporations, and 
     therefore may not be included in a consolidated return of an 
     affiliated group including nonlife-insurance companies, 
     unless the common parent of the group elects to treat the 
     life insurance companies as includible corporations (sec. 
     1504(c)(2)).
       Under the election to treat life insurance companies as 
     includible corporations of an affiliated group, two special 
     5-year limitation rules apply. The first 5-year rule provides 
     that a life insurance company may not be treated as an 
     includible corporation until it has been a member of the 
     group for the 5 taxable years immediately preceding the 
     taxable year for which the consolidated return is filed (sec. 
     1504(c)(2)). The second 5-year rule provides that any net 
     operating loss of a nonlife-insurance member of the group may 
     not offset the taxable income of a life insurance member for 
     any of the first 5 years the life and nonlife-insurance 
     corporations have been members of the same affiliated group 
     (sec. 1503(c)(2)). This rule applies to nonlife losses for 
     the current taxable year or as a carryover or carryback.
       A separate 35-percent limitation also applies under the 
     election to treat life insurance companies as includible 
     corporations of an affiliated group (sec. 1503(c)(1)). This 
     rule provides that if the non-life-insurance members of the 
     group have a net operating loss, then the amount of the loss 
     that is not absorbed by carrybacks against the nonlife-
     insurance members' income may offset the life insurance 
     members' income only to the extent of the lesser of: (1) 35 
     percent of the amount of the loss; or (2) 35 percent of the 
     life insurance members' taxable income. The unused portion of 
     the loss is available as a carryover and is added to 
     subsequent-year losses, subject to the same 35-percent 
     limitation.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provision repeals the 5-year 
     limitation providing that a life insurance company may not be 
     treated as an includible corporation until it has been a 
     member of the group for the 5 taxable years immediately 
     preceding the taxable year for which the consolidated return 
     is filed (sec. 1504(c)(2)). The provision also repeals the 
     rule that a life insurance corporation is not an includible 
     corporation unless the common parent makes an election to 
     treat life insurance companies as includible corporations 
     (sec. 1504(c)(1)). Thus, under the provision, a life 
     insurance company is treated as an includible corporation 
     starting with the first taxable year for which it becomes a 
     member of the affiliated group and otherwise meets the 
     definition of an includible corporation. The provision 
     retains the 5-year rule of section 1503(c)(2), as well as the 
     35-percent limitation of present-law section 1503(c)(1) with

[[Page H4677]]

     respect to any life insurance company that is an includible 
     corporation of an affiliated group.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2009. No affiliated group terminates solely by reason of the 
     provision. Under regulations, the provision waives the 5-year 
     waiting period for reconsolidation under section 1504(a)(3), 
     in the case of any corporation that was previously an 
     includible corporation, but was subsequently deemed not to be 
     an includible corporation as a result of becoming a 
     subsidiary of a corporation that was not an includible 
     corporation solely by reason of the 5-year rule of section 
     1504(c)(2) (providing that a life insurance company may not 
     be treated as an includible corporation until it has been a 
     member of the group for the 5 taxable years immediately 
     preceding the taxable year for which the consolidated return 
     is filed).


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Suspension of reduction of deductions for mutual life 
         insurance companies and of policyholder surplus accounts 
         of life insurance companies (sec. 512 of the Senate 
         amendment and secs. 809 and 815 of the Code)


                              present law

     Reduction in deductions for policyholder dividends and 
         reserves of mutual life insurance companies (sec. 809)
       In general, a corporation may not deduct amounts 
     distributed to shareholders with respect to the corporation's 
     stock. The Deficit Reduction Act of 1984 added a provision to 
     the rules governing insurance companies that was intended to 
     remedy the failure of prior law to distinguish between 
     amounts returned by mutual life insurance companies to 
     policyholders as customers, and amounts distributed to them 
     as owners of the mutual company.
       Under the provision, section 809, a mutual life insurance 
     company is required to reduce its deduction for policyholder 
     dividends by the company's differential earnings amount. If 
     the company's differential earnings amount exceeds the amount 
     of its deductible policyholder dividends, the company is 
     required to reduce its deduction for changes in its reserves 
     by the excess of its differential earnings amount over the 
     amount of its deductible policyholder dividends. The 
     differential earnings amount is the product of the 
     differential earnings rate and the average equity base of a 
     mutual life insurance company.
       The differential earnings rate is based on the difference 
     between the average earnings rate of the 50 largest stock 
     life insurance companies and the earnings rate of all mutual 
     life insurance companies. The mutual earnings rate applied 
     under the provision is the rate for the second calendar year 
     preceding the calendar year in which the taxable year 
     begins. Under present law, the differential earnings rate 
     cannot be a negative number.
       A company's equity base equals the sum of: (1) its surplus 
     and capital increased by 50 percent of the amount of any 
     provision for policyholder dividends payable in the following 
     taxable year; (2) the amount of its nonadmitted financial 
     assets; (3) the excess of its statutory reserves over its tax 
     reserves; and (4) the amount of any mandatory security 
     valuation reserves, deficiency reserves, and voluntary 
     reserves. A company's average equity base is the average of 
     the company's equity base at the end of the taxable year and 
     its equity base at the end of the preceding taxable year.
       A recomputation or ``true-up'' in the succeeding year is 
     required if the differential earnings amount for the taxable 
     year either exceeds, or is less than, the recomputed 
     differential earnings amount. The recomputed differential 
     earnings amount is calculated taking into account the average 
     mutual earnings rate for the calendar year (rather than the 
     second preceding calendar year, as above). The amount of the 
     true-up for any taxable year is added to, or deducted from, 
     the mutual company's income for the succeeding taxable year.
       For a mutual life insurance company's taxable years 
     beginning in 2001, 2002, or 2003, the differential earnings 
     rate is treated as zero for purposes of computing both the 
     differential earnings amount and the recomputed differential 
     earnings amount (true-up).
     Distributions to shareholders from policyholders surplus 
         account (sec. 815)
       Under the law in effect from 1959 through 1983, a life 
     insurance company was subject to a three-phase taxable income 
     computation under Federal tax law. Under the three-phase 
     system, a company was taxed on the lesser of its gain from 
     operations or its taxable investment income (Phase I) and, if 
     its gain from operations exceeded its taxable investment 
     income, 50 percent of such excess (Phase II). Federal income 
     tax on the other 50 percent of the gain from operations was 
     deferred, and was accounted for as part of a policyholder's 
     surplus account and, subject to certain limitations, taxed 
     only when distributed to stockholders or upon corporate 
     dissolution (Phase III). To determine whether amounts had 
     been distributed, a company maintained a shareholders surplus 
     account, which generally included the company's previously 
     taxed income that would be available for distribution to 
     shareholders. Distributions to shareholders were treated as 
     being first out of the shareholders surplus account, then out 
     of the policyholders surplus account, and finally out of 
     other accounts.
       The Deficit Reduction Act of 1984 included provisions that, 
     for 1984 and later years, eliminated further deferral of tax 
     on amounts (described above) that previously would have been 
     deferred under the three-phase system. Although for taxable 
     years after 1983, life insurance companies may not enlarge 
     their policyholders surplus account, the companies are not 
     taxed on previously deferred amounts unless the amounts are 
     treated as distributed to shareholders or subtracted from the 
     policyholders surplus account (sec. 815).
       Under present law, any direct or indirect distribution to 
     shareholders from an existing policyholders surplus account 
     of a stock life insurance company is subject to tax at the 
     corporate rate in the taxable year of the distribution. 
     Present law provides that any distribution to shareholders is 
     treated as made (1) first out of the shareholders surplus 
     account, to the extent thereof, (2) then out of the 
     policyholders surplus account, to the extent thereof, and 
     (3) finally, out of other accounts.


                               house bill

       No provision.


                            senate amendment

     Reduction in deductions for policyholder dividends and 
         reserves of mutual life insurance companies (sec. 809)
       The Senate amendment provision provides that for a mutual 
     life insurance company's taxable years beginning after 
     December 31, 2003, and before January 1, 2009, the 
     differential earnings rate is treated as zero for purposes of 
     computing both the differential earnings amount and the 
     recomputed differential earnings amount (true-up), under the 
     rules requiring reduction in certain deductions of mutual 
     life insurance companies (sec. 809).
     Distributions to shareholders from policyholders surplus 
         account (sec. 815)
       The Senate amendment provision suspends for a life 
     insurance company's taxable year beginning after December 31, 
     2003, and before January 1, 2009, the application of the 
     rules imposing income tax on distributions to shareholders 
     from the policyholders surplus account of a life insurance 
     company (sec. 815). The Senate amendment provision also 
     modifies the order in which distributions reduce the various 
     accounts, so that distributions are treated as first made out 
     of the policyholders surplus account, to the extent thereof, 
     and then out of the shareholders surplus account, and lastly 
     out of other accounts.
       Effective date.--The Senate amendment provisions relating 
     to section 809 and section 815 are effective for taxable 
     years beginning after December 31, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provisions.
     3. Section 355 ``active business test'' applied to chains of 
         affiliated corporations (sec. 513 of the Senate amendment 
         and sec. 355 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 such property had been 
     sold for its fair market value. An exception to this rule 
     applies if the distribution of the stock of a controlled 
     corporation satisfies the requirements of section 355 of the 
     Code. To qualify for tax-free treatment under section 355, 
     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.\350\ 
     For this purpose, a corporation is engaged in the active 
     conduct of a trade or business only if (1) the corporation is 
     directly engaged in the active conduct of a trade or 
     business, or (2) the corporation is not directly engaged in 
     an active business, but substantially all of its assets 
     consist of stock and securities of a corporation it controls 
     that is engaged in the active conduct of a trade or 
     business.\351\
---------------------------------------------------------------------------
     \350\ Section 355(b). If the distributing corporation had no 
     assets other than stock or securities in the controlled 
     corporations immediately before the distribution, then each 
     of the controlled corporations must be engaged immediately 
     after the distribution in the active conduct of a trade or 
     business.
     \351\ Section 355(b)(2)(A).
---------------------------------------------------------------------------
       In determining whether a corporation satisfies the active 
     trade or business requirement, the IRS position for advance 
     ruling purposes is that the value of the gross assets of the 
     trade or business being relied on must ordinarily constitute 
     at least 5 percent of the total fair market value of the 
     gross assets of the corporation directly conducting the trade 
     or business.\352\ However, if the corporation is not directly 
     engaged in an active trade or business, then the IRS takes 
     the position that the ``substantially all'' test requires 
     that at least 90 percent of the fair market value of the 
     corporation's gross assets consist of stock and securities of 
     a controlled corporation that is engaged in the active 
     conduct of a trade or business.\353\
---------------------------------------------------------------------------
     \352\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
     \353\ Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. 
     Proc. 77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------


                               house bill

       No provision.

[[Page H4678]]

                            senate amendment

       Under the Senate amendment, the active business test is 
     determined by reference to the relevant affiliated group. For 
     the 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)(B) (regardless of whether the corporations are 
     includible corporations under section 1504(b)). The relevant 
     affiliated group for a controlled corporation is determined 
     in a similar manner (with the controlled corporation as the 
     common parent).
       Effective date.--The Senate amendment applies to 
     distributions after the date of enactment, with three 
     exceptions. The Senate amendment does not apply to 
     distributions (1) made pursuant to an agreement which is 
     binding on the date of enactment and at all times thereafter, 
     (2) described in a ruling request submitted to the IRS on or 
     before the date of enactment, or (3) described on or before 
     the date of enactment in a public announcement or in a filing 
     with the Securities and Exchange Commission. The 
     distributing corporation may irrevocably elect not to have 
     the exceptions described above apply.
       The Senate amendment also applies to any distribution prior 
     to the date of enactment, but solely for the purpose of 
     determining whether, after the date of enactment, the 
     taxpayer continues to satisfy the requirements of section 
     355(b)(2)(A).\354\
---------------------------------------------------------------------------
     \354\ For example, a holding company taxpayer that had 
     distributed a controlled corporation in a spin-off prior to 
     the date of enactment, in which spin-off the taxpayer 
     satisfied the ``substantially all'' active business stock 
     test of present law section 355(b)(2)(A) immediately after 
     the distribution, would not be deemed to have failed to 
     satisfy any requirement that it continue that same qualified 
     structure for any period of time after the distribution, 
     solely because of a restructuring that occurs after the date 
     of enactment and that would satisfy the requirements of new 
     section 355(b)(2)(A).
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

                          C. Other Provisions

     1. Civil rights tax relief (sec. 521 of the Senate amendment 
         and sec. 62 of the Code)


                              present law

       Under present law, gross income generally does not include 
     the amount of any damages (other than punitive damages) 
     received (whether by suit or agreement and whether as lump 
     sums or as periodic payments) by individuals on account of 
     personal physical injuries (including death) or physical 
     sickness.\355\ Expenses relating to recovering such damages 
     are generally not deductible.\356\
---------------------------------------------------------------------------
     \355\ Sec. 104(a)(2).
     \356\ Sec. 265(a)(1).
---------------------------------------------------------------------------
       Other damages are generally included in gross income. The 
     related expenses to recover the damages, including attorneys' 
     fees, are generally deductible as expenses for the production 
     of income,\357\ subject to the two-percent floor on itemized 
     deductions.\358\ Thus, such expenses are deductible only to 
     the extent the taxpayer's total miscellaneous itemized 
     deductions exceed two percent of adjusted gross income. Any 
     amount allowable as a deduction is subject to reduction under 
     the overall limitation of itemized deductions if the 
     taxpayer's adjusted gross income exceeds a threshold 
     amount.\359\ For purposes of the alternative minimum tax, no 
     deduction is allowed for any miscellaneous itemized 
     deduction.
---------------------------------------------------------------------------
     \357\ Sec. 212.
     \358\ Sec. 67.
     \359\ Sec. 68.
---------------------------------------------------------------------------
       In some cases, claimants will engage an attorney to 
     represent them on a contingent fee basis. That is, if the 
     claimant recovers damages, a prearranged percentage of the 
     damages will be paid to the attorney; if no damages are 
     recovered, the attorney is not paid a fee. The proper tax 
     treatment of contingent fee arrangements with attorneys has 
     been litigated in recent years. Some courts \360\ have held 
     that the entire amount of damages is income and that the 
     claimant is entitled to a miscellaneous itemized deduction 
     subject to both the two-percent floor as an expense for the 
     production of income for the portion paid to the attorney and 
     to the overall limitation on itemized deductions. Other 
     courts have held that the portion of the recovery that is 
     paid directly to the attorney is not income to the claimant, 
     holding that the claimant has no claim of right to that 
     portion of the recovery.\361\
---------------------------------------------------------------------------
     \360\ Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd 259 
     F.3d 881 (7th Cir. 2001); Coady v. Commissioner, 213 F.3d 
     1187 (9th Cir. 2000); Benci-Woodward v. Commissioner, 219 
     F.3d 941 (9th Cir. 2000); Baylin v. United States, 43 F.3d 
     1451 (Fed. Cir. 1995).
     \361\ Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959); 
     Estate of Arthur Clarks v. United States, 202 F.3d 854 (6th 
     Cir. 2000); Srivastava v. Commissioner, 220 F.3d 353 (5th 
     Cir. 2000). In some of these cases, such as Cotnam, State law 
     has been an important consideration in determining that the 
     claimant has no claim of right to the recovery.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides an above-the-line deduction 
     for attorneys' fees and costs paid by, or on behalf of, the 
     taxpayer in connection with any action involving a claim of 
     unlawful discrimination or certain claims against the Federal 
     Government. The amount that may be deducted above-the-line 
     may not exceed the amount includible in the taxpayer's gross 
     income for the taxable year on account of a judgment or 
     settlement (whether by suit or agreement and whether as lump 
     sum or periodic payments) resulting from such claim.
       Under the Senate amendment, ``unlawful discrimination'' 
     means an act that is unlawful under certain provisions of any 
     of the following: the Civil Rights Act of 1991, the 
     Congressional Accountability Act of 1995, the National Labor 
     Relations Act, the Fair Labor Standards Act of 1938, the Age 
     Discrimination in Employment Act of 1967, the Rehabilitation 
     Act of 1973, the Employee Retirement Security Income Act of 
     1974, the Education Amendments of 1972, the Employee 
     Polygraph Protection Act of 1988, the Worker Adjustment and 
     Retraining Notification Act, the Family and Medical Leave Act 
     of 1993, chapter 43 of Title 38 of the United States Code, 
     the Revised Statutes, the Civil Rights Act of 1964, the Fair 
     Housing Act, the Americans with Disabilities Act of 1990, any 
     provision of Federal law (popularly known as whistleblower 
     protection provisions) prohibiting the discharge of an 
     employee, discrimination against an employee, or any other 
     form of retaliation or reprisal against an employee for 
     asserting rights or taking other actions permitted under 
     Federal law, or any provision of State or local law, or 
     common law claims permitted under Federal, State, or local 
     law providing for the enforcement of civil rights or 
     regulating any aspect of the employment relationship, 
     including prohibiting the discharge of an employee, 
     discrimination against an employee, or any other form of 
     retaliation or reprisal against an employee for asserting 
     rights or taking other actions permitted by law.
       Effective date.--The Senate amendment is effective for fees 
     and costs paid after the date of enactment with respect to 
     any judgment or settlement occurring after such date.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Increase section 382 limitation for certain corporations 
         in bankruptcy (sec. 522 of the Senate amendment and sec. 
         382 of the Code)


                              present law

       If a corporation with net operating losses experiences an 
     ownership change, then the annual amount of pre-change net 
     operating loss carryovers that it may use against post-change 
     income is limited. The basic annual post-change limit is the 
     value of the corporation's stock at the time of the ownership 
     change, multiplied by the long-term tax-exempt rate 
     (prescribed by the Treasury department) applicable to the 
     time of the change.
       In general, an ownership change occurs if, within a three-
     year period, there is a 50-percentage point increase in 
     ownership by any one or more 5-percent shareholders. A 
     special rule applies to bankruptcy situations. If a 
     corporation is under the jurisdiction of a court in a title 
     11 or similar case, no ownership change will occur if the 
     shareholders and creditors of the old loss corporation, as a 
     result of owning stock or debt of the old corporation, own at 
     least 50 percent of the stock of the new loss corporation. 
     Only indebtedness held for at least 18 months prior to the 
     date of filing the title 11 or similar case counts for this 
     purpose. In effect, such ``old and cold'' creditors are 
     treated as persons who had effectively become shareholders of 
     the corporation prior to the ownership change, due to the 
     impending bankruptcy of the corporation.
       If ``old and cold'' creditors dispose of their debt to new 
     persons and those persons become shareholders as a result of 
     owning that debt, the receipt of stock by those persons will 
     be treated as the acquisition of stock by new shareholders, 
     and can trigger an ownership change that causes the section 
     382 limitation to apply.


                               house bill

       No provision.


                            senate amendment

       For a limited time period, the Senate amendment doubles the 
     amount of the section 382 limitation applicable to 
     corporations that experience an ownership change emerging 
     from bankruptcy in a title 11 or similar case. The Senate 
     amendment applies for a period of two taxable years to 
     corporations that experience an ownership change in a title 
     11 or similar case after December 31, 2002.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning in 2004 and 2005.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Increase in historic rehabilitation credit for residential 
         housing for the elderly (sec. 523 of the Senate amendment 
         and sec. 47 of the Code)


                              present law

     Rehabilitation credit
       Present law provides a credit for rehabilitation 
     expenditures (sec. 47). A 20-percent credit is provided for 
     rehabilitation expenditures with respect to a certified 
     historic structure. For this purpose, a certified historic 
     structure means any building that is listed in the National 
     Register, or that is located in a registered historic 
     district and is certified by the Secretary of the Interior to 
     the Secretary of the Treasury as being of historic 
     significance to the district.
       A building is treated as having been substantially 
     rehabilitated only if the rehabilitation expenditures during 
     the 24-month period selected by the taxpayer and ending

[[Page H4679]]

     within the taxable year exceed the greater of the adjusted 
     basis of the building (and its structural components), or 
     $5,000. The taxpayer's depreciable basis in the property is 
     reduced by any rehabilitation credit claimed.
     Low-income housing credit
       The low-income housing tax credit (sec. 42) may be claimed 
     over a 10-year period for the cost of rental housing occupied 
     by tenants having incomes below specified levels. The credit 
     percentage for newly constructed or substantially 
     rehabilitated housing that is not Federally subsidized is 
     adjusted monthly by the Internal Revenue Service so that the 
     10 annual installments have a present value of 70 percent of 
     the total qualified expenditures. The credit percentage for 
     new substantially rehabilitated housing that is Federally 
     subsidized and for existing housing that is substantially 
     rehabilitated is calculated to have a present value of 30 
     percent of qualified expenditures. The aggregate credit 
     authority provided annually to each State is $1.75 per 
     resident, except in the case of projects that also receive 
     financing with proceeds of tax-exempt bonds issued subject to 
     the private activity bond volume limit and certain carry-over 
     amounts. The $1.75 per resident cap is indexed for inflation.
       Qualified basis with respect to which the credit may be 
     computed is generally determined as the portion of the 
     eligible basis of the qualified low-income building 
     attributable to the low-income rental units. Qualified basis 
     generally is the taxpayer's depreciable basis in a qualified 
     low-income building. In the case of a taxpayer who claims the 
     rehabilitation credit for a qualified low-income building, 
     the taxpayer's depreciable basis in the building is reduced 
     by the amount of the rehabilitation credit claimed. In 
     addition, eligible basis is reduced by any Federal grant 
     received with respect to the building. A qualified low-income 
     building is a building that meets certain compliance criteria 
     and is depreciable under the modified accelerated cost 
     recovery system (``MACRS'').


                               house bill

       No provision.


                            senate amendment

       The Senate amendment increases the present-law 20-percent 
     credit for historic rehabilitation expenses to 25 percent in 
     the case of rehabilitation expenses incurred with respect to 
     a building which is also a low-income housing credit property 
     in which substantially all of the tenants, both those tenants 
     in rent-restricted units and in other residential units, are 
     age 65 or greater. The Senate amendment permits the 25-
     percent rehabilitation credit to be claimed with respect to 
     all parts of the building, not only those parts on which the 
     taxpayer also claims the low-income housing credit.\362\
---------------------------------------------------------------------------
     \362\ The Senate amendment also repeals a transition rule to 
     the Tax Reform Act of 1986 permitting the taxpayers who own 
     the property described in sec. 251(d)(4)(X) of the Tax Reform 
     Act of 1986 to use ACRS depreciation, in lieu of MACRS 
     depreciation. This change enables such property to qualify 
     for the provision.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Modification of application of income forecast method of 
         depreciation (sec. 524 of the Senate amendment and sec. 
         167 of the Code)


                              present law

       The modified Accelerated Cost Recovery System (``MACRS'') 
     does not apply to certain property, including any motion 
     picture film, video tape, or sound recording, or to any other 
     property if the taxpayer elects to exclude such property from 
     MACRS and the taxpayer properly applies a unit-of-production 
     method or other method of depreciation not expressed in a 
     term of years. Section 197 does not apply to certain 
     intangible property, including property produced by the 
     taxpayer or any interest in a film, sound recording, video 
     tape, book or similar property not acquired in a transaction 
     (or a series of related transactions) involving the 
     acquisition of assets constituting a trade or business or 
     substantial portion thereof. Thus, the recovery of the cost 
     of a film, video tape, or similar property that is produced 
     by the taxpayer or is acquired on a ``stand-alone'' basis by 
     the taxpayer may not be determined under either the MACRS 
     depreciation provisions or under the section 197 amortization 
     provisions. The cost recovery of such property may be 
     determined under section 167, which allows a depreciation 
     deduction for the reasonable allowance for the exhaustion, 
     wear and tear, or obsolescence of the property. A taxpayer is 
     allowed to recover, through annual depreciation deductions, 
     the cost of certain property used in a trade or business or 
     for the production of income. Section 167(g) provides that 
     the cost of motion picture films, sound recordings, 
     copyrights, books, and patents are eligible to be recovered 
     using the income forecast method of depreciation.
       Under the income forecast method, a property's depreciation 
     deduction for a taxable year is determined by multiplying the 
     adjusted basis of the property by a fraction, the numerator 
     of which is the income generated by the property during the 
     year and the denominator of which is the total forecasted or 
     estimated income expected to be generated prior to the close 
     of the tenth taxable year after the year the property was 
     placed in service. Any costs that are not recovered by the 
     end of the tenth taxable year after the property was placed 
     in service may be taken into account as depreciation in such 
     year.
       The adjusted basis of property that may be taken into 
     account under the income forecast method only includes 
     amounts that satisfy the economic performance standard of 
     section 461(h). In addition, taxpayers that claim 
     depreciation deductions under the income forecast method are 
     required to pay (or receive) interest based on a 
     recalculation of depreciation under a ``look-back'' method.
       The ``look-back'' method is applied in any ``recomputation 
     year'' by (1) comparing depreciation deductions that had been 
     claimed in prior periods to depreciation deductions that 
     would have been claimed had the taxpayer used actual, rather 
     than estimated, total income from the property; (2) 
     determining the hypothetical overpayment or underpayment of 
     tax based on this recalculated depreciation; and (3) applying 
     the overpayment rate of section 6621 of the Code. Except as 
     provided in Treasury regulations, a ``recomputation year'' is 
     the third and tenth taxable year after the taxable year the 
     property was placed in service, unless the actual income from 
     the property for each taxable year ending with or before the 
     close of such years was within 10 percent of the estimated 
     income from the property for such years.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment clarifies that, solely for purposes of 
     computing the allowable deduction for property under the 
     income forecast method of depreciation, participations and 
     residuals may be included in the adjusted basis of the 
     property beginning in the year such property is placed in 
     service, but only if such participations and residuals relate 
     to income to be derived from the property before the close of 
     the tenth taxable year following the year the property is 
     placed in service (as defined in section 167(g)(1)(A)). For 
     purposes of the provision, participations and residuals are 
     defined as costs the amount of which, by contract, varies 
     with the amount of income earned in connection with such 
     property. The Senate amendment also clarifies that the income 
     from the property to be taken into account under the income 
     forecast method is the gross income from such property.
       The Senate amendment also grants authority to the Treasury 
     Department to prescribe appropriate adjustments to the basis 
     of property (and the look-back method) to reflect the 
     treatment of participations and residuals under the 
     provision.
       In addition, the Senate amendment clarifies that, in the 
     case of property eligible for the income forecast method that 
     the holding in the Associated Patentees decision will 
     continue to constitute a valid method of depreciation and may 
     be used in connection with the income forecast method of 
     accounting. Thus, rather than accounting for participations 
     and residuals as a cost of the property under the income 
     forecast method of depreciation, the taxpayer may elect 
     to deduct those payments as they are paid as under the 
     Associated Patentees decision. This election shall be made 
     on a property-by-property basis and shall be applied 
     consistently with respect to a given property thereafter. 
     The Senate amendment also clarifies that distribution 
     costs are not taken into account for purposes of 
     determining the taxpayer's current and total forecasted 
     income with respect to a property.
       Effective date.--The Senate amendment provision applies to 
     property placed in service after date of enactment. No 
     inference is intended as to the appropriate treatment under 
     present law. It is intended that the Treasury Department and 
     the IRS expedite the resolution of open cases. In resolving 
     these cases in an expedited and balanced manner, the Treasury 
     Department and IRS are encouraged to take into account the 
     principles of the bill.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Additional advance refunding of certain governmental bonds 
         (sec. 525 of the Senate amendment and sec. 149 of the 
         Code)


                              present law

       Interest on bonds issued by States or local governments is 
     excluded from income if the proceeds of the borrowing are 
     used to carry out governmental functions of those entities or 
     the debt is repaid with governmental funds (section 103). 
     Interest on bonds that nominally are issued by States or 
     local governments, but the proceeds of which are used 
     (directly or indirectly) by a private person and payment of 
     which is derived from funds of such a private person is 
     taxable unless the purpose of the borrowing is approved 
     specifically in the Code or in a non-Code provision of a 
     revenue Act. These bonds are called private activity bonds. 
     Present law includes several exceptions permitting States or 
     local governments to act as conduits providing tax-exempt 
     financing for private activities. One such exception is the 
     provision of financing for activities of charitable 
     organizations described in section 501(c)(3) of the Code 
     (``qualified 501(c)(3) bonds'').
       An advance refunding bond is issued to refund another bond 
     more than 90 days before the redemption of the refunded bond. 
     Under

[[Page H4680]]

     present law, governmental bonds and qualified 501(c)(3) bonds 
     may be advanced refunded, subject to certain limitations 
     described below. Private activity bonds (other than qualified 
     501(c)(3) bonds) may not be advanced refunded. Bonds eligible 
     for advance refunding can be advance refunded once if the 
     original bond was issued after 1985 or advance refunded twice 
     if the original bond was issued before 1985. Special rules 
     apply for advance refunding bonds under the New York Liberty 
     Zone provisions of the Code (sec. 1400L(e)(3)). ``Liberty 
     Advance Refunding Bonds,'' which may be advance refunded one 
     additional time, are tax-exempt bonds for which all present-
     law advance refunding authority was exhausted before 
     September 12, 2001, and with respect to which the advance 
     refunding bonds authorized under present law were outstanding 
     on September 11, 2001. In addition, at least 90 percent of 
     the net proceeds of the original bond must have been used to 
     finance facilities located in New York City and must be 
     governmental general obligation bonds issued by either New 
     York City or certain New York State Authorities.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, certain governmental bonds are 
     eligible for an additional advance refunding. To be eligible 
     for an additional refunding, the original bond has to have 
     been part of an issue 90 percent or more of the net proceeds 
     of which were used to finance a public elementary or 
     secondary school in any State in which the State's highest 
     court ruled by opinion issued on November 21, 2002, that the 
     State school funding system violates the State constitution 
     and is constitutionally inadequate. The additional advance 
     refunding bond must be issued before the date, which is two 
     years after the date of enactment of the bill.
       Effective date.--The Senate amendment provision is 
     effective for advance refunding bonds issued after the date 
     of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Exclusion of income derived from certain wagers on horse 
         races from gross income of nonresident alien individuals 
         (sec. 526 of the Senate amendment and sec. 872(b) of the 
         Code)


                              Present Law

       Under section 871, certain items of gross income received 
     by a nonresident alien from sources within the United States 
     are subject to a flat 30-percent withholding tax. Gambling 
     winnings received by a nonresident alien from wagers placed 
     in the United States are U.S.-source and thus generally are 
     subject to this withholding tax, unless exempted by treaty. 
     Currently, several U.S. income tax treaties exempt U.S.-
     source gambling winnings of residents of the other treaty 
     country from U.S. withholding tax. In addition, no 
     withholding tax is imposed under section 871 on the non-
     business gambling income of a nonresident alien from wagers 
     on the following games (except to the extent that the 
     Secretary determines that collection of the tax would be 
     administratively feasible): blackjack, baccarat, craps, 
     roulette, and big-6 wheel. Various other (non-gambling-
     related) items of income of a nonresident alien are excluded 
     from gross income under section 872(b) and are thereby exempt 
     from the 30-percent withholding tax, without any authority 
     for the Secretary to impose the tax by regulation. In cases 
     in which a withholding tax on gambling winnings applies, 
     section 1441(a) of the Code requires the party making the 
     winning payout to withhold the appropriate amount and makes 
     that party responsible for amounts not withheld.
       With respect to gambling winnings of a nonresident alien 
     resulting from a wager initiated outside the United States on 
     a pari-mutuel \363\ event taking place within the United 
     States, the source of the winnings, and thus the 
     applicability of the 30-percent U.S. withholding tax, depends 
     on the type of wagering pool from which the winnings are 
     paid. If the payout is made from a separate foreign pool, 
     maintained completely in a foreign jurisdiction (e.g., a pool 
     maintained by a racetrack or off-track betting parlor that is 
     showing in a foreign country a simulcast of a horse race 
     taking place in the United States), then the winnings paid to 
     a nonresident alien generally would not be subject to 
     withholding tax, because the amounts received generally would 
     not be from sources within the United States. However, if the 
     payout is made from a ``merged'' or ``commingled'' pool, in 
     which betting pools in the United States and the foreign 
     country are combined for a particular event, then the portion 
     of the payout attributable to wagers placed in the United 
     States could be subject to withholding tax. The party making 
     the payment, in this case a racetrack or off-track betting 
     parlor in a foreign country, would be responsible for 
     withholding the tax.
---------------------------------------------------------------------------
     \363\ In pari-mutuel wagering (common in horse racing), odds 
     and payouts are determined by the aggregate bets placed. The 
     money wagered is placed into a pool, the party maintaining 
     the pool takes a percentage of the total, and the bettors 
     effectively bet against each other. Part-mutuel wagering may 
     be contrasted with fixed-odds wagering (common in sports 
     wagering), in which odds (or perhaps a point spread) are 
     agreed to by the bettor and the party taking the bet and are 
     not affected by the bets placed by other bettors.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an exclusion from gross 
     income under section 872(b) for winnings paid to a 
     nonresident alien resulting from a legal wager initiated 
     outside the United States in a pari-mutuel pool on a live 
     horse race in the United States, regardless of whether the 
     pool is a separate foreign pool or a merged U.S.-foreign 
     pool.
       Effective date.--The Senate amendment provision applies to 
     proceeds from wagering transactions after September 30, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Federal reimbursement of emergency health services 
     furnished to undocumented aliens (sec. 527 of the Senate 
     amendment)


                              Present Law

       Section 4723 of the Balanced Budget Act of 1997, provided 
     $25 million a year for fiscal years 1998-2001, with the funds 
     allotted to the 12 States with the highest number of 
     undocumented aliens (based on estimates by the Immigration 
     and Naturalization Service for 1992 or later). From that 
     allotment, the Secretary reimbursed each State, or political 
     subdivision thereof, for certain emergency health services 
     furnished to undocumented aliens.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an entitlement of $48 million 
     for fiscal year 2004 for the Federal reimbursement for 
     providers of emergency health services to undocumented 
     aliens.
       Effective date.--The Senate amendment provision is 
     effective beginning in fiscal year 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Treatment of premiums for mortgage insurance (sec. 528 of 
         the Senate amendment and sec. 163 of the Code)


                              Present Law

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


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision provides that 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 qualified residence interest and thus deductible. 
     The amount allowable as a deduction under the provision is 
     phased out ratably by 10 percent for each $1,000 by which the 
     taxpayer's adjusted gross income exceeds $100,000 ($500 and 
     $50,000, respectively, in the case of a married individual 
     filing a separate return). Thus, the deduction is not allowed 
     if the taxpayer's adjusted gross income exceeds $110,000 
     ($55,000 in the case of married individual filing a separate 
     return).
       For this purpose, qualified mortgage insurance means 
     mortgage insurance provided by the Veterans Administration, 
     the Federal Housing Administration, or the Rural Housing 
     Administration, and private mortgage insurance (defined in 
     section 2 of the Homeowners Protection Act of 1998).
       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 it is 
     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 
     Veterans Administration or Rural Housing Administration).
       Reporting rules apply under the provision.
       Effective date.--The Senate amendment provision is 
     effective for amounts paid or accrued after the date of 
     enactment in taxable years ending after that date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Sense of the Senate on repealing the 1993 tax hike on 
         Social Security Benefits (sec. 529 of the Senate 
         Amendment)


                              Present Law

       Present law provides for a two-tier system of taxation of 
     Social Security benefits. Under this system, up to either 50 
     percent or 85 percent of Social Security benefits and 
     includible in gross income, depending on the

[[Page H4681]]

     taxpayer's income. The 85-percent tax was enacted in 1993.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment includes a sense of the Senate that 
     the Senate Finance Committee should report out the Social 
     Security Benefits Tax Relief Act of 2003 \364\ to repeal the 
     tax on seniors not later than July 31, 2003, and that the 
     Senate will consider such bill not later than September 30, 
     2003, in a manner consistent with the preservation of the 
     Medicare Trust Fund.
---------------------------------------------------------------------------
     \364\ S. 514.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective on the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Sense of the Senate relating to the flat tax (sec. 530 of 
         the Senate amendment)


                              Present Law

       No provision.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment includes a sense of the Senate that 
     the Senate Finance Committee and the Joint Economic Committee 
     should undertake a comprehensive analysis of simplification 
     or flat tax proposals, including appropriate hearings, and 
     consider legislation providing for a flat tax.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Temporary rate reduction for certain dividends received 
         from controlled foreign corporations (sec. 531 of the 
         Senate amendment and new sec. 965 of the Code)


                              Present Law

       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. 
     Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income generally is 
     deferred. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless of whether the income has been 
     distributed as a dividend to the domestic parent corporation. 
     The main anti-deferral regimes in this context are the 
     controlled foreign corporation rules of subpart F \365\ and 
     the passive foreign investment company rules.\366\ A foreign 
     tax credit generally is available to offset, in whole or in 
     part, the U.S. tax owed on foreign-source income, whether 
     earned directly by the domestic corporation, repatriated as 
     an actual dividend, or included under one of the anti-
     deferral regimes.\367\
---------------------------------------------------------------------------
     \365\ Secs. 951-964.
     \366\ Secs. 1291-1298.
     \367\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, certain actual and deemed 
     dividends received by a U.S. corporation from a controlled 
     foreign corporation are subject to tax at a reduced rate of 
     5.25 percent. For corporations taxed at the top corporate 
     income tax rate of 35 percent, this rate reduction is 
     equivalent to an 85-percent dividends-received deduction. 
     This rate reduction is available only for the first taxable 
     year of an electing taxpayer ending 120 days or more after 
     the date of enactment of the provision.
       The reduced rate applies only to repatriations in excess of 
     the taxpayer's average repatriation level over 3 of the 5 
     most recent taxable years ending on or before December 31, 
     2002, determined by disregarding the highest-repatriation 
     year and the lowest-repatriation year among such 5 
     years.\368\ The taxpayer may designate which of its dividends 
     are treated as meeting the base-period average level and 
     which of its dividends are treated as comprising the excess.
---------------------------------------------------------------------------
     \368\ If the taxpayer has fewer than 5 taxable years ending 
     on or before December 31, 2002, then the base period consists 
     of all such taxable years, with none disregard.
---------------------------------------------------------------------------
       In order to qualify for the reduced rate, dividends must be 
     described in a ``domestic reinvestment plan'' approved by the 
     taxpayer's senior management and board of directors. This 
     plan must provide for the reinvestment of the repatriated 
     dividends in the United States, ``including as a source for 
     the funding of worker hiring and training; infrastructure; 
     research and development; capital investments; or the 
     financial stabilization of the corporation for the purposes 
     of job retention or creation.''
       The Senate amendment provision disallows 85 percent of the 
     foreign tax credits attributable to dividends subject to the 
     reduced rate and removes 85 percent of the underlying income 
     from the taxpayer's foreign tax credit limitation fraction 
     under section 904.
       In the case of an affiliated group, an election under the 
     provision is made by the common parent on a group-wide basis, 
     and all members of the group are treated as a single 
     taxpayer. The election applies to all controlled foreign 
     corporations with respect to which an electing taxpayer is a 
     United States shareholder.
       Effective date.--The Senate amendment provision is 
     effective for the first taxable year of an electing taxpayer 
     ending 120 days or more after the provision's date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Repeal of 10-percent rehabilitation tax credit (sec. 531 
         of the Senate amendment and section 47 of the Code)


                              Present Law

       Present law provides a two-tier tax credit for 
     rehabilitation expenditures (sec. 47).
       A 20-percent credit is provided for rehabilitation 
     expenditures with respect to a certified historic structure. 
     For this purpose, a certified historic structure means any 
     building that is listed in the National Register, or that is 
     located in a registered historic district and is certified by 
     the Secretary of the Interior to the Secretary of the 
     Treasury as being of historic significance to the district.
       A 10-percent credit is provided for rehabilitation 
     expenditures with respect to buildings first placed in 
     service before 1936. The pre-1936 building must meet certain 
     requirements in order for expenditures with respect to it to 
     qualify for the rehabilitation tax credit. In the 
     rehabilitation process, certain walls and structures must 
     have been retained. Specifically, (1) 50 percent or more of 
     the existing external walls must be retained in place as 
     external walls, (2) 75 percent or more of the existing 
     external walls of the building must be retained in place as 
     internal or external walls, and (3) 75 percent or more of the 
     existing internal structural framework of the building must 
     be retained in place. Further, the building must have been 
     substantially rehabilitated, and it must have been placed in 
     service before the beginning of the rehabilitation. A 
     building is treated as having been substantially 
     rehabilitated only if the rehabilitation expenditures during 
     the 24-month period selected by the taxpayer and ending with 
     or within the taxable year exceed the greater of (1) the 
     adjusted basis of the building (and its structural 
     components), or $5,000.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision repeals the 10-percent 
     credit for rehabilitation expenditures with respect to 
     buildings first placed in service before 1936. The provision 
     retains the present-law 20-percent credit for rehabilitation 
     expenditures with respect to a certified historic structure.
       Effective date.--The provision is effective for 
     expenditures incurred after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     13. Income inclusion for certain delinquent child support 
         (sec. 532 of the Senate amendment and sec. 166 of the 
         Code)


                              Present Law

     Bad debt deduction
       Non-business bad debts may be deductible as short-term 
     capital losses on Schedule D of the Form 1040. Non-business 
     bad debts generally are debts that the taxpayer did not 
     acquire or create in the course of operating the taxpayer's 
     business. The present-law rule that capital losses (both 
     short-term and long-term) may not exceed the sum of $3,000 
     plus any capital gains for any taxable year is applicable.
       Non-business bad debts are only deductible only if: (1) the 
     debt is wholly worthless (partially worthless debts are not 
     deductible) and (2) the taxpayer has a tax basis in the debt 
     that becomes bad. If these requirements are satisfied, the 
     amount of the deductible non-business bad debt is the 
     individual's basis in the bad debt. Generally, the amount of 
     basis that a taxpayer has in a debt is the amount of the cash 
     advance in the case of a loan or the amount of taxable income 
     recognized by the taxpayer with reference to the debt. 
     Deductions for bad debts are allowed only for the taxable 
     year in which the debt becomes wholly worthless.
       Custodial parents do not qualify for a non-business bad 
     debt deduction on unpaid child support because, they have no 
     basis in the debt and the debt may not be wholly worthless.
     Bad debt income inclusion
       There is no income inclusion for individuals who are 
     delinquent in paying their child support obligations.


                               House Bill

       No provision


                            senate amendment

       The Senate amendment creates an income inclusion for a non-
     custodial parent for certain unpaid child support obligations 
     at the close of a taxable year. The income inclusion is 
     limited to the amount of unpaid child support at the end of 
     the taxable year that equals or exceeds one-half of the non-
     custodial taxpayer's total child support obligation to the 
     custodial parent for the year. This test is not applied on a 
     child-by-child basis. For example, in the case of child 
     support for

[[Page H4682]]

     two children, the test applies the one-half or more test to 
     the combined child support obligations for both children.
       Under the bill, any payments from the non-custodial parent 
     to the custodial parent subsequent to the close of the 
     taxable year are not deductible by the non-custodial parent 
     (regardless of whether the non-custodial parent had a 
     previous income inclusion with regard to such amounts).
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2002.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Sense of the Senate regarding the low-income housing tax 
         credit (sec. 533 of the Senate amendment)


                              present law

       The low-income housing tax credit may be claimed over a 10-
     year period for the cost of rental housing occupied by 
     tenants having incomes below specified levels. The credit 
     percentage for newly constructed or substantially 
     rehabilitated housing that is not Federally subsidized is 
     adjusted monthly by the Internal Revenue Service so that the 
     10 annual installments have a present value of 70 percent of 
     the total qualified expenditures. The credit percentage for 
     new substantially rehabilitated housing that is Federally 
     subsidized and for existing housing that is substantially 
     rehabilitated is calculated to have a present value of 30 
     percent qualified expenditures.
       The aggregate credit authority provided annually to each 
     State was $1.75 per resident in calendar year 2002. Beginning 
     in calendar year 2003, the per-capita portion of the credit 
     cap will be adjusted annually for inflation. For small 
     States, a minimum annual cap of $2 million was provided for 
     calendar year 2002. Beginning in calendar year 2003, the 
     small State minimum is adjusted for inflation.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment includes a statement that it is the 
     sense of the Senate that any reduction or elimination of the 
     taxation on dividends should include provisions to preserve 
     the success of the low-income housing tax credit.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     15. Expensing of investment in broadband equipment (sec. 534 
         of the Senate amendment and new sec. 191 of the Code)


                              present law

       Under present law, a taxpayer generally must capitalize the 
     cost of property used in a trade or business and recover such 
     cost over time through annual deductions for depreciation or 
     amortization. Tangible property generally is depreciated 
     under the Modified Accelerated Cost Recovery System (MACRS) 
     of section 168, which determines depreciation by applying 
     specific recovery periods, placed-in-service conventions, and 
     depreciation methods to the cost of various types of 
     depreciable property.
       Personal property is classified under MACRS based on the 
     property's ``class life'' unless a different classification 
     is specifically provided in section 168. The class life 
     applicable for personal property is the asset guideline 
     period (midpoint class life as of January 1, 1986). Based on 
     the property's classification, a recovery period is 
     prescribed under MACRS. In general, there are six classes of 
     recovery periods to which personal property can be assigned. 
     For example, personal property that has a class life of four 
     years or less has a recovery period of three years, whereas 
     personal property with a class life greater than four years 
     but less than 10 years has a recovery period of five years. 
     The class lives and recovery periods for most property are 
     contained in Rev. Proc. 87-56, 1987-2 CB 674 (as clarified 
     and modified by Rev. Proc. 88-22, 1988-1 CB 785).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that expenses incurred by the 
     taxpayer for qualified broadband expenditures with respect to 
     qualified equipment placed in service prior to January 1, 
     2005 may be deducted in full in the year in which the 
     equipment is placed in service.
       Qualified expenditures are expenditures incurred with 
     respect to equipment with which the taxpayer offers current 
     generation broadband services to qualified subscribers. In 
     addition, qualified expenditures include qualified 
     expenditures incurred by the taxpayer with respect to 
     qualified equipment with which the taxpayer offers next 
     generation broadband services to qualified subscribers. 
     Current generation broadband services are defined as the 
     transmission of signals at a rate of at least 1 million bits 
     per second to the subscriber and at a rate of at least 
     128,000 bits per second from the subscriber. Next 
     generation broadband services are defined as the 
     transmission of signals at a rate of at least 22 million 
     bits per second to the subscriber and at a rate of at 
     least 5 million bits per second from the subscriber.
       Qualified subscribers for the purposes of the current 
     generation broadband deduction include nonresidential 
     subscribers in rural or underserved areas, and residential 
     subscribers in rural or underserved areas that are not in a 
     saturated market. A saturated market is defined as a census 
     tract in which current generation broadband services have 
     been provided by a single provider to 85 percent or more of 
     the total number of potential residential subscribers 
     residing within such census tracts. For the purposes of the 
     next generation broadband deduction, qualified subscribers 
     include nonresidential subscribers in rural or underserved 
     areas or any residential subscriber. In the case of a 
     taxpayer who incurs expenditures for equipment capable of 
     serving both subscribers in qualifying areas and other areas, 
     qualifying expenditures are determined by multiplying 
     otherwise qualifying expenditures by the ratio of the number 
     of potential qualifying subscribers to all potential 
     subscribers the qualifying equipment would be capable of 
     serving.
       Qualifying equipment must be capable of providing broadband 
     services a majority of the time during periods of maximum 
     demand. Qualifying equipment is that equipment that extends 
     from the last point of switching to the outside of the 
     building in which the subscriber is located, equipment that 
     extends from the customer side of a mobile telephone 
     switching office to a transmission/reception antenna 
     (including the antenna) of the subscriber, equipment that 
     extends from the customer side of the headend to the outside 
     of the building in which the subscriber is located, or 
     equipment that extends from a transmission/reception antenna 
     to a transmission/reception antenna on the outside of the 
     building used by the subscriber. Any packet switching 
     equipment deployed in connection with other qualifying 
     equipment is qualifying equipment, regardless of location, 
     provided that it is the last such equipment in a series as 
     part of transmission of a signal to a subscriber or the first 
     in a series in the transmission of a signal from a 
     subscriber. Also, multiplexing and demultiplexing equipment 
     also is qualified equipment.
       A rural area is any census tract which is not within 10 
     miles of any incorporated or census designated place with a 
     population of more than 25,000 and which is not within a 
     county with a population density of more than 500 people per 
     square mile. An underserved area is any census tract which is 
     located in an empowerment zone or enterprise community or any 
     census tract in which the poverty level is greater than or 
     equal to 30 percent and in which the median family income is 
     less than 70 percent of the greater of metropolitan area 
     median family income or Statewide median family income. A 
     residential subscriber is any individual who purchases 
     broadband service to be delivered to his or her dwelling.
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after December 31, 
     2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     16. Income tax credit for cost of carrying tax-paid distilled 
         spirits in wholesale inventories and in control State 
         bailment warehouses (sec. 535 of the Senate amendment and 
         new sec. 5011 of the Code)


                              present law

       As is true of most major Federal excise taxes, the excise 
     tax on distilled spirits is imposed at a point in the chain 
     of distribution before the product reaches the retail 
     (consumer) level. Tax on domestically produced and/or bottled 
     distilled spirits arises upon production (receipt) in a 
     bonded distillery and is collected based on removals from the 
     distillery during each semi-monthly period. Distilled spirits 
     that are bottled before importation into the United States 
     are taxed on removal from the first U.S. warehouse where they 
     are landed (including a warehouse located in a foreign trade 
     zone).
       No tax credits are allowed under present law for business 
     costs associated with having tax-paid products in inventory. 
     Rather, excise tax that is included in the purchase price of 
     a product is treated the same as the other components of the 
     product cost, i.e., deductible as a cost of goods sold.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment creates a new income tax credit for 
     wholesale distributors, distillers, and importers, of 
     distilled spirits. The credit is calculated by multiplying 
     the number of cases of bottled distilled spirits by the 
     average tax-financing cost per case for the most recent 
     calendar year ending before the beginning of such taxable 
     year. A case is 12 80-proof 750-milliliter bottles. The 
     average tax-financing cost per case is the amount of interest 
     that would accrue at corporate overpayment rates during an 
     assumed 60-day holding period on an assumed tax rate of 
     $25.68 per case of 12 750-milliliter bottles.
       The wholesaler credit only applies to domestically bottled 
     distilled spirits \369\ purchased directly from the bottler 
     of such spirits. For distillers and importers, the credit is 
     limited to bottled inventory in a warehouse owned and 
     operated by, or on behalf of, a State when title to such 
     inventory has not

[[Page H4683]]

     passed unconditionally. The credit for distillers and 
     importers applies to distilled spirits bottled both 
     domestically and abroad.
---------------------------------------------------------------------------
     \369\ Distilled spirits that are imported in bulk and then 
     bottled domestically qualify as domestically bottled 
     distilled spirits.
---------------------------------------------------------------------------
       The credit is in addition to present-law rules allowing tax 
     included in inventory costs to be deducted as a cost of goods 
     sold.
       The credit cannot be carried back to a taxable year 
     beginning before January 1, 2003.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2002.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     17. Contribution in aid of construction (sec. 536 of the 
         Senate amendment and sec. 118 of the Code)


                              present law

       Section 118(a) provides that gross income of a corporation 
     does not include a contribution to its capital. In general, 
     section 118(b) provides that a contribution to the capital of 
     a corporation does not include any contribution in aid of 
     construction or any other contribution as a customer or 
     potential customer and, as such, is includible in gross 
     income of the corporation. However, for any amount of money 
     or property received by a regulated public utility that 
     provides water or sewerage disposal services, such amount 
     shall be considered a contribution to capital (excludible 
     from gross income) so long as such amount: (1) is a 
     contribution in aid of construction, and (2) is not included 
     in the taxpayer's rate base for rate-making purposes. If the 
     contribution is in property other than water or sewerage 
     disposal facilities, the amount is generally excludible from 
     gross income only if the amount is expended to acquire or 
     construct water or sewerage disposal facilities within a 
     specified time period. A contribution in aid of construction 
     does not include a customer connection fee or amounts paid as 
     service charges for starting or stopping services.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment clarifies that water and sewer service 
     laterals received by a regulated public utility that provides 
     water or sewerage disposal services is considered a 
     contribution to capital and excludible from gross income of 
     such utility.
       Effective date.--The Senate amendment provision is 
     effective for contributions made after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     18. Travel expenses for spouses (sec. 537 of the Senate 
         amendment and sec. 274 of the Code)


                              present law

       In general, no deduction is permitted for the travel 
     expenses of a spouse, dependent, or other individual 
     accompanying a taxpayer (or an officer or employee of the 
     taxpayer) on business travel.\370\
---------------------------------------------------------------------------
     \370\ Sec. 274(m)(3).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment repeals this provision generally 
     prohibiting a deduction for the travel expenses of a spouse, 
     dependent, or other person accompanying a taxpayer (or an 
     officer or employee of a taxpayer). All other present-law 
     limitations on these expenses continue to apply.
       Effective date.--The Senate amendment provision is 
     effective for expenses paid or incurred after the date of 
     enactment and on or before December 31, 2004.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     19. Certain sightseeing flights exempt from taxes on air 
         transportation (sec. 538 of the Senate amendment and sec. 
         4281 of the Code)


                              present law

       The Code imposes a tax on amounts paid for the taxable 
     transportation of persons (``the ticket tax'') (sec. 
     4261(a)). Taxable transportation for purposes of imposing the 
     ticket tax is transportation that begins and ends in the 
     United States (sec. 4262(a)). Aircrafts having a maximum 
     certificated takeoff weight of 6,000 pounds or less (``small 
     aircraft'') are not subject to the ticket tax unless such 
     aircraft is operated on an established line (sec. 4281).
       Treasury regulations define the term ``operated on an 
     established line'' to mean operated with some degree of 
     regularity between definite points (Treas. Reg. sec. 49.4263-
     5(c)). The term implies that the air carrier maintains 
     control over the direction, routes, time, number of 
     passengers carried, etc. The Treasury regulations also 
     provide that transportation need not be between two definite 
     points to be taxable. A payment for continuous transportation 
     beginning and ending at the same point is subject to the tax 
     (Treas. Reg. sec. 49.4261-1(c)). Thus, the ticket tax applies 
     to regularly conducted sightseeing air tours that begin and 
     end at the same point.\371\
---------------------------------------------------------------------------
     \371\ See Lake Mead Air Inc. v. United States, 99-1 USTC par. 
     70,119 (D. Nev. 1997). The Lake Mead court found that that 
     the tours started and ended at the same point without fail 
     therefore, the flights were between definite points. Finding 
     that the flights were operated with some degree of regularity 
     and between definite points, the court found that the flights 
     were operated on an established line. As a result, the 
     exemption for small aircraft operating on nonestablished 
     lines did not apply and the court concluded that the flights 
     were taxable transportation for purposes of the ticket tax. 
     However, the court found that Lake Mead was not a responsible 
     person for collecting the tax for purposes of the 100 percent 
     penalty imposed by section 6672.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, small aircrafts are not 
     considered as operated on an established line if such 
     aircraft is operated on a flight the sole purpose of which is 
     sightseeing.
       Effective date.--The Senate amendment provision is 
     effective with respect to transportation beginning on or 
     after the date of enactment, but does not apply to any amount 
     paid before such date.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     20. Required coverage for reconstructive surgery following 
         mastectomies (sec. 539 of the Senate amendment and new 
         sec. 9813 of the Code)


                              present law

       The Women's Health and Cancer Rights Act of 1998 amended 
     ERISA and the Public Health Service Act to provide that 
     health plans offering mastectomy coverage must also provide 
     coverage for reconstructive breast surgery. Under ERISA, a 
     group health plan, and a health insurance issuer providing 
     health insurance coverage in connection with a group health 
     plan, that provides medical and surgical benefits with 
     respect to mastectomies is required to provide coverage for 
     reconstructive surgery following mastectomies.\372\ In the 
     case of a participant or beneficiary who is receiving 
     benefits in connection with a mastectomy and who elects 
     breast reconstruction in connection with such mastectomy, 
     coverage is required for (1) all stages of reconstruction of 
     the breast on which the mastectomy has been performed, (2) 
     surgery and reconstruction of the other breast to produce a 
     symmetrical appearance, and (3) prostheses and physical 
     complications of mastectomy, including lymphedemas, in a 
     manner determined in consultation with the attending 
     physician and the patient.
---------------------------------------------------------------------------
     \372\ ERISA sec. 713. A similar provision is also included in 
     the Public Health Service Act.
---------------------------------------------------------------------------
       Coverage may be subject to annual deductibles and 
     coinsurance provisions as may be deemed appropriate and as 
     are consistent with those established for other benefits 
     under the plan or coverage. Written notice of the 
     availability of the coverage must be delivered to the 
     participant upon enrollment and annually thereafter. Notice 
     must be in writing and prominently positioned in any 
     literature or correspondence made available or distributed by 
     the plan or issuer and must be transmitted as specifically 
     required.
       A group health plan may not deny a patient eligibility, or 
     continued eligibility, to enroll or to renew coverage under 
     the terms of the plan, solely for the purpose of avoiding the 
     requirements of the provision. In addition, a group health 
     plan may not penalize or otherwise reduce or limit the 
     reimbursement of an attending provider, or provide incentives 
     (monetary or otherwise) to an attending provider, to induce 
     such provider to provide care to an individual participant or 
     beneficiary in a manner inconsistent with the provision. 
     Nothing in the section should be construed to prevent a group 
     health plan from negotiating the level and type of 
     reimbursement with a provider for care provided in accordance 
     with the section.
       The Code imposes an excise tax on failures to meet certain 
     group health plan requirements.\373\ The excise tax is equal 
     to $100 per day during the period of noncompliance and is 
     generally imposed on the employer sponsoring the plan if the 
     plan fails to meet the requirements. The maximum tax that can 
     be imposed during a taxable year cannot exceed the lesser of 
     10 percent of the employer's group health plan expenses for 
     the prior year or $500,000. No tax is imposed if the 
     Secretary determines that the employer did not know, and 
     exercising reasonable diligence would not have known, that 
     the failure existed.
---------------------------------------------------------------------------
     \373\ Sec. 4980D.
---------------------------------------------------------------------------
       Present law does not impose an excise tax relating to 
     required coverage for reconstructive surgery following 
     mastectomies.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment adds to the Code a provision requiring 
     a group health plan that provides medical and surgical 
     benefits with respect to a mastectomy to provide coverage for 
     reconstructive surgery following the mastectomy. The 
     requirements follow those of ERISA. A group health plan that 
     does not comply with the requirements of the provision is 
     subject to the excise tax on failures to meet certain group 
     health plan requirements.\374\
---------------------------------------------------------------------------
     \374\ Sec. 4980D.
---------------------------------------------------------------------------
       Under the new Code section, a group health plan that 
     provides medical and surgical benefits with respect to a 
     mastectomy must provide, in the case of a participant or 
     beneficiary who is receiving benefits in connection with a 
     mastectomy and who elects breast reconstruction in connection 
     with

[[Page H4684]]

     such mastectomy, coverage for (1) all stages of 
     reconstruction of the breast of which the mastectomy has been 
     performed, (2) surgery and reconstruction of the other breast 
     to produce a symmetrical appearance, and (3) prostheses and 
     physical complications of mastectomy, including lymphedemas, 
     in a manner determined in consultation with the attending 
     physician and the patient.
       Coverage may be subject to annual deductibles and 
     coinsurance provisions as deemed appropriate and consistent 
     with those established for other benefits under the plan. 
     Written notification of the availability of such coverage 
     must be delivered to the participant upon enrollment and 
     annually thereafter. Unlike ERISA, the specific manner in 
     which notice must be given is not included in the new Code 
     provision.
       Under the Senate amendment, a group health plan may not 
     deny a patient eligibility, or continued eligibility, to 
     enroll or to renew coverage under the terms of the plan, 
     solely for the purpose of avoiding the requirements of the 
     provision. In addition, a group health plan may not penalize 
     or otherwise reduce or limit the reimbursement of an 
     attending provider, or provide incentives (monetary or 
     otherwise) to an attending provider, to induce such provider 
     to provide care to an individual participant or beneficiary 
     in a manner inconsistent with the provision. Nothing in the 
     provision should be construed to prevent a group health plan 
     from negotiating the level and type of reimbursement with a 
     provider for care provided in accordance with the provision.
       Under the Senate amendment, in the case of a group heath 
     plan maintained pursuant to one or more collective bargaining 
     agreements between employee representatives and one or more 
     employers, any plan amendment made pursuant to a collective 
     bargaining agreement relating to the plan which amends the 
     plan solely to conform to any requirement added by the 
     provision will not be treated as a termination of the 
     collective bargaining agreement.
       Effective date.--The Senate amendment provision is 
     effective for plan years beginning on or after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     21. Renewal community modifications (secs. 540 and 541 of the 
         Senate amendment and secs. 1400E and 1400H of the Code)


                              Present Law

       The Code authorizes the designation of 40 ``renewal 
     communities'' within which special tax incentives will be 
     available. The following is a description of the designation 
     process and the tax incentives that will be available within 
     the renewal communities.
     Designation process
       Designation of 40 renewal communities.--The Secretary of 
     HUD, was authorized to designate up to 40 renewal communities 
     from areas nominated by States and local governments. At 
     least 12 of the designated communities must be in rural 
     areas. The designation of an area as a renewal community 
     terminates after December 31, 2009.
       Eligibility criteria.--To be designated as a renewal 
     community, a nominated area must meet the following criteria: 
     (1) each census tract must have a poverty rate of at least 20 
     percent; (2) in the case of an urban area, at least 70 
     percent of the households have incomes below 80 percent of 
     the median income of households within the local government 
     jurisdiction; (3) the unemployment rate is at least 1.5 times 
     the national unemployment rate; and (4) the area is one of 
     pervasive poverty, unemployment, and general distress. 
     Generally, those areas with the highest average ranking of 
     eligibility factors (1), (2), and (3) above will be 
     designated as renewal communities.
       The boundary of a renewal community must be continuous. In 
     addition, the renewal community must have a minimum 
     population of 4,000 if the community is located within a 
     metropolitan statistical area (at least 1,000 in all other 
     cases), and a maximum population of not more than 200,000. 
     The population limitations do not apply to any renewal 
     community that is entirely within an Indian reservation.
       In addition, certain State and local government commitments 
     are necessary for an area to receive designation.
     Tax incentives for renewal communities
       The following tax incentives generally are available during 
     the period beginning January 1, 2002, and ending December 31, 
     2009.
       Zero-percent capital gain rate.--A zero-percent capital 
     gains rate applies with respect to gain from the sale of a 
     qualified community asset acquired after December 31, 2001, 
     and before January 1, 2010, and held for more than five 
     years. A ``qualified community asset'' includes: (1) 
     qualified community stock (meaning original-issue stock 
     purchased for cash in a renewal community business); (2) a 
     qualified community partnership interest (meaning a 
     partnership interest acquired for cash in a renewal community 
     business); and (3) qualified community business property 
     (meaning tangible property originally used in a renewal 
     community business by the taxpayer) that is purchased or 
     substantially improved after December 31, 2001.
       The termination of an area's status as a renewal community 
     will not affect whether property is a qualified community 
     asset, but any gain attributable to the period before January 
     1, 2002, or after December 31, 2014, is not eligible for the 
     zero-percent rate.
       Renewal community employment credit.--A 15-percent wage 
     credit is available to employers for the first $10,000 of 
     qualified wages paid to each employee who (1) is a resident 
     of the renewal community, and (2) performs substantially all 
     employment services within the renewal community in a trade 
     or business of the employer. In general, any taxable business 
     carrying out activities in the renewal community may claim 
     the wage credit.
       Commercial revitalization deduction.--Each State is 
     permitted to allocate up to $12 million of ``commercial 
     revitalization expenditures'' to each renewal community 
     located within the State for each calendar year after 2001 
     and before 2010. The appropriate State agency will make the 
     allocations pursuant to a qualified allocation plan. A 
     ``commercial revitalization expenditure'' means the cost of a 
     new building or the cost of substantially rehabilitating an 
     existing building. The qualifying expenditures for any 
     building cannot exceed $10 million.
       Additional section 179 expensing.--A renewal community 
     business is allowed an additional $35,000 of section 179 
     expensing for qualified renewal property placed in service 
     after December 31, 2001, and before January 1, 2010. The 
     section 179 expensing allowed to a taxpayer is phased out by 
     the amount by which 50 percent of the cost of qualified 
     renewal property placed in service during the year by the 
     taxpayer exceeds $200,000.
       Extension of work opportunity tax credit (``WOTC'').--The 
     provision expands the high-risk youth and qualified summer 
     youth categories in the WOTC to include qualified individuals 
     who live in a renewal community.
     Expiration date
       The tax benefits available in renewal communities are 
     effective for the period beginning January 1, 2002, and 
     ending December 31, 2009.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that an employee who resides 
     in one area that is designated as a renewal community, but 
     who works in a certain other area that also is designated as 
     a renewal community qualifies for the renewal community 
     employment credit. To qualify the area of residence and the 
     area of employment must be in the same State and within five 
     miles.
       In addition, the Senate amendment provides that, at the 
     request of the local community, the Secretary of Housing and 
     Urban development may expand the size of an existing renewal 
     community to include a census tract that satisfy eligibility 
     standards based on the 2000 Census, but which did not qualify 
     based on the 1990 Census solely by reason of applicable 1990 
     population or poverty requirements. The Senate amendment also 
     permits, upon the request of the local community, the 
     Secretary of Housing and Urban Development to expand the size 
     of an existing renewal community to include certain adjacent 
     census tracts populated with 100 or fewer persons.
       Effective date.--The Senate amendment provisions are 
     effective as if included in the Community Renewal Tax Relief 
     Act of 2000.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       22. Combat zone expansions (secs. 542 and 543 of the Senate 
     amendment and sec. 112 of the Code)


                              Present Law

       In general, gross income does not include compensation for 
     active service in the armed forces of the United States below 
     the grade of commissioned officer for any month during which 
     the service person served in a combat zone.\375\ For 
     commissioned officers, the maximum excludible under this 
     provision is the highest level of pay for an enlisted person. 
     In general, the determination that an area is a combat zone 
     is made by the President by an Executive Order.\376\
---------------------------------------------------------------------------
     \375\ Sec. 112.
     \376\ Sec. 112(c)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment removes the limitation on this 
     exclusion for commissioned officers, so that their entire 
     basic pay is excludible. The Senate amendment also provides 
     that direct transit to and from a combat zone (not to exceed 
     14 days) is treated as service in a combat zone. The Senate 
     amendment treats military service as part of Operation Iraqi 
     Freedom in Guantanamo Bay, Cuba, and Diego Garcia as if it 
     were in a combat zone.
       Effective date.--The Senate amendment provision is 
     effective on January 1, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     23. Ratable income inclusion for citrus canker tree payments 
         (sec. 544 of the Senate amendment and sec. 451 and 1033 
         of the Code)


                              Present Law

       Generally, a taxpayer recognizes gain on the sale or 
     exchange of property to the extent the sales price (and any 
     other consideration received) exceeds the seller's basis in 
     the property. The recognized gain is subject to current 
     income tax unless the gain is deferred or not recognized 
     under a special tax provision.

[[Page H4685]]

       Under section 1033, gain realized by a taxpayer from an 
     involuntary conversion of property is deferred to the extent 
     the taxpayer purchases property similar or related in service 
     or use to the converted property within the applicable 
     period. The taxpayer's basis in the replacement property 
     generally is the same as the taxpayer's basis in the 
     converted property, decreased by the amount of any money or 
     loss recognized on the conversion, and increased by the 
     amount of any gain recognized on the conversion. The 
     applicable period for the taxpayer to replace the converted 
     property begins with the date of the disposition of the 
     converted property (or the earliest date of the threat or 
     imminence of requisition or condemnation of the converted 
     property, whichever is earlier) and generally ends two years 
     after the close of the first taxable year in which any part 
     of the gain upon conversion is realized. Longer replacement 
     periods are available in the case of real property and 
     principal residences involuntarily converted as a result of 
     Presidentially declared disaster.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits a taxpayer to elect to 
     recognize any realized gain by reason of receiving a citrus 
     canker tree payment ratably over a 10-year period beginning 
     with the taxable year in which such payment is received or 
     accrued by the taxpayer. The provision defines a citrus 
     canker tree payment as a payment made to an owner of a 
     commercial citrus grove to recover income that was lost as a 
     result of the removal of commercial citrus trees to control 
     canker under the amendments to the citrus canker regulations 
     made by the final rule published in the Federal Register by 
     the Secretary of the Agriculture on June 18, 2001. An 
     election under the provision is made by attaching a statement 
     to that effect in the taxpayer's return for the taxable year 
     in which the payment is received or accrued in the manner as 
     the Secretary prescribes. An election is binding for that 
     taxable year and all subsequent taxable years.
       The Senate amendment also extends the applicable period 
     under section 1033 for a taxpayer to replace commercial 
     citrus trees which are involuntarily converted under a public 
     order as a result of citrus tree canker to four years. In 
     addition, the Secretary of the Treasury is granted authority 
     to further extend the replacement period on a regional basis 
     if a State or Federal health authority determines that the 
     land on which such trees grew is not free from the bacteria 
     that causes citrus tree canker.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning before, on, or after 
     the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     24. Exclusion of certain punitive damage awards (sec. 545 of 
         the Senate amendment and sec. 104 of the Code)


                              Present Law

       Under present law, gross income generally does not include 
     the amount of any damages received (whether by suit or 
     agreement and whether as lump sums or as periodic payments) 
     by individuals on account of personal physical injuries 
     (including death) or physical sickness.\377\ However, this 
     exclusion does not apply to punitive damages.\378\
---------------------------------------------------------------------------
     \377\ Sec. 104(a)(2).
     \378\ Id.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an exclusion from gross 
     income for any portion of an award of punitive damages in a 
     civil action that is paid to a State under a split-award 
     statute or any attorneys' fees or other costs incurred by the 
     taxpayer in connection with obtaining such an award which are 
     allocable to such portion.
       Under the Senate amendment, a ``split-award statute'' is a 
     State law that requires a fixed portion of an award of 
     punitive damages in a civil action to be paid to the State.
       Effective date.--The Senate amendment applies to awards 
     made in taxable years ending after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     25. Repeal of pre-1997 tax on certain imported recycled 
         halons (sec. 546 of the Senate amendment and sec. 4682 of 
         the Code)


                              Present Law

       An excise tax is imposed on the sale or use by the 
     manufacturer or importer of certain ozone-depleting chemicals 
     (sec. 4681). The amount of tax generally is determined by 
     multiplying the base tax amount applicable for the calendar 
     year by an ozone-depleting factor assigned to each taxable 
     chemical. The base tax amount was $5.80 per pound in 1996 and 
     $6.25 per pound in 1997, and increased by $0.45 cents per 
     pound per year thereafter. The ozone-depleting factors for 
     taxable halons are three for halon-1211, 10 for halon-1301, 
     and six for halon-2402.
       In general, taxable chemicals that are recovered and 
     recycled within the United States are exempt from tax. In 
     addition, exemption is provided for imported recycled halon-
     1301 and halon-2402 if such chemicals are imported after 
     December 31, 1996, from countries that are signatories to the 
     Montreal Protocol on Substances that Deplete the Ozone Layer.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that no tax is liable for 
     imported recycled halon-1301 or halon-2402 if such chemicals 
     were imported after December 31, 1993, from countries that 
     were signatories to the Montreal Protocol on Substances that 
     Deplete the Ozone Layer at the time such chemicals were 
     imported. In addition, the Senate amendment provides that no 
     tax is liable for imported recycled halon-1211 if such 
     chemicals were imported after December 31, 1993 and before 
     August 5, 1997, from countries that were signatories to the 
     Montreal Protocol on Substances that Deplete the Ozone Layer 
     at the time such chemicals were imported. If, before the end 
     of the one-year period commencing with the date of enactment, 
     any taxpayer who previously paid tax under the then 
     prevailing law files for a refund or credit of taxes paid, 
     such refund or credit is to be made.
       Effective date.--The Senate amendment provision is 
     effective upon the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     26. Modification of involuntary conversion rules for 
         businesses affected by the September 11, 2001 terrorist 
         attacks (sec. 547 of the Senate amendment and sec. 1400L 
         of the Code)


                              Present Law

       A taxpayer may elect not to recognize gain with respect to 
     property that is involuntarily converted if the taxpayer 
     acquires within an applicable period (the ``replacement 
     period'') property similar or related in service or use 
     (section 1033). If the taxpayer does not replace the 
     converted property with property similar or related in 
     service or use, then gain generally is recognized. If the 
     taxpayer elects to apply the rules of section 1033, gain on 
     the converted property is recognized only to the extent that 
     the amount realized on the conversion exceeds the cost of the 
     replacement property. In general, the replacement period 
     begins with the date of the disposition of the converted 
     property and ends two years after the close of the first 
     taxable year in which any part of the gain upon conversion is 
     realized.\379\ The replacement period is extended to three 
     years if the converted property is real property held for the 
     productive use in a trade or business or for investment.\380\
---------------------------------------------------------------------------
     \379\ Section 1033(a)(2)(B).
     \380\ Section 1033(g)(4).
---------------------------------------------------------------------------
       The Jobs Creation and Worker Assistance Act of 2002 \381\ 
     extends the replacement period to five years for a taxpayer 
     to purchase property to replace property that was 
     involuntarily converted within the New York Liberty Zone 
     \382\ as a result of the terrorist attacks that occurred on 
     September 11, 2001. However, the five-year period is 
     available only if substantially all of the use of the 
     replacement property is in New York City. In all other cases, 
     the present-law replacement period rules continue to apply.
---------------------------------------------------------------------------
     \381\ Pub. Law No. 107-147, sec. 301 (2002).
     \382\ The ``New York Liberty Zone'' generally is the area 
     located on or south of Canal street, East Broadway (east of 
     its intersection with Canal Street), or Grand Street (east of 
     its intersection with East Broadway) in the Borough of 
     Manhattan, New York, New York.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       For property that was involuntarily converted within the 
     New York Liberty Zone as a result of the terrorist attacks 
     that occurred on September 11, 2001, the Senate amendment 
     provides that if a taxpayer is a member of an affiliated 
     group of corporations filing a consolidated return that 
     replacement property may be purchased by any member of the 
     affiliated group (in lieu of the taxpayer).\383\
---------------------------------------------------------------------------
     \383\ It is anticipated that the Secretary of the Treasury 
     will issue guidance as may be necessary to ensure that gain 
     shall not be recognized under the consolidated return 
     provisions and to ensure that any investment adjustments, or 
     any other adjustments under the consolidated regulations, 
     accurately reflect the implications of permitting another 
     member of the consolidated group to purchase the replacement 
     property.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision is 
     effective for involuntary conversions in the New York Liberty 
     Zone occurring on or after September 11, 2001.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

     D. Medicare Provisions (Secs. 561-576 of the Senate Amendment)


                              Present Law

     Standardized Amount Equalization
       Present law pays rural and small urban facilities 1.6 
     percent less on every inpatient discharge than their 
     counterparts in urban areas of a million or more people.
     Equalization of Medicare Disproportionate Share (DSH) 
         Payments
       Present law differentiates between rural and urban 
     hospitals that treat vulnerable populations.

[[Page H4686]]

     Assistance for Low Volume Hospitals
       Present law fails to recognize the special costs incurred 
     by hospitals with less than 2,000 discharges per year.
     Revision of Labor Share to 62 percent
       Medicare's standardized amounts are apportioned into a 
     labor-related amount (which is then adjusted by the wage 
     index value of the area where the hospital is located or to 
     which it has been reassigned) and a nonlabor-related amount 
     (which is generally not subject to geographical adjustment). 
     Under present law, the labor-related amount comprises 71.1 
     percent of the national standardized amount.
     Extend Hold Harmless for Rural Hospitals under Hospital 
         Outpatient Prospective Payment System
       Present law payments to outpatient hospital departments 
     vary from year to year.
     Critical Access Hospital Improvements
       Many rural hospitals have elected to become critical access 
     hospitals (CAHs) under present law.
     10-percent Add-on for Rural Home Health Agencies
       Special add-on payment to rural home health agencies 
     expired on April 1, 2003.
     Five-percent Add-on for Clinic and Emergency Room Visits for 
         Small Rural Hospitals
       Present law treats clinic and emergency room visits no 
     differently than other services provided by the hospital.
     Five-percent Add-on for Rural Ground Ambulance Trips
       Present law fails to compensate for the long distances 
     rural ambulances drive to treat patients.
     Exclusion of Services Provided By Rural Health Clinic-based 
         Practitioners from SNF Consolidated Billing
       Present law requires providers based in a rural health 
     clinic to submit their bills for services provided to nursing 
     home patients to the nursing home rather than to Medicare.
     Make 10-percent Bonus Payments under Medicare Incentive 
         Payment Program Automatic
       Present law requires physicians participating in the 
     Medicare Incentive Payment program to apply for bonus 
     payments when they elect to serve in Health Professional 
     Shortage Areas.
     Two-Year Extension of Reasonable Cost Payments for Laboratory 
         Tests in Sole Community Hospitals
       Present law allows laboratory tests performed in sole 
     community hospitals to be paid at their reasonable cost, 
     rather than under a fee schedule.
     Set Work, Practice Expense and Malpractice Geographic Indices 
         for Physician Payments at 1.0
       Present law adjusts three components of physician payments 
     under the physician fee schedule based on geography.
     10-Year Freeze in CPI Updates for Durable Medical Equipment, 
         Prosthetics and Orthotics
       Present law produces payment updates equal to CPI for 
     providers and suppliers in this category.
     Collect Coinsurance and Deductible Amounts for Clinical 
         Laboratory Tests
       Present law includes no cost-sharing obligation for 
     clinical laboratory tests.
     Limit Reimbursement for Currently Covered Drugs
       Present law pays for limited prescription drugs and 
     biologicals at 95 percent of the product's average wholesale 
     price.


                               House Bill

       No provision.


                            Senate Amendment

     Standardized Amount Equalization
       The Senate amendment raises the inpatient base rate for 
     hospitals in rural and small urban areas to the same rate as 
     that in large urban areas.
     Equalization of Medicare Disproportionate Share (DSH) 
         Payments
       The Senate amendment equalizes payments to both rural and 
     urban hospitals that receive Medicare DSH payments.
     Assistance for Low Volume Hospitals
       The Senate amendment improves payments for those hospitals 
     with extremely low annual patient volume.
     Revision of Labor Share to 62 percent
       The Senate amendment reduces the labor-related amount to 62 
     percent of the national standardized amount.
     Extend Hold Harmless for Rural Hospitals Under Hospital 
         Outpatient Prospective Payment System
       The Senate amendment protects rural hospitals against 
     possible reductions due to the new outpatient prospective 
     payment system through 2006.
     Critical Access Hospital Improvements
       The Senate amendment (1) reinstates Periodic Interim 
     Payment (PIP), which provides facilities with a steadier 
     stream of payment in order to improve their cash flow; (2) 
     eliminates the current requirement that CAH-based ambulance 
     services be at least 35 miles from another ambulance service 
     in order to receive cost-based payment; and (3) provides 
     coverage for emergency on-call providers, and (4) excludes 
     CAHs from the wage index calculation.
     10-percent Add-on for Rural Home Health Agencies
       The Senate amendment extends special add-on payments that 
     expired April 1, 2003 to rural home health agencies and makes 
     them permanent.
     Five-percent Add-on for Clinic and Emergency Room Visits for 
         Small Rural Hospitals
       The Senate amendment increases Medicare payment for visits 
     to small rural hospitals' outpatient clinics and emergency 
     rooms, which serve a critical primary care function in rural 
     areas.
     Five-percent Add-on for Rural Ground Ambulance Trips
       The Senate amendment extends a five-percent add-on payment 
     for all ground ambulance trips provided in a rural area.
     Exclusion of Services Provided By Rural Health Clinic-based 
         Practitioners From SNF Consolidated Billing
       The Senate amendment exempts practitioners based in rural 
     health clinics from the requirement to submit their bills for 
     services provided to nursing home patients to the nursing 
     home rather than to Medicare, reducing administrative burdens 
     and making their payments more predictable.
     Make 10-percent Bonus Payments Under Medicare Incentive 
         Payment Program Automatic
       Present law requires physicians participating in the 
     Medicare Incentive Payment program to apply for bonus 
     payments when they elect to serve in Health Professional 
     Shortage Areas. The Senate amendment makes bonus payments 
     automatic to physicians participating in the Medicare 
     Incentive Payment program, eliminating bureaucratic barriers 
     to receipt of such funds.
     Two-Year Extension of Reasonable Cost Payments for Laboratory 
         Tests in Sole Community Hospitals
       The Senate amendment extends the allowance for laboratory 
     tests performed in sole community hospitals to be paid at 
     their reasonable cost, rather than under a fee schedule for 
     an additional two years.
     Set Work, Practice Expense and Malpractice Geographic Indices 
         for Physician Payments at 1.0
       The Senate amendment sets a floor of 1.0 on geographic 
     adjustments to the work, practice expense and professional 
     liability insurance components of physician payment.
     10-Year Freeze in CPI Updates for Durable Medical Equipment, 
         Prosthetics and Orthotics
       The Senate amendment freezes CPI updates for payment for 
     durable medical equipment, prosthetics, and orthotics for ten 
     years.
     Collect Coinsurance and Deductible Amounts for Clinical 
         Laboratory Tests
       The Senate amendment extends the same coinsurance and 
     deductible rules to clinical laboratory tests that apply to 
     all other Part B services.
     Limit Reimbursement for Currently Covered Drugs
       The Senate amendment lowers that amount paid for limited 
     prescription drugs and biologicals to 85 percent of the 
     product's average wholesale price, or the amount payable for 
     the product during the last quarter of the previous year, 
     whichever is lower.


                          Conference Agreement

       The conference agreement does not in the Senate amendment 
     provisions.

 E. Provisions Relating to S Corporations (Secs. 581-594 of the Senate 
             Amendment and Sections 1361-1379 of the Code)

                  1. Shareholders of an S corporation


                              present law

       The taxable income or loss of an S corporation is taken 
     into account by the corporation's shareholders, rather than 
     by the entity, whether or not such income is distributed. A 
     small business corporation may elect to be treated as an S 
     corporation. A ``small business corporation'' is defined as a 
     domestic corporation which is not an ineligible corporation 
     and which does not have (1) more than 75-shareholders; (2) as 
     a shareholder, a person (other than certain trusts, estates, 
     charities, and qualified retirement plans) who is not an 
     individual; (3) a nonresident alien as a shareholder; and (4) 
     more than one class of stock. For purposes of the 75-
     shareholder limitation, a husband and wife are treated as one 
     shareholder. An ``ineligible corporation'' means any 
     corporation that is a member of an affiliated group, certain 
     financial institutions that use the reserve method of 
     accounting for bad debts, certain insurance companies, a 
     section 936 corporation, or a DISC or former DISC.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provision provides that all family 
     members owning stock can elect to be treated as one 
     shareholder. A family is defined as the lineal descendants of 
     a common ancestor (and their spouses). The common ancestor 
     cannot be more than six generations removed from the youngest 
     generation of shareholder at the time the S election is made 
     (or the effective date of this provision, if later). The 
     election is made available to only one family per 
     corporation, must be made with the consent of all 
     shareholders of the corporation and remains in effect until 
     terminated.
       The Senate amendment provision increases the maximum number 
     of eligible shareholders from 75 to 100.
       Finally, under the Senate amendment nonresident aliens are 
     allowed as beneficiaries of an electing small business trust.

[[Page H4687]]

       Effective date.--The Senate amendment provisions apply to 
     taxable years beginning after December 31, 2003, except that 
     the provision relating to nonresident aliens is effective on 
     date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Termination of election and additions to tax due to 
         passive investment income


                              present law

       An S corporation is subject to corporate-level tax, at the 
     highest marginal corporate tax rate, on its net passive 
     income if the corporation has (1) subchapter C earnings and 
     profits at the close of the taxable year and (2) gross 
     receipts more than 25 percent of which are passive investment 
     income.
       In addition, an S corporation election is terminated 
     whenever the corporation has subchapter C earnings and 
     profits at the close of three consecutive taxable years and 
     has gross receipts for each of such years more than 25 
     percent of which are passive investment income.
       For these purposes, ``passive investment income'' generally 
     means gross receipts derived from royalties, rents, 
     dividends, interest, annuities, and sales or exchanges of 
     stock or securities (to the extent of gains). ``Passive 
     investment income'' generally does not include interest on 
     accounts receivable, gross receipts that are derived directly 
     from the active and regular conduct of a lending or finance 
     business, gross receipts from certain liquidations, or gain 
     or loss from any section 1256 contract (or related property) 
     of an options or commodity dealer. ``Net passive income'' is 
     defined as passive investment income reduced by the allowable 
     deductions that are directly connected with the production of 
     the income.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provision increases the 25-percent 
     threshold to 60 percent.
       Also, the Senate amendment repeals capital gain as a 
     category of passive income.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Treatment of S corporation shareholders
       (a) In general


                              present law

       In general, each S corporation shareholder takes into 
     account its pro rata share of the S corporation income and 
     loss for the taxable year.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision makes the following changes 
     in the treatment of S corporation shareholders:
       Under the Senate amendment provision, if a shareholder's 
     stock in an S corporation is transferred incident to a 
     divorce decree, the pro rata share of any suspended corporate 
     loss is transferred to the transferee spouse.
       Under the Senate amendment provision, the beneficiary of a 
     qualified subchapter S trust is allowed the suspended losses 
     under the at-risk rules and the passive loss rules when the 
     trust disposes of the stock.
       Effective date.--The Senate amendment provisions apply to 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       (b) Electing small business trusts


                              Present Law

       Under present law, an electing small business trust 
     (``ESBT'') may be an S corporation shareholder. In general, 
     the beneficiaries of an ESBT must be individuals and others 
     taxpayers that may own stock in an S corporation directly. 
     Each potential current beneficiary of the trust is counted as 
     a shareholder in determining whether or not the corporation 
     meets the requirement that an S corporation have no more than 
     75 shareholders.
       The portion of the trust consisting of S corporation stock 
     is treated as a separate trust. The trust is taxed at the 
     maximum trust tax rate (which is the same as the maximum 
     individual tax rate) on the items of income, deduction, gain, 
     or loss passing through from the S corporation. The remaining 
     portion of the trust is treated as a separate trust taxed 
     under the normal rules relating to the taxation of trusts and 
     beneficiaries. In computing the amount of the distribution 
     deduction for the trust, no subchapter S items are taken into 
     account.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment provision, unexercised powers of 
     appointment are disregarded in determining the beneficiaries 
     of an electing small business trust.
       Under the Senate amendment provision, the treatment of 
     distributions from an electing small business trust is 
     clarified by treating distributions from each portion (i.e., 
     the portion attributable to the S corporation stock and the 
     remaining portion) of the trust as separate distributions.
       Effective date.--The Senate amendment provisions apply to 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment provision.
     4. Provisions relating to banks
       (a) IRAs holding bank stock


                              Present Law

       An individual retirement arrangement (``IRA'') may not hold 
     stock in an S corporation.
       The Code contains rules prohibiting certain transactions 
     between disqualified persons and certain tax-favored 
     retirement arrangements, including IRAs. These rules are 
     designed to prevent certain self-dealing transactions. For 
     example, the sale of an asset held by an IRA to the 
     beneficiary of the IRA is a prohibited transaction. In 
     general, an excise tax is imposed on prohibited transactions. 
     In the case of an IRA, however, if the IRA beneficiary 
     engages in a prohibited transaction, the excise tax does not 
     apply and, instead, the IRA ceases to be an IRA.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision provides that the sale of 
     holding bank stock held in an IRA to the beneficiary of the 
     IRA is not a prohibited transaction, in order to allow the 
     corporation to be eligible to elect to be an S corporation.
       Effective date.--The Senate amendment provision applies to 
     stock held by an IRA on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       (b) Exclusion of investment securities income from passive 
           income test for bank S corporations


                              Present Law

       An S corporation is subject to corporate-level tax, at the 
     highest marginal corporate tax rate, on its net passive 
     income if the corporation has (1) subchapter C earnings and 
     profits at the close of the taxable year and (2) gross 
     receipts more than 25 percent of which are passive investment 
     income.
       In addition, an S corporation election is terminated 
     whenever the corporation has subchapter C earnings and 
     profits at the close of three consecutive taxable years and 
     has gross receipts for each of such years more than 25 
     percent of which are passive investment income.
       For these purposes, ``passive investment income'' generally 
     means gross receipts derived from royalties, rents, 
     dividends, interest, annuities, and sales or exchanges of 
     stock or securities (to the extent of gains). ``Passive 
     investment income'' generally does not include interest on 
     accounts receivable, gross receipts that are derived directly 
     from the active and regular conduct of a lending or finance 
     business, gross receipts from certain liquidations, or gain 
     or loss from any section 1256 contract (or related property) 
     of an options or commodity dealer. ``Net passive income'' is 
     defined as passive investment income reduced by the allowable 
     deductions that are directly connected with the production of 
     the income.


                               House Bill

       No amendment.


                            Senate Amendment

       The Senate amendment provision provides that, in the case 
     of a bank or bank holding company, passive income does not 
     include interest and does not include dividends on assets 
     required to be held by the bank or bank holding company.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       (c) Treatment of qualifying director shares


                              Present Law

       A small business corporation may elect to be treated as an 
     S corporation. A ``small business corporation'' is defined as 
     a domestic corporation which is not an ineligible corporation 
     and which does not have (1) more than 75 shareholders; (2) as 
     a shareholder, a person (other than certain trusts, estates, 
     charities, or qualified retirement plans) who is not an 
     individual; (3) a nonresident alien as a shareholder; and (4) 
     more than one class of stock.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment provision, shares held by reason 
     of being a bank director that are subject to an agreement 
     pursuant to which the holder is required to dispose of the 
     shares upon termination of the holder's status as a director 
     at the same price the individual acquired the shares are not 
     treated as a second class of stock. Distributions are treated 
     like interest payments.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page H4688]]

     5. Qualified subchapter S subsidiaries
       (a) Relief from inadvertently invalid qualified subchapter 
           S subsidiaries and elections and terminations


                              Present Law

       Under present law, inadvertent subchapter S elections and 
     terminations may be waived.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision allows inadvertent qualified 
     subchapter S subsidiary elections and terminations to be 
     waived by the IRS.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       (b) Information returns for qualified subchapter S 
           subsidiaries


                              Present Law

       Under present law, a wholly owned subsidiary of an S 
     corporation may elect to be treated as not a separate 
     corporation. The assets, liabilities, and items of income, 
     deduction, and credit of the subsidiary are treated as 
     assets, liabilities, and items of the parent S corporation.


                               House Bill

       No provision


                            Senate Amendment

       The Senate amendment provision provides authority to the 
     Secretary of the Treasury to provide guidance regarding 
     information returns of subchapter S subsidiaries.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Elimination of all earnings and profits attributable to 
         pre-1983 years


                              Present Law

       The Small Business Job Protection Act of 1996 provided that 
     if a corporation was an S corporation for its first taxable 
     year beginning after 1996, the accumulated earnings and 
     profits of the corporation were reduced as of the beginning 
     of that year by the accumulated earnings and profits (if any) 
     accumulated in a taxable year beginning before 1983 for which 
     the corporation was an electing small business corporation 
     under subchapter S.


                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provision eliminates all accumulated 
     earnings and profits of a corporation accumulated in a 
     taxable year beginning before 1983 for which the corporation 
     was an electing small business corporation under subchapter 
     S.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

VIII. Blue Ribbon Commission on Comprehensive Tax Reform (Secs. 601-607 
                        of the Senate Amendment)


                              Present Law

       No provision.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment establishes the Blue Ribbon Commission 
     on Comprehensive Tax Reform (the ``Commission''). The 
     Commission is composed of 12 members, of whom: (1) one is the 
     Chairman of the Board of the Federal Reserve System; (2) two 
     are appointed by the majority leader of the Senate; (3) two 
     are appointed by the minority leader of the Senate; (4) two 
     are appointed by the Speaker of the House of Representatives; 
     (5) two are appointed by the minority leader of the House of 
     Representatives; and (6) three are appointed by the 
     President, of which no more than two will be of the same 
     party as the President. Members of the Commission may be 
     employees or former employees of the Federal Government. 
     Appointments of Commission members will be made not later 
     than July 30, 2003. Members of the Commission will be 
     appointed for the life of the Commission. Any vacancy in the 
     Commission will not affect its powers but will be filled in 
     the same manner as the original appointment.
       The Commission will hold its first meeting not later than 
     30 days after the date on which all Commission members have 
     been appointed. The President will select a Commission 
     Chairman (``Chairman'') and Vice Chairman from among the 
     members of the Commission. The Commission will meet at the 
     call of the Chairman. A majority of the members of the 
     Commission will constitute a quorum, but a lesser number of 
     members may hold hearings (discussed below).
       The Commission will conduct a thorough study of all matters 
     relating to a comprehensive reform of the Federal tax system, 
     including the reform of the Internal Revenue Code of 1986 and 
     the implementation (if appropriate) of other types of tax 
     systems. The Commission will develop recommendations on how 
     to comprehensively reform the Federal tax system in a manner 
     that generates appropriate revenue for the Federal 
     Government. Not later than 18 months after the date on which 
     all initial members of the Commission have been appointed, 
     the Commission will submit a report to the President and 
     Congress which will contain a detailed statement of the 
     findings and conclusions of the Commission, together with its 
     recommendations for such legislation and administrative 
     actions as it considers appropriate.
       The Commission may hold such hearings, sit and act at such 
     times and places, take such testimony, and receive such 
     evidence as the Commission considers advisable to carry out 
     the amendment. Additionally, the Commission may secure 
     directly from any Federal department or agency such 
     information as the Commission considers necessary to carry 
     out the amendment. Upon request of the Chairman, the head of 
     such department or agency will furnish such information to 
     the Commission. The Commission may use the United States 
     mails in the same manner and under the same condition as 
     other departments and agencies of the Federal Government. 
     The Commission may accept, use, and dispose of gifts or 
     donations of services or property.
       Each member of the Commission who is not an officer or 
     employee of the Federal Government will be compensated at a 
     rate equal to the daily equivalent of a prescribed annual 
     rate of pay \384\ for each day (including travel time) during 
     which such member is engaged in the performance of the duties 
     of the Commission. All members of the Commission who are 
     officers or employees of the United States will serve without 
     compensation in addition to that received for their services 
     as officers or employees of the United States. Commission 
     members will be allowed travel expenses, including per diem 
     in lieu of subsistence, at rates authorized for employees of 
     agencies while away from their homes or regular places of 
     business in the performance of services for the 
     Commission.\385\
---------------------------------------------------------------------------
     \384\ The applicable rate of pay is the basic pay prescribed 
     for level IV of the Executive Schedule under 5 U.S.C. 5315.
     \385\ Subchapter I of chapter 57 of title 5, U.S.C.
---------------------------------------------------------------------------
       The Chairman, without regard to the civil service laws and 
     regulations, may appoint and terminate an executive director 
     and such other additional personnel as may be necessary to 
     enable the Commission to perform its duties. The employment 
     of an executive director will be subject to confirmation by 
     the Commission. The Chairman may fix the compensation of the 
     executive director and other personnel without regard to 
     classification of positions and general schedule pay 
     rates,\386\ except that the rate of pay for the executive 
     director and other personnel may not exceed the rate payable 
     for level V of the executive schedule.\387\
---------------------------------------------------------------------------
     \386\ Chapter 51 and subchapter III of chapter 53 of title 5, 
     U.S.C.
     \387\ 5 U.S.C. 5316.
---------------------------------------------------------------------------
       Any employee of the Federal Government may be detailed to 
     the Commission without reimbursement, and such detail will be 
     without interruption or loss of civil service status or 
     privilege. The Chairman may procure temporary and 
     intermittent services \388\ at rates for individuals which do 
     not exceed the daily equivalent of the annual rate of basic 
     pay prescribed for level V of the executive schedule.
---------------------------------------------------------------------------
     \388\ 5 U.S.C. 3109(b).
---------------------------------------------------------------------------
       The Commission will terminate 90 days after the date on 
     which the Commission submits the report required by the 
     provision. Such sums as are necessary to carry out the Senate 
     amendment are appropriated.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                          IX. REIT Provisions

A. REIT Modification Provisions (Secs. 701-707 of the Senate Amendment 
                   and Secs. 856 and 857 of the Code)


                              Present Law

     In general
       Real estate investment trusts (``REITs'') are treated, in 
     substance, as pass-through entities under present law. Pass-
     through status is achieved by allowing the REIT a deduction 
     for dividends paid to its shareholders. REITs are generally 
     restricted to investing in passive investments primarily in 
     real estate and securities.
       A REIT must satisfy four tests on a year-by-year basis: 
     organizational structure, source of income, nature of assets, 
     and distribution of income. Whether the REIT meets the asset 
     tests is generally measured each quarter.
     Organizational structure requirements
       To qualify as a REIT, an entity must be for its entire 
     taxable year a corporation or an unincorporated trust or 
     association that would be taxable as a domestic corporation 
     but for the REIT provisions, and must be managed by one or 
     more trustees. The beneficial ownership of the entity must be 
     evidenced by transferable shares or certificates of 
     ownership. Except for the first taxable year for which an 
     entity elects to be a REIT, the beneficial ownership of the 
     entity must be held by 100 or more persons, and the entity 
     may not be so closely held by individuals that it would be 
     treated as a personal holding company if all its adjusted 
     gross income constituted personal holding company income. A 
     REIT is disqualified for any year in which it does not comply 
     with regulations to

[[Page H4689]]

     ascertain the actual ownership of the REIT's outstanding 
     shares.
     Income requirements
       In order for an entity to qualify as a REIT, at least 95 
     percent of its gross income generally must be derived from 
     certain passive sources (the ``95-percent income test''). In 
     addition, at least 75 percent of its income generally must be 
     from certain real estate sources (the ``75-percent income 
     test''), including rents from real property (as defined) and 
     gain from the sale or other disposition of real property.
       Qualified rental income
       Amounts received as impermissible ``tenant services 
     income'' are not treated as rents from real property.\389\ In 
     general, such amounts are for services rendered to tenants 
     that are not ``customarily furnished'' in connection with the 
     rental of real property.\390\ Special rules also permit 
     amounts to be received from certain ``foreclosure property'' 
     treated as such for 3 years after the property is acquired by 
     the REIT in foreclosure after a default (or imminent default) 
     on a lease of such property or an indebtedness which such 
     property secured.
---------------------------------------------------------------------------
     \389\ A REIT is not treated as providing services that 
     produce impermissible tenant services income if such services 
     are provided by an independent contractor from whom the REIT 
     does not derive or receive any income. An independent 
     contractor is defined as a person who does not own, directly 
     or indirectly, more than 35 percent of the shares of the 
     REIT. Also, no more than 35 percent of the total shares of 
     stock of an independent contractor (or of the interests in 
     net assets or net profits, if not a corporation) can be owned 
     directly or indirectly by persons owning 35 percent or more 
     of the interests in the REIT.
     \390\ Rents for certain personal property leased in 
     connection are treated as rents from real property if the 
     fair market value of the personal property does not exceed 15 
     percent of the aggregate fair market values of the real and 
     personal property
---------------------------------------------------------------------------
       Rents from real property, for purposes of the 95-percent 
     and 75-percent income tests, generally do not include any 
     amount received or accrued from any person in which the REIT 
     owns, directly or indirectly, 10 percent or more of the vote 
     or value.\391\ An exception applies to rents received from a 
     taxable REIT subsidiary (``TRS'') (described further below) 
     if at least 90 percent of the leased space of the property is 
     rented to persons other than a TRS or certain related 
     persons, and if the rents from the TRS are substantially 
     comparable to unrelated party rents.\392\
---------------------------------------------------------------------------
     \391\ Section 856(d)(2)(B).
     \392\ Section 856(d)(8).
---------------------------------------------------------------------------
       Certain hedging instruments
       Except as provided in regulations, a payment to a REIT 
     under an interest rate swap or cap agreement, option, futures 
     contract, forward rate agreement, or any similar financial 
     instrument, entered into by the trust in a transaction to 
     reduce the interest rate risks with respect to any 
     indebtedness incurred or to be incurred by the REIT to 
     acquire or carry real estate assets, and any gain from the 
     sale or disposition of any such investment, is treated as 
     income qualifying for the 95-percent income test.
       Tax if qualified income tests not met
       If a REIT fails to meet the 95-percent or 75-percent income 
     tests but has set out the income it did receive in a schedule 
     and any error in the schedule is due to reasonable cause and 
     not willful neglect, then the REIT does not lose its REIT 
     status but instead pays a tax measured by the greater of the 
     amount by which 90 percent \393\ of the REIT's gross income 
     exceeds the amount of items subject to the 95-percent test, 
     or the amount by which 75 percent of the REIT's gross income 
     exceeds the amount of items subject to the 75-percent 
     test.\394\
---------------------------------------------------------------------------
     \393\ Prior to 1999, the rule had applied to the amount by 
     which 95 percent of the income exceeded the items subject to 
     the 95 percent test.
     \394\ The ratio of the REIT's net to gross income is applied 
     to the excess amount, to determine the amount of tax 
     (disregarding certain items otherwise subject to a 100-
     percent tax). In effect, the formula seeks to require that 
     all of the REIT net income attributable to the failure of the 
     income tests will be paid as tax. Sec. 857(b)(5).
---------------------------------------------------------------------------
       Income or loss from prohibited transactions
       In general, a REIT must derive its income from passive 
     sources and not engage in any active trade or business. A 100 
     percent tax is imposed on the net income of a REIT from 
     ``prohibited transactions''. A prohibited transaction is the 
     sale or other disposition of property described in section 
     1221(1) of the Code (property held for sale in the ordinary 
     course of a trade or business) other than foreclosure 
     property.\395\ A safe harbor is provided for certain sales of 
     rent producing real property that otherwise might be 
     considered prohibited transactions. The safe harbor is 
     limited to seven or fewer sales a year or, alternatively, any 
     number of sales provided that the aggregate adjusted basis of 
     the property sold does not exceed 10 percent of the aggregate 
     basis of all the REIT's assets at the beginning of the REIT's 
     taxable year. The safe harbor only applies to property that 
     has been held by the REIT for at least 4 years. In addition, 
     property is eligible for the safe harbor only if the 
     aggregate expenditures made directly or indirectly by the 
     REIT during the 4-year period prior to date of sale do not 
     exceed 30 percent of the net selling price of the property.
---------------------------------------------------------------------------
     \395\ Thus, the 100 percent tax on prohibited transactions 
     helps to ensure that the REIT is a passive entity and may not 
     engage in ordinary retailing activities such as sales to 
     customers of condominium units or subdivided lots in a 
     development project.
---------------------------------------------------------------------------
       Certain timber income
       REITs have been formed to hold land on which trees are 
     grown. Upon maturity of the trees, the standing trees are 
     sold by the REIT to its taxable REIT subsidiary, which cuts 
     and logs the trees and processes the timber to produce 
     lumber, lumber products such a plywood or composite. The 
     Internal Revenue Service has issued private letter rulings in 
     particular instances stating that the income can qualify as 
     REIT real property income because the uncut timber and the 
     timberland on which the timber grew is considered real 
     property and the sale of uncut trees can qualify as capital 
     gain derived from the sale of real property.\396\
---------------------------------------------------------------------------
     \396\ See, e.g., PLR 200052021, PLR 199945055, PLR 19927021, 
     PLR 8838016. A private letter ruling may be relied upon only 
     by the taxpayer to which the ruling is issued. However, such 
     rulings provide an indication of administrative practice.
---------------------------------------------------------------------------
     Asset requirements
       To satisfy the asset requirements to qualify for treatment 
     as a REIT, at the close of each quarter of its taxable year, 
     an entity must have at least 75 percent of the value of its 
     assets invested in real estate assets, cash and cash items, 
     and government securities (the ``75-percent asset test''). 
     The term real estate asset is defined to mean real property 
     (including interests in real property and mortgages on real 
     property) and interests in REITs.
       Limitation on investment in other entities
       A REIT is limited in the amount that it can own in other 
     corporations. Specifically, a REIT cannot own securities 
     (other than Government securities and certain real estate 
     assets) in an amount greater than 25 percent of the value of 
     REIT assets. In addition, it cannot own such securities of 
     any one issuer representing more than 5 percent of the total 
     value of REIT assets or more than 10 percent of the voting 
     securities or 10 percent of the value of the outstanding 
     securities of any one issuer. Securities for purposes of 
     these rules are defined by reference to the Investment 
     Company Act of 1940.
       ``Straight debt'' exception
       Securities of an issuer that are within a safe-harbor 
     definition of ``straight debt'' (as defined for purposes of 
     subchapter S \397\ are not taken into account in applying the 
     limitation that a REIT may not hold more than 10 percent of 
     the value of outstanding securities of a single issuer, if: 
     (1) the issuer is an individual, or (2) the only securities 
     of such issuer held by the REIT or a taxable REIT subsidiary 
     of the REIT are straight debt, or (3) the issuer is a 
     partnership and the trust holds at least a 20 percent profits 
     interest in the partnership.
---------------------------------------------------------------------------
     \397\ Section 1361(c)(5), without regard to paragraph 
     (B)(iii) thereof.
---------------------------------------------------------------------------
       Straight debt is defined as a written or unconditional 
     promise to pay on demand or on a specified date a sum certain 
     in money if (i) the interest rate (and interest payment 
     dates) are not contingent on profits, the borrower's 
     discretion, or similar factors; (ii) there is no 
     convertibility (directly or indirectly) into stock; and (iii) 
     the creditor is an individual (other than a nonresident 
     alien), an estate, certain trusts, or a person which is 
     actively and regularly engaged in the business of lending 
     money.
       Certain subsidiary ownership permitted with income treated 
           as income of the REIT
       Under one exception to the rule limiting a REIT's 
     securities holdings to no more than 10 percent of the vote or 
     value of a single issuer, a REIT can own 100 percent of the 
     stock of a corporation, but in that case the income and 
     assets of such corporation are treated as income and assets 
     of the REIT.
       Special rules for Taxable REIT subsidiaries
       Under another exception to the general rule limiting REIT 
     securities ownership of other entities, a REIT can own stock 
     of a taxable REIT subsidiary (``TRS''), generally, a 
     corporation other than a real estate investment trust \398\ 
     with which the REIT makes a joint election to be subject to 
     special rules. A TRS can engage in active business operations 
     that would produce income that would not be qualified income 
     for purposes of the 95-percent or 75-percent income tests for 
     a REIT, and that income is not attributed to the REIT. For 
     example a TRS could provide noncustomary services to REIT 
     tenants, or it could engage directly in the active operation 
     and management of real estate (without use of an independent 
     contractor); and the income the TRS derived from these 
     nonqualified activities would not be treated as disqualified 
     REIT income. Transactions between a TRS and a REIT are 
     subject to a number of specified rules that are intended to 
     prevent the TRS (taxable as a separate corporate entity) from 
     shifting taxable income from its activities to the pass 
     through entity REIT or from absorbing more than its share of 
     expenses. Under one rule, a 100 percent excise tax is imposed 
     on rents, deductions, or interest paid by the TRS to the REIT 
     to the extent such items would exceed an arm's length amount 
     as determined under section 482.\399\
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     \398\ Certain corporations are not eligible to be a TRS, such 
     as a corporation which directly or indirectly operates or 
     manages a lodging facility or a health care facility or 
     directly or indirectly provides to any other person rights to 
     a brand name under which any lodging facility or health care 
     facility is operated. Sec. 856((1)(3).
     \399\ If the excise tax applies, the item is not also 
     reallocated back to the TRS under section 482.

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[[Page H4690]]

       Rents subject to the 100 percent excise tax do not include 
     rents for services of a TRS that are for services customarily 
     furnished or rendered in connection with the rental of real 
     property.
       They also do not include rents from a TRS that are for real 
     property or from incidental personal property provided with 
     such real property.
     Income distribution requirements
       A REIT is generally required to distribute 90 percent of 
     its income before the end of its taxable year, as deductible 
     dividends paid to shareholders. This rule is similar to a 
     rule for regulated investment companies (``RICs'') that 
     requires distribution of 90 percent of income. Both RICS and 
     REITs can make certain ``deficiency dividends'' after the 
     close of the taxable year, and have these treated as made 
     before the end of the year. Deficiency dividends may be 
     declared on or after the date of ``determination''. A 
     determination is defined to include only (i) a final decision 
     by the Tax Court or other court of competent jurisdiction, 
     (ii) a closing agreement under section 7121, or (iii) under 
     Treasury regulations, an agreement signed by the Secretary 
     and the REIT.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment makes a number of modifications to the 
     REIT rules.
     Straight debt modification
       The provision modifies the definition of ``straight debt'' 
     for purposes of the limitation that a REIT may not hold more 
     than 10 percent of the value of the outstanding securities of 
     a single issuer, to provide more flexibility than the present 
     law rule. In addition, except as provided in regulations, 
     neither such straight debt nor certain other types of 
     securities are considered ``securities'' for purposes of this 
     rule.
       Straight debt securities
       ``Straight-debt'' is still defined by reference to section 
     1361(c)(5), however, without regard to subparagraph (B)(iii) 
     thereof (limiting the nature of the creditor).
       Special rules are provided permitting certain contingencies 
     for purposes of the REIT provision. Any interest or principal 
     shall not be treated as failing to satisfy section 
     1361(c)(5)(B)(i) solely by reason of the fact that the time 
     of payment of such interest or principal is subject to a 
     contingency, but only if one of several factors applies. The 
     first type of contingency that is permitted is one that does 
     not have the effect of changing the effective yield to 
     maturity, as determined under section 1272, other than a 
     change in the annual yield to maturity which either (i) does 
     not exceed the greater of \1/4\ of 1 percent or 5 percent of 
     the annual yield to maturity, or (ii) results solely from a 
     default or the exercise of a prepayment right by the issuer 
     of the debt.
       The second type of contingency that is permitted is one 
     under which neither the aggregate issue price nor the 
     aggregate face amount of the debt instruments held by the 
     REIT exceeds $1,000,000 and not more than 12 months of 
     unaccrued interest can be required to be prepaid thereunder.
       The bill eliminates the present law rule requiring a REIT 
     to own a 20 percent equity interest in a partnership in order 
     for debt to qualify as ``straight debt''. The bill instead 
     provides new ``look-through'' rules determining a REIT 
     partner's share of partnership securities, generally treating 
     debt to the REIT as part of the REIT's partnership interest 
     for this purpose, except in the case of otherwise qualifying 
     debt of the partnership.
       Certain corporate or partnership issues that otherwise 
     would be permitted to be held without limitation under the 
     special straight debt rules described above will not be so 
     permitted if the REIT holding such securities, and any of its 
     taxable REIT subsidiaries, holds any securities of the issuer 
     which are not permitted securities (prior to the application 
     of this rule) and have an aggregate value greater than 1 
     percent of the issuer's outstanding securities.
       Other securities
       Except as provided in regulations, the following also are 
     not considered ``securities'' for purposes of the rule that a 
     REIT cannot own more than 10 percent of the value of the 
     outstanding securities of a single issuer: (i) any loan to an 
     individual or an estate, (ii) any section 467 rental 
     agreement, (as defined in section 467(d)), other than with a 
     person described in section 856(d)(2)(B), (iii) any 
     obligation to pay rents from real property, (iv) any security 
     issued by a State or any political subdivision thereof, the 
     District of Columbia, a foreign government, or any political 
     subdivision thereof, or the Commonwealth of Puerto Rico, but 
     only if the determination of any payment received or accrued 
     under such security does not depend in whole or in part on 
     the profits of any entity not described in this category, or 
     payments on any obligation issued by such an entity, (v) any 
     security issued by a real estate investment trust; (vi) any 
     other arrangement that, as determined by the Secretary, is 
     excepted from the definition of a security.
     Safe harbor testing date for certain rents
       The bill provides specific safe-harbor rules regarding the 
     dates for testing whether 90 percent of a REIT property is 
     rented to unrelated persons and whether the rents paid by 
     related persons are substantially comparable to unrelated 
     party rents. These testing rules are provided solely for 
     purposes of the special provision permitting rents received 
     from a related party to be treated as qualified rental income 
     for purposes of the income tests.\400\
---------------------------------------------------------------------------
     \400\ The proposal does not modify any of the standards of 
     section 482 as they apply to REITS and to taxable REIT 
     subsidiaries.
---------------------------------------------------------------------------
     Customary services exception
       The bill prospectively eliminates the safe harbor allowing 
     rents received by a REIT to be exempt from the 100 percent 
     excise tax if the rents are for customary services performed 
     by the TRS \401\ or are from a TRS and are for the provision 
     of certain incidental personal property. Instead, such 
     payments would be free of the excise tax if they satisfy the 
     present law safe-harbor that applies if the REIT pays the TRS 
     at least 150 percent of the cost to the TRS of providing any 
     services.
---------------------------------------------------------------------------
     \401\ Although a REIT could itself provide such services and 
     receive the income for them without receiving any 
     disqualified income, in that case the REIT itself would be 
     bearing the cost of providing the service. Under the present 
     law exception for a TRS providing such service, there is no 
     explicit requirement that the TRS be reimbursed for the full 
     cost of the service.
---------------------------------------------------------------------------
     Hedging rules
       The rules governing the tax treatment of arrangements 
     engaged in by a REIT to reduce interest rate risks are 
     prospectively conformed to the rules included in section 
     1221.
     95-percent gross income requirement
       The bill prospectively amends the tax liability owed by the 
     REIT when it fails to meet the 95-percent of gross income 
     test by applying a taxable fraction based on 95 percent, 
     rather than 90 percent of the REIT's gross income.
     Safe harbor from prohibited transactions for certain 
         timberland sales
       The bill provides that a sale of a real estate asset will 
     not be a prohibited transaction the following six 
     requirements are met:
       (1) The asset must have been held for at least 4 years in 
     the trade or business of producing timber;
       (2) The aggregate expenditures made the REIT (or a partner 
     of the REIT) during the 4-year period preceding the date of 
     sale that are includible in the basis of the property that 
     are directly related to the operation of the property for the 
     production of timber or for the preservation of the property 
     for use as timberland must not exceed 30 percent of the net 
     selling price of the property;
       (3) The aggregate expenditures made the REIT (or a partner 
     of the REIT) during the 4-year period preceding the date of 
     sale that are includible in the basis of the property that do 
     not qualify under the second requirement (i.e., those 
     expenditures are not directly related to the operation of the 
     property for the production of timber or the preservation of 
     the property for use as timberland) must not exceed 5 percent 
     of the net selling price of the property;
       (4) The REIT either (i) does not make more than 7 sales of 
     property (other than sales of foreclosure property or sales 
     to which 1033 applies) or (ii) the aggregate adjusted bases 
     (as determined for purposes of computing earnings and 
     profits) of property sold during the year (other than sales 
     of foreclosure property or sales to which 1033 applies) does 
     not exceed 10 percent of the aggregate bases (as determined 
     for purposes of computing earnings and profits)of property of 
     all assets of the REIT as of the beginning of the year;
       (5) Substantially all of the marketing expenditure with 
     respect to the property are made by persons who an 
     independent contractor (as defined by section 856(d)(3) with 
     respect to the REIT and from whom the REIT does not derive 
     any income; and
       (6) The sales price of the sale of the property to a 
     taxable REIT subsidiary cannot be based in whole or in part 
     on the income or profits that the subsidiary derives from the 
     sales of such properties.
       Costs that are not includible in the basis of the property 
     are not counted towards either the 30 or 5 percent 
     requirements.
       Capital expenditures counted towards 30-percent requirement
       Capital expenditures counted towards the 30-percent limit 
     are those expenditures that are includible in the basis of 
     the property (other than timberland acquisition 
     expenditures), and that are directly related to operation of 
     the property for the production of timber, or for the 
     preservation of the property for use as timberland. These 
     capital expenditures are those incurred directly in the 
     operation of raising timber (i.e., silviculture), as opposed 
     to capital expenditures incurred in the ownership of 
     undeveloped land. In general, these capital expenditures 
     incurred directly in the operation of raising timber include 
     capital expenditures incurred by the REIT to create an 
     established stand of growing trees. A stand of trees is 
     considered established when a target stand exhibits the 
     expected growing rate and is free of non-target competition 
     (e.g., hardwoods; grasses, brush, etc.) that may 
     significantly inhibit or threaten the target stand survival. 
     The costs commonly incurred during stand establishment are: 
     (1) site preparation including manual or mechanical 
     scarification, manual or mechanical cutting, disking, 
     bedding, shearing, raking, piling, broadcast and windrow/pile 
     burning (including slash disposal costs as required for stand 
     establishment); 2) site regeneration including manual or 
     mechanical hardwood coppice; (3) chemical application via 
     aerial or ground

[[Page H4691]]

     to eliminate or reduce vegetation; (4) nursery operating 
     costs including personnel salaries and benefits, 
     facilities costs, cone collection and seed extraction, and 
     other costs directly attributable to the nursery 
     operations (to the extent such costs are allocable to 
     seedlings used by the REIT); (5) seedlings including 
     storage, transportation and handling equipment; (6) direct 
     planting of seedlings; (7) initial stand fertilization, up 
     through stand establishment; (8) construction cost of road 
     to be used for removal of logs or fire protection; (9) 
     environmental costs (i.e., habitat conservation plans), 
     (10) any post stand capital establishment costs (e.g., 
     ``mid-term fertilization costs).''
       Capital expenditures counted towards 5-percent requirement
       Capital expenditures counted towards the 5-percent limit 
     are those capital expenditures incurred in the ownership of 
     undeveloped land that are not incurred in the direct 
     operation of raising timber (i.e., silviculture). This 
     category of capital expenditures includes (1) expenditures to 
     separate the REIT's holdings of land into separate parcels; 
     (2) costs of granting leases or easements to cable, cellular 
     or similar companies, (3) costs in determining the presence 
     or quality of minerals located on the land; (4) costs 
     incurred to defend changes in law that would limit future use 
     of the land by the REIT or a purchaser from the REIT; and (5) 
     costs incurred to determine alternative uses of the land 
     (e.g., recreational use); and (6) development costs of the 
     property incurred by the REIT (e.g., engineering, surveying, 
     legal, permit, consulting, road construction, utilities, and 
     other development costs for use other than to grow timber).
     Effective date
       The bill is generally effective for taxable years beginning 
     after December 31, 2000.
       However, some of the provisions are effective for taxable 
     years beginning after the date of enactment. These are: the 
     new ``look through'' rules determining a REIT partner's share 
     of partnership securities for purposes of the ``straight 
     debt'' rules; the provision changing the 90-percent of gross 
     income reference to 95 percent, for purposes of the tax 
     liability if a REIT fails to meet the 95-percent of gross 
     income test; the new hedging definition; the rule modifying 
     the treatment of rents with respect to customary services; 
     and the safe harbor from prohibited transactions relating to 
     timberland sales.\402\
---------------------------------------------------------------------------
     \402\ The provision relating to timberland sales is not 
     intended to change present law regarding when structures 
     involving timberland may qualify for REIT status.
---------------------------------------------------------------------------


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

B. REIT Savings Provisions (Sec. 711 of the Senate Amendment and Secs. 
                     856, 857 and 860 of the Code)


                              Present Law

       A REIT loses its status as a REIT, and becomes subject to 
     tax as a C corporation, if it fails to meet specified tests 
     regarding the sources of its income, the nature and amount of 
     its assets, its structure, and the amount of its income 
     distributed to shareholders.\403\
---------------------------------------------------------------------------
     \403\ See description of Present Law under REIT modification 
     provisions, supra.
---------------------------------------------------------------------------
       In the case of a failure to meet the source of income 
     requirements, if the failure is due to reasonable cause and 
     not to willful neglect, the REIT may continue its REIT status 
     if it pays the disallowed income as a tax to the 
     Treasury.\404\
---------------------------------------------------------------------------
     \404\ Sec. 856(c)(6) and Sec. 857(b)(5).
---------------------------------------------------------------------------
       There is no similar provision that allows a REIT to pay a 
     penalty and avoid disqualification in the case of other 
     qualification failures.
       A REIT may make a deficiency dividend after a determination 
     is made that it has not distributed the correct amount of its 
     income, and avoid disqualification. The Code provides only 
     for determinations involving a controversy with the IRS and 
     does not provide for a REIT to make such a distribution on 
     its own initiative.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, a REIT may avoid 
     disqualification in the event of certain failures of the 
     requirements for REIT status, provided that (1) the failure 
     was due to reasonable cause and not willful neglect, (2) the 
     failure is corrected, and (3) a penalty amount is paid.
       One requirement of present law is that, with certain 
     exceptions, (i) not more than 5 percent of the value of total 
     REIT assets may be represented by securities of one issuer, 
     and (ii) a REIT may not hold securities possessing more than 
     10 percent of the total voting power or 10 percent of the 
     total value of the outstanding securities of any one 
     issuer.\405\ The requirements must be satisfied each quarter.
---------------------------------------------------------------------------
     \405\ Sec. 856(c)(4)(B)(iii). These rules do not apply to 
     securities of a taxable REIT subsidiary, or to securities 
     that qualify for the 75 percent asset test of section 
     856(c)(4)(A), such as real estate assets, cash items 
     (including receivables), or Government securities.
---------------------------------------------------------------------------
       Certain de minimis asset failures of 5percent or 10percent 
           tests
       The bill provides that a REIT will not lose its REIT status 
     for failing to satisfy these requirements in a quarter if the 
     failure is due to the ownership of assets the total value of 
     which does not exceed the lesser of (i) 1 percent of the 
     total value of the REIT's assets at the end of the quarter 
     for which such measurement is done or (ii) 10 million 
     dollars; provided in either case that the REIT either 
     disposes of the assets within 6 months after the last day of 
     the quarter in which the REIT identifies the failure (or such 
     other time period prescribed by the Treasury), or otherwise 
     meets the requirements of those rules by the end of such time 
     period.\406\
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     \406\ A REIT might satisfy the requirements without a 
     disposition, for example, by increasing its other assets in 
     the case of the 5 percent rule; or by the issuer modifying 
     the amount or value of its total securities outstanding in 
     the case of the 10 percent rule.
---------------------------------------------------------------------------
       Larger asset test failures (whether of 5-percent or 10-
           percent tests, or of 75-percent or other asset tests)
       If a REIT fails to meet any of the asset test requirements 
     requirements for a particular quarter and the failure exceeds 
     the de minimis threshold described above, then the REIT still 
     will be deemed to have satisfied the requirements if: (i) 
     following the REIT's identification of the failure, the REIT 
     files a schedule with a description of each asset that caused 
     the failure, in accordance with regulations prescribed by the 
     Treasury; (ii) the failure was due to reasonable cause and 
     not to willful neglect, (iii) the REIT disposes of the assets 
     within 6 months after the last day of the quarter in which 
     the identification occurred or such other time period as is 
     prescribed by the Treasury (or the requirements of the rules 
     are otherwise met within such period), and (iv) the REIT pays 
     a tax on the failure.
       The tax that the REIT must pay on the failure is the 
     greater of (i) $50,000, or (ii) an amount determined 
     (pursuant to regulations) by multiplying the highest rate of 
     tax for corporations under section 11, times the net income 
     generated by the assets for the period beginning on the first 
     date of the failure and ending on the date the REIT has 
     disposed of the assets (or otherwise satisfies the 
     requirements).
       Such taxes are treated as excise taxes, for which the 
     deficiency provisions of the excise tax subtitle of the Code 
     (subtitle F) apply.
       Conforming reasonable cause and reporting standard for 
           failures of income tests
       The bill conforms the reporting and reasonable cause 
     standards for failure to meet the income tests to the new 
     asset test standards. However, the bill does not change the 
     rule under section 857(b)(5) that for income test failures, 
     all of the net income attributed to the disqualified gross 
     income is paid as tax.
       Other failures
       The bill adds a provision under which, if a REIT fails to 
     satisfy one or more requirements for REIT qualification, 
     other than the 95-percent and 75-percent gross income tests 
     and other than the new rules provided for failures of the 
     asset tests, the REIT may retain its REIT qualification if 
     the failures are due to reasonable cause and not willful 
     neglect, and if the REIT pays a penalty of $50,000 for each 
     such failure.
       Taxes and penalties paid deducted from amount required to 
           be distributed
       Any taxes or penalties paid under the provision are 
     deducted from the net income of the REIT in determining the 
     amount the REIT must distribute under the 90 percent 
     distribution requirement.
       Expansion of deficiency dividend procedure
       The Senate amendment expands the circumstances in which a 
     REIT may declare a deficiency dividend, by allowing such a 
     declaration to occur after the REIT unilaterally has 
     identified a failure to pay the relevant amount. Thus, the 
     declaration need not await a decision of the Tax Court, a 
     closing agreement, or an agreement signed by the Secretary of 
     the Treasury.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

              X. Extension of Certain Expiring Provisions

  A. Tax on Failure To Comply With Mental Health Parity Requirements 
      (Sec. 801 of the Senate Amendment and Sec. 9812 of the Code)


                              Present Law

       The Mental Health Parity Act of 1996 amended ERISA and the 
     Public Health Service Act to provide that group health plans 
     that provide both medical and surgical benefits and mental 
     health benefits cannot impose aggregate lifetime or annual 
     dollar limits on mental health benefits that are not imposed 
     on substantially all medical and surgical benefits. The 
     provisions of the Mental Health Parity Act are effective with 
     respect to plan years beginning on or after January 1, 1998, 
     and expire with respect to benefits for services furnished on 
     or after December 31, 2003.\407\
---------------------------------------------------------------------------
     \407\ Since enactment, the mental health parity requirements 
     have been extended on more than one occasion.
---------------------------------------------------------------------------
       The Taxpayer Relief Act of 1997 added to the Internal 
     Revenue Code the requirements imposed under the Mental Health 
     Parity Act, and imposed an excise tax on group health plans 
     that fail to meet the requirements. The excise tax is equal 
     to $100 per day

[[Page H4692]]

     during the period of noncompliance and is generally imposed 
     on the employer sponsoring the plan if the plan fails to meet 
     the requirements. The maximum tax that can be imposed during 
     a taxable year cannot exceed the lesser of 10 percent of the 
     employer's group health plan expenses for the prior year or 
     $500,000. No tax is imposed if the Secretary determines that 
     the employer did not know, and exercising reasonable 
     diligence would not have known, that the failure existed.
       The excise tax is applicable with respect to plan years 
     beginning on or after January 1, 1998, and expires with 
     respect to benefits for services provided on or after 
     December 31, 2003.\408\
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     \408\ The excise tax does not apply to benefits for services 
     furnished on or after September 30, 2001, and before January 
     10, 2002.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the excise tax for failures to 
     comply with mental health parity requirements through 
     December 31, 2004.
       Effective date.--The Senate amendment is effective for plan 
     years beginning after December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 B. Extend Alternative Minimum Tax Relief for Individuals (Sec. 802 of 
             the Senate Amendment and Sec. 26 of the Code)


                              Present Law

       Present law provides for certain nonrefundable personal tax 
     credits (i.e., the dependent care credit, the credit for the 
     elderly and disabled, the adoption credit, the child tax 
     credit,\409\ the credit for interest on certain home 
     mortgages, the HOPE Scholarship and Lifetime Learning 
     credits, the IRA credit, and the D.C. homebuyer's credit).
---------------------------------------------------------------------------
     \409\ A portion of the child credit may be refundable.
---------------------------------------------------------------------------
       For taxable years beginning in 2003, all the nonrefundable 
     personal credits are allowed to the extent of the full amount 
     of the individual's regular tax and alternative minimum tax.
       Without an extension of these rules for taxable years 
     beginning after 2003, these credits (other than the adoption 
     credit, child credit and IRA credit) would be allowed only to 
     the extent that the individual's regular income tax liability 
     exceeds the individual's tentative minimum tax, determined 
     without regard to the minimum tax foreign tax credit. The 
     adoption credit, child credit, and IRA credit are allowed to 
     the full extent of the individual's regular tax and 
     alternative minimum tax.
       The alternative minimum tax is the amount by which the 
     tentative minimum tax exceeds the regular income tax. An 
     individual's tentative minimum tax is an amount equal to (1) 
     26 percent of the first $175,000 ($87,500 in the case of a 
     married individual filing a separate return) of alternative 
     minimum taxable income (``AMTI'') in excess of a phased-out 
     exemption amount and (2) 28 percent of the remaining AMTI. 
     The maximum tax rates on net capital gain used in computing 
     the tentative minimum tax are the same as under the regular 
     tax. AMTI is the individual's taxable income adjusted to take 
     account of specified preferences and adjustments. The 
     exemption amounts are: (1) $45,000 ($49,000 in taxable years 
     beginning before 2005) in the case of married individuals 
     filing a joint return and surviving spouses; (2) $33,750 
     ($35,750 in taxable years beginning before 2005) in the case 
     of other unmarried individuals; (3) $22,500 ($24,500 in 
     taxable years beginning before 2005) in the case of married 
     individuals filing a separate return; and (4) $22,500 in the 
     case of an estate or trust. The exemption amounts are phased 
     out by an amount equal to 25 percent of the amount by which 
     the individual's AMTI exceeds (1) $150,000 in the case of 
     married individuals filing a joint return and surviving 
     spouses, (2) $112,500 in the case of other unmarried 
     individuals, and (3) $75,000 in the case of married 
     individuals filing separate returns or an estate or a trust. 
     These amounts are not indexed for inflation.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision extends the provisions 
     allowing an individual to offset the entire regular tax 
     liability and alternative minimum tax liability by the 
     personal nonrefundable credits for one year.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

C. Extension of Electricity Production Credit for Electricity Produced 
from Certain Renewable Resources (Sec. 803 of the Senate Amendment and 
                          Sec. 45 of the Code)


                              Present Law

       An income tax credit is allowed for the production of 
     electricity from either qualified wind energy, qualified 
     ``closed-loop'' biomass, or qualified poultry waste 
     facilities (sec. 45). The amount of the credit is 1.5 cents 
     per kilowatt hour (indexed for inflation) of electricity 
     produced.\410\ The credit is allowable for production during 
     the 10-year period after a facility is originally placed in 
     service.
---------------------------------------------------------------------------
     \410\ The amount of the credit is 1.8 cents per kilowatt hour 
     for 2002.
---------------------------------------------------------------------------
       The credit applies to electricity produced by a wind energy 
     facility placed in service after December 31, 1993, and 
     before January 1, 2004, to electricity produced by a closed-
     loop biomass facility placed in service after December 31, 
     1992, and before January 1, 2004, and to a poultry waste 
     facility placed in service after December 31, 1999, and 
     before January 1, 2004.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the placed in service date for 
     qualified facilities from facilities placed in service before 
     January 1, 2004 to facilities placed in service before 
     January 1, 2005.
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after December 31, 
     2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   D. Extend the Work Opportunity Tax Credit (Sec. 804 of the Senate 
                   Amendment and Sec. 51 of the Code)


                              Present Law

     In general
       The work opportunity tax credit (``WOTC'') is available on 
     an elective basis for employers hiring individuals from one 
     or more of eight targeted groups. The credit equals 40 
     percent (25 percent for employment of less than 400 hours) of 
     qualified wages. Generally, qualified wages are wages 
     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.
       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).
       For purposes of the credit, wages are generally defined as 
     under the Federal Unemployment Tax Act, without regard to the 
     dollar cap.
     Targeted groups eligible for the credit
       The eight targeted groups are: (1) families eligible to 
     receive benefits under the Temporary Assistance for Needy 
     Families (``TANF'') Program; (2) high-risk youth; (3) 
     qualified ex-felons; (4) vocational rehabilitation referrals; 
     (5) qualified summer youth employees; (6) qualified veterans; 
     (7) families receiving food stamps; and (8) persons receiving 
     certain Supplemental Security Income (``SSI'') benefits.
       The employer's deduction for wages is reduced by the amount 
     of the credit.
     Expiration date
       The credit is effective for wages paid or incurred to a 
     qualified individual who begins work for an employer before 
     January 1, 2004.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the work opportunity tax 
     credit for one year (through December 31, 2004).
       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer on or after January 1, 2004, and before January 1, 
     2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   E. Extend the Welfare-To-Work Tax Credit (Sec. 805 of the Senate 
                  Amendment and Sec. 51A of the Code)


                              Present Law

     In general
       The welfare-to-work tax credit is available on an elective 
     basis for employers for the first $20,000 of eligible wages 
     paid to qualified long-term family assistance recipients 
     during the first two years of employment. The credit is 35 
     percent of the first $10,000 of eligible wages in the first 
     year of employment and 50 percent of the first $10,000 of 
     eligible wages in the second year of employment. The maximum 
     credit is $8,500 per qualified employee.
       Qualified long-term family assistance recipients are: (1) 
     members of a family that has received family assistance for 
     at least 18 consecutive months ending on the hiring date; (2) 
     members of a family that has received family assistance for a 
     total of at least 18 months (whether or not consecutive) 
     after the date of enactment of this credit if they are hired 
     within 2 years after the date that the 18-month total is 
     reached; and (3) members of a family that is no longer 
     eligible for family assistance because of either Federal or 
     State time limits, if they are hired within two years after 
     the Federal or State time limits made the family ineligible 
     for family assistance. Family assistance means benefits under 
     the Temporary Assistance to Needy Families (``TANF'') 
     program.
       For purposes of the credit, wages are generally defined 
     under the Federal Unemployment Tax Act, without regard to the 
     dollar amount. In addition, wages include the following: (1) 
     educational assistance excludable under a section 127 
     program; (2) the value of excludable health plan coverage but 
     not more than the applicable premium defined under section 
     4980B(f)(4); and (3) dependent care assistance excludable 
     under section 129.

[[Page H4693]]

       The employer's deduction for wages is reduced by the amount 
     of the credit.
     Expiration date
       The welfare to work credit is effective for wages paid or 
     incurred to a qualified individual who begins work for an 
     employer before January 1, 2004.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the welfare-to-work tax credit 
     for one year (through December 31, 2004).
       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer on or after January 1, 2004, and before January 1, 
     2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

F. Taxable Income Limit on Percentage Depletion for Oil and Natural Gas 
Produced from Marginal Properties (Sec. 806 of the Senate Amendment and 
                         Sec. 613A of the Code)


                              Present Law

     In general
       Depletion, like depreciation, is a form of capital cost 
     recovery. In both cases, the taxpayer is allowed a deduction 
     in recognition of the fact that an asset--in the case of 
     depletion for oil or gas interests, the mineral reserve 
     itself--is being expended in order to produce income. Certain 
     costs incurred prior to drilling an oil or gas property are 
     recovered through the depletion deduction. These include 
     costs of acquiring the lease or other interest in the 
     property and geological and geophysical costs (in advance of 
     actual drilling). Depletion is available to any person having 
     an economic interest in a producing property.
       Two methods of depletion are allowable under the Code: (1) 
     the cost depletion method, and (2) the percentage depletion 
     method (secs. 611-613). Under the cost depletion method, the 
     taxpayer deducts that portion of the adjusted basis of the 
     depletable property which is equal to the ratio of units sold 
     from that property during the taxable year to the number of 
     units remaining as of the end of the taxable year plus the 
     number of units sold during the taxable year. Thus, the 
     amount recovered under cost depletion may never exceed the 
     taxpayer's basis in the property.
       Under the percentage depletion method, generally, 15 
     percent of the taxpayer's gross income from an oil- or gas-
     producing property is allowed as a deduction in each taxable 
     year (section 613A(c)). The amount deducted generally may not 
     exceed 100 percent of the net income from that property in 
     any year (the ``net-income limitation'') (section 613(a)). 
     The 100-percent-of-net-income limitation for production from 
     marginal wells has been suspended for taxable years beginning 
     after December 31, 1997, and before January 1, 2004. 
     Additionally, the percentage depletion deduction for all oil 
     and gas properties may not exceed 65 percent of the 
     taxpayer's overall taxable income (determined before such 
     deduction and adjusted for certain loss carrybacks and trust 
     distributions) (section 613A(d)(1)).\411\ Because percentage 
     depletion, unlike cost depletion, is computed without regard 
     to the taxpayer's basis in the depletable property, 
     cumulative depletion deductions may be greater than the 
     amount expended by the taxpayer to acquire or develop the 
     property.
---------------------------------------------------------------------------
     \411\ Amounts disallowed as a result of this rule may be 
     carried forward and deducted in subsequent taxable years, 
     subject to the 65-percent taxable income limitation for those 
     years.
---------------------------------------------------------------------------
       A taxpayer is required to determine the depletion deduction 
     for each oil or gas property under both the percentage 
     depletion method (if the taxpayer is entitled to use this 
     method) and the cost depletion method. If the cost depletion 
     deduction is larger, the taxpayer must utilize that method 
     for the taxable year in question (section 613(a)).
     Limitation of oil and gas percentage depletion to independent 
         producers and royalty owners
       Generally, only independent producers and royalty owners 
     (as contrasted to integrated oil companies) are allowed to 
     claim percentage depletion. Percentage depletion for eligible 
     taxpayers is allowed only with respect to up to 1,000 barrels 
     of average daily production of domestic crude oil or an 
     equivalent amount of domestic natural gas (section 613A(c)). 
     For producers of both oil and natural gas, this limitation 
     applies on a combined basis.
       In addition to the independent producer and royalty owner 
     exception, certain sales of natural gas under a fixed 
     contract in effect on February 1, 1975, and certain natural 
     gas from geopressured brine, are eligible for percentage 
     depletion, at rates of 22 percent and 10 percent, 
     respectively. These exceptions apply without regard to the 
     1,000-barrel-per-day limitation and regardless of whether the 
     producer is an independent producer or an integrated oil 
     company.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends for an additional year the 
     suspension of the 100-percent net-income limit for marginal 
     wells to include taxable years beginning after December 31, 
     2003 and before January 1, 2005.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 G. Qualified Zone Academy Bonds (Sec. 807 of the Senate Amendment and 
                        Sec. 1397E 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. Activities 
     that can be financed with these tax-exempt bonds include the 
     financing of public schools (sec. 103).
     Qualified zone academy bonds
       As an alternative to traditional tax-exempt bonds, States 
     and local governments are given the authority to issue 
     ``qualified zone academy bonds'' (``QZABs'') (sec. 1397E). A 
     total of $400 million of qualified zone academy bonds may be 
     issued annually in calendar years 1998 through 2003. The $400 
     million aggregate bond cap is allocated each year to the 
     States according to their respective populations of 
     individuals below the poverty line. Each State, in turn, 
     allocates the credit authority to qualified zone academies 
     within such State.
       Financial institutions that hold qualified zone academy 
     bonds are entitled to a nonrefundable tax credit in an amount 
     equal to a credit rate multiplied by the face amount of the 
     bond. A taxpayer holding a qualified zone academy bond on the 
     credit allowance date is entitled to a credit. The credit is 
     includable in gross income (as if it were a taxable interest 
     payment on the bond), and may be claimed against regular 
     income tax and AMT liability.
       The Treasury Department sets the credit rate at a rate 
     estimated to allow issuance of qualified zone academy bonds 
     without discount and without interest cost to the issuer. The 
     maximum term of the bond is determined by the Treasury 
     Department, so that the present value of the obligation to 
     repay the bond is 50 percent of the face value of the bond.
       ``Qualified zone academy bonds'' are defined as any bond 
     issued by a State or local government, provided that: (1) at 
     least 95 percent of the proceeds are used for the purpose of 
     renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy'', and (2) private 
     entities have promised to contribute to the qualified zone 
     academy certain equipment, technical assistance or training, 
     employee services, or other property or services with a value 
     equal to at least 10 percent of the bond proceeds.
       A school is a ``qualified zone academy'' if: (1) the school 
     is a public school that provides education and training below 
     the college level, (2) the school operates a special academic 
     program in cooperation with businesses to enhance the 
     academic curriculum and increase graduation and employment 
     rates, and (3) either (a) the school is located in an 
     empowerment zone or enterprise community designated under the 
     Code, or (b) it is reasonably expected that at least 35 
     percent of the students at the school will be eligible for 
     free or reduced-cost lunches under the school lunch program 
     established under the National School Lunch Act.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment authorizes issuance of up to $400 
     million of qualified zone academy bonds for calendar year 
     2004.
       Effective date.--The provision is effective for obligations 
     issued after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   H. Cover Over of Tax on Distilled Spirits (Sec. 808 of the Senate 
                Amendment and Sec. 7652(e) of the Code)


                              Present Law

       A $13.50 per proof gallon \412\ excise tax is imposed on 
     distilled spirits produced in or imported (or brought) into 
     the United States. The excise tax does not apply to distilled 
     spirits that are exported from the United States or to 
     distilled spirits that are consumed in U.S. possessions 
     (e.g., Puerto Rico and the Virgin Islands).
---------------------------------------------------------------------------
     \412\ A proof of gallon is a liquid gallon consisting of 50 
     percent alcohol.
---------------------------------------------------------------------------
       The Code provides for coverover (payment) of $13.25 per 
     proof gallon of the excise tax imposed on rum imported (or 
     brought) into the United States (without regard to the 
     country of origin) to Puerto Rico and the Virgin Islands 
     during the period July 1, 1999 through December 31, 2003. 
     Effective on January 1, 2004, the coverover rate is scheduled 
     to return to its permanent level of $10.50 per proof gallon.
       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.


                               house bill

       No provision.

[[Page H4694]]

                            Senate Amendment

       The Senate amendment extends the $13.25-per-proof-gallon 
     coverover rate for one additional year, through December 31, 
     2004.
       Effective date.--The Senate amendment provision is 
     effective for articles brought into the United States after 
     December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  I. Extend Deduction for Corporate Donations of Computer Technology 
      (Sec. 809 of the Senate Amendment and Sec. 170 of the Code)


                              Present Law

       In the case of a charitable contribution of inventory or 
     other ordinary-income or short-term capital gain property, 
     the amount of the charitable deduction generally is limited 
     to the taxpayer's basis in the property. In the case of a 
     charitable contribution of tangible personal property, the 
     deduction is limited to the taxpayer's basis in such property 
     if the use by the recipient charitable organization is 
     unrelated to the organization's tax-exempt purpose. In cases 
     involving contributions to a private foundation (other than 
     certain private operating foundations), the amount of the 
     deduction is limited to the taxpayer's basis in the 
     property.\413\
---------------------------------------------------------------------------
     \413\ Sec. 170(e)(1).
---------------------------------------------------------------------------
       Under present law, a taxpayer's deduction for charitable 
     contributions of scientific property used for research and 
     for contributions of computer technology and equipment 
     generally is limited to the taxpayer's basis (typically, 
     cost) in the property. However, certain corporations may 
     claim a deduction in excess of basis for a ``qualified 
     research contribution'' or a ``qualified computer 
     contribution.'' \414\ This enhanced deduction is equal to the 
     lesser of (1) basis plus one-half of the item's appreciated 
     value (i.e., basis plus one half of fair market value minus 
     basis) or (2) two times basis.
---------------------------------------------------------------------------
     \414\ Secs. 170(e)(4) and 170(e)(6).
---------------------------------------------------------------------------
       A qualified computer contribution means a charitable 
     contribution by a corporation of any computer technology or 
     equipment, which meets standards of functionality and 
     suitability as established by the Secretary of the Treasury. 
     The contribution must be to certain educational organizations 
     or public libraries and made not later than three years after 
     the taxpayer acquired the property or, if the taxpayer 
     constructed the property, not later than the date 
     construction of the property is substantially completed.\415\ 
     The original use of the property must be by the donor or the 
     donee,\416\ and in the case of the donee, must be used 
     substantially for educational purposes related to the 
     function or purpose of the donee. The property must fit 
     productively into the donee's education plan. The donee may 
     not transfer the property in exchange for money, other 
     property, or services, except for shipping, installation, and 
     transfer costs. To determine whether property is constructed 
     by the taxpayer, the rules applicable to qualified research 
     contributions apply. That is, property is considered 
     constructed by the taxpayer only if the cost of the parts 
     used in the construction of the property (other than parts 
     manufactured by the taxpayer or a related person) does not 
     exceed 50 percent of the taxpayer's basis in the property. 
     Contributions may be made to private foundations under 
     certain conditions.\417\
---------------------------------------------------------------------------
     \415\ If the taxpayer constructed the property and reacquired 
     such property, the contribution must be within three years of 
     the date the original construction was substantially 
     completed. Sec. 170(e)(6)(D)(i).
     \416\ This requirement does not apply if the property was 
     reacquired by the manufacturer and contributed. Sec. 
     170(e)(6)(D)(ii).
     \417\ Sec. 170(e)(6)(C).
---------------------------------------------------------------------------
       The enhanced deduction for qualified computer contributions 
     expires for any contribution made during any taxable year 
     beginning after December 31, 2003.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision extends the enhanced 
     deduction for qualified computer contributions to apply to 
     contributions made during taxable years beginning on or 
     before December 31, 2004.
       Effective date.--The Senate amendment provision is 
     effective for contributions made after December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 J. Extension of Credit for Electric Vehicles (Sec. 810 of the Senate 
                   Amendment and Sec. 30 of the Code)


                              Present Law

       A 10-percent tax credit is provided for the cost of a 
     qualified electric vehicle, up to a maximum credit of $4,000 
     (sec. 30). A qualified electric vehicle is a motor vehicle 
     that is powered primarily by an electric motor drawing 
     current from rechargeable batteries, fuel cells, or other 
     portable sources of electrical current, the original use of 
     which commences with the taxpayer, and that is acquired for 
     the use by the taxpayer and not for resale. The full amount 
     of the credit is available for purchases prior to 2004. The 
     credit phases down in the years 2004 through 2006, and is 
     unavailable for purchases after December 31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment delays the beginning of the phase out 
     of the credit by one year and provides that the credit is 
     available for purchases through December 31, 2007.
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after December 31, 
     2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   K. Extension of Deduction for Clean-Fuel Vehicles and Clean-Fuel 
 Vehicle Refueling Property (Sec. 811 of the Senate Amendment and Sec. 
                           179A of the Code)


                              Present Law

     Clean-fuel vehicles
       Certain costs of qualified clean-fuel vehicle may be 
     expensed and deducted when such property is placed in service 
     (sec. 179A). Qualified clean-fuel vehicle property includes 
     motor vehicles that use certain clean-burning fuels (natural 
     gas, liquefied natural gas, liquefied petroleum gas, 
     hydrogen, electricity and any other fuel at least 85 percent 
     of which is methanol, ethanol, any other alcohol or ether). 
     The maximum amount of the deduction is $50,000 for a truck or 
     van with a gross vehicle weight over 26,000 pounds or a bus 
     with seating capacities of at least 20 adults; $5,000 in the 
     case of a truck or van with a gross vehicle weight between 
     10,000 and 26,000 pounds; and $2,000 in the case of any other 
     motor vehicle. Qualified electric vehicles do not qualify for 
     the clean-fuel vehicle deduction. The deduction phases down 
     in the years 2004 through 2006, and is unavailable for 
     purchases after December 31, 2006.
     Clean-fuel vehicle refueling property
       Clean-fuel vehicle refueling property may be expensed and 
     deducted when such property is placed in service (sec. 179A). 
     Clean-fuel vehicle refueling property comprises property for 
     the storage or dispensing of a clean-burning fuel, if the 
     storage or dispensing is the point at which the fuel is 
     delivered into the fuel tank of a motor vehicle. Clean-fuel 
     vehicle refueling property also includes property for the 
     recharging of electric vehicles, but only if the property is 
     located at a point where the electric vehicle is recharged. 
     Up to $100,000 of such property at each location owned by the 
     taxpayer may be expensed with respect to that location. The 
     deduction is unavailable for costs incurred after December 
     31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment delays the beginning of the phase down 
     of the deduction for qualified clean-fuel vehicle property by 
     one year and provides that the deduction is available through 
     December 31, 2007. The Senate amendment extends the deduction 
     for clean-fuel vehicle refueling property by one year to 
     include equipment placed in service prior to January 1, 2008.
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after December 31, 
     2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  L. Adjusted Gross Income Determined by Taking Into Account Certain 
 Expenses of Elementary and Secondary School Teachers (Sec. 812 of the 
               Senate Amendment and Sec. 62 of the Code)


                              present law

       In general, ordinary and necessary business expenses are 
     deductible (sec. 162), and unreimbursed employee business 
     expenses 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.
       However, an above-the-line deduction is allowed for taxable 
     years beginning in 2002 and 2003 for up to $250 annually of 
     expenses paid or incurred by an eligible educator for books, 
     supplies (other than nonathletic supplies for courses of 
     instruction in health or physical education), computer 
     equipment (including related software and services) and other 
     equipment, and supplementary materials used by the eligible 
     educator in the classroom. To be eligible for this deduction, 
     the expenses must be otherwise deductible under section 162 
     as a trade or business expense. A deduction is allowed only 
     to the extent the amount of expenses exceeds the amount of 
     such expenses excludable from income under section 135 
     (relating to education savings bonds), section 529(c)(1) 
     (relating to qualified tuition programs), and section 
     530(d)(2) (relating to Coverdell education savings accounts).
       An eligible educator is a kindergarten through grade 12 
     teacher, instructor, counselor, principal, or aide in a 
     school for at least 900 hours during a school year. A school 
     means any school that provides elementary education or 
     secondary education, as determined under State law.
       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 $139,500 (for 
     2003).\418\ In addition, miscellaneous itemized deductions 
     are not allowable under the alternative minimum tax.
---------------------------------------------------------------------------
     \418\ The effect of this overall limitation is phased down 
     beginning in 2006.

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

[[Page H4695]]

                               house bill

       No provision.


                            senate amendment

       The Senate amendment extends the present-law above-the-line 
     deduction for eligible educators to include taxable years 
     beginning in 2004.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 M. Extend Archer Medical Savings Accounts (``MSAs'') (Sec. 813 of the 
               Senate Amendment and Sec. 220 of the Code)


                              Present Law

     In general
       Within limits, contributions to an Archer MSA are 
     deductible in determining adjusted gross income if made by an 
     eligible individual and are excludable from gross income and 
     wages for employment tax purposes if made by the employer of 
     an eligible individual. Earnings on amounts in an Archer MSA 
     are not currently taxable. Distributions from an Archer MSA 
     for medical expenses are not includible in gross income. 
     Distributions not used for medical expenses are includible in 
     gross income. In addition, distributions not used for medical 
     expenses are subject to an additional 15-percent tax unless 
     the distribution is made after age 65, death, or disability.
     Eligible individuals
       Archer MSAs are available to employees covered under an 
     employer-sponsored high deductible plan of a small employer 
     and self-employed individuals covered under a high deductible 
     health plan.\419\ An employer is a small employer if it 
     employed, on average, no more than 50 employees on business 
     days during either the preceding or the second preceding 
     year. An individual is not eligible for an Archer MSA if he 
     or she is covered under any other health plan in addition to 
     the high deductible plan.
---------------------------------------------------------------------------
     \419\ Self-employed individuals include more than two-percent 
     shareholders of S corporations who are treated as partners 
     for purposes of fringe benefit rules pursuant to section 
     1372.
---------------------------------------------------------------------------
     Tax treatment of and limits on contributions
       Individual contributions to an Archer MSA are deductible 
     (within limits) in determining adjusted gross income (i.e., 
     ``above-the-line''). In addition, employer contributions are 
     excludable from gross income and wages for employment tax 
     purposes (within the same limits), except that this exclusion 
     does not apply to contributions made through a cafeteria 
     plan. In the case of an employee, contributions can be made 
     to an Archer MSA either by the individual or by the 
     individual's employer.
       The maximum annual contribution that can be made to an 
     Archer MSA for a year is 65 percent of the deductible under 
     the high deductible plan in the case of individual coverage 
     and 75 percent of the deductible in the case of family 
     coverage.
     Definition of high deductible plan
       A high deductible plan is a health plan with an annual 
     deductible of at least $1,700 and no more than $2,500 in the 
     case of individual coverage and at least $3,350 and no more 
     than $5,050 in the case of family coverage. In addition, the 
     maximum out-of-pocket expenses with respect to allowed costs 
     (including the deductible) must be no more than $3,350 in the 
     case of individual coverage and no more than $6,150 in the 
     case of family coverage.\420\ A plan does not fail to qualify 
     as a high deductible plan merely because it does not have a 
     deductible for preventive care as required by State law. A 
     plan does not qualify as a high deductible health plan if 
     substantially all of the coverage under the plan is for 
     permitted coverage (as described above). In the case of a 
     self-insured plan, the plan must in fact be insurance (e.g., 
     there must be appropriate risk shifting) and not merely a 
     reimbursement arrangement.
---------------------------------------------------------------------------
     \420\ These dollar amounts are for 2003. These amounts are 
     indexed for inflation in $50 increments.
---------------------------------------------------------------------------
     Cap on taxpayers utilizing Archer MSAs and expiration of 
         pilot program
       The number of taxpayers benefiting annually from an Archer 
     MSA contribution is limited to a threshold level (generally 
     750,000 taxpayers). The number of Archer MSAs established has 
     not exceeded the threshold level.
       After 2003, no new contributions may be made to Archer MSAs 
     except by or on behalf of individuals who previously had 
     Archer MSA contributions and employees who are employed by a 
     participating employer.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends Archer MSAs through December 
     31, 2004.
       Effective date.--The Senate amendment provision is 
     effective on January 1, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

N. Extension of Expensing of Brownfield Remediation Expenses (Sec. 814 
           of the Senate Amendment and Sec. 198 of the Code)


                              present law

       Under Code section 198, taxpayers can elect to treat 
     certain environmental remediation expenditures that would 
     otherwise be chargeable to capital account as deductible in 
     the year paid or incurred. The deduction applies for both 
     regular and alternative minimum tax purposes. The expenditure 
     must be incurred in connection with the abatement or control 
     of hazardous substances at a qualified contaminated site. In 
     general, any expenditure for the acquisition of depreciable 
     property used in connection with the abatement or control of 
     hazardous substances at a qualified contaminated site does 
     not constitute a qualified environmental remediation 
     expenditure. However, depreciation deductions allowable for 
     such property, which would otherwise be allocated to the site 
     under the principles set forth in Commissioner v. Idaho Power 
     Co. \421\ and section 263A, are treated as qualified 
     environmental remediation expenditures.
---------------------------------------------------------------------------
     \421\ Commissioner v. Idaho Power Co., 418 U.S. 1 (1974) 
     (holding that equipment depreciation allocable to the 
     taxpayer's construction of capital facilities must be 
     capitalized under section 263(a)(1)).
---------------------------------------------------------------------------
       A ``qualified contaminated site'' (a so-called 
     ``brownfield'') generally is any property that is held for 
     use in a trade or business, for the production of income, or 
     as inventory and is certified by the appropriate State 
     environmental agency to be an area at or on which there has 
     been a release (or threat of release) or disposal of a 
     hazardous substance. Both urban and rural property may 
     qualify. However, sites that are identified on the national 
     priorities list under the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980 
     (``CERCLA'') cannot qualify as targeted areas. Hazardous 
     substances generally are defined by reference to sections 
     101(14) and 102 of CERCLA, subject to additional limitations 
     applicable to asbestos and similar substances within 
     buildings, certain naturally occurring substances such as 
     radon, and certain other substances released into drinking 
     water supplies due to deterioration through ordinary use.
       Eligible expenditures are those paid or incurred before 
     January 1, 2004.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment extends by one year the present-law 
     deduction for environmental remediation expenditures to 
     include expenditures incurred prior to January 1, 2005.
       Effective date.--The Senate amendment provision is 
     effective for expenditures incurred after December 31, 2002.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

            XI. Improving Tax equity for Military Personnel

 A. Exclusion of Gain on Sale of a Principal Residence by a Member of 
 the Uniformed Services or the Foreign Service (Sec. 901 of the Senate 
                  Amendment and Sec. 121 of the Code)


                              present law

       Under present law, an individual taxpayer may exclude up to 
     $250,000 ($500,000, if married filing a joint return) of gain 
     realized on the sale or exchange of a principal residence. To 
     be eligible for the exclusion, the taxpayer must have owned 
     and used the residence as a principal residence for at least 
     two of the five years ending on the sale or exchange. A 
     taxpayer who fails to meet these requirements by reason of a 
     change of place of employment, health, or, to the extent 
     provided under regulations, unforeseen circumstances is able 
     to exclude an amount equal to the fraction of the $250,000 
     ($500,000 if married filing a joint return) that is equal to 
     the fraction of the two years that the ownership and use 
     requirements are met. There are no special rules relating to 
     members of the uniformed services or the Foreign Service of 
     the United States.


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, an individual may elect to 
     suspend for a maximum of ten years the five-year test period 
     for ownership and use during certain absences due to service 
     in the uniformed services, or the Foreign Service of the 
     United States. The uniformed services include: (1) the Armed 
     forces (the Army, Navy, Air Force, Marine Corps, and Coast 
     Guard); (2) the commissioned corps of the National Oceanic 
     and Atmospheric Administration; and (3) the commissioned 
     corps of the Public Health Service. If the election is made, 
     the five-year period ending on the date of the sale or 
     exchange of a principal residence does not include any period 
     up to ten years during which the taxpayer or the taxpayer's 
     spouse is on qualified official extended duty as a member of 
     the uniformed services, or in the Foreign Service of the 
     United States. For these purposes, qualified official 
     extended duty is any period of extended duty by a member of 
     the uniformed services, or the Foreign Service of the United 
     States while serving at a place of duty at least 50 miles 
     away from the taxpayer's principal residence or under orders 
     compelling residence in Government furnished quarters. 
     Extended duty is defined as any period of duty pursuant to a 
     call or order to such duty for a period in excess of 90 days 
     or for an indefinite period. The election may be made with 
     respect to only one property for a suspension period.
       Effective date.--The Senate amendment provision is 
     effective for sales or exchanges after May 6, 1997.

[[Page H4696]]

                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

B. Exclusion from Gross Income of Certain Death Gratuity Payments (Sec. 
         902 of the Senate Amendment and Sec. 134 of the Code)


                              present law

       Present law provides that qualified military benefits are 
     not included in gross income. Generally, a qualified military 
     benefit is any allowance or in-kind benefit (other than 
     personal use of a vehicle) which: (1) is received by any 
     member or former member of the uniformed services of the 
     United States or any dependent of such member by reason of 
     such member's status or service as a member of such uniformed 
     services; and (2) was excludable from gross income on 
     September 9, 1986, under any provision of law, regulation, or 
     administrative practice which was in effect on such date. 
     Generally, other than certain cost of living adjustments, no 
     modification or adjustment of any qualified military benefit 
     after September 9, 1986, is taken into account for purposes 
     of this exclusion from gross income. Qualified military 
     benefits include certain death gratuities. The amount of the 
     death gratuity military benefit was increased to $6,000 but 
     the amount of the exclusion from gross income was not 
     increased to take into account this change.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment extends the exclusion from gross 
     income to any adjustment to the amount of the death gratuity 
     payable under Chapter 75 of Title 10 of the United States 
     Code that is pursuant to a provision of law with respect to 
     the death of certain members of the Armed services on active 
     duty, inactive duty training, or engaged in authorized 
     travel. Therefore, the amount of the exclusion is increased 
     to $6,000.
       Effective date.--The Senate amendment provision is 
     effective with respect to deaths occurring after September 
     10, 2001.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

     C. Exclusion for Amounts Received Under Department of Defense 
  Homeowners Assistance Program (Sec. 903 of the Senate Amendment and 
                         Sec. 132 of the Code)


                              present law

     HAP payment
       The Department of Defense Homeowners Assistance Program 
     (``HAP'') provides payments to certain employees and members 
     of the Armed Forces to offset the adverse effects on housing 
     values that result from a military base realignment or 
     closure. The payments are authorized under the provisions of 
     Title 42 U.S.C. section 3374.
       In general, under HAP, eligible individuals receive either 
     (1) a cash payment as compensation for losses that may be or 
     have been sustained in a private sale, in an amount not to 
     exceed the difference between (a) 95 percent of the fair 
     market value of their property prior to public announcement 
     of intention to close all or part of the military base or 
     installation and (b) the fair market value of such property 
     at the time of the sale, or (2) as the purchase price for 
     their property, an amount not to exceed 90 percent of the 
     prior fair market value as determined by the Secretary of 
     Defense, or the amount of the outstanding mortgages.
     Tax treatment
       Unless specifically excluded, gross income for Federal 
     income tax purposes includes all income from whatever source 
     derived. Amounts received under HAP are received in 
     connection with the performance of services. These amounts 
     are includible in gross income as compensation for services 
     to the extent such payments exceed the fair market value of 
     the property relinquished in exchange for such payments. 
     Additionally, such payments are wages for Federal Insurance 
     Contributions Act (``FICA'') tax purposes (including 
     Medicare).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment generally exempts from gross income 
     amounts received under the HAP (as in effect on the date of 
     enactment of this Senate amendment). Amounts received under 
     the program also are not considered wages for FICA tax 
     purposes (including Medicare). The excludable amount is 
     limited to the reduction in the fair market value of 
     property.
       Effective date.--The Senate amendment provision is 
     effective for payments made after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

  D. Expansion of Combat Zone Filing Rules to Contingency Operations 
      (Sec. 904 of the Senate Amendment and Sec. 7508 of the Code)


                              Present Law

     General time limits for filing tax returns
       Individuals generally must file their Federal income tax 
     returns by April 15 of the year following the close of a 
     taxable year. The Secretary may grant reasonable extensions 
     of time for filing such returns. Treasury regulations provide 
     an additional automatic two-month extension (until June 15 
     for calendar-year individuals) for United States citizens and 
     residents in military or naval service on duty on April 15 of 
     the following year (the otherwise applicable due date of the 
     return) outside the United States. No action is necessary to 
     apply for this extension, but taxpayers must indicate on 
     their returns (when filed) that they are claiming this 
     extension. Unlike most extensions of time to file, this 
     extension applies to both filing returns and paying the tax 
     due.
       Treasury regulations also provide, upon application on the 
     proper form, an automatic four-month extension (until August 
     15 for calendar-year individuals) for any individual timely 
     filing that form and paying the amount of tax estimated to be 
     due.
       In general, individuals must make quarterly estimated tax 
     payments by April 15, June 15, September 15, and January 15 
     of the following taxable year. Wage withholding is considered 
     to be a payment of estimated taxes.
     Suspension of time periods
       In general, the period of time for performing various acts 
     under the Code, such as filing tax returns, paying taxes, or 
     filing a claim for credit or refund of tax, is suspended for 
     any individual serving in the Armed Forces of the United 
     States in an area designated as a ``combat zone'' during the 
     period of combatant activities. An individual who becomes a 
     prisoner of war is considered to continue in active service 
     and is therefore also eligible for these suspension of time 
     provisions. The suspension of time also applies to an 
     individual serving in support of such Armed Forces in the 
     combat zone, such as Red Cross personnel, accredited 
     correspondents, and civilian personnel acting under the 
     direction of the Armed Forces in support of those Forces. The 
     designation of a combat zone must be made by the President in 
     an Executive Order. The President must also designate the 
     period of combatant activities in the combat zone (the 
     starting date and the termination date of combat).
       The suspension of time encompasses the period of service in 
     the combat zone during the period of combatant activities in 
     the zone, as well as (1) any time of continuous qualified 
     hospitalization resulting from injury received in the combat 
     zone \422\ or (2) time in missing in action status, plus the 
     next 180 days.
---------------------------------------------------------------------------
     \422\ Two special rules apply to continuous hospitalization 
     inside the United States. First, the suspension of time 
     provisions based on continuous hospitalization inside the 
     United States are applicable only to the hospitalized 
     individual; they are not applicable to the spouse of such 
     individual. Second, in no event do the suspension of time 
     provisions based on continuous hospitalization inside the 
     United States extend beyond five years from the date the 
     individual returns to the United States. These two special 
     rules do not apply to continuous hospitalization outside the 
     United States.
---------------------------------------------------------------------------
       The suspension of time applies to the following acts:
       (1) Filing any return of income, estate, or gift tax 
     (except employment and withholding taxes);
       (2) Payment of any income, estate, or gift tax (except 
     employment and withholding taxes);
       (3) Filing a petition with the Tax Court for 
     redetermination of a deficiency, or for review of a decision 
     rendered by the Tax Court;
       (4) Allowance of a credit or refund of any tax;
       (5) Filing a claim for credit or refund of any tax;
       (6) Bringing suit upon any such claim for credit or refund;
       (7) Assessment of any tax;
       (8) Giving or making any notice or demand for the payment 
     of any tax, or with respect to any liability to the United 
     States in respect of any tax;
       (9) Collection of the amount of any liability in respect of 
     any tax;
       (10) Bringing suit by the United States in respect of any 
     liability in respect of any tax; and
       (11) Any other act required or permitted under the internal 
     revenue laws specified by the Secretary of the Treasury.
       Individuals may, if they choose, perform any of these acts 
     during the period of suspension. Spouses of qualifying 
     individuals are entitled to the same suspension of time, 
     except that the spouse is ineligible for this suspension for 
     any taxable year beginning more than two years after the date 
     of termination of combatant activities in the combat zone.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment applies the special suspension of time 
     period rules to persons deployed outside the United States 
     away from the individual's permanent duty station while 
     participating in an operation designated by the Secretary of 
     Defense as a contingency operation or that becomes a 
     contingency operation. A contingency operation is defined 
     \423\ as a military operation that is designated by the 
     Secretary of Defense as an operation in which members of the 
     Armed Forces are or may become involved in military actions, 
     operations, or hostilities against an enemy of the United 
     States or against an opposing military force, or results in 
     the call or order to (or retention of) active duty of members 
     of the uniformed services during a war or a national 
     emergency declared by the President or Congress.
---------------------------------------------------------------------------
     \423\ The definition is by cross-reference to 10 U.S.C. 101.

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

[[Page H4697]]

       Effective date.--The Senate amendment provision applies to 
     any period for performing an act that has not expired before 
     the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 E. Modification of Membership Requirement for Exemption From Tax for 
 Certain Veterans' Organizations (Sec. 905 of the Senate Amendment and 
                         Sec. 501 of the Code)


                              Present Law

       Under present law, a veterans' organization as described in 
     section 501(c)(19) of the Code generally is exempt from 
     taxation. The Code defines such an organization as a post or 
     organization of past or present members of the Armed Forces 
     of the United States: (1) that is organized in the United 
     States or any of its possessions; (2) no part of the net 
     earnings of which inures to the benefit of any private 
     shareholder or individual; and (3) that meets certain 
     membership requirements. The membership requirements are that 
     (1) at least 75 percent of the organization's members are 
     past or present members of the Armed Forces of the United 
     States, and (2) substantially all of the remaining members 
     are cadets or are spouses, widows, or widowers of past or 
     present members of the Armed Forces of the United States or 
     of cadets. No more than 2.5 percent of an organization's 
     total members may consist of individuals who are not 
     veterans, cadets, or spouses, widows, or widowers of such 
     individuals.
       Contributions to an organization described in section 
     501(c)(19) may be deductible for Federal income or gift tax 
     purposes if the organization is a post or organization of war 
     veterans.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits ancestors or lineal 
     descendants of past or present members of the Armed Forces of 
     the United States or of cadets to qualify as members for 
     purposes of the ``substantially all'' test. The Senate 
     amendment does not change the requirement that 75 percent of 
     the organization's members must be past or present members 
     of the Armed Forces of the United States.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  F. Clarification of Treatment of Certain Dependent Care Assistance 
 Programs Provided to Members of the Uniformed Services of the United 
   States (Sec. 906 of the Senate Amendment and Sec. 134 of the Code)


                              Present Law

       Present law provides that qualified military benefits are 
     not included in gross income. Generally, a qualified military 
     benefit is any allowance or in-kind benefit (other than 
     personal use of a vehicle) which: (1) is received by any 
     member or former member of the uniformed services of the 
     United States or any dependent of such member by reason of 
     such member's status or service as a member of such uniformed 
     services; and (2) was excludable from gross income on 
     September 9, 1986, under any provision of law, regulation, or 
     administrative practice which was in effect on such date. 
     Generally, other than certain cost of living adjustments, no 
     modification or adjustment of any qualified military benefit 
     after September 9, 1986, is taken into account for purposes 
     of this exclusion from gross income.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies that dependent care 
     assistance provided under a dependent care assistance program 
     (as in effect on the date of enactment of this Senate 
     amendment) for a member of the uniformed services by reason 
     of such member's status or service as a member of the 
     uniformed services is excludable from gross income as a 
     qualified military benefit subject to the present-law rules. 
     The uniformed services include: (1) the Armed Forces (the 
     Army, Navy, Air Force, Marine Corps, and Coast Guard); (2) 
     the commissioned corps of the National Oceanic and 
     Atmospheric Administration; and (3) the commissioned corps of 
     the Public Health Service. Amounts received under the program 
     also are not considered wages for Federal Insurance 
     Contributions Act tax purposes (including Medicare).
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2002. No inference is intended as to the tax treatment of 
     such amounts for prior taxable years.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   G. Treatment of Service Academy Appointments as Scholarships for 
Purposes of Qualified Tuition Programs and Coverdell Education Savings 
Accounts (Sec. 907 of the Senate Amendment and Secs. 529 and 530 of the 
                                 Code)


                              Present Law

       The Code provides tax-exempt status to qualified tuition 
     programs, meaning programs established and maintained by a 
     State or agency or instrumentality thereof or by one or more 
     eligible educational institutions under which a person (1) 
     may purchase tuition credits or certificates on behalf of a 
     designated beneficiary which entitle the beneficiary to the 
     waiver or payment of qualified higher education expenses of 
     the beneficiary, or (2) in the case of a program established 
     by and maintained by a State or agency or instrumentality 
     thereof, may make contributions to an account which is 
     established for the purpose of meeting the qualified higher 
     education expenses of the designated beneficiary of the 
     account. Contributions to qualified tuition programs may be 
     made only in cash. Qualified tuition programs must have 
     adequate safeguards to prevent contributions on behalf of a 
     designated beneficiary in excess of amounts necessary to 
     provide for the qualified higher education expenses of the 
     beneficiary.
       The Code provides tax-exempt status to Coverdell education 
     savings accounts (``ESAs''), meaning certain trusts or 
     custodial accounts which are created or organized in the 
     United States exclusively for the purpose of paying the 
     qualified education expenses of a designated beneficiary. 
     Contributions to ESAs may be made only in cash. Annual 
     contributions to ESAs may not exceed $2,000 per beneficiary 
     (except in cases involving certain tax-free rollovers) and 
     may not be made after the designated beneficiary reaches age 
     18.
       Earnings on contributions to an ESA or a qualified tuition 
     program generally are subject to tax when withdrawn. However, 
     distributions from an ESA or qualified tuition program are 
     excludable from the gross income of the distributee to the 
     extent that the total distribution does not exceed the 
     qualified education expenses incurred by the beneficiary 
     during the year the distribution is made.
       If the qualified education expenses of the beneficiary for 
     the year are less than the total amount of the distribution 
     from an ESA or qualified tuition program, then the qualified 
     education expenses are deemed to be paid from a pro-rata 
     share of both the principal and earnings components of the 
     distribution. In such a case, only a portion of the earnings 
     is excludable (i.e., the portion of the earnings based on the 
     ratio that the qualified education expenses bear to the total 
     amount of the distribution) and the remaining portion of the 
     earnings is includible in the beneficiary's gross income.
       The earnings portion of a distribution from an ESA or a 
     qualified tuition program that is includible in income is 
     generally subject to an additional 10 percent tax. The 10 
     percent additional tax does not apply if a distribution is 
     made on account of the death or disability of the designated 
     beneficiary, or on account of a scholarship received by the 
     designated beneficiary (to the extent it does not exceed the 
     amount of the scholarship).
       Service obligations are required of recipients of 
     appointments to the United States Military Academy, the 
     United States Naval Academy, the United States Air Force 
     Academy, the United States Coast Guard Academy, or the United 
     States Merchant Marine Academy. Because of these service 
     obligations, appointments to the Academies are not considered 
     scholarships for purposes of the waiver of the additional 10 
     percent tax on withdrawals from ESAs and qualified tuition 
     programs that are not used for qualified education purposes.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits penalty-free withdrawals from 
     Coverdell education savings accounts and qualified tuition 
     programs made on account of the attendance of the beneficiary 
     at the United States Military Academy, the United States 
     Naval Academy, the United States Air Force Academy, the 
     United States Coast Guard Academy, or the United States 
     Merchant Marine Academy.
       The amount of funds that can be withdrawn penalty free is 
     limited to the costs of advanced education as defined in 10 
     United States Code section 2005(e)(3) (as in effect on the 
     date of the enactment of the Senate amendment) at such 
     Academies.
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

      H. Suspension of Tax-Exempt Status of Designated Terrorist 
  Organizations (Sec. 908 of the Senate Amendment and Sec. 501 of the 
                                 Code)


                              Present Law

       Under present law, the Internal Revenue Service 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 an 
     organization described in section 501(c)(3), 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 is no longer entitled 
     to exemption. There is no procedure under current law for the 
     IRS to suspend the tax-exempt status of an organization.

[[Page H4698]]

       To combat terrorism, the Federal government has designated 
     a number of organizations as terrorist organizations or 
     supporters of terrorism under the Immigration and Nationality 
     Act, the International Emergency Economic Powers Act, and the 
     United Nations Participation Act of 1945.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision suspends the tax-exempt 
     status of an organization that is exempt from tax under 
     section 501(a) for any period during which the organization 
     is designated or identified by U.S. Federal authorities as a 
     terrorist organization or supporter of terrorism. The 
     provision also makes such an organization ineligible to apply 
     for tax exemption under section 501(a). The period of 
     suspension runs from the date the organization is first 
     designated or identified (or from the date of enactment of 
     the provision, whichever is later) 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.
       The Senate amendment provision describes a terrorist 
     organization as an organization that has been designated or 
     otherwise individually identified (1) as a terrorist 
     organization or foreign terrorist organization under the 
     authority of section 212(a)(3)(B)(vi)(II) or section 219 of 
     the Immigration and Nationality Act; (2) in or pursuant to an 
     Executive order that is related to terrorism and issued under 
     the authority of the International Emergency Economic Powers 
     Act or section 5 of the United Nations Participation Act for 
     the purpose of imposing on such organization an economic or 
     other sanction; or (3) in or pursuant to an Executive order 
     that refers to the provision and is issued under the 
     authority of any Federal law if the organization is 
     designated or otherwise individually identified in or 
     pursuant to such Executive order as supporting or engaging in 
     terrorist activity (as defined in section 212(a)(3)(B) of the 
     Immigration and Nationality Act) or supporting terrorism (as 
     defined in section 140(d)(2) of the Foreign Relations 
     Authorization Act, Fiscal Years 1988 and 1989). During the 
     period of suspension, no deduction for any contribution to a 
     terrorist organization is allowed under the Code, including 
     under sections 170, 545(b)(2), 556(b)(2), 642(c), 2055, 
     2106(a)(2), or 2522.
       No organization or other person may challenge, under 
     section 7428 or any other provision of law, in any 
     administrative or judicial proceeding relating to the Federal 
     tax liability of such organization or other person, the 
     suspension of tax-exemption, the ineligibility to apply for 
     tax-exemption, a designation or identification described 
     above, the timing of the period of suspension, or a denial of 
     deduction described above. The suspended organization may 
     maintain other suits or administrative actions against the 
     agency or agencies that designated or identified the 
     organization, for the purpose of challenging such designation 
     or identification (but not the suspension of tax-exempt 
     status under this provision).
       If the tax-exemption of an organization is suspended and 
     each designation and identification that has been made with 
     respect to the organization is determined to be erroneous 
     pursuant to the law or Executive order making the designation 
     or identification, and such erroneous designation results in 
     an overpayment of income tax for any taxable year with 
     respect to such organization, a credit or refund (with 
     interest) with respect to such overpayment shall be made. If 
     the operation of any law or rule of law (including res 
     judicata) prevents the credit or refund at any time, the 
     credit or refund may nevertheless be allowed or made if 
     the claim for such credit or refund is filed before the 
     close of the one-year period beginning on the date that 
     the last remaining designation or identification with 
     respect to the organization is determined to be erroneous.
       The Senate amendment provision directs the IRS to update 
     the listings of tax-exempt organizations to take account of 
     organizations that have had their exemption suspended and to 
     publish notice to taxpayers of the suspension of an 
     organization's tax-exemption and the fact that contributions 
     to such organization are not deductible during the period of 
     suspension.
       Effective date.--The Senate amendment provision is 
     effective for designations made before, on, or after the date 
     of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 I. Above-the-Line Deduction for Overnight Travel Expenses of National 
 Guard and Reserve Members (Sec. 909 of the Senate Amendment and Sec. 
                            162 of the Code)


                              Present Law

       National Guard and Reserve members may claim itemized 
     deductions for their nonreimbursable expenses for 
     transportation, meals, and lodging when they must travel away 
     from home (and stay overnight) to attend National Guard and 
     Reserve meetings. These overnight travel expenses are 
     combined with other miscellaneous itemized deductions on 
     Schedule A of the individual's income tax return and are 
     deductible only to the extent that the aggregate of these 
     deductions exceeds two percent of the taxpayer's adjusted 
     gross income. No deduction is generally permitted for 
     commuting expenses to and from drill meetings.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an above-the-line deduction 
     for the overnight transportation, meals, and lodging expenses 
     of National Guard and Reserve members who must travel away 
     from home more than 100 miles (and stay overnight) to attend 
     National Guard and Reserve meetings. Accordingly, these 
     individuals incurring these expenses can deduct them from 
     gross income regardless of whether they itemize their 
     deductions. The amount of the expenses that may be deducted 
     may not exceed the general Federal Government per diem rate 
     applicable to that locale.
       Effective date.--The Senate amendment provision is 
     effective with respect to amounts paid or incurred after 
     December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 J. Extension of Certain Tax Relief Provisions to Astronauts (Sec. 910 
   of the Senate Amendment and Secs. 101, 692, and 2201 of the Code)


                              Present Law

     In general
       The Victims of Terrorism Tax Relief Act of 2001 (the 
     ``Victims Act'') provided certain income and estate tax 
     relief to individuals who die from wounds or injury incurred 
     as a result of the terrorist attacks against the United 
     States on September 11, 2001, and April 19, 1995 (the bombing 
     of the Alfred P. Murrah Federal Building in Oklahoma City) or 
     as a result of illness incurred due to an attack involving 
     anthrax that occurred on or after September 11, 2001, and 
     before January 1, 2002.
     Income tax relief
       The Victims Act extended relief similar to the present-law 
     treatment of military or civilian employees of the United 
     States who die as a result of terrorist or military activity 
     outside the United States to individuals who die as a result 
     of wounds or injury which were incurred as a result of the 
     terrorist attacks that occurred on September 11, 2001, or 
     April 19, 1995, and individuals who die as a result of 
     illness incurred due to an attack involving anthrax that 
     occurs on or after September 11, 2001, and before January 1, 
     2002. Under the Victims Act, such individuals generally are 
     exempt from income tax for the year of death and for prior 
     taxable years beginning with the taxable year prior to the 
     taxable year in which the wounds or injury occurred. \424\ 
     The exemption applies to these individuals whether killed in 
     an attack (e.g., in the case of the September 11, 2001, 
     attack in one of the four airplanes or on the ground) or in 
     rescue or recovery operations.
---------------------------------------------------------------------------
     \424\ Present law does not provide relief from self-
     employment tax liability.
---------------------------------------------------------------------------
       Present law provides a minimum tax relief benefit of 
     $10,000 to each eligible individual regardless of the income 
     tax liability of the individual for the eligible tax years. 
     If an eligible individual's income tax for years eligible for 
     the exclusion under the provision is less than $10,000, the 
     individual is treated as having made a tax payment for such 
     individual's last taxable year in an amount equal to the 
     excess of $10,000 over the amount of tax not imposed under 
     the provision.
       Subject to rules prescribed by the Secretary, the exemption 
     from tax does not apply to the tax attributable to (1) 
     deferred compensation which would have been payable after 
     death if the individual had died other than as a specified 
     terrorist victim, or (2) amounts payable in the taxable year 
     which would not have been payable in such taxable year but 
     for an action taken after September 11, 2001. Thus, for 
     example, the exemption does not apply to amounts payable from 
     a qualified plan or individual retirement arrangement to the 
     beneficiary or estate of the individual. Similarly, amounts 
     payable only as death or survivor's benefits pursuant to 
     deferred compensation preexisting arrangements that would 
     have been paid if the death had occurred for another 
     reason are not covered by the exemption. In addition, if 
     the individual's employer makes adjustments to a plan or 
     arrangement to accelerate the vesting of restricted 
     property or the payment of nonqualified deferred 
     compensation after the date of the particular attack, the 
     exemption does not apply to income received as a result of 
     that action.\425\ Also, if the individual's beneficiary 
     cashed in savings bonds of the decedent, the exemption 
     does not apply. On the other hand, the exemption does 
     apply, for example, to a final paycheck of the individual 
     or dividends on stock held by the individual when paid to 
     another person or the individual's estate after the date 
     of death but before the end of the taxable year of the 
     decedent (determined without regard to the death). The 
     exemption also applies to payments of an individual's 
     accrued vacation and accrued sick leave.
---------------------------------------------------------------------------
     \425\ Such amounts may, however, be excludable from gross 
     income under the death benefit exclusion provided in section 
     102 of the Victims Acts.
---------------------------------------------------------------------------
       The tax relief does not apply to any individual identified 
     by the Attorney General to have been a participant or 
     conspirator in any terrorist attack to which the provision 
     applies, or a representative of such individual.

[[Page H4699]]

     Exclusion of death benefits
       The Victims Act generally provides an exclusion from gross 
     income for amounts received if such amounts are paid by an 
     employer (whether in a single sum or otherwise \426\) by 
     reason of the death of an employee who dies as a result of 
     wounds or injury which were incurred as a result of the 
     terrorist attacks that occurred on September 11, 2001, or 
     April 19, 1995, or as a result of illness incurred due to an 
     attack involving anthrax that occured on or after September 
     11, 2001, and before January 1, 2002. Subject to rules 
     prescribed by the Secretary, the exclusion does not apply to 
     amounts that would have been payable if the individual had 
     died for a reason other than the attack. The exclusion does 
     apply, however, to death benefits provided under a qualified 
     plan that satisfy the incidental benefit rule.
---------------------------------------------------------------------------
     \426\ Thus, for example, payments made over a period of years 
     could qualify for the exclusion.
---------------------------------------------------------------------------
       For purposes of the exclusion, self-employed individuals 
     are treated as employees. Thus, for example, payments by a 
     partnership to the surviving spouse of a partner who died as 
     a result of the September 11, 2001 attacks may be excludable 
     under the provision.
       The tax relief does not apply to any individual identified 
     by the Attorney General to have been a participant or 
     conspirator in any terrorist attack to which the provision 
     applies, or a representative of such individual.
     Estate tax relief
       Present law provides a reduction in Federal estate tax for 
     taxable estates of U.S. citizens or residents who are active 
     members of the U.S. Armed Forces and who are killed in action 
     while serving in a combat zone (sec. 2201). This provision 
     also applies to active service members who die as a result of 
     wounds, disease, or injury suffered while serving in a combat 
     zone by reason of a hazard to which the service member was 
     subjected as an incident of such service.
       In general, the effect of section 2201 is to replace the 
     Federal estate tax that would otherwise be imposed with a 
     Federal estate tax equal to 125 percent of the maximum State 
     death tax credit determined under section 2011(b). Credits 
     against the tax, including the unified credit of section 2010 
     and the State death tax credit of section 2011, then apply to 
     reduce (or eliminate) the amount of the estate tax payable.
       Generally, the reduction in Federal estate taxes under 
     section 2201 is equal in amount to the ``additional estate 
     tax.'' The additional estate tax is the difference between 
     the Federal estate tax imposed by section 2001 and 125 
     percent of the maximum State death tax credit determined 
     under section 2011(b) as in effect prior to its repeal by the 
     Economic Growth and Tax Relief Reconciliation Act of 2001.
       The Victims Act generally treats individuals who die from 
     wounds or injury incurred as a result of the terrorist 
     attacks that occurred on September 11, 2001, or April 19, 
     1995, or as a result of illness incurred due to an attack 
     involving anthrax that occurred on or after September 11, 
     2001, and before January 1, 2002, in the same manner as if 
     they were active members of the U.S. Armed Forces killed in 
     action while serving in a combat zone or dying as a result of 
     wounds or injury suffered while serving in a combat zone for 
     purposes of section 2201. Consequently, the estates of these 
     individuals are eligible for the reduction in Federal estate 
     tax provided by section 2201. The tax relief does not apply 
     to any individual identified by the Attorney General to have 
     been a participant or conspirator in any terrorist attack to 
     which the provision applies, or a representative of such 
     individual.
       The Victims Act also changes the general operation of 
     section 2201, as it applies to both the estates of service 
     members who qualify for special estate tax treatment under 
     present and prior law and to the estates of individuals who 
     qualify for the special treatment only under the Act. Under 
     the Victims Act, the Federal estate tax is determined in the 
     same manner for all estates that are eligible for Federal 
     estate tax reduction under section 2201. In addition, the 
     executor of an estate that is eligible for special estate tax 
     treatment under section 2201 may elect not to have section 
     2201 apply to the estate. Thus, in the event that an estate 
     may receive more favorable treatment without the application 
     of section 2201 in the year of death than it would under 
     section 2201, the executor may elect not to apply the 
     provisions of section 2201, and the estate tax owed (if any) 
     would be determined pursuant to the generally applicable 
     rules.
       Under the Victims Act, section 2201 no longer reduces 
     Federal estate tax by the amount of the additional estate 
     tax. Instead, the Victims Act provides that the Federal 
     estate tax liability of eligible estates is determined under 
     section 2001 (or section 2101, in the case of decedents who 
     were neither residents nor citizens of the United States), 
     using a rate schedule that is equal to 125 percent of the 
     pre-EGTRRA maximum State death tax credit amount. This rate 
     schedule is used to compute the tax under section 2001(b) or 
     section 2101(b) (i.e., both the tentative tax under section 
     2001(b)(1) and section 2101(b), and the hypothetical gift tax 
     under section 2001(b)(2) are computed using this rate 
     schedule). As a result of this provision, the estate tax 
     is unified with the gift tax for purposes of section 2201 
     so that a single graduated (but reduced) rate schedule 
     applies to transfers made by the individual at death, 
     based upon the cumulative taxable transfers made both 
     during lifetime and at death.
       In addition, while the Victims Act provides an alternative 
     reduced rate table for purposes of determining the tax under 
     section 2001(b) or section 2101(b), the amount of the unified 
     credit nevertheless is determined as if section 2201 did not 
     apply, based upon the unified credit as in effect on the date 
     of death. For example, in the case of victims of the 
     September 11, 2001, terrorist attack, the applicable unified 
     credit amount under section 2010(c) would be determined by 
     reference to the actual section 2001(c) rate table.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the exclusion from income tax, 
     the exclusion for death benefits, and the estate tax relief 
     available under the Victims of Terrorism Tax Relief Act of 
     2001 to astronauts who lose their lives on a space mission 
     (including the individuals who lost their lives in the space 
     shuttle Columbia disaster).
       Effective date.--The Senate amendment provision is 
     generally effective for qualified individuals whose lives are 
     lost on a space mission after December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                         XII. Sunset Provision

     A. Termination of Certain Provisions (Sec. 1001 of the Senate 
                               Amendment)


                              Present Law

       Budget reconciliation is a procedure under the 
     Congressional Budget Act of 1974 (the ``Budget Act'') by 
     which Congress implements spending and tax policies contained 
     in a budget resolution. The Budget Act contains numerous 
     rules enforcing the scope of items permitted to be considered 
     under the budget reconciliation process. One such rule, the 
     so-called ``Byrd rule,'' was incorporated into the Budget Act 
     in 1990. The Byrd rule, named after its principal sponsor, 
     Senator Robert C. Byrd, is contained in section 313 of the 
     Budget Act. The Byrd rule generally permits members to raise 
     a point of order against extraneous provisions (those which 
     are unrelated to the goals of the reconciliation process) 
     from either a reconciliation bill or a conference report on 
     such bill.
       Under the Byrd rule, a provision is considered to be 
     extraneous if it falls under one or more of the following six 
     definitions: (1) it does not produce a change in outlays or 
     revenues; (2) it produces an outlay increase or revenue 
     decrease when the instructed committee is not in compliance 
     with its instructions; (3) it is outside of the jurisdiction 
     of the committee that submitted the title or provision for 
     inclusion in the reconciliation measure; (4) it produces a 
     change in outlays or revenues which is merely incidental to 
     the nonbudgetary components of the provision; (5) it would 
     increase the deficit for a fiscal year beyond those covered 
     by the reconciliation measure; or (6) it recommends changes 
     in Social Security.


                               House Bill

       No provision.


                            Senate Amendment

       To ensure compliance with the Budget Act, the Senate 
     amendment provides that certain provisions of, and amendments 
     made by, the bill do not apply for taxable years beginning 
     after December 31, 2012.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
       The conference agreement does not modify the application of 
     the Economic Growth Tax Reconciliation Relief Act of 2001 
     (``EGTRRA'') sunset provision. The EGTRRA provision is 
     contained in Title IX of Pub. L. No.107-16.

                     XIII. Tax Complexity Analysis

       The following tax complexity analysis is provided pursuant 
     to section 4022(b) of the Internal Revenue Service Reform and 
     Restructuring Act of 1998, which requires the staff of the 
     Joint Committee on Taxation (in consultation with the 
     Internal Revenue Service (``IRS'') and the Treasury 
     Department) to provide a complexity analysis of tax 
     legislation reported by the House Committee on Ways and 
     Means, the Senate Committee on Finance, or a Conference 
     Report containing tax provisions. The complexity analysis is 
     required to report on the complexity and administrative 
     issues raised by provisions that directly or indirectly amend 
     the Internal Revenue Code and that have widespread 
     applicability to individuals or small businesses. For each 
     such provision identified by the staff of the Joint Committee 
     on Taxation, a summary description of the provision is 
     provided along with an estimate of the number and type of 
     affected taxpayers, and a discussion regarding the relevant 
     complexity and administrative issues.
       Following the analysis of the staff of the Joint Committee 
     on Taxation are the comments of the IRS and the Treasury 
     Department regarding each of the provisions included in the 
     complexity analysis, including a discussion of the likely 
     effect on IRS forms and any expected impact on the IRS.
     1. Increase the child tax credit (sec. 101 of the conference 
         agreement)
     Summary description of provision
       The amount of the child credit is increased to $1,000 for 
     2003 and 2004, reverting to

[[Page H4700]]

     present law phase-in thereafter. For 2003, the increased 
     amount of the child credit will be paid in advance beginning 
     in July 2003 on the basis of information on each taxpayer's 
     2002 return filed in 2003. Advance payments will be made in a 
     manner similar to the advance payment checks issued by the 
     Treasury in 2001 to reflect the creation of the 10-percent 
     regular income tax rate bracket.
     Number of affected taxpayers
       It is estimated that the provisions will affect 
     approximately 27 million individual tax returns.
     Discussion
       Individuals should not have to keep additional records due 
     to this provision, nor will additional regulatory guidance be 
     necessary to implement this provision.
       The IRS will need to add to the individual income tax forms 
     package a new worksheet so that taxpayers can reconcile the 
     amount of the check they receive from the Department of the 
     Treasury with the credit they are allowed as an acceleration 
     of the child tax credit for 2003. This worksheet should be 
     relatively simple and many taxpayers will not need to fill it 
     out completely because they will have received the full 
     amount by check.
     2. Expansion of the 15-percent rate bracket (sec. 102 of the 
         conference agreement)
     Summary description of provision
       The bill accelerates the increase of the size of the 15-
     percent regular income tax rate bracket for married 
     individuals filing joint returns to twice the width of the 
     15-percent regular income tax rate bracket for unmarried 
     individual returns effective for 2003 and 2004, reverting to 
     present-law phase-in for 2005 and thereafter.
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 19 million individual tax returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. The increased size 
     of the 15-percent regular income tax rate bracket for married 
     individuals filing joint returns should not result in an 
     increase in disputes with the IRS, nor will regulatory 
     guidance be necessary to implement this provision.
     3. Standard deduction tax relief (sec. 103 of the conference 
         agreement)
     Summary description of provision
       The conference agreement accelerates the increase in the 
     basic standard deduction amount for joint returns to twice 
     the basic standard deduction amount for unmarried individual 
     returns effective for 2003 and 2004, reverting to present-law 
     phase-in for 2005 and thereafter.
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 22 million individual returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. The higher basic 
     standard deduction should not result in an increase in 
     disputes with the IRS, nor will regulatory guidance be 
     necessary to implement this provision. In addition, the 
     provision should not increase individuals' tax preparation 
     costs.
       Some taxpayers who currently itemize deductions may respond 
     to the provision by claiming the increased standard deduction 
     in lieu of itemizing. According to estimates by the staff of 
     the Joint Committee on Taxation, approximately three million 
     individual tax returns will realize greater tax savings from 
     the increased standard deduction than from itemizing their 
     deductions. In addition to the tax savings, such taxpayers 
     will no longer have to file Schedule A to Form 1040 and a 
     significant number of which will no longer need to engage in 
     the record keeping inherent in itemizing below-the-line 
     deductions. Moreover, by claiming the standard deduction, 
     such taxpayers may qualify to use simpler versions of the 
     Form 1040 (i.e., Form 1040EZ or Form 1040A) that are not 
     available to individuals who itemize their deductions. 
     These forms simplify the return preparation process by 
     eliminating from the Form 1040 those items that do not 
     apply to particular taxpayers.
       This reduction in complexity and record keeping also may 
     result in a decline in the number of individuals using a tax 
     preparation service or a decline in the cost of using such a 
     service. Furthermore, if the provision results in a taxpayer 
     qualifying to use one of the simpler versions of the Form 
     1040, the taxpayer may be eligible to file a paperless 
     Federal tax return by telephone. The provision also should 
     reduce the number of disputes between taxpayers and the IRS 
     regarding substantiation of itemized deductions.
     4. Reduction in income tax rates for individuals (secs. 104 
         and 105 of the conference agreement)
     Summary description of provision
       The conference agreement accelerates the scheduled increase 
     in the taxable income levels for the 10-percent rate bracket 
     from 2008 to 2003 and 2004, reverting to the present-law 
     phasein for 2005 and thereafter. Specifically, the conference 
     agreement increases the taxable income level for the 10-
     percent regular income tax rate brackets for unmarried 
     individuals from $6,000 to $7,000 and for married individuals 
     filing jointly from $12,000 to $14,000. For taxable years 
     beginning after 2004, the amounts will revert to the levels 
     provided in present-law (e.g., $7,000 for unmarried 
     individuals and $12,000 for married couples filing jointly 
     for 2005).
       Also, the conference agreement accelerates the reductions 
     in the regular income tax rates in excess of the 15-percent 
     regular income tax rate that are scheduled for 2004 and 2006. 
     Therefore, the regular income tax rates in excess of 15 
     percent under the conference agreement are 25 percent, 28 
     percent, 33 percent, and 35 percent for 2003 and thereafter.
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 76 million individual tax returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. It should not 
     result in an increase in disputes with the IRS, nor will 
     regulatory guidance be necessary to implement this provision. 
     In addition, the provision should not increase the tax 
     preparation costs for most individuals. Reductions in the 
     regular income tax as a result of these rate reductions as 
     well as the expansion of the child credit, standard 
     deduction, and 10-percent bracket, will cause some taxpayers 
     to become subject to the alternative minimum tax.
       The Secretary of the Treasury is expected to make 
     appropriate revisions to the wage withholding tables to 
     reflect the proposed rate reduction for calendar year 2003 as 
     expeditiously as possible. To implement the effects of the 
     additional amount of child tax credit for 2003, employers 
     would be required to use a new (second) set of withholding 
     rate tables to determine the correct withholding amounts for 
     each employee. Switching to the new withholding rate tables 
     during the year can be expected to result in a one-time 
     additional burden for employers.
     5. Bonus depreciation (sec. 201 of the conference agreement)
     Summary description of provision
       The conference agreement provides an additional first-year 
     depreciation deduction equal to 50 percent of the adjusted 
     basis of qualified property. Qualified property is defined in 
     the same manner as for purposes of the 30-percent additional 
     first-year depreciation deduction provided by the Job 
     Creation and Workers Assistance Act of 2002, except that the 
     applicable time period for acquisition (or self construction) 
     of the property is modified. In general, in order to qualify 
     the property must be acquired after May 5, 2003, and before 
     January 1, 2005, and no binding written contract for the 
     acquisition is in effect before May 6, 2003. Property 
     eligible for the 50-percent additional first year 
     depreciation deduction is not eligible for the 30-percent 
     additional first year depreciation deduction.
     Number of affected taxpayers
       It is estimated that more than 10 percent of small 
     businesses will be affected by the provision.
     Discussion
       It is not anticipated that small businesses will have to 
     keep additional records due to this provision, nor will 
     additional regulatory guidance be necessary to implement this 
     provision. It is not anticipated that the provision will 
     result in an increase in disputes between small businesses 
     and the IRS. However, small businesses will have to perform 
     additional analysis to determine whether property qualifies 
     for the provision. In addition, for qualified property, small 
     businesses will be required to perform additional 
     calculations to determine the proper amount of allowable 
     depreciation. Complexity may also be increased because the 
     provision is temporary. For example, different tax treatment 
     will apply for identical equipment based on the acquisition 
     and placed in service date. Further, the Secretary of the 
     Treasury is expected to have to make appropriate revisions to 
     the applicable depreciation tax forms.
     6. Capital gain rate reduction (sec. 301 of the conference 
         agreement)
     Summary description of provision
       The conference agreement reduces the 10- and 20-percent 
     rates on the adjusted net capital gain to five and 15 
     percent, respectively. These lower rates apply to both the 
     regular tax and the alternative minimum tax. The lower rates 
     apply to assets held more than one year. The five percent 
     rate becomes zero percent for taxable years beginning after 
     2007. The conference agreement applies to taxable years 
     ending on or after May 6, 2003, and beginning before January 
     1, 2009.
       For taxable years that include May 6, 2003, the lower rates 
     apply to amounts properly taken into account for the portion 
     of the year on or after that date. This generally has the 
     effect of applying the lower rates to capital assets sold or 
     exchanged (and installment payments received) on or after 
     May 6, 2003. In the case of gain and loss taken into 
     account by a pass-through entity, the date taken into 
     account by the entity is the appropriate date for applying 
     this rule.
     Number of affected taxpayers
       It is estimated that the provisions will affect over 15 
     million individual tax returns.
     Discussion
       The elimination of the five-year holding period means that 
     taxpayers with gains on assets held for more than 5 years 
     will no longer need to separately compute tax for such gain 
     on schedule D of Form 1040. Additionally, the form will not 
     need to be expanded beginning in 2006 to separate out gain of 
     capital assets held more than five years

[[Page H4701]]

     that were purchased after 2000. This may reduce tax 
     preparation costs. Mutual fund reporting on the Form 1099 
     will be made easier by the elimination of the five-year 
     holding period.
       For 2003, multiple rates will be in effect depending on 
     whether gain was realized before or after May 6, 2003. This 
     will make the schedule D more complicated for tax year 2003, 
     and may increase tax preparation costs.
     7. Dividend tax relief (sec. 302 of the conference agreement)
     Summary description of provision
       Under the conference agreement, qualified dividends 
     received by an individual shareholder from domestic and 
     qualified foreign corporations are generally taxed at the 
     rates that apply to net capital gain. This treatment applies 
     for purposes of both the regular tax and the alternative 
     minimum tax. Thus, under the conference agreement, dividends 
     will be taxed at rates of five and 15 percent, the same rates 
     applicable to net capital gain.
       If a shareholder does not hold a share of stock for more 
     than 60 days during the 120-day period beginning 60 days 
     before the ex-dividend date, dividends received on the stock 
     are not eligible for the reduced rates. Also, the reduced 
     rates are not available for dividends to the extent that the 
     taxpayer is obligated to make related payments with respect 
     to positions in substantially similar or related property.
     Number of affected taxpayers
       It is estimated that the provisions will affect over 20 
     million individual tax returns.
     Discussion
       Individuals computing their tax will need to add qualified 
     dividends to net capital gain in computing their income tax 
     using the tax computation portion of Schedule D of Form 1040 
     (or other tax computation forms or schedules as the Internal 
     Revenue Service may prescribe). Additional individuals will 
     need to use the tax computation schedule, which may increase 
     tax preparation costs.
       New Form 1099s will need to differentiate qualified from 
     nonqualified dividends, and additional burdens will be 
     imposed on payors to comply with the new Form 1099 reporting. 
     Additional record keeping will be necessary with respect to 
     compliance with the 60-day holding period rules. It is likely 
     that there will be increased taxpayer errors with respect to 
     the proper reporting of dividends as a result.
                                       Department of the Treasury,


                                     Internal Revenue Service,

                                                   Washington, DC.
     Ms. Mary Schmitt,
     Acting Chief of Staff, Joint Committee on Taxation,
     Washington, DC.
       Dear Ms. Schmitt: Enclosed are the combined comments of the 
     Internal Revenue Service and the Treasury Department on the 
     seven provisions from the House and Senate markup of H.R. 2, 
     the ``Jobs and Growth Tax Relief Reconciliation Act of 
     2003,'' that your staff identified for complexity analysis in 
     their May 22, 2003 telephone calls to the IRS Legislative 
     Affairs Division.
       Our comments are based on the description of those 
     provisions in the enclosed analysis. Due to the short 
     turnaround time, our comments are provisional and subject to 
     change upon a more complete and in-depth analysis of the 
     provisions.
           Sincerely,
                                                  Mark W. Everson,
                                                     Commissioner.
       Enclosure.

 Complexity Analysis of the Jobs and Growth Reconciliation Tax Act of 
                                  2003


          Acceleration of the Increase In the Child Tax Credit

                               Provision

       The amount of the child credit is increased to $1,000 for 
     2003 and 2004. For 2003, the increased amount ($400) will be 
     paid in advance beginning in July 2003 on the basis of 
     information on each taxpayer's 2002 return. Advance payments 
     are to be made in a similar manner to the advance payment 
     checks issued by the Treasury in 2001 to reflect the creation 
     of the 10-percent regular income tax rate bracket. After 2005 
     the child credit will revert to the levels provided in 
     present law (e.g., $700 for 2005).

                       IRS and Treasury Comments

        No new forms would be required as a result of the 
     child tax credit provisions mentioned above.
        The increased amount of the child tax credit and 
     the increased refundable portion would be incorporated in the 
     instructions for Forms 1040, 1040A, 1040NR, 1040-PR, and 
     1040-SS for 2003 and 2004.
        The applicable amount of the child tax credit for 
     2005 and later years would be incorporated in the 
     instructions for Form 1040, 1040A, 1040NR, 1040-PR, and on 
     Form 1040-ES for 2005 and later years.
        Subsequent to enactment, the IRS would have to 
     advise taxpayers who make estimated tax payments for 2003 how 
     they can adjust their estimated tax payments for 2003 to 
     reflect the increased child tax credit, the increased 
     refundable portion, and the required reduction for those who 
     receive advance payments.
        Supplemental programming changes would be required 
     for processing 2003 returns to reflect the increased child 
     tax credit, the increased refundable portion, and the 
     required reduction for those who receive advance payments.
        Programming changes would be required for 2004 and 
     later years to reflect the reversion of the applicable child 
     tax credit amount to the amounts currently scheduled for the 
     years. Currently, the IRS computation programs are updated 
     annually to incorporate mandated inflation adjustments. 
     Programming changes necessitated by the provision would be 
     included during that process.


                        advance payment feature

        An estimated 26 million checks will be mailed 
     beginning in July 2003.
        It will take three weeks to mail checks to those 
     taxpayers whose 2002 tax returns have already been filed and 
     processed. Checks for taxpayers whose returns are filed and 
     processed later in the year will be mailed weekly, through 
     the end of December 2003.
        Some taxpayers may be entitled to more than their 
     advance payment checks due to changes in financial or family 
     status between 2002 and 2003. For example, IRS will not know 
     if a taxpayer gives birth to a child or adopts a child in 
     2003 until the taxpayer files the 2003 tax return. If they 
     are entitled to a larger increase in the child tax credit 
     than they received in their advance payment checks, they will 
     get the additional amounts on their 2003 tax returns.
        Notice will be sent to taxpayers informing them of 
     the amount of their advance payment, the number of children 
     used to compute the amount, if the amount was limited due to 
     the phase-out range, tax liability, or earned income. The 
     notices will also advise taxpayers that this amount will have 
     to be taken into account in determining the amount of their 
     child tax credit on the 2003 tax return.
        Two lines will be added to the Child Tax Credit 
     Worksheet for 2003. Based on experience with the 2001 rate 
     reduction credit and advance payment, it is anticipated that 
     a number of taxpayers will make errors in this computation on 
     their 2003 tax returns.
        The advance payment will require programming 
     changes to compute the amount and resources to answer 
     taxpayer questions, print and mail notices, and correct 
     errors made on 2003 returns as a result of the advance 
     payment.


           acceleration of the standard deduction tax relief

     Provision
       The basic standard deduction amount for joint returns is 
     increased to twice the basic standard deduction amount for 
     unmarried individuals returns, effective for 2003 and 2004. 
     After 2004, the applicable percentages will revert to 
     present-law levels (e.g., 174 percent of the basic standards 
     deduction for unmarried individuals for 2005).
     IRS and Treasury Comments
        The increased basic standard deduction for married 
     taxpayers would be incorporated in the instructions for Forms 
     1040, 1040A, 1040EZ, and on Forms 1040, 1040A, and 1040EZ for 
     2003, 2004 and 2005. No new forms would be required.
        The amount of the basic standard deduction for 
     married taxpayers after 2004 (based on reversion to the 
     currently scheduled levels) would be incorporated in the 
     instructions for Forms 1040, 1040A, 1040EZ and on Forms W-4 
     1040, 1040A, 1040EZ and 1040-ES for 2005 and later years.
        Subsequent to enactment, the IRS would have to 
     advise taxpayers how they can adjust their estimated tax 
     payment of Federal income tax withholding for 2003 to reflect 
     the increased basic standard deduction.
        Supplemental programming changes would be required 
     to reflect the increased basic standard deduction for 2003.
        Programming changes would be required in 2005 and 
     later to reflect the reversion of the standard deduction 
     amounts to the currently scheduled amounts for those years. 
     Currently, the IRS computation program are updated annually 
     to incorporate mandated inflation adjustment. Programming 
     changes necessitated by the provision would be increased 
     during that process.
        The larger basic standard deduction would reduce 
     the number of taxpayers who itemize their deductions in 2003 
     and 2004. It would also reduce the number of taxpayers who 
     are required to file income tax returns in those years.


     acceleration of the expansion of the 15-percent rate bracket.

     Provision
  The width of the 15-percent regular income tax rate bracket for joint 
returns is increased to twice the width of the 15-percent regular 
income tax rate bracket for unmarried individual returns, effective for 
2003 and 2004. After 2004, the end point of the 15-percent rate bracket 
for married couples filing joint returns (as a percentage of the end 
point of the 15-percent rate bracket for unmarried individuals) will 
revert to present-law levels (i.e., 180 percent of the end point of the 
15-percent rate bracket for unmarried individuals for 2005).
     IRS and Treasury Comments
        The expanded 15-percent rate bracket for married 
     taxpayers would be incorporated in the tax tables and the tax 
     rate schedules shown in the instructions for Forms 1040, 
     1040A, 1040EZ, and 1040NR for 2003 and 2004. No new forms 
     would be required.

[[Page H4702]]

        The applicable width of the 15-percent rate 
     bracket for married taxpayers after 2004 (based on reversion 
     to the currently scheduled levels) would be incorporated in 
     the tax table and tax rate schedules shown in the 
     instructions for Forms 1040, 1040A, 1040EZ, and 1040NR and on 
     Form 1040-ES for 2005 and later years.
        The expanded 15-percent rate bracket would also be 
     incorporated in the tax rate schedules shown on Form 1040-ES 
     for 2004. Subsequent to enactment, the IRS would have to 
     advise taxpayers who make estimated tax payments for 2003 how 
     they can adjust their estimated tax payments for 2003 to 
     reflect the expanded 15-percent rate bracket.
        Supplemental programming changes would be required 
     to reflect the expanded 15-percent rate bracket for 2003.
        Programming changes would be required to reflect 
     the reversion to present law levels for determining the width 
     of the 15-percent rate bracket for 2005 and later years. 
     Currently, the IRS computation programs are updated annually 
     to incorporate mandated inflation adjustments. Programming 
     changes necessitated by the provision would be included 
     during that process.
        New withholding rate tables and schedules to 
     update the current Circular E for use by employers during the 
     remainder of calendar year 2003 would be required.


  acceleration of the reduction of regular individual income tax rates

     Provision
       The conference agreement accelerates the scheduled increase 
     in the taxable income levels for the 10-percent rate bracket 
     from 2008 to 2003, and 2004, reverting to the present-law 
     phase-in for 2005 and thereafter. Specially, the conference 
     agreement increases the taxable income level for the 10-
     percent regular income tax rate brackets for unmarried 
     individuals from $6,000 to $7,000 and for married individuals 
     filing jointly from $12,000 to $14,000. For taxable years 
     beginning after 2004, the amounts will revert to the levels 
     provided in present-law (i.e., $6,000 for unmarried 
     individuals and $12,000 for married couples filing jointly 
     for 2005).
       Also, the conference agreement accelerates the reductions 
     in the regular income tax rates in excess of the 15-percent 
     regular income tax rate that are scheduled for 2004 and 2006. 
     Therefore, the regular income tax rates in excess of 15 
     percent under the conference agreement are 25 percent, 28 
     percent, 33 percent, and 35 percent for 2003 and thereafter.
     IRS and Treasury Comments
        No new forms would be required as a result of the 
     above-mentioned provisions.
        The increased taxable income levels for the 10-
     percent rate bracket would be incorporated in the tax tables 
     and tax rate schedules shown in the instructions for Forms 
     1040, 1040A, 1040EZ, 1040NR, and 1040NR-EZ 2003 and 2004.
        The reduced tax rates would be incorporated in the 
     tax tables and tax rate schedules shown in the instructions 
     for Forms 1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, and 1041 
     for 2003 and 2004.
        Changes to the 10-percent rate bracket for tax 
     years beginning after 2004 resulting from the reversion to 
     the present-law phase-in schedule would be incorporated in 
     the tax tables and tax rate schedules shown in the 
     instructions for Forms 1040, 1040A, 1040EZ, 1040NR, and 
     1040NR-EZ and on Form 1040-ES for 2005 and later years. 
     Currently, the IRS computation programs are updated annually 
     to incorporate mandated inflation adjustments. Programming 
     changes necessitated by the provision would be included 
     during that process.
        The increased taxable income levels for the 10-
     percent rate bracket and the reduced tax rates would also be 
     incorporated in the tax rate schedules shown on Form 1040-ES 
     for 2004. Subsequent to enactment, the IRS would have to 
     advise taxpayers who make estimated tax payments for 2003 how 
     they can adjust their estimated tax payments for 2003 to 
     reflect the increased taxable income levels for the 10-
     percent rate bracket and the reduced rates.


          special depreciation allowances for certain property

     Provision
       The bill provides an additional first-year depreciation 
     deduction equal to 50 percent of the adjusted basis of 
     qualified property. Qualified property is defined in the same 
     manner as for purposes of the 30-percent additional first-
     year depreciation deduction provided by the Job Creation and 
     Workers Assistance Act of 2002, except that the applicable 
     time period for acquisition (or self construction) of the 
     property is modified. In general, in order to qualify, the 
     property must be acquired after May 5, 2003, and before 
     January 1, 2006, and no binding written contract for the 
     acquisition can be in effect before May 6, 2003. Property 
     eligible for the 50-percent additional first-year 
     depreciation deduction is not eligible for the 30-percent 
     additional first-year depreciation deduction.
     IRS and Treasury Comments
        The increase and extension of additional first-
     year depreciation would have no significant impact on Form 
     4562 or any other tax forms. The instructions for Form 4562 
     and other instructions and publications would be expanded to 
     explain and implement the new rules.
        No programming changes would be required by this 
     provision.


                 reduced individual capital gains rates

     Provision
       The 10- and 20-percent rates on the adjusted net capital 
     gain are reduced to 5 and 15 percent, respectively, effective 
     in taxable years ending on or after May 6, 2003, and 
     beginning before January 1, 2009.
       For taxable years that include May 6, 2003, the lower rates 
     apply to amounts properly taken into account for the portion 
     of the year on or after that date. This generally has the 
     effect of applying the lower rates to capital assets sold or 
     exchanged (and installment payments received) on or after May 
     6, 2003.
     IRS and Treasury Comments
        The mid-year effective date of May 6, 2003, 
     creates complexity and burden for taxpayers, and will likely 
     result in a large number of errors (as occurred in 1997 when 
     similar mid-year changes were made to the capital gains tax 
     rate). A January 1, 2003, effective date would greatly 
     simplify matters for 2003 (instead of adding 8 lines to 
     several products for 2003 as described below, 4 lines would 
     be removed).
        To figure the amount of gain taxed at 5% and 15% 
     for 2003, 8 lines would be added to: Schedule D (Form 1040); 
     the Schedule D Tax Worksheet; Form 6251 (alternative minimum 
     tax); and Form 8801 (credit for prior year minimum tax).
        Column (g) of Schedule D would be revised to 
     request information for amounts applicable to the portion of 
     the tax year after May 5, 2003. Additional instructions and a 
     6-line worksheet would be added to figure 28% rate gain or 
     loss, as that amount is currently figured in column (g).
        Rules would have to be developed and applied for 
     2003 to account for the limit on net section 1231 losses, 
     capital loss carryforwards, carryforwards not allowed due to 
     passive activity rules or at-risk rules, etc.
        The amount of net capital gain for the portion of 
     the tax year after May 5, 2003, would have to be transcribed 
     from the tax return and programming changes would be required 
     to figure the amount of gain taxed at 5% and 15%.
        For 2003, Form 1099-DIV filers would be required 
     to figure and report to recipients the amount of gain after 
     May 5, 2003.
        Taxpayers whose only capital gains are capital 
     gain distributions would not be able to use the shorter 
     Capital Gain Tax Worksheet in the instructions for Form 1040 
     and Form 1040A, but instead would be required to file Form 
     1040 and attach Schedule D, to report the amount of their 
     capital gain distributions properly taken into account after 
     May 5, 2003, and figure their tax using the 5%, 10%, 15%, and 
     20% capital gains tax rates. This provision would therefore 
     increase the number of taxpayers filing Schedule D by up to 6 
     million.
        For 2004, the 8 lines added for 2003 and 4 current 
     lines (used to figure the 8% rate) would be removed from: 
     Schedule D; the Schedule D Tax Worksheet; Form 6251; and Form 
     8801.
        The 8-line Qualified 5-Year Gain Worksheet in the 
     Instructions for Schedule D would not be necessary after 
     2003.
        For 2006, when the 18% capital gains tax rate 
     becomes effective for individuals, this provision would also 
     save us from having to add 4 lines to Schedule D, the 
     Schedule D Tax Worksheet, Form 6251, Form 8801, and the 
     Qualified 5-Year Gain Worksheet.
        Form 1099-DIV filers would not be required to 
     report qualified 5-year gain after 2003, and would not be 
     required in 2005 to begin reporting qualified 5-year gain 
     eligible for the 18% rate.
        For tax years beginning after 2008, the 5% and 15% 
     rates would cease to apply, the 8% rate on qualified 5-year 
     gain would again apply, and the 18% rate on qualified 5-year 
     gain on property acquired after 2000 would begin to apply. At 
     least 8 lines would have to be added to the 2009 Schedule D 
     (Form 1040) and 2009 Schedule D Tax Worksheet, 2009 Form 
     6251, and Form 8801. A worksheet of at least 8 lines would be 
     required to figure the 8% and 18% qualified 5-year gain 
     amounts. Several million taxpayers, filing Form 1040 or 
     1040A, whose only capital gains are capital gain 
     distributions and dividends would no longer be eligible to 
     figure their tax using a short Capital Gain Tax Worksheet, 
     but instead would be required to file Form 1040 and Schedule 
     D. Form 1099-DIV filers would again have to track and report 
     8% qualified 5-year gain, and would have to begin reporting 
     18% qualified 5 year gain.


                     dividend income of individuals

     Provision
       Dividends received by an individual shareholder from 
     domestic corporations are taxed at the rates for net capital 
     gain (5 or 15 percent per the above reduction in the capital 
     gains rate), effective for taxable years beginning after 2002 
     and before 2013.
       If a shareholder does not hold a share of stock for more 
     than 60 days during the 90-day period beginning 60 days 
     before the ex-dividend date, dividends received on the stock 
     are not eligible for the capital gain rates. Also, the 
     capital gain rates are not available for dividends to the 
     extent that the taxpayer is obligated to make related 
     payments with respect to positions in substantially similar 
     or related property. Other rules apply.
     IRS and Treasury Comments
        No new forms would be required as a result of the 
     above-mentioned provision.

[[Page H4703]]

        A box to report qualified dividends would be added 
     to Form 1099-DIV for 2004 through 2012.
        Subsequent to enactment, the IRS would have to 
     issue a revised Form 1099-DIV for 2003 and advise taxpayers 
     who make estimated tax payments for 2003 how they can adjust 
     their estimated tax payments to reflect the new rates 
     applicable to qualified dividends.
        Two lines would be added to Part IV of Schedule D 
     (and the Schedule D Tax Worksheet) for 2003 through 2012 to 
     increase net capital gain by the amount of qualified 
     dividends.
        The new tax rates applicable to qualified 
     dividends would be reflected in the instructions for Forms 
     1040 and 1040A for 2003 through 2012.
        Taxpayers who have qualified dividends would be 
     required to report them on Schedule D and complete up to 19 
     lines (23 lines for 2003) in Part IV of Schedule D to figure 
     their tax using the 15% and 5% capital gains tax rates, even 
     if they did not otherwise have a net capital gain. For 
     example, taxpayers whose only income was wages, interest, and 
     dividends reported on Form 1040A would now be required to 
     file Form 1040 and attach Schedule D to report the amount of 
     qualified dividends and figure their tax.
        Supplemental programming changes would be required 
     to reflect the new tax rates applicable to qualified 
     dividends for 2003.
        Programming changes would be required to reflect 
     the tax rates applicable to qualified dividends after 2012. 
     Currently, the IRS tax computation programs are updated 
     annually to incorporate mandated inflation adjustments. 
     Programming changes necessitated by the provision would be 
     included during that process.
        Technical guidance (regulations, revenue rulings, 
     etc.) will probably be needed to implement the anti-abuse 
     rules.
        For tax years beginning after 2008, the additional 
     lines added for 2003-2007--one line for Form 1040 and two 
     lines in each place tax is figured using capital gains tax 
     rates (Schedule D, Schedule D Tax Worksheet, and Capital Gain 
     Tax Worksheets)--would be removed.


                  effect of all bill provisions on amt

       Despite specific changes which tend to increase the number 
     of AMT taxpayers, the bill's increase in the AMT exemption 
     amounts for 2003-2004 would significantly reduce the number 
     of AMT taxpayers in those years relative to current law.

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[[Page H4706]]

     William M. Thomas,
     Tom DeLay,
                                Managers on the Part of the House.

     Chuck Grassley,
     Orrin Hatch,
     Don Nickles,
     Trent Lott,
     Managers on the Part of the Senate.

                          ____________________