[Congressional Record Volume 151, Number 165 (Monday, December 19, 2005)]
[Senate]
[Pages S14028-S14053]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      TECHNICAL DESCRIPTION FOR GULF OPPORTUNITY ZONE ACT OF 2005

  Mr. GRASSLEY. Mr. President, I wish to submit for the record the 
Joint Committee's technical explanation of the Gulf Opportunity Zone 
Act of 2005. This explanation is of the Senate amendment to H.R. 4440. 
This legislation was passed by the Senate on Friday, December 16, 2005. 
Let me make it clear that this technical explanation was actually 
submitted to the Senate at the time the bill was passed to be printed 
in the Congressional Record. Unfortunately, due to a clerical error 
this did not happen. Therefore, I ask unanimous consent that the 
technical explanation be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                              INTRODUCTION

       The bill provides tax benefits for the Gulf Opportunity 
     Zone and certain areas affected by Hurricanes Rita and Wilma. 
     It also includes tax and trade technical corrections. 
     Finally, the bill provides that any of its provisions causing 
     an effect on receipts, budget authority, or outlays is 
     designated as an emergency requirement pursuant to section 
     402 of H. Con. Res. 95 (109th Congress).

            TITLE I--ESTABLISHMENT OF GULF OPPORTUNITY ZONE

               A. Tax Benefits for Gulf Opportunity Zone

     1. Definitions of ``Gulf Opportunity Zone,'' ``Rita GO 
         Zone,'' ``Wilma GO Zone,'' and other definitions (new 
         sec. 1400M of the Code)


                          General Definitions

     Gulf Opportunity Zone
       For purposes of the bill, the ``Gulf Opportunity Zone'' is 
     defined as that portion of the Hurricane Katrina Disaster 
     Area determined by the President to warrant individual or 
     individual and public assistance from the Federal Government 
     under the Robert T. Stafford Disaster Relief and Emergency 
     Assistance Act by reason of Hurricane Katrina.
     Hurricane Katrina disaster area
       The term ``Hurricane Katrina disaster area'' means an area 
     with respect to which a major disaster has been declared by 
     the President before September 14, 2005, under section 401 of 
     the Robert T. Stafford Disaster Relief and Emergency 
     Assistance Act by reason of Hurricane Katrina.
     Rita GO Zone
       The term ``Rita GO Zone'' means that portion of the 
     Hurricane Rita disaster area determined by the President to 
     warrant individual or individual and public assistance from 
     the Federal Government under section 401 of the Robert T. 
     Stafford Disaster Relief and Emergency Assistance Act by 
     reason of Hurricane Rita.
     Hurricane Rita disaster area
       The term ``Hurricane Rita disaster area'' means an area 
     with respect to which a major disaster has been declared by 
     the President before October 6, 2005, under section 401 of 
     the Robert T. Stafford Disaster Relief and Emergency 
     Assistance Act, by reason of Hurricane Rita.
     Wilma GO Zone
       The term ``Wilma GO Zone'' means that portion of the 
     Hurricane Wilma disaster area determined by the President to 
     warrant individual or individual and public assistance from 
     the Federal Government under section 401 of the Robert T. 
     Stafford Disaster Relief and Emergency Assistance Act by 
     reason of Hurricane Wilma.
     Hurricane Wilma disaster area
       The term ``Hurricane Wilma disaster area'' means an area 
     with respect to which a major disaster has been declared by 
     the President before November 14, 2005, under section 401 of 
     the Robert T. Stafford Disaster Relief and Emergency 
     Assistance Act, by reason of Hurricane Wilma.
     2. Tax-exempt bond financing for the Gulf Opportunity Zone 
         (new sec. 1400N(a) of the Code)


                              Present Law

     Rules governing issuance of tax-exempt bonds
       In general
       Under present law, gross income does not include interest 
     on State or local bonds (sec. 103). State and local bonds are 
     classified generally as either governmental bonds or private 
     activity bonds. Governmental bonds are bonds which are 
     primarily used to finance governmental functions or are 
     repaid with governmental funds. Private activity bonds are 
     bonds with respect to which the State or local government 
     serves as a conduit providing financing to nongovernmental 
     persons (e.g., private businesses or individuals). The 
     exclusion from income for State and local bonds does not 
     apply to private activity bonds, unless the bonds are issued 
     for certain permitted purposes (``qualified private activity 
     bonds'').
       Private activities eligible for financing with tax-exempt 
           bonds
       The definition of qualified private activity bonds includes 
     an exempt facility bond, or qualified mortgage, veterans' 
     mortgage, small issue, redevelopment, 501(c)(3), or student 
     loan bond (sec. 141(e)). The definition of exempt facility 
     bond includes bonds issued to finance certain transportation 
     facilities (airports, ports, mass commuting, and high-speed 
     intercity rail facilities); qualified residential rental 
     projects; privately owned and/or operated utility facilities 
     (sewage, water, solid waste disposal, and local district 
     heating and cooling facilities, certain private electric and 
     gas facilities, and hydroelectric dam enhancements); public/
     private educational facilities; qualified green building and 
     sustainable design projects; and qualified highway or surface 
     freight transfer facilities (sec. 142(a)).

[[Page S14029]]

       As noted above, subject to certain requirements, qualified 
     private activity bonds may be issued to finance residential 
     rental property or owner-occupied housing. Residential rental 
     property may be financed with exempt facility bonds if the 
     financed project is a ``qualified residential rental 
     project.'' A project is a qualified residential rental 
     project if 20 percent or more of the residential units in 
     such project are occupied by individuals whose income is 50 
     percent or less of area median gross income (the ``20-50 
     test''). Alternatively, a project is a qualified residential 
     rental project if 40 percent or more of the residential units 
     in such project are occupied by individuals whose income is 
     60 percent or less of area median gross income (the ``40-60 
     test'').
       Owner-occupied housing may be financed with qualified 
     mortgage bonds. Qualified mortgage bonds are bonds issued to 
     make mortgage loans to qualified mortgagors for the purchase, 
     improvement, or rehabilitation of owner-occupied residences. 
     The Code imposes several limitations on qualified mortgage 
     bonds, including income limitations for homebuyers and 
     purchase price limitations for the home financed with bond 
     proceeds. The income limitations are satisfied if all 
     financing provided by an issue is provided for mortgagors 
     whose family income does not exceed 115 percent of the median 
     family income for the metropolitan area or State, whichever 
     is greater, in which the financed residences are located. The 
     purchase price limitations provide that a residence financed 
     with qualified mortgage bonds may not have a purchase price 
     in excess of 90 percent of the average area purchase price 
     for that residence. In addition to these limitations, 
     qualified mortgage bonds generally cannot be used to finance 
     a mortgage for a homebuyer who had an ownership interest in a 
     principal residence in the three years preceding the 
     execution of the mortgage (the ``first-time homebuyer'' 
     requirement).
       Special income and purchase price limitations apply to 
     targeted area residences. A targeted area residence is one 
     located in either (1) a census tract in which at least 70 
     percent of the families have an income which is 80 percent or 
     less of the state-wide median income or (2) an area of 
     chronic economic distress. For targeted area residences, the 
     income limitation is satisfied when no more than one-third of 
     the mortgages are made without regard to any income limits 
     and the remainder of the mortgages are made to mortgagors 
     whose family income is 140 percent or less of the applicable 
     median family income. The purchase price limitation is raised 
     from 90 percent to 110 percent of the average area purchase 
     price for targeted area residences. In addition, the first-
     time homebuyer requirement does not apply to targeted area 
     residences.
       Qualified mortgage bonds also may be used to finance 
     qualified home-improvement loans. Qualified home-improvement 
     loans are defined as loans to finance alterations, repairs, 
     and improvements on an existing residence, but only if such 
     alterations, repairs, and improvements substantially protect 
     or improve the basic livability or energy efficiency of the 
     property. Under present law, qualified home-improvement loans 
     may not exceed $15,000.
       Issuance of most qualified private activity bonds is 
     subject (in whole or in part) to annual State volume 
     limitations (sec. 146)). Exceptions are provided for bonds 
     for certain governmentally owned facilities (e.g., airports, 
     ports, high-speed intercity rail, and solid waste disposal) 
     and bonds which are subject to separate local, State, or 
     national volume limits (e.g., public/private educational 
     facility bonds, enterprise zone facility bonds, qualified 
     green building bonds, and qualified highway or surface 
     freight transfer facility bonds).
       In addition, qualified private activity bonds generally are 
     subject to restrictions on the use of proceeds for the 
     acquisition of land and existing property, use of proceeds to 
     finance certain specified facilities (e.g., airplanes, 
     skyboxes, other luxury boxes, health club facilities, 
     gambling facilities, and liquor stores), and use of proceeds 
     to pay costs of issuance (e.g., bond counsel and underwriter 
     fees). Small issue and redevelopment bonds also are subject 
     to additional restrictions on the use of proceeds for certain 
     facilities (e.g., golf courses and massage parlors).
       Moreover, the term of qualified private activity bonds 
     generally may not exceed 120 percent of the economic life of 
     the property being financed and certain public 
     approval requirements (similar to requirements that 
     typically apply under State law to issuance of 
     governmental debt) apply under Federal law to issuance of 
     private activity bonds.
       Liberty Zone Bonds
       Present law permits an aggregate of $8 billion in exempt 
     facility bonds for the purpose of financing the construction 
     and rehabilitation of nonresidential real property and 
     residential rental real property in a designated ``Liberty 
     Zone'' (the ``Zone'') of New York City (``Liberty Zone 
     bonds''). The Zone consists of all business addresses 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. 
     No more than $800 million of the authorized bond amount may 
     be used to finance property used for retail sales of tangible 
     property (e.g., department stores, restaurants, etc.) and 
     functionally related and subordinate property. The $800 
     million limit is divided equally between the Mayor of New 
     York City and the Governor of New York State. In addition, no 
     more than $1.6 billion of the authorized bond amount may be 
     used to finance residential rental property. The $1.6 billion 
     limit also is divided equally between the Mayor of New York 
     City and the Governor of New York State. Liberty Zone Bonds 
     must be issued before January 1, 2010.
       Property eligible for financing with these bonds includes 
     buildings and their structural components, fixed tenant 
     improvements, and public utility property (e.g., gas, water, 
     electric and telecommunication lines). Fixtures and equipment 
     that could be removed from the designated zone for use 
     elsewhere are not eligible for financing with these bonds. 
     Issuance of these bonds is limited to projects approved by 
     the Mayor of New York City or the Governor of New York State, 
     each of whom may designate up to $4 billion of the aggregate 
     bond authority.
       Arbitrage restrictions on tax-exempt bonds
       To prevent States and local governments from issuing more 
     tax-exempt bonds than necessary for the activity being 
     financed or from issuing such bonds earlier than needed for 
     the purpose of the borrowing, the Code includes arbitrage 
     restrictions limiting the ability to profit from investment 
     of tax-exempt bond proceeds. In general, arbitrage profits 
     may be earned only during specified periods (e.g., defined 
     ``temporary periods'' before funds are needed for the purpose 
     of the borrowing) or on specified types of investments (e.g., 
     ``reasonably required reserve or replacement funds''). 
     Subject to limited exceptions, profits that are earned during 
     these periods or on such investments must be rebated to the 
     Federal Government. Governmental bonds are subject to less 
     restrictive arbitrage rules than most private activity bonds.


                        Explanation of Provision

     Gulf Opportunity Zone Bonds
       The provision authorizes the issuance of qualified private 
     activity bonds to finance the construction and rehabilitation 
     of residential and nonresidential property located in the 
     Gulf Opportunity Zone (``Gulf Opportunity Zone Bonds''). Gulf 
     Opportunity Zone Bonds must be issued after the date of 
     enactment and before January 1, 2011.
       Gulf Opportunity Zone Bonds may be issued by the State of 
     Alabama, Louisiana, or Mississippi, or any political 
     subdivision thereof. Issuance of bonds authorized under the 
     provision is limited to projects approved by the Governor of 
     the State (or the State bond commission in the case of a bond 
     which is required under State law to be approved by such 
     commission) in which the financed project shall be located. 
     The maximum aggregate face amount of Gulf Opportunity Zone 
     Bonds that may be issued in any State is limited to $2,500 
     multiplied by the population of the respective State within 
     the Gulf Opportunity Zone. Current refundings of outstanding 
     bonds issued under the provision do not count against the 
     aggregate volume limit to the extent that the principal 
     amount of the refunding bonds does not exceed the outstanding 
     principal amount of the bonds being refunded. Gulf 
     Opportunity Zone Bonds may not be advance refunded.
       Depending on the purpose for which such bonds are issued, 
     Gulf Opportunity Zone Bonds are treated as either exempt 
     facility bonds or qualified mortgage bonds. Gulf Opportunity 
     Zone Bonds are treated as exempt facility bonds if 95 percent 
     or more of the net proceeds of such bonds are to be used for 
     qualified project costs located in the Gulf Opportunity Zone. 
     Qualified project costs include the cost of acquisition, 
     construction, reconstruction, and renovation of 
     nonresidential real property (including buildings and their 
     structural components and fixed improvements associated with 
     such property), qualified residential rental projects (as 
     defined in section 142(d) with certain modifications), and 
     public utility property. For purposes of the provision, costs 
     associated with improving a facility (e.g., installing 
     equipment that enhances the pollution control of a 
     manufacturing facility) may be permitted project costs if 
     such costs are chargeable to the capital account of the 
     facility or would be so chargeable either with a proper 
     election by a taxpayer or but for a proper election by a 
     taxpayer to deduct the costs.
       Bond proceeds may not be used to finance movable fixtures 
     and equipment. The purpose of this limitation is to ensure 
     that property financed with the bonds will remain in the Gulf 
     Opportunity Zone. ``Movable fixtures and equipment'' does not 
     include components that are assembled to construct an 
     industrial plant. Such term also does not include consumer 
     appliances installed in owner-occupied residences and 
     residential rental property financed with the proceeds of 
     Gulf Opportunity Zone Bonds.
       Rather than applying the 20-50 and 40-60 test under present 
     law, a project is a qualified residential rental project 
     under the provision if 20 percent or more of the residential 
     units in such project are occupied by individuals whose 
     income is 60 percent or less of area median gross income or 
     if 40 percent or more of the residential units in such 
     project are occupied by individuals whose income is 70 
     percent or less of area median gross income.
       Gulf Opportunity Zone Bonds are treated as qualified 
     mortgage bonds if the bonds of such issue meet the 
     requirements of a qualified mortgage issue (as defined in 
     section 143 and modified by this provision) and the 
     residences financed with such bonds are located

[[Page S14030]]

     in the Gulf Opportunity Zone. For these purposes, residences 
     located in the Gulf Opportunity Zone are treated as targeted 
     area residences. Thus, the first-time homebuyer rule is 
     waived and purchase and income rules for targeted area 
     residences apply to residences financed with bonds issued 
     under the provision. Under the provision, 100 percent of the 
     mortgages must be made to mortgagors whose family income is 
     140 percent or less of the applicable median family income. 
     Thus, the present law rule allowing one-third of the 
     mortgages to be made without regard to any income limits does 
     not apply. In addition, the provision increases from 
     $15,000 to $150,000 the amount of a qualified home-
     improvement loan that may be financed with bond proceeds.
       Subject to the following exceptions and modifications, 
     issuance of Gulf Opportunity Zone Bonds is subject to the 
     general rules applicable to issuance of qualified private 
     activity bonds:
       (1) Except as otherwise permitted for a qualified mortgage 
     issue, repayments of bond-financed loans may not be used to 
     make additional loans;
       (2) Issuance of the bonds is not subject to the aggregate 
     annual State private activity bond volume limits (sec. 146);
       (3) The restriction on acquisition of existing property is 
     applied using a minimum requirement of 50 percent of the cost 
     of acquiring the building being devoted to rehabilitation 
     (sec. 147(d));
       (4) The special arbitrage expenditure rules for certain 
     construction bond proceeds apply to available construction 
     proceeds of Gulf Opportunity Zone Bonds issued to finance 
     qualified project costs, treating such bonds as a 
     construction issue (sec. 148(f)(4)(C));
       (5) Interest on the bonds is not a preference item for 
     purposes of the alternative minimum tax preference for 
     private activity bond interest (sec. 57(a)(5)); and
       (6) No portion of the proceeds of the bonds may be used to 
     provide any property described in section 144(c)(6)(B) (i.e., 
     any private or commercial golf course, country club, massage 
     parlor, hot tub facility, suntan facility, racetrack or other 
     facility used for gambling, or any store the principal 
     purpose of which is the sale alcoholic beverages for 
     consumption off premises).


                             Effective Date

       The provision is effective for bonds issued after the date 
     of enactment and before January 1, 2011.
     3. Advance refunding of certain tax-exempt bonds (new sec. 
         1400N(b) of the Code)


                              Present Law

     In general
       Interest on bonds issued by State and local governments 
     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 
     (``governmental bonds''). Interest on State or local bonds to 
     finance activities of private persons (``private activity 
     bonds'') is taxable unless a specific exception applies. 
     Bonds issued to finance the activities of charitable 
     organizations described in section 501(c)(3) (``qualified 
     501(c)(3) bonds'') are one type of tax-exempt private 
     activity bonds (``qualified private activity bonds''). 
     Qualified private activity bonds also include exempt facility 
     bonds. The definition of exempt facility bonds includes bonds 
     issued to finance certain transportation facilities (e.g., 
     airports, docks, and wharves).
       Generally, qualified private activity bonds are subject to 
     restrictions on the use of proceeds for the acquisition of 
     land and existing property, use of proceeds to finance 
     certain specified facilities (e.g., airplanes, skyboxes, 
     other luxury boxes, health club facilities, gambling 
     facilities, and liquor stores), and use of proceeds to pay 
     costs of issuance (e.g., bond counsel and underwriter fees). 
     Certain types of qualified private activity bonds (e.g., 
     small issue and redevelopment bonds) also are subject to 
     additional restrictions on the use of proceeds for certain 
     facilities (e.g., golf courses and massage parlors). 
     Moreover, the term of qualified private activity bonds 
     generally may not exceed 120 percent of the economic life of 
     the property being financed and certain public approval 
     requirements (similar to requirements that typically apply 
     under State law to issuance of governmental debt) apply under 
     Federal law to issuance of private activity bonds.
     Limitations on advance refundings
       A refunding bond is defined as any bond used to pay 
     principal, interest, or redemption price on a prior bond 
     issue (the refunded bond). The Code contains different rules 
     for ``current'' as opposed to ``advance'' refunding bonds. A 
     current refunding occurs when the refunded bond is redeemed 
     within 90 days of issuance of the refunding bonds. 
     Conversely, a bond is classified as an advance refunding bond 
     if it is issued more than 90 days before the redemption of 
     the refunded bond (sec. 149(d)(5)). Proceeds of advance 
     refunding bonds are generally invested in an escrow account 
     and held until a future date when the refunded bond may be 
     redeemed. Thus, after issuance of an advance refunding bond, 
     there is a period of time when both the refunding bonds and 
     the refunded bonds remain outstanding.
       There is no statutory limitation on the number of times 
     that tax-exempt bonds may be currently refunded. However, the 
     Code limits the number of advance refundings with tax-exempt 
     bonds. Generally, governmental bonds and qualified 501(c)(3) 
     bonds may be advance refunded one time (sec. 149(d)(3)). 
     Private activity bonds, other than qualified 501(c)(3) bonds, 
     may not be advance refunded.
       Under present law, certain bonds used to fund facilities 
     located in New York City are permitted one additional advance 
     refunding if issued before January 1, 2006. In addition to 
     satisfying other requirements, the bond refunded must be (1) 
     a State or local bond that is a general obligation of New 
     York City, (2) a State or local bond issued by the New York 
     Municipal Water Finance Authority or Metropolitan 
     Transportation Authority of New York City, or (3) a qualified 
     501(c)(3) bond which is a qualified hospital bond issued by 
     or on behalf of the State of New York or New York City. The 
     maximum amount of additional advance refunding bonds that may 
     be issued is $9 billion.
     Arbitrage restrictions on tax-exempt bonds
       To prevent States and local governments from issuing more 
     tax-exempt bonds than is necessary for the activity being 
     financed or from issuing such bonds earlier than needed for 
     the purpose of the borrowing, the Code includes arbitrage 
     restrictions limiting the ability to profit from investment 
     of tax-exempt bond proceeds. In general, arbitrage profits 
     may be earned only during specified periods (e.g., defined 
     ``temporary periods'' before funds are needed for the purpose 
     of the borrowing) or on specified types of investments (e.g., 
     ``reasonably required reserve or replacement funds''). 
     Subject to limited exceptions, profits that are earned during 
     these periods or on such investments must be rebated to the 
     Federal Government. Governmental bonds are subject to less 
     restrictive arbitrage rules than most private activity bonds.


                        Explanation of Provision

       The provision permits an additional advance refunding of 
     certain governmental and qualified 501(c)(3) bonds issued by 
     the State of Alabama, Louisiana, or Mississippi, or any 
     political subdivision thereof. The provision also permits one 
     advance refunding of certain exempt facility bonds for 
     airports, docks, or wharves issued by the State of Alabama, 
     Louisiana, or Mississippi, or any political subdivision 
     thereof, notwithstanding the general prohibition on the 
     advance refunding of such bonds.
       The advance refunding authority under this provision only 
     applies to bonds issued by the State of Alabama, Louisiana, 
     or Mississippi, or any political subdivision thereof, which 
     were outstanding on August 28, 2005, and could not be advance 
     refunded under Code restrictions in effect on that date. 
     (Although section 1400L(e)(4)(A) refers to restrictions on 
     advance refundings under ``any provision of law,'' rather 
     than under the ``Code,'' no inference should be drawn from 
     the use of different terms). Further, to be eligible for the 
     additional advance refunding, the advance refunding bond must 
     be the only other outstanding bond with respect to the 
     refunded bond. Thus, at no time after the advance refunding 
     authorized under the provision occurs may there be more than 
     two sets of bonds outstanding.
       The maximum amount of advance refunding bonds that may be 
     issued pursuant to this provision is $4.5 billion in the case 
     of Louisiana, $2.250 billion in the case of Mississippi, and 
     $1.125 billion in the case of Alabama. Eligible advance 
     refunding bonds must be designated as such by the governor of 
     the respective State. Advance refunding bonds issued under 
     the provision must satisfy present-law arbitrage restrictions 
     and all requirements otherwise applicable to advance 
     refunding issues (e.g., redemption requirements and 
     prohibition on abusive transactions). Moreover, bonds may not 
     be advance refunded under this provision if any portion of 
     the proceeds of such bonds was used to provide any property 
     described in section 144(c)(6)(B) (i.e., any private or 
     commercial golf course, country club, massage parlor, hot tub 
     facility, suntan facility, racetrack or other facility used 
     for gambling, or any store the principal purpose of which is 
     the sale alcoholic beverages for consumption off premises).


                             Effective Date

       The provision is effective for advance refunding bonds 
     issued after the date of enactment and before January 1, 
     2011.
     4. Increase the low-income housing credit cap and make other 
         modifications (new sec. 1400N(c) of the Code)


                              Present Law

     In general
       The low-income housing credit may be claimed over a 10-year 
     period for the cost of rental housing occupied by tenants 
     having incomes below specified levels. The amount of the 
     credit for any taxable year in the credit period is the 
     applicable percentage of the qualified basis of each 
     qualified low-income building. The qualified basis of any 
     qualified low-income building for any taxable year equals the 
     applicable fraction of the eligible basis of the building.
       The credit percentage for newly constructed or 
     substantially rehabilitated housing that is not Federally 
     subsidized is adjusted monthly by the Internal Revenue 
     Service so that the 10 annual installments have a present 
     value of 70 percent of the total qualified basis. The credit 
     percentage for newly constructed or substantially 
     rehabilitated housing that is Federally subsidized and for 
     existing housing that is substantially

[[Page S14031]]

     rehabilitated is calculated to have a present value of 30 
     percent of qualified basis. These are referred to as the 70 
     percent credit and 30 percent credit, respectively.
     Income targeting
       In order to be eligible for the low-income housing credit, 
     a qualified low-income building must be part of a qualified 
     low-income housing project. In general, a qualified low-
     income housing project is defined as a project which 
     satisfies one of two tests at the election of the taxpayer. 
     The first test is met if 20 percent or more of the 
     residential units in the project are both rent-restricted and 
     occupied by individuals whose income is 50 percent or less of 
     area median gross income (the ``20-50 test''). The second 
     test is met if 40 percent or more of the residential units in 
     such project are both rent-restricted and occupied by 
     individuals whose income is 60 percent or less of area median 
     gross income (the ``40-60 test'').
     Credit cap
       Generally, the aggregate credit authority provided annually 
     to each State for calendar year 2006 is $1.90 per resident 
     with a minimum annual cap of $2,180,000 for certain small 
     population States. These amounts are indexed for inflation. 
     These limits do not apply in the case of projects that also 
     receive financing with proceeds of tax-exempt bonds issued 
     subject to the private activity bond volume limit.
     Basis of building eligible for the credit
       Buildings located in high cost areas (i.e., qualified 
     census tracts and difficult development areas) are eligible 
     for an enhanced credit. Under the enhanced credit, the 70-
     percent and 30 percent credit is increased to a 91 percent 
     and 39 percent credit, respectively. The mechanism for this 
     increase is an increase from 100 to 130 percent of the 
     otherwise applicable eligible basis of a new building or the 
     rehabilitation expenditures of an existing building. A 
     further requirement for the enhanced credit is that no more 
     than 20 percent of the population of each metropolitan 
     statistical area or nonmetropolitan statistical area may 
     be a difficult to develop area.
     Stacking rule
       Authority to allocate credits remains at the State (as 
     opposed to local) government level unless State law provides 
     otherwise. Generally, credits may be allocated only from 
     volume authority arising during the calendar year in which 
     the building is placed in service, except in the case of: (1) 
     credits claimed on additions to qualified basis; (2) credits 
     allocated in a later year pursuant to an earlier binding 
     commitment made no later than the year in which the building 
     is placed in service; and (3) carryover allocations.
       Each State annually receives low-income housing credit 
     authority equal to $1.90 per State resident for allocation to 
     qualified low-income projects. In addition to this $1.90 per 
     resident amount, each State's ``housing credit ceiling'' 
     includes the following amounts: (1) the unused State housing 
     credit ceiling (if any) of such State for the preceding 
     calendar year; (2) the amount of the State housing credit 
     ceiling (if any) returned in the calendar year; and (3) the 
     amount of the national pool (if any) allocated to such State 
     by the Treasury Department.
       The national pool consists of States' unused housing credit 
     carryovers. For each State, the unused housing credit 
     carryover for a calendar year consists of the excess (if any) 
     of the unused State housing credit ceiling for such year over 
     the excess (if any) of the aggregate housing credit dollar 
     amount allocated for such year over the sum of $1.90 per 
     resident and the credit returns for such year. The amounts in 
     the national pool are allocated only to States that allocated 
     their entire housing credit ceiling for the preceding 
     calendar year and requested a share in the national pool not 
     later than May 1 of the calendar year. The national pool 
     allocation to qualified States is made on a pro rata basis 
     equivalent to the fraction that a State's population enjoys 
     relative to the total population of all qualified States for 
     that year.
       The present-law stacking rule provides that each State is 
     treated as using its allocation of the unused State housing 
     credit ceiling (if any) from the preceding calendar before 
     the current year's allocation of credit (including any 
     credits returned to the State) and then finally any national 
     pool allocations.


                        Explanation of Provision

     Income targeting
       In the case of property placed in service during 2006, 
     2007, and 2008 in a nonmetropolitan area within the Gulf 
     Opportunity Zone, the income targeting rules of the low-
     income housing credit are applied by replacing the area 
     median gross income standard with a national nonmetropolitan 
     median gross income standard. These new income targeting 
     rules apply to all such buildings in the Gulf Opportunity 
     Zone regardless of whether the building receives its credit 
     allocation under the otherwise applicable low-income housing 
     credit cap or the additional credit cap (described below). 
     The income targeting rules are not changed for buildings in 
     metropolitan areas in the Gulf Opportunity Zone.
     Credit cap
       Under the provision, the otherwise applicable housing 
     credit ceiling amount is increased for each of the States 
     within the Gulf Opportunity Zone. This increase applies to 
     calendar years 2006, 2007, and 2008. The additional credit 
     cap for each of the affected States equals $18.00 times the 
     number of such State's residents within the Gulf Opportunity 
     Zone. This amount is not adjusted for inflation. For purposes 
     of this additional credit cap amount, the determination of 
     population for any calendar year is made on the basis of the 
     most recent census estimate of the resident population of the 
     State in the Gulf Opportunity Zone released by the Bureau of 
     the Census before August 28, 2005.
       In addition, the otherwise applicable housing credit 
     ceiling amount is increased for Florida and Texas by 
     $3,500,000 per State. This increase only applies to calendar 
     year 2006.
     Basis of building eligible for the credit
       Under the provision, the Gulf Opportunity Zone, the Rita Go 
     Zone, and the Wilma Go Zone are treated as high-cost areas 
     for purposes of the low-income housing credit for property 
     placed-in-service in calendar years 2006, 2007, and 2008. 
     Therefore, buildings located in the Gulf Opportunity Zone, 
     the Rita Go Zone, and the Wilma Go Zone are eligible for the 
     enhanced credit. Under the enhanced credit, the 70 percent 
     and 30 percent credits are increased to 91 percent and 39 
     percent credits, respectively. The 20 percent of population 
     restriction is waived for this purpose. This enhanced credit 
     applies regardless of whether the building receives its 
     credit allocation under the otherwise applicable low-income 
     housing credit cap or the additional credit cap.
     Carryover
       The additional credit cap available for States within the 
     Gulf Opportunity Zone for calendar years 2006, 2007 and 2008 
     may not be carried forward from any year to any other year. 
     The present-law rules apply for purposes of the Rita Go Zone 
     and the Wilma Go Zone.
     Stacking rule
       Within each calendar year, each applicable State within the 
     GO Zone must treat the additional credit cap allocable under 
     the provision to that State as allocated before any other 
     credit cap amounts. Therefore, under the provision each 
     applicable State within the GO Zone is treated as using 
     credits in the following order: (1) the additional credit cap 
     (including any such credits returned to the State) under the 
     Gulf Opportunity Zone, then (2) its allocation of the unused 
     State housing credit ceiling (if any) from the preceding 
     calendar, then (3) the current year's allocation of present-
     law credit (including any credits returned to the State) and 
     then (4) any national pool allocations. This generally 
     maximizes the total amount of credit (under both otherwise 
     applicable low income housing credit cap and the additional 
     credit cap for the Gulf Opportunity Zone) which may be 
     carried forward.
       The present-law rules apply for purposes of the Rita Go 
     Zone and the Wilma Go Zone.


                             Effective Date

       The provisions relating to the increased credit cap, 
     carryover and stacking rule applicable to the GO Zone are 
     generally effective for calendar years beginning after 2005 
     and before 2009.
       The provision relating to the increased credit cap 
     applicable to Florida and Texas is generally effective for 
     calendar years beginning after 2005 and before 2007.
       The provision to treat the Gulf Opportunity Zone, Rita Go 
     Zone and the Wilma Go Zone as a high-cost area is generally 
     effective for calendar years beginning after 2005 and before 
     2009, and buildings placed in service during such period in 
     the case of projects that also receive financing with the 
     proceeds of tax-exempt bonds subject to the private activity 
     bond volume limit which are issued during that period.
       The income targeting provision is effective for property 
     placed in service during 2006, 2007 and 2008. This provision 
     applies to property which receives a credit allocation in any 
     of those three years or a prior year. It also applies in the 
     case of credit projects that receive tax-exempt bond 
     financing subject to the private activity bond volume limit.
     5. Additional first-year depreciation for Gulf Opportunity 
         Zone property (new sec. 1400N(d) of the Code)


                              Present Law

       A taxpayer is allowed to recover, through annual 
     depreciation deductions, the cost of certain property used in 
     a trade or business or for the production of income. The 
     amount of the depreciation deduction allowed with respect to 
     tangible property for a taxable year is determined under the 
     modified accelerated cost recovery system (``MACRS''). 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.

[[Page S14032]]

       In lieu of depreciation, a taxpayer with a sufficiently 
     small amount of annual investment generally may elect to 
     deduct 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.


                        Explanation of Provision

       The provision allows an additional first-year depreciation 
     deduction equal to 50 percent of the adjusted basis of 
     qualified Gulf Opportunity Zone property. In order to 
     qualify, property 13 generally must be placed in service on 
     or before December 31, 2007 (December 31, 2008 in the case of 
     nonresidential real property and residential rental 
     property).
       The additional first-year depreciation deduction is allowed 
     for both regular tax and alternative minimum tax purposes for 
     the taxable year in which the property is placed in service. 
     The additional first-year depreciation deduction is subject 
     to the general rules regarding whether an item is deductible 
     under section 162 or subject to capitalization under section 
     263 or section 263A. The basis of the property and the 
     depreciation allowances in the year of purchase and later 
     years are appropriately adjusted to reflect the additional 
     first-year depreciation deduction. In addition, the provision 
     provides that there is no adjustment to the allowable amount 
     of depreciation for purposes of computing a taxpayer's 
     alternative minimum taxable income with respect to property 
     to which the provision applies. A taxpayer is allowed to 
     elect out of the additional first-year depreciation for any 
     class of property for any taxable year.
       In order for property to qualify for the additional first-
     year depreciation deduction, it must meet all of the 
     following requirements. First, the property must be property 
     to which the general rules of the Modified Accelerated Cost 
     Recovery System (``MACRS'') apply with (1) an applicable 
     recovery period of 20 years or less, (2) computer software 
     other than computer software covered by section 197, (3) 
     water utility property (as defined in section 168(e)(5)), (4) 
     certain leasehold improvement property, or (5) certain 
     nonresidential real property and residential rental property. 
     Second, substantially all of the use of such property must be 
     in the Gulf Opportunity Zone and in the active conduct of a 
     trade or business by the taxpayer in the Gulf Opportunity 
     Zone. Third, the original use of the property in the Gulf 
     Opportunity Zone must commence with the taxpayer on or after 
     August 28, 2005. (Thus, used property may constitute 
     qualified property so long as it has not previously been used 
     within the Gulf Opportunity Zone. In addition, it is intended 
     that additional capital expenditures incurred to recondition 
     or rebuild property the original use of which in the Gulf 
     Opportunity Zone began with the taxpayer would satisfy the 
     ``original use'' requirement. See Treasury Regulation sec. 
     1.48-2 Example 5.) Finally, the property must be acquired by 
     purchase (as defined under section 179(d)) by the taxpayer on 
     or after August 28, 2005 and placed in service on or before 
     December 31, 2007. For qualifying nonresidential real 
     property and residential rental property, the property must 
     be placed in service on or before December 31, 2008, in lieu 
     of December 31, 2007. Property does not qualify if a binding 
     written contract for the acquisition of such property was in 
     effect before August 28, 2005. However, property is not 
     precluded from qualifying for the additional first-year 
     depreciation merely because a binding written contract to 
     acquire a component of the property is in effect prior to 
     August 28, 2005.
       Property that is manufactured, constructed, or produced by 
     the taxpayer for use by the taxpayer qualifies if the 
     taxpayer begins the manufacture, construction, or production 
     of the property on or after August 28, 2005, and the property 
     is placed in service on or before December 31, 2007 (and all 
     other requirements are met). In the case of qualified 
     nonresidential real property and residential rental property, 
     the property must be placed in service on or before December 
     31, 2008. 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.
       Under a special rule, property any portion of which is 
     financed with the proceeds of a tax-exempt obligation under 
     section 103 is not eligible for the additional first-year 
     depreciation deduction. Recapture rules apply under the 
     provision if the property ceases to be qualified Gulf 
     Opportunity Zone property.


                             Effective Date

       The provision applies to property placed in service on or 
     after August 28, 2005, in taxable years ending on or after 
     such date.
     6. Increase in expensing for Gulf Opportunity Zone property 
         (new sec. 1400N(e) of the Code)


                              Present Law

       In lieu of depreciation, a taxpayer with a sufficiently 
     small amount of annual investment may elect to deduct (or 
     ``expense'') such costs. Present law provides that the 
     maximum amount a taxpayer may expense, for taxable years 
     beginning in 2003 through 2007, is $100,000 of the cost of 
     qualifying property placed in service for the taxable year. 
     Additional section 179 incentives are provided with respect 
     to a qualified property used by a business in the New York 
     Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 
     1397A), or a renewal community (sec. 1400J). In general, 
     qualifying property is defined as depreciable tangible 
     personal property that is purchased for use in the active 
     conduct of a trade or business. Off-the-shelf computer 
     software placed in service in taxable years beginning before 
     2008 is treated as qualifying property. The $100,000 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 $400,000. The $100,000 and $400,000 
     amounts are indexed for inflation for taxable years beginning 
     after 2003 and before 2008.
       For taxable years beginning in 2008 and thereafter, a 
     taxpayer with a sufficiently small amount of annual 
     investment may elect to deduct up to $25,000 of the cost of 
     qualifying property placed in service for the taxable year. 
     The $25,000 amount is reduced (but not below zero) by the 
     amount by which the cost of qualifying property placed in 
     service during the taxable year exceeds $200,000.
       The amount eligible to be expensed for a taxable year may 
     not exceed the taxable income for a taxable year that is 
     derived from the active conduct of a trade or business 
     (determined without regard to this provision). Any amount 
     that is not allowed as a deduction because of the taxable 
     income limitation may be carried forward to succeeding 
     taxable years (subject to similar limitations). No general 
     business credit under section 38 is allowed with respect to 
     any amount for which a deduction is allowed under section 
     179.
       An expensing election is made under rules prescribed by the 
     Secretary (sec. 179(c)(1)). Under Treas. Reg. sec. 179-5, 
     applicable to property placed in service in taxable years 
     beginning after 2002 and before 2008, a taxpayer is permitted 
     to make or revoke an election under section 179 without the 
     consent of the Commissioner on an amended Federal tax return 
     for that taxable year. This amended return must be filed 
     within the time prescribed by law for filing an amended 
     return for the taxable year. For taxable years beginning in 
     2008 and thereafter, an expensing election may be revoked 
     only with consent of the Commissioner (sec. 179(c)(2)).


                        Explanation of Provision

       Under the provision, the $100,000 maximum amount that a 
     taxpayer may elect to deduct under section 179 is increased 
     by the lesser of $100,000, or the cost of qualified section 
     179 Gulf Opportunity Zone property for the taxable year. The 
     provision applies with respect to qualified section 179 Gulf 
     Opportunity Zone property acquired on or after August 28, 
     2005, and placed in service on or before December 31, 2007. 
     Thus, in addition to the $100,000 maximum cost of any section 
     179 property (including property that also meets the 
     definition of qualified section 179 Gulf Opportunity Zone 
     property) that may be deducted under present law, a taxpayer 
     may elect to deduct a maximum $100,000 additional amount of 
     the taxpayer's cost of qualified section 179 Gulf Opportunity 
     Zone property, resulting in a maximum deductible amount of 
     $200,000 of qualified section 179 Gulf Opportunity Zone 
     property. (The $100,000 present-law portion of this amount is 
     indexed for taxable years beginning after 2003 and before 
     2008, so the total may be higher than $200,000 after 
     taking indexation of this portion into account.) The 
     $100,000 additional amount for the cost of qualified 
     section 179 Gulf Opportunity Zone property is not indexed.
       The provision provides a special rule for the reduction in 
     the $200,000 maximum deduction for the cost of qualified 
     section 179 Gulf Opportunity Zone property. Under this rule, 
     the $200,000 amount is reduced (but not below zero) by the 
     amount by which the cost of qualified section 179 Gulf 
     Opportunity Zone property placed in service during the 
     taxable year exceeds a dollar cap of up to $1 million. (The 
     $400,000 present-law portion of this amount is indexed for 
     taxable years beginning after 2003 and before 2008, so the 
     total may be higher than $1 million after taking indexation 
     of this portion into account.) The dollar cap is computed by 
     increasing the $400,000 present-law amount by the lesser of 
     (1) $600,000, or (2) the cost of qualified section 179 Gulf 
     Opportunity Zone property placed in service during the 
     taxable year. The $600,000 amount is not indexed.
       The operation of the reduction may be illustrated as 
     follows. In each of the following examples, assume that the 
     taxable income limitation of section 179(b)(3)(A) does not 
     cause a reduction in the amount that may be expensed for the 
     taxable year. For example, assume that in the taxable year, a 
     taxpayer's cost of section 179 property that is qualified 
     Gulf Opportunity Zone property is $800,000, and in that year 
     the taxpayer acquires no other section 179 property. Under 
     the provision, the taxpayer's deductible amount is increased 
     by $100,000 to $200,000 (the lesser of $100,000 and cost of 
     the taxpayer's qualified section 179 Gulf Opportunity Zone 
     property). Under the provision, the $400,000 phase-out amount 
     in section 179(b)(2) is increased by $600,000 (i.e., the 
     lesser of $600,000 or the $800,000 cost of qualified section 
     179 Gulf Opportunity Zone property), so that the phase-out 
     amount is $1 million. The taxpayer's cost of section 179 
     property is $800,000 in total (less than the $1 million 
     phase-out amount), so no reduction is made in the $200,000 
     amount of qualified Gulf Opportunity Zone

[[Page S14033]]

     property that may be deducted under section 179 for the 
     taxable year. As another example, assume for the taxable year 
     that a taxpayer's cost of section 179 property that is 
     qualified Gulf Opportunity Zone property is $200,000, and its 
     cost of other section 179 property is $450,000. Under the 
     provision, the $400,000 phase-out amount in section 179(b)(2) 
     is increased to $600,000 by the $200,000 cost of qualified 
     section 179 Gulf Opportunity Zone property. The taxpayer had 
     a total $650,000 cost of section 179 property for the taxable 
     year. The taxpayer's section 179 deduction is reduced by the 
     $50,000 difference between $650,000 and $600,000. Thus, under 
     the provision, the taxpayer may deduct $150,000 ($200,000 
     less $50,000) under section 179 for the taxable year.
       Qualified section 179 Gulf Opportunity Zone property means 
     section 179 property (as defined in section 179(d) of present 
     law) that also meets the requirements to qualify for Gulf 
     Opportunity Zone bonus depreciation. Specifically, for 
     section 179 purposes, qualified Gulf Opportunity Zone 
     property is property (1) described in section 
     168(k)(2)(A)(i), (2) substantially all of the use of which is 
     in the Gulf Opportunity Zone and is in the active conduct of 
     a trade or business by the taxpayer in that Zone, (3) the 
     original use of which commences with the taxpayer on or after 
     August 28, 2005, (4) which is acquired by the taxpayer by 
     purchase on or after August 28, 2005, but only if no written 
     binding contract for the acquisition was in effect before 
     August 28, 2005, and (5) which is placed in service by the 
     taxpayer on or before December 31, 2007. Such property does 
     not include alternative depreciation property, tax-exempt 
     bond-financed property, or qualified revitalization 
     buildings.
       The provision includes rules coordinating increased section 
     179 amounts provided under the bill with present-law 
     expensing rules with respect to enterprise zone businesses in 
     empowerment zones and with respect to renewal communities. 
     For purposes of those rules, qualified section 179 Gulf 
     Opportunity Zone property is not treated as qualified zone 
     property or qualified renewal property, unless the taxpayer 
     elects not to take such qualified section 179 Gulf 
     Opportunity Zone property into account for purposes of this 
     provision. Thus, a taxpayer acquiring property that could 
     qualify as either qualified section 179 Gulf Opportunity Zone 
     property, or qualified zone property or qualified renewal 
     property, may elect the additional expensing provided either 
     under this provision, or under the empowerment zone or 
     renewal community rules, but not both, with respect to the 
     property.
       Recapture rules apply under the provision if recapture 
     applies under section 179(d)(10) or if the property ceases to 
     be qualified section 179 Gulf Opportunity Zone property.


                             Effective Date

       The provision is effective for taxable years ending on or 
     after August 28, 2005, for qualified section 179 Gulf 
     Opportunity Zone property acquired after August 27, 2005, and 
     placed in service on or before December 31, 2007.
     7. Expensing for certain demolition and clean-up costs (new 
         sec. 1400N(f) of the Code)


                              Present Law

       Under present law, the cost of demolition of a structure is 
     capitalized into the taxpayer's basis in the land on which 
     the structure is located. (Sec. 280B). Land is not subject to 
     an allowance for depreciation or amortization.
       The treatment of the cost of debris removal depends on the 
     nature of the costs incurred. For example, the cost of debris 
     removal after a storm may in some cases constitute an 
     ordinary and necessary business expense which is deductible 
     in the year paid or incurred. In other cases, debris removal 
     costs may be in the nature of replacement of part of the 
     property that was damaged. In such cases, the costs are 
     capitalized and added to the taxpayer's basis in the 
     property. For example, Revenue Ruling 71-161, 1971-1 C.B. 76, 
     permits the use of clean-up costs as a measure of casualty 
     loss but requires that such costs be added to the post-
     casualty basis of the property.


                        Explanation of Provision

       Under the provision, a taxpayer is permitted a deduction 
     for 50 percent of any qualified Gulf Opportunity Zone clean-
     up cost paid or incurred on or after August 28, 2005, and 
     before January 1, 2008. The remaining 50 percent is 
     capitalized as under present law.
       A qualified Gulf Opportunity Zone clean-up cost is an 
     amount paid or incurred for the removal of debris from, or 
     the demolition of structures on, real property located in the 
     Gulf Opportunity Zone to the extent that the amount would 
     otherwise be capitalized. In order to qualify, the 
     property must be held for use in a trade or business, for 
     the production of income, or as inventory.


                             Effective Date

       The provision applies to costs paid or incurred on or after 
     August 28, 2005 in taxable years ending on or after such 
     date.
     8. Extension of expensing for environmental remediation costs 
         (new sec. 1400N(g) of the Code)


                              Present Law

       Taxpayers may elect to deduct (or ``expense'') certain 
     environmental remediation expenditures that would otherwise 
     be chargeable to capital account, in the year paid or 
     incurred (sec. 198). 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.
       A ``qualified contaminated site'' generally is any property 
     that (1) is held for use in a trade or business, for the 
     production of income, or as inventory and (2) is at a site on 
     which there has been a release (or threat of release) or 
     disposal of certain hazardous substances as certified by the 
     appropriate State environmental agency (so-called 
     ``brownfields'').
       Section 198(d)(1) defines a ``hazardous substance'' as a 
     substance which is so defined in section 101(14) of the 
     Comprehensive Environmental Response, Compensation, and 
     Liability Act of 1980 (``CERCLA''), and any substance which 
     is administratively designated as a hazardous substance under 
     section 102 of CERCLA. Under section 198(d)(2), however, the 
     term ``hazardous substance'' does not include any substance 
     with respect to which a removal or remediation is not 
     permitted under section 104 of CERCLA by reason of subsection 
     (a)(3) thereof, which exempts from the scope of such 
     provision ``the release or threat of release (A) of a 
     naturally occurring substance in its unaltered form, or 
     altered solely through naturally occurring processes or 
     phenomena, from a location where it is naturally found; (B) 
     from products which are part of the structure of, and result 
     in exposure within, residential buildings or business or 
     community structures; or (C) into public or private drinking 
     water supplies due to deterioration of the system through 
     ordinary use.'' However, sites which are identified on the 
     national priorities list under CERCLA cannot qualify for 
     expensing under section 198.
       Petroleum products generally are not regarded as hazardous 
     substances for purposes of section 198. Section 101(14) of 
     CERCLA specifically excludes ``petroleum, including crude oil 
     or any fraction thereof which is not otherwise specifically 
     listed or designated as a hazardous substance under 
     subparagraphs (A) through (F) of this paragraph,'' from the 
     definition of ``hazardous substance.''
       Under present law, eligible expenditures are those paid or 
     incurred before January 1, 2006.


                        Explanation of Provision

       The provision extends the present-law expensing provision 
     for two years (through December 31, 2007) for qualified 
     contaminated sites located in the Gulf Opportunity Zone.
       In addition, under the provision, petroleum products are 
     treated as hazardous substances for purposes of applying the 
     expensing provision (as extended) within the Gulf Opportunity 
     Zone. Petroleum products are defined by reference to section 
     4612(a)(3), and include crude oil, crude oil condensates and 
     natural gasoline. Thus, for example, the release of crude oil 
     upon property held for use in a trade or business in the Gulf 
     Opportunity Zone results in such property being treated as a 
     qualified contaminated site. The present law exceptions for 
     sites on the national priorities list under CERCLA, and for 
     substances with respect to which a removal or remediation is 
     not permitted under section 104 of CERCLA by reason of 
     subsection (a)(3) thereof, would continue to apply to all 
     hazardous substances (including petroleum products).
       Expenditures paid or incurred to abate the contamination on 
     or after August 28, 2005 and before December 31, 2007, would 
     be eligible for expensing.


                             Effective Date

       The provision is effective for taxable years ending on or 
     after August 28, 2005.
     9. Increase in rehabilitation tax credit with respect to 
         certain buildings located in the Gulf Opportunity Zone 
         (new sec. 1400N(h) of the Code)


                              Present Law

       Present law provides a two-tier tax credit for 
     rehabilitation expenditures.
       A 20-percent credit is provided for qualified 
     rehabilitation expenditures with respect to a certified 
     historic structure. For this purpose, a certified historic 
     structure means any building that is listed in the National 
     Register, or that is located in a registered historic 
     district and is certified by the Secretary of the Interior to 
     the Secretary of the Treasury as being of historic 
     significance to the district.
       A 10-percent credit is provided for qualified 
     rehabilitation expenditures with respect to a qualified 
     rehabilitated building, which generally means a building that 
     was first placed in service before 1936. The pre-1936 
     building must meet requirements with respect to retention of 
     existing external walls and internal structural framework of 
     the building in order for expenditures with respect to it to 
     qualify for the 10-percent credit. A building is treated as 
     having met the substantial rehabilitation requirement under 
     the 10-percent credit only if the rehabilitation expenditures 
     during the 24-month period selected by the taxpayer and 
     ending within the taxable year exceed the greater of (1) the 
     adjusted basis of the building (and its structural 
     components), or (2) $5,000.
       The provision requires the use of straight-line 
     depreciation or the alternative depreciation system in order 
     for rehabilitation expenditures to be treated as qualified 
     under the provision.


                        Explanation of Provision

       The provision increases from 20 to 26 percent, and from 10 
     to 13 percent, respectively,

[[Page S14034]]

     the credit under section 47 with respect to any certified 
     historic structure or qualified rehabilitated building 
     located in the Gulf Opportunity Zone, provided the qualified 
     rehabilitation expenditures with respect to such buildings or 
     structures are incurred on or after August 28, 2005, and 
     before January 1, 2009.


                             Effective Date

       The provision is effective for expenditures incurred on or 
     after August 28, 2005, and before January 1, 2009, for 
     taxable years ending on or after August 28, 2005.
     10. Increased expensing for reforestation expenditures of 
         small timber producers (new sec. 1400N(i)(1) of the Code)


                              Present Law

       Present law permits a taxpayer to elect to deduct (or 
     ``expense'') a limited amount of certain reforestation 
     expenditures that would otherwise be required to be 
     capitalized, in the year paid or incurred (sec. 194(b)). No 
     more than $10,000 of reforestation expenditures made by a 
     taxpayer in any year can qualify for expensing with respect 
     to each qualified timber property. The limit is reduced to 
     $5,000 per qualified timber property for married taxpayers 
     filing separate returns.
       All members of a controlled group of corporations are 
     treated as a single taxpayer for purposes of the $10,000 
     limit. A controlled group of corporations for purposes of 
     section 194 is defined as under section 1563(a), except that 
     the 80-percent ownership requirement is reduced to a more 
     than 50-percent requirement. If a partnership or S 
     corporation incurs reforestation expenditures, the $10,000 
     limit applies separately to the partnership or S corporation 
     and to each partner or shareholder. For an estate with 
     reforestation expenditures, the $10,000 limit is apportioned 
     between the estate and its beneficiaries. Section 194(b) does 
     not apply to trusts.
       Reforestation expenditures include direct costs incurred in 
     connection with forestation or reforestation by planting or 
     artificial or natural seeding, including costs for site 
     preparation, seeds and seeding, labor and tools, and 
     depreciation on equipment used in planting or seeding. 
     Qualified timber property means a woodlot or other site 
     located in the United States which will contain trees in 
     significant commercial quantities and which is held by the 
     taxpayer for the planting, cultivating, caring for, and 
     cutting of trees for sale or use in the commercial production 
     of timber products (sec. 194(c)(1)).
       If a taxpayer's otherwise qualifying reforestation 
     expenditures exceed the amount permitted to be expensed under 
     section 194, the remaining expenditures are amortized, and 
     the taxpayer is entitled to a deduction with respect to the 
     amortization of the amortizable basis (sec. 194(a)). 
     Reforestation expenditures qualifying for amortization are 
     deducted in 84 equal monthly installments starting with the 
     seventh month of the taxable year during which the 
     expenditures are paid or incurred. Only reforestation 
     expenditures that would otherwise be included in the basis of 
     qualified timber property qualify for expensing and, with 
     respect to amounts in excess of the $10,000 limit, for 
     amortization (however, costs that could be deducted in the 
     absence of section 194 are not required to be amortized).


                        Explanation of Provision

       The provision doubles, for certain taxpayers, the present-
     law expensing limit for reforestation expenditures paid or 
     incurred by such taxpayers (i) during the period after on or 
     August 28, 2005, and before January 1, 2008, with respect to 
     qualified timber property any portion of which is located in 
     the Gulf Opportunity Zone, (ii) during the period on or after 
     September 23, 2005, and before January 1, 2008, with respect 
     to qualified timber property any portion of which is located 
     in the Rita Zone and no portion of which is located in the 
     Gulf Opportunity Zone, and (iii) during the period on or 
     after October 23, 2005, and before January 1, 2008, with 
     respect to qualified timber property any portion of which is 
     located in the Wilma Zone. The amount by which the expensing 
     limit is increased, however, is limited to the amount of 
     reforestation expenditures paid or incurred during the 
     relevant portion of the taxable year.
       For example, suppose an otherwise eligible calendar-year 
     taxpayer incurred $20,000 of reforestation expenditures in 
     June, 2005 (i.e., prior to the relevant period), and incurs 
     an additional $5,000 of reforestation expenditures in 
     October, 2005, in the Gulf Opportunity Zone; the taxpayer 
     would be permitted to expense $15,000 of the expenditures 
     (because the increase in the expensing limit is limited to 
     the $5,000 of expenditures paid or incurred during the 
     relevant period within the taxable year) and could amortize 
     the remaining $10,000 under section 194(a). By contrast, if 
     the taxpayer had incurred $5,000 of reforestation 
     expenditures in June, 2005, and incurs an additional $20,000 
     of reforestation expenditures in October, 2005, then the 
     taxpayer would be permitted to expense $20,000 of the 
     expenditures, and could amortize the remaining $5,000 under 
     section 194(a).
       The provision applies to taxpayers with aggregate holdings 
     of qualified timber property which do not exceed 500 acres at 
     any time during the taxable year. ``Qualified timber 
     property'' is defined by section 194(c)(1) as ``a woodlot or 
     other site located in the United States which will contain 
     trees in significant commercial quantities and which is held 
     by the taxpayer for the planting, cultivating, caring for, 
     and cutting of trees for sale or use in the commercial 
     production of timber products.''
       The provision does not apply to any taxpayer which is a 
     corporation the stock of which is publicly traded on an 
     established securities market, or which is a real estate 
     investment trust.


                             Effective Date

       The proposal is effective for taxable years ending on or 
     after August 28, 2005, (i) for expenditures paid or incurred 
     on or after August 28, 2005, and before January 1, 2008, with 
     respect to qualified timber property any portion of which is 
     located in the Gulf Opportunity Zone, (ii) for expenditures 
     paid or incurred on or after September 23, 2005, and before 
     January 1, 2008, with respect to qualified timber property 
     any portion of which is located in the Rita Zone and no 
     portion of which located in the Gulf Opportunity Zone, and 
     (iii) for expenditures paid or incurred on or after October 
     23, 2005, and before January 1, 2008, with respect to 
     qualified timber property any portion of which is located in 
     the Wilma Zone.
     11. Five-year NOL carryback of certain timber losses (new 
         sec. 1400N(i)(2) of the Code)


                              Present Law

       A net operating loss (``NOL'') is, generally, the amount by 
     which a taxpayer's business deductions exceed the taxpayer's 
     gross income. In general, an NOL may be carried back two 
     years and carried over 20 years to offset taxable income in 
     these years (sec. 172). NOLs generally are first applied to 
     the earliest of the taxable years to which the loss may be 
     carried (sec. 172(b)(2)).
       In the case of an NOL arising from a farming loss, the NOL 
     can be carried back five years. A ``farming loss'' is defined 
     as the amount of any net operating loss attributable to a 
     farming business as defined in section 263A(e)(4). Under 
     section 263A(e)(4), a farming business includes the trade or 
     business of farming, as well as the trade or business of 
     operating a nursery or sod farm, or the raising or harvesting 
     of trees bearing fruit, nuts, or other crops, or ornamental 
     trees. It does not include the planting, cultivating, caring 
     for, holding or cutting of trees for sale or use in the 
     commercial production of timber products.
       A farming loss cannot exceed the taxpayer's NOL for the 
     taxable year. In calculating the amount of a taxpayer's NOL 
     carrybacks, the portion of the NOL that is attributable to a 
     farming loss is treated as a separate NOL and is taken into 
     account after the remaining portion of the NOL for the 
     taxable year.


                        Explanation of Provision

       Under the provision, for purposes of determining the 
     farming loss (if any) of certain taxpayers, income and loss 
     is treated as attributable to a farming business if such 
     income and loss is attributable to qualified timber property 
     any portion of which is located in the Gulf Opportunity Zone 
     or in the Rita GO Zone, and if such income and loss is 
     allocable to that portion of the taxpayer's taxable year 
     which is (i) on or after August 28, 2005 (for qualified 
     timber property any portion of which is located in the Gulf 
     Opportunity Zone), on or after September 23, 2005 (for 
     qualified timber property any portion of which is located in 
     the Rita GO Zone and no portion of which is located in the 
     Gulf Opportunity Zone), or on or after October 23, 2005 (for 
     qualified timber property any portion of which is located in 
     the Wilma Zone) and (ii) before January 1, 2007. ``Qualified 
     timber property'' is defined by section 194(c)(1) as ``a 
     woodlot or other site located in the United States which will 
     contain trees in significant commercial quantities and which 
     is held by the taxpayer for the planting, cultivating, caring 
     for, and cutting of trees for sale or use in the commercial 
     production of timber products.''
       The provision applies to taxpayers with aggregate holdings 
     of qualified timber property which do not exceed 500 acres at 
     any time during the taxable year. Further, the provision only 
     applies (i) with respect to qualified timber property any 
     portion of which is located in the Gulf Opportunity Zone, if 
     the taxpayer held such property on August 28, 2005, (ii) with 
     respect to qualified timber property any portion of which is 
     located in the Rita GO Zone and no portion of which is 
     located in the Gulf Opportunity Zone, if the taxpayer held 
     such property on September 23, 2005, and (iii) with respect 
     to qualified timber property any portion of which is located 
     in the Wilma Zone, if the taxpayer held such property on 
     October 23, 2005.
       The provision does not apply to any taxpayer which is a 
     corporation the stock of which is publicly traded on an 
     established securities market, or which is a real estate 
     investment trust.


                             Effective Date

       The proposal is effective for taxable years ending on or 
     after August 28, 2005, with respect to income and loss which 
     is allocable to that portion of the taxpayer's taxable year 
     which is (i) on or after August 28, 2005 (for qualified 
     timber property any portion of which is located in the Gulf 
     Opportunity Zone), on or after September 23, 2005 (for 
     qualified timber property any portion of which is located in 
     the Rita Zone and no portion of which is located in the Gulf 
     Opportunity Zone), or on or after October 23, 2005 (for 
     qualified timber property any portion of which is located in 
     the Wilma Zone) and (ii) before January 1, 2007.

[[Page S14035]]

     12. Special rule for Gulf Opportunity Zone public utility 
         casualty losses (new sec. 1400N(j) of the Code)


                              Present Law

     In general
       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 
     carryover of an NOL reduces Federal income tax for the 
     carryover year.
       In general, an NOL may be carried back two years and 
     carried over 20 years to offset taxable income in such years. 
     NOLs generally are first applied to the earliest of the 
     taxable years to which the loss may be carried.
     Exceptions to the general rule
       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).
     Specified liability losses
       The specified liability loss rules generally apply to 
     certain product liability losses and other liability losses. 
     The amount of the specified liability loss cannot exceed the 
     taxpayer's NOL for the taxable year. A specified liability 
     loss is treated as a separate NOL for the taxable year which 
     is eligible for a 10-year carryback period. Any remaining 
     portion of the taxpayer's NOL is subject to the general two-
     year carryback period.


                        Explanation of Provision

       The provision provides an election for taxpayers to treat 
     any Gulf Opportunity Zone public utility casualty loss as a 
     specified liability loss to which the present-law 10-year 
     carryback period applies. A Gulf Opportunity Zone public 
     utility casualty loss is any casualty loss of public utility 
     property by reason of Hurricane Katrina which is allowed as a 
     deduction under section 165. The amount of the casualty loss 
     is reduced by the amount of any gain recognized by the 
     taxpayer from involuntary conversions of public utility 
     property located in the Gulf Opportunity Zone caused by 
     Hurricane Katrina. The total amount of specified liability 
     loss, including any amount of public utility casualty loss 
     treated as such, is limited to the amount of the taxpayer's 
     overall NOL for the taxable year as under present law. 
     Taxpayers who elect the applicability of the proposed 
     provision with respect to any loss are not eligible to also 
     treat the loss as having occurred in any prior taxable year 
     under section 165(i), nor may they include the casualty loss 
     as part of the five-year NOL carryback provided under another 
     provision of the bill.
       For purposes of the proposed provision, public utility 
     property is defined as in section 168(i)(10) to mean, 
     generally, property used predominantly in a rate-regulated 
     trade or business of the furnishing or sale of electrical 
     energy, water, or sewage disposal services; gas or steam 
     through a local distribution system; telephone services or 
     certain other communication services; or transportation of 
     gas or steam by pipeline.


                             Effective Date

       The provision is effective for losses arising in taxable 
     years ending on or after August 28, 2005.
     13. Five-year NOL carryback for certain amounts related to 
         Hurricane Katrina or the Gulf Opportunity Zone (new sec. 
         1400N(k) of the Code)


                              Present Law

     In general
       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 
     carryover of an NOL reduces Federal income tax for the 
     carryover year.
       In general, an NOL may be carried back two years and 
     carried over 20 years to offset taxable income in such years. 
     NOLs generally are first applied to the earliest of the 
     taxable years to which the loss may be carried.
       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).
       Separately, under section 165(i), a taxpayer who incurs a 
     loss attributable to a Presidentially declared disaster may 
     elect to take such loss into account for the taxable year 
     immediately preceding the taxable year in which the disaster 
     occurred. This rule applies regardless of whether the 
     taxpayer has an overall net operating loss for the relevant 
     taxable years.
       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. However, 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, offset 
     100 percent of a taxpayer's AMTI.


                        Explanation of Provision

     In general
       The provision provides a special five-year carryback period 
     for NOLs to the extent of certain specified amounts related 
     to Hurricane Katrina or the Gulf Opportunity Zone. The amount 
     of the NOL which is eligible for the five year carryback 
     (``eligible NOL'') is limited to the aggregate amount of the 
     following deductions: (i) qualified Gulf Opportunity Zone 
     casualty losses; (ii) certain moving expenses; (iii) certain 
     temporary housing expenses; (iv) depreciation deductions with 
     respect to qualified Gulf Opportunity Zone property for the 
     taxable year the property is placed in service; and (v) 
     deductions for certain repair expenses resulting from 
     Hurricane Katrina. The provision applies for losses paid or 
     incurred after August 27, 2005, and before January 1, 2008; 
     however, an irrevocable election not to apply the five-year 
     carryback under the provision may be made with respect to any 
     taxable year.
     Qualified Gulf Opportunity Zone casualty losses
       The amount of qualified Gulf Opportunity Zone casualty 
     losses which may be included in the eligible NOL is the 
     amount of the taxpayer's casualty losses with respect to (1) 
     property used in a trade or business, and (2) capital assets 
     held for more than one year in connection with either a trade 
     or business or a transaction entered into for profit. In 
     order for a casualty loss to qualify, the property must be 
     located in the Gulf Opportunity Zone and the loss must be 
     attributable to Hurricane Katrina. As under present law, the 
     amount of any casualty loss includes only the amount not 
     compensated for by insurance or otherwise. In addition, the 
     total amount of the casualty loss which may be included in 
     the eligible NOL is reduced by the amount of any gain 
     recognized by the taxpayer from involuntary conversions of 
     property located in the Gulf Opportunity Zone caused by 
     Hurricane Katrina.
       To the extent that a casualty loss is included in the 
     eligible NOL and carried back under the provision, the 
     taxpayer is not eligible to also treat the loss as having 
     occurred in the prior taxable year under section 165(i). 
     Similarly, the five year carryback under the provision does 
     not apply to any loss taken into account for purposes of the 
     ten-year carryback of public utility casualty losses which is 
     provided under another provision in the bill.
     Moving expenses
       Certain employee moving expenses of an employer may be 
     included in the eligible NOL. In order to qualify, an amount 
     must be paid or incurred after August 27, 2005, and before 
     January 1, 2008 with respect to an employee who (i) lived in 
     the Gulf Opportunity Zone before August 28, 2005, (ii) was 
     displaced from their home either temporarily or permanently 
     as a result of Hurricane Katrina, and (iii) is employed in 
     the Gulf Opportunity Zone by the taxpayer after the expense 
     is paid or incurred.
       For this purpose, moving expenses are defined as under 
     present law to include only the reasonable expenses of moving 
     household goods and personal effects from the former 
     residence to the new residence, and of traveling (including 
     lodging) from the former residence to the new place of 
     residence. However, for purposes of the provision, the former 
     residence and the new residence may be the same residence if 
     the employee initially vacated the residence as a result of 
     Hurricane Katrina. It is not necessary for the individual 
     with respect to whom the moving expenses are incurred to have 
     been an employee of the taxpayer at the time the expenses 
     were incurred. Thus, assuming the other requirements are met, 
     a taxpayer who pays the moving expenses of a prospective 
     employee and subsequently employs the individual in the Gulf 
     Opportunity Zone may include such expenses in the eligible 
     NOL.
     Temporary housing expenses
       Any deduction for expenses of an employer to temporarily 
     house employees who are employed in the Gulf Opportunity Zone 
     may be included in the eligible NOL. It is not necessary for 
     the temporary housing to be located in the Gulf Opportunity 
     Zone in order for such expenses to be included in the 
     eligible NOL; however, the employee's principal place of 
     employment with the taxpayer must be in Gulf Opportunity 
     Zone. So, for example, if a taxpayer temporarily houses an 
     employee at a location outside of the Gulf Opportunity Zone, 
     and the employee commutes into the Gulf Opportunity Zone to 
     the employee's principal place of employment, such temporary 
     housing costs will be included in the eligible NOL (assuming 
     all other requirements are met).
     Depreciation of Gulf Opportunity Zone property
       The eligible NOL includes the depreciation deduction (or 
     amortization deduction in lieu

[[Page S14036]]

     of depreciation) with respect to qualified Gulf Opportunity 
     Zone property placed in service during the year. The special 
     carryback period applies to the entire allowable depreciation 
     deduction for such property for the year in which it is 
     placed in service, including both the regular depreciation 
     deduction and the additional first-year depreciation 
     deduction, if any. An election out of the additional first-
     year depreciation deduction for Gulf Opportunity Zone 
     property does not preclude eligibility for the five-year 
     carryback.
     Repair expenses
       The eligible NOL includes deductions for repair expenses 
     (including the cost of removal of debris) with respect to 
     damage caused by Hurricane Katrina. For example, expenses 
     relating to the removal of mold and other contaminants from 
     property located in the Gulf Opportunity Zone will be 
     included in the eligible NOL. In order to qualify, the amount 
     must be paid or incurred after August 27, 2005 and before 
     January 1, 2008, and the property must be located in the Gulf 
     Opportunity Zone.
     Other rules
       The amount of the NOL to which the five-year carryback 
     period applies is limited to the amount of the corporation's 
     overall NOL for the taxable year. Any remaining portion of 
     the taxpayer's NOL is subject to the general two-year 
     carryback period. Ordering rules similar to those for 
     specified liability losses apply to losses carried back under 
     the provision.
       In addition, the general rule which limits a taxpayer's NOL 
     deduction to 90 percent of AMTI will not apply to any NOL to 
     which the five-year carryback period applies under the 
     provision. Instead, a taxpayer may apply such NOL carrybacks 
     to offset up to 100 percent of AMTI.


                             Effective Date

       The provision is effective for losses arising in taxable 
     years ending on or after August 28, 2005.
     14. Gulf Tax credit bonds (new sec. 1400N(l) of the Code)


                              Present Law

     In general
       Under present law, gross income does not include interest 
     on State or local bonds (sec. 103). State and local bonds are 
     classified generally as either governmental bonds or private 
     activity bonds. Governmental bonds are bonds which are 
     primarily used to finance governmental functions or are 
     repaid with governmental funds. Private activity bonds are 
     bonds with respect to which the State or local government 
     serves as a conduit providing financing to nongovernmental 
     persons (e.g., private businesses or individuals). The 
     exclusion from income for State and local bonds does not 
     apply to private activity bonds, unless the bonds are issued 
     for certain permitted purposes (``qualified private activity 
     bonds'').
       Generally, qualified private activity bonds are subject to 
     restrictions on the use of proceeds for the acquisition of 
     land and existing property, use of proceeds to finance 
     certain specified facilities (e.g., airplanes, skyboxes, 
     other luxury boxes, health club facilities, gambling 
     facilities, and liquor stores), and use of proceeds to pay 
     costs of issuance (e.g., bond counsel and underwriter fees). 
     Certain types of qualified private activity bonds (e.g., 
     small issue and redevelopment bonds) also are subject to 
     additional restrictions on the use of proceeds for certain 
     facilities (e.g., golf courses and massage parlors). 
     Moreover, the term of qualified private activity bonds 
     generally may not exceed 120 percent of the economic life of 
     the property being financed and certain public approval 
     requirements (similar to requirements that typically apply 
     under State law to issuance of governmental debt) apply under 
     Federal law to issuance of private activity bonds.
     Tax-credit bonds
       As an alternative to traditional tax-exempt bonds, States 
     and local governments may issue tax-credit bonds for limited 
     purposes. Rather than receiving interest payments, a taxpayer 
     holding a tax-credit bond on an allowance date is entitled to 
     a credit. Generally, the credit amount is includible in gross 
     income (as if it were a taxable interest payment on the 
     bond), and the credit may be claimed against regular income 
     tax and alternative minimum tax liability. Two types of tax-
     credit bonds may be issued under present law, ``qualified 
     zone academy bonds,'' which are bonds issued for the purpose 
     of renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other 
     personnel at certain school facilities, and ``clean renewable 
     energy bonds,'' which are bonds issued to finance facilities 
     that would qualify for the tax credit under section 45 
     without regard to the placed in service date requirements of 
     that section.
     Arbitrage restrictions on tax-exempt bonds
       To prevent States and local governments from issuing more 
     tax-exempt bonds than is necessary for the activity being 
     financed or from issuing such bonds earlier than needed for 
     the purpose of the borrowing, the Code includes arbitrage 
     restrictions limiting the ability to profit from investment 
     of tax-exempt bond proceeds. In general, arbitrage profits 
     may be earned only during specified periods (e.g., defined 
     ``temporary periods'' before funds are needed for the purpose 
     of the borrowing) or on specified types of investments (e.g., 
     ``reasonably required reserve or replacement funds''). 
     Subject to limited exceptions, profits that are earned during 
     these periods or on such investments must be rebated to the 
     Federal Government. Governmental bonds are subject to less 
     restrictive arbitrage rules than most private activity bonds.


                        Explanation of Provision

       The provision creates a new category of tax-credit bonds 
     that may be issued in calendar year 2006 by the States of 
     Louisiana, Mississippi, and Alabama (``Gulf Tax Credit 
     Bonds''). As with present law tax-credit bonds, the taxpayer 
     holding Gulf Tax Credit Bonds on the allowance date would be 
     entitled to a tax credit. The amount of the credit would be 
     determined by multiplying the bond's credit rate by the face 
     amount on the holder's bond. The credit would be includible 
     in gross income (as if it were an interest payment on the 
     bond) and could be claimed against regular income tax 
     liability and alternative minimum tax liability.
       Under the provision, 95 percent or more of the proceeds of 
     Gulf Tax Credit Bonds must be used to (i) pay principal, 
     interest, or premium on a bond (other than a private activity 
     bond) that was outstanding on August 28, 2005, and was issued 
     by the State issuing the Gulf Tax Credit Bonds, or any 
     political subdivision thereof, or (ii) make a loan to any 
     political subdivision of such State to pay principal, 
     interest, or premium on a bond (other than a private activity 
     bond) issued by such political subdivision. In addition, the 
     issuer of Gulf Tax Credit Bonds must provide additional funds 
     to pay principal, interest, or premium on outstanding bonds 
     equal to the amount of Gulf Tax Credit Bonds issued to repay 
     such outstanding bonds. Gulf Tax Credit Bonds must be a 
     general obligation of the issuing State and must be 
     designated by the Governor of such issuing State. The maximum 
     maturity on Gulf Tax Credit Bonds is two years. In addition, 
     present-law arbitrage rules that restrict the ability of 
     State and local governments to invest bond proceeds apply to 
     Gulf Tax Credit Bonds.
       The maximum amount of Gulf Tax Credit Bonds that may be 
     issued pursuant to this provision is $200 million in the case 
     of Louisiana, $100 million in the case of Mississippi, and 
     $50 million in the case of Alabama. Gulf Tax Credit Bonds may 
     not be used to pay principal, interest, or premium on any 
     bond with respect to which there is any outstanding refunded 
     or refunding bond. Moreover, Gulf Tax Credit Bonds may not be 
     used to pay principal, interest, or premium on any prior bond 
     if the proceeds of such prior bond were used to provide any 
     property described in section 144(c)(6)(B) (i.e., any private 
     or commercial golf course, country club, massage parlor, hot 
     tub facility, suntan facility, racetrack or other facility 
     used for gambling, or any store the principal purpose of 
     which is the sale alcoholic beverages for consumption off 
     premises).


                             Effective Date

       The provision is effective for bonds issued after December 
     31, 2005 and before January 1, 2007.
     15. Additional allocation of new markets tax credit for 
         investments that serve the Gulf Opportunity Zone (new 
         sec. 1400N(m) of the Code)


                              Present Law

       Section 45D provides a new markets tax credit for qualified 
     equity investments made to acquire stock in a corporation, or 
     a capital interest in a partnership, that is a qualified 
     community development entity (``CDE''). The amount of the 
     credit allowable to the investor (either the original 
     purchaser or a subsequent holder) is (1) a five-percent 
     credit for the year in which the equity interest is purchased 
     from the CDE and for each of the following two years, and (2) 
     a six-percent credit for each of the following four years. 
     The credit is determined by applying the applicable 
     percentage (five or six percent) to the amount paid to the 
     CDE for the investment at its original issue, and is 
     available for a taxable year to the taxpayer who holds the 
     qualified equity investment on the date of the initial 
     investment or on the respective anniversary date that occurs 
     during the taxable year. The credit is recaptured if at any 
     time during the seven-year period that begins on the date of 
     the original issue of the investment the entity ceases to be 
     a qualified CDE, the proceeds of the investment cease to be 
     used as required, or the equity investment is redeemed.
       A qualified CDE is any domestic corporation or partnership: 
     (1) whose primary mission is serving or providing investment 
     capital for low-income communities or low-income persons; (2) 
     that maintains accountability to residents of low-income 
     communities by their representation on any governing board of 
     or any advisory board to the CDE; and (3) that is certified 
     by the Secretary as being a qualified CDE. A qualified equity 
     investment means stock (other than nonqualified preferred 
     stock) in a corporation or a capital interest in a 
     partnership that is acquired directly from a CDE for cash, 
     and includes an investment of a subsequent purchaser if such 
     investment was a qualified equity investment in the hands of 
     the prior holder. Substantially all of the investment 
     proceeds must be used by the CDE to make qualified low-income 
     community investments. For this purpose, qualified low-income 
     community investments include: (1) capital or equity 
     investments in, or loans to, qualified active low-income 
     community businesses; (2) certain financial counseling and

[[Page S14037]]

     other services to businesses and residents in low-
     income communities; (3) the purchase from another CDE of 
     any loan made by such entity that is a qualified low-
     income community investment; or (4) an equity investment 
     in, or loan to, another CDE.
       A ``low-income community'' is a population census tract 
     with either (1) a poverty rate of at least 20 percent or (2) 
     median family income which does not exceed 80 percent of the 
     greater of metropolitan area median family income or 
     statewide median family income (for a non-metropolitan census 
     tract, does not exceed 80 percent of statewide median family 
     income). In the case of a population census tract located 
     within a high migration rural county, low-income is defined 
     by reference to 85 percent (rather than 80 percent) of 
     statewide median family income. For this purpose, a high 
     migration rural county is any county that, during the 20-year 
     period ending with the year in which the most recent census 
     was conducted, has a net out-migration of inhabitants from 
     the county of at least 10 percent of the population of the 
     county at the beginning of such period.
       The Secretary has the authority to designate ``targeted 
     populations'' as low-income communities for purposes of the 
     new markets tax credit. For this purpose, a ``targeted 
     population'' is defined by reference to section 103(20) of 
     the Riegle Community Development and Regulatory Improvement 
     Act of 1994 (12 U.S.C. 4702(20)) to mean individuals, or an 
     identifiable group of individuals, including an Indian tribe, 
     who (A) are low-income persons; or (B) otherwise lack 
     adequate access to loans or equity investments. Under such 
     Act, ``low-income'' means (1) for a targeted population 
     within a metropolitan area, less than 80 percent of the area 
     median family income; and (2) for a targeted population 
     within a non-metropolitan area, less than the greater of 80 
     percent of the area median family income or 80 percent of the 
     statewide non-metropolitan area median family income (12 
     U.S.C. 4702(17)). Under such Act, a targeted population is 
     not required to be within any census tract. In addition, a 
     population census tract with a population of less than 2,000 
     is treated as a low-income community for purposes of the 
     credit if such tract is within an empowerment zone, the 
     designation of which is in effect under section 1391, and is 
     contiguous to one or more low-income communities.
       A qualified active low-income community business is defined 
     as a business that satisfies, with respect to a taxable year, 
     the following requirements: (1) at least 50 percent of the 
     total gross income of the business is derived from the active 
     conduct of trade or business activities in any low-income 
     community; (2) a substantial portion of the tangible property 
     of such business is used in a low-income community; (3) a 
     substantial portion of the services performed for such 
     business by its employees is performed in a low-income 
     community; and (4) less than five percent of the average of 
     the aggregate unadjusted bases of the property of such 
     business is attributable to certain financial property or to 
     certain collectibles.
       The maximum annual amount of qualified equity investments 
     is capped at $2.0 billion per year for calendar years 2004 
     and 2005, and at $3.5 billion per year for calendar years 
     2006 and 2007.


                        Explanation of Provision

       The provision allows an additional allocation of the new 
     markets tax credit in an amount equal to $300,000,000 for 
     2005 and 2006, and $400,000,000 for 2007, to be allocated 
     among qualified CDEs to make qualified low-income community 
     investments within the Gulf Opportunity Zone. To qualify for 
     any such allocation, a qualified CDE must have as a 
     significant mission the recovery and redevelopment of the 
     Gulf Opportunity Zone. The carryover of any unused additional 
     allocation is applied separately from the carryover with 
     respect to allocations made under present law.


                             Effective Date

       The proposal is effective on the date of enactment.
     16. Representations regarding income eligibility for purposes 
         of qualified residential rental project requirements (new 
         sec. 1400N(n) of the Code)


                              Present Law

     In general
       Under present law, gross income does not include interest 
     on State or local bonds (sec. 103). State and local bonds are 
     classified generally as either governmental bonds or private 
     activity bonds. Governmental bonds are bonds which are 
     primarily used to finance governmental functions or are 
     repaid with governmental funds. Private activity bonds are 
     bonds with respect to which the State or local government 
     serves as a conduit providing financing to nongovernmental 
     persons (e.g., private businesses or individuals). The 
     exclusion from income for State and local bonds does not 
     apply to private activity bonds, unless the bonds are issued 
     for certain permitted purposes (``qualified private activity 
     bonds'').
     Qualified private activity bonds
       The definition of a qualified private activity bond 
     includes an exempt facility bond, or qualified mortgage, 
     veterans' mortgage, small issue, redevelopment, 501(c)(3), or 
     student loan bond. The definition of exempt facility bond 
     includes bonds issued to finance certain transportation 
     facilities (airports, ports, mass commuting, and high-speed 
     intercity rail facilities); qualified residential rental 
     projects; privately owned and/or operated utility facilities 
     (sewage, water, solid waste disposal, and local district 
     heating and cooling facilities, certain private electric and 
     gas facilities, and hydroelectric dam enhancements); public/
     private educational facilities; qualified green building and 
     sustainable design projects; and qualified highway or surface 
     freight transfer facilities.
       Subject to certain requirements, qualified private activity 
     bonds may be issued to finance residential rental property or 
     owner-occupied housing. Residential rental property may be 
     financed with exempt facility bonds if the financed project 
     is a ``qualified residential rental project.'' A project is a 
     qualified residential rental project if 20 percent or more of 
     the residential units in such project are occupied by 
     individuals whose income is 50 percent or less of area median 
     gross income (the ``20-50 test''). Alternatively, a project 
     is a qualified residential rental project if 40 percent or 
     more of the residential units in such project are occupied by 
     individuals whose income is 60 percent or less of area median 
     gross income (the ``40-60 test''). The issuer must elect to 
     apply either the 20-50 test or the 40-60 test. Operators of 
     qualified residential rental projects must annually certify 
     that such project meets the requirements for 
     qualification, including meeting the 20-50 test or the 40-
     60 test.


                        Explanation of Provision

       Under the provision, the operator of a qualified 
     residential rental project may rely on the representations of 
     prospective tenants displaced by reason of Hurricane Katrina 
     for purposes of determining whether such individual satisfies 
     the income limitations for qualified residential rental 
     projects and, thus, the project is in compliance with the 20-
     50 test or the 40-60 test. (For a description of 
     modifications to the 20-50 test and the 40-60 test for 
     qualified residential rental projects financed in the GO 
     Zone, see I.A.2. Tax-exempt financing for the Gulf 
     Opportunity Zone, above).
       This rule only applies if the individual's tenancy begins 
     during the six-month period beginning on the date when such 
     individual was displaced by Hurricane Katrina.


                             Effective Date

       The provision is effective on the date of enactment.
     17. Treatment of public utility disaster losses (new sec. 
         1400N(o) of the Code)


                              Present Law

       Under section 165(i), certain losses attributable to a 
     disaster occurring in a Presidentially declared disaster area 
     may, at the election of the taxpayer, be taken into account 
     for the taxable year immediately preceding the taxable year 
     in which the disaster occurred.
       Section 6411 provides a procedure under which taxpayers may 
     apply for tentative carryback and refund adjustments with 
     respect to net operating losses, net capital losses, and 
     unused business credits.


                        Explanation of Provision

       The provision provides an election for taxpayers who 
     incurred casualty losses attributable to Hurricane Katrina 
     with respect to public utility property located in the Gulf 
     Opportunity Zone. Under the election, such losses may be 
     taken into account in the fifth taxable year (rather than the 
     1st taxable year) immediately preceding the taxable year in 
     which the loss occurred. If the application of this provision 
     results in the creation or increase of a net operating loss 
     for the year in which the casualty loss is taken into 
     account, the net operating loss may be carried back or 
     carried over as under present law applicable to net operating 
     losses for such year.
       For this purpose, public utility property is property used 
     predominantly in the trade or business of the furnishing or 
     sale of electrical energy, water, or sewage disposal 
     services; gas or steam through a local distribution system; 
     telephone services, or other communication services if 
     furnished or sold by the Communications Satellite Corporation 
     for purposes authorized by the Communications Satellite Act 
     of 1962; or transportation of gas or steam by pipeline. Such 
     property is eligible regardless of whether the taxpayer's 
     rates are established or approved by any regulatory body.
       A taxpayer making the election under the provision is 
     eligible to file an application for a tentative carryback 
     adjustment of the tax for any prior taxable year affected by 
     the election. As under present law with respect to tentative 
     carryback and refund adjustments, the IRS generally has 90 
     days to act on the refund claim. Under the provision, the 
     statute of limitations with respect to such a claim can not 
     expire earlier than one year after the date of enactment. 
     Also, a taxpayer making the election with respect to a loss 
     is not entitled to interest with respect to any overpayment 
     attributable to the loss.


                             Effective Date

       The provision is effective for taxable years ending on or 
     after August 28, 2005.
     18. Tax benefits not available with respect to certain 
         property (new sec. 1400N of the Code)


                              Present Law

       Under present law, specific tax benefits do not apply with 
     respect to certain types of property. For example, private 
     activity bonds are subject to restrictions on the use of 
     proceeds for the acquisition of land and existing property, 
     use of proceeds to finance

[[Page S14038]]

     certain specified facilities (e.g., airplanes, skyboxes, 
     other luxury boxes, health club facilities, gambling 
     facilities, and liquor stores), and use of proceeds to pay 
     costs of issuance (e.g., bond counsel and underwriter fees). 
     Small issue and redevelopment bonds also are subject to 
     additional restrictions on the use of proceeds for certain 
     facilities (e.g., golf courses and massage parlors).


                        Explanation of Provision

       The provisions relating to additional first-year 
     depreciation, increased expensing under section 179, and the 
     five-year carryback of NOLs attributable to casualty losses, 
     depreciation, or amortization otherwise provided under new 
     Code section 1400N do not apply with respect to certain 
     property. Specifically, the provisions do not apply with 
     respect to any private or commercial golf course, country 
     club, massage parlor, hot tub facility, suntan facility, or 
     any store the principal business of which is the sale of 
     alcoholic beverages for consumption off premises. The 
     provisions also do not apply with respect to any gambling or 
     animal racing property.
       For this purpose, gambling or animal racing property 
     includes certain personal property and certain real property. 
     Personal property treated as gambling or animal racing 
     property is any equipment, furniture, software, or other 
     property used directly in connection with gambling, the 
     racing of animals, or the on-site (i.e., at the racetrack) 
     viewing of such racing. Real property treated as gambling or 
     animal racing property is the portion of any real property 
     (determined by square footage) that is dedicated to gambling, 
     the racing of animals, or the on-site viewing of such racing 
     (except if the portion so dedicated is less than 100 square 
     feet). For example, the additional first-year depreciation 
     for a building which is used as both a casino and a hotel 
     (and which otherwise qualifies for additional first-year 
     depreciation under the bill) is determined without regard to 
     the portion of the building's basis which bears the same 
     percentage to the total basis as the percentage of square 
     footage dedicated to gambling (i.e., the casino floor) 
     bears to total square footage of the building.
       No apportionment calculation is required with respect to 
     real property which meets the 100-square-foot de minimis 
     exception. Thus, for example, no apportionment calculation is 
     required in the case of a retail store that sells lottery 
     tickets in a less-than-100-square-foot area, nor in the case 
     of an establishment that, while not a casino, contains a 
     small number of gaming machines and devices in an area or 
     areas whose aggregate size is less than 100 square feet.


                             Effective Date

       The provision is effective for taxable years ending on or 
     after August 28, 2005, except that the inapplicability of the 
     five-year carryback of NOLs attributable to casualty losses, 
     depreciation, or amortization, is effective for losses 
     arising in such years.
     19. Expansion of Hope Scholarship and Lifetime Learning 
         Credit for students in the Gulf Opportunity Zone (new 
         sec. 1400O of the Code)


                              Present Law

     Hope credit
       The Hope credit (sec. 25A) is a nonrefundable credit of up 
     to $1,500 per student per year for qualified tuition and 
     related expenses paid for the first two years of the 
     student's post-secondary education in a degree or certificate 
     program. The Hope credit rate is 100 percent on the first 
     $1,000 of qualified tuition and related expenses, and 50 
     percent on the next $1,000 of qualified tuition and related 
     expenses. The Hope credit that a taxpayer may otherwise claim 
     is phased out ratably for taxpayers with modified adjusted 
     gross income between $43,000 and $53,000 ($87,000 and 
     $107,000 for married taxpayers filing a joint return) for 
     2005. These adjusted gross income phase-out ranges are 
     indexed for inflation. Also, each of the $1,000 amounts of 
     qualified tuition and related expenses to which the 100-
     percent credit rate and 50 percent credit rate apply are 
     indexed for inflation, with the amount rounded down to the 
     next lowest multiple of $100. The first adjustment to these 
     qualified expense amounts as a result of inflation is 
     expected in 2006. The Hope credit generally may not be 
     claimed against a taxpayer's alternative minimum tax 
     liability. However, the credit may be claimed against a 
     taxpayer's alternative minimum tax liability for taxable 
     years beginning prior to January 1, 2006.
       The qualified tuition and related expenses must be incurred 
     on behalf of the taxpayer, the taxpayer's spouse, or a 
     dependent of the taxpayer. The Hope credit is available with 
     respect to an individual student for two taxable years, 
     provided that the student has not completed the first two 
     years of post-secondary education before the beginning of the 
     second taxable year.
       In addition, for each taxable year, a taxpayer may elect 
     either the Hope credit, the Lifetime Learning credit 
     (described below), or the deduction for qualified tuition and 
     related expenses (sec. 222) with respect to an eligible 
     student.
       The Hope credit is available for ``qualified tuition and 
     related expenses,'' which include tuition and fees (excluding 
     nonacademic fees) required to be paid to an eligible 
     educational institution as a condition of enrollment or 
     attendance of an eligible student at the institution. Charges 
     and fees associated with meals, lodging, insurance, 
     transportation, and similar personal, living, or family 
     expenses are not eligible for the credit. The expenses of 
     education involving sports, games, or hobbies are not 
     qualified tuition and related expenses unless this education 
     is part of the student's degree program. Total qualified 
     tuition and related expenses are reduced by any scholarship 
     or fellowship grants excludable from gross income under 
     section 117 and any other tax-free educational benefits 
     received by the student (or the taxpayer claiming the credit) 
     during the taxable year. The Hope credit is not allowed with 
     respect to any education expense for which a deduction is 
     claimed under section 162 or any other section of the Code.
       An eligible student for purposes of the Hope credit is an 
     individual who is enrolled in a degree, certificate, or other 
     program (including a program of study abroad approved for 
     credit by the institution at which such student is enrolled) 
     leading to a recognized educational credential at an eligible 
     educational institution. The student must pursue a course of 
     study on at least a half-time basis. A student is considered 
     to pursue a course of study on at least a half-time basis 
     if the student carries at least one half the normal full-
     time work load for the course of study the student is 
     pursuing for at least one academic period that begins 
     during the taxable year. To be eligible for the Hope 
     credit, a student must not have been convicted of a 
     Federal or State felony consisting of the possession or 
     distribution of a controlled substance.
       For taxable years beginning in 2004 and 2005, the Hope 
     credit offsets the alternative minimum tax. For taxable years 
     thereafter, the Hope credit does not offset the alternative 
     minimum tax.
       Effective for taxable years beginning after December 31, 
     2010, the changes to the Hope credit made by EGTRRA no longer 
     apply. The EGTRRA change scheduled to expire is the change 
     that permitted a taxpayer to claim a Hope credit in the same 
     year that he or she claimed an exclusion from an education 
     savings account. Thus, after 2010, a taxpayer cannot claim a 
     Hope credit in the same year he or she claims an exclusion 
     from an education savings account.
     Lifetime Learning credit
       Individual taxpayers are allowed to claim a nonrefundable 
     credit, the Lifetime Learning credit, equal to 20 percent of 
     qualified tuition and related expenses incurred during the 
     taxable year on behalf of the taxpayer, the taxpayer's 
     spouse, or any dependents (Sec. 25A). Up to $10,000 of 
     qualified tuition and related expenses per taxpayer return 
     are eligible for the Lifetime Learning credit (i.e., the 
     maximum credit per taxpayer return is $2,000). In contrast 
     with the Hope credit, the maximum credit amount is not 
     indexed for inflation. The Lifetime Learning credit generally 
     may not be claimed against a taxpayer's alternative minimum 
     tax liability. However, the credit may be claimed against a 
     taxpayer's alternative minimum tax liability for taxable 
     years beginning prior to January 1, 2006.
       In contrast to the Hope credit, a taxpayer may claim the 
     Lifetime Learning credit for an unlimited number of taxable 
     years. Also in contrast to the Hope credit, the maximum 
     amount of the Lifetime Learning credit that may be claimed on 
     a taxpayer's return will not vary based on the number of 
     students in the taxpayer's family--that is, the Hope credit 
     is computed on a per student basis, while the Lifetime 
     Learning credit is computed on a family-wide basis. The 
     Lifetime Learning credit amount that a taxpayer may otherwise 
     claim is phased out ratably for taxpayers with modified 
     adjusted gross income between $43,000 and $53,000 ($87,000 
     and $107,000 for married taxpayers filing a joint return) for 
     2005. These phaseout ranges are the same as those for the 
     Hope credit, and are similarly indexed for inflation.
       A taxpayer may claim the Lifetime Learning credit for a 
     taxable year with respect to one or more students, even 
     though the taxpayer also claims a Hope credit for that same 
     taxable year with respect to other students. If, for a 
     taxable year, a taxpayer claims a Hope credit with respect to 
     a student, then the Lifetime Learning credit is not available 
     with respect to that same student for that year (although the 
     Lifetime Learning credit may be available with respect to 
     that same student for other taxable years). As with the Hope 
     credit, a taxpayer may not claim the Lifetime Learning credit 
     and also claim the section 222 deduction for qualified 
     tuition and related expenses (described below).
       As with the Hope credit, the Lifetime Learning credit is 
     available for ``qualified tuition and related expenses,'' 
     which include tuition and fees (excluding nonacademic fees) 
     required to be paid to an eligible educational institution as 
     a condition of enrollment or attendance of a student at the 
     institution. Eligible higher education institutions are 
     defined in the same manner for purposes of both the Hope and 
     Lifetime Learning credits. Charges and fees associated with 
     meals, lodging, insurance, transportation, and similar 
     personal, living or family expenses are not eligible for the 
     credit. The expenses of education involving sports, games, or 
     hobbies are not qualified tuition expenses unless this 
     education is part of the student's degree program, or the 
     education is undertaken to acquire or improve the job skills 
     of the student.
       In contrast to the Hope credit, qualified tuition and 
     related expenses for purposes of the Lifetime Learning credit 
     include tuition and fees incurred with respect to 
     undergraduate or graduate-level courses (as explained above, 
     the Hope credit is available

[[Page S14039]]

     only with respect to the first two years of a student's 
     undergraduate education). Additionally, in contrast to the 
     Hope credit, the eligibility of a student for the Lifetime 
     Learning credit does not depend on whether the student has 
     been convicted of a Federal or State felony consisting of the 
     possession or distribution of a controlled substance.
       As under the Hope credit, total qualified tuition and fees 
     are reduced by any scholarship or fellowship grants 
     excludable from gross income under section 117 and any other 
     tax-free educational benefits received by the student during 
     the taxable year (such as employer-provided educational 
     assistance excludable under section 127). The Lifetime 
     Learning credit is not allowed with respect to any education 
     expense for which a deduction is claimed under section 162 or 
     any other section of the Code.
       For taxable years beginning in 2004 and 2005, the Lifetime 
     Learning credit offsets the alternative minimum tax. For 
     taxable years thereafter, the credit does not offset the 
     alternative minimum tax.
       Effective for taxable years beginning after December 31, 
     2010, the changes to the Lifetime Learning credit made by 
     EGTRRA no longer apply. The EGTRRA change scheduled to expire 
     is the change that permitted a taxpayer to claim a Lifetime 
     Learning credit in the same year that he or she claimed an 
     exclusion from an education savings account. Thus, after 
     2010, taxpayers cannot claim a Lifetime Learning credit in 
     the same year he or she claims an exclusion from an education 
     savings account.
     Definition of qualified higher education expenses for 
         purposes of qualified tuition programs
       Present law provides favorable tax treatment for qualified 
     tuition programs that meet the requirements of section 529 of 
     the Code. For purposes of the rules relating to qualified 
     tuition programs, ``qualified higher education expenses'' 
     means tuition, fees, books, supplies, and equipment required 
     for the enrollment or attendance at an eligible educational 
     institution and expenses for special needs services in the 
     case of a special needs beneficiary which are incurred in 
     connection with such enrollment or attendance. In addition, 
     in the case of at least half-time students, qualified higher 
     education expenses include certain room and board expenses.


                        Explanation of Provision

       The provision temporarily expands the Hope and Lifetime 
     Learning credits for students attending (i.e., enrolled and 
     paying tuition at) an eligible education institution located 
     in the Gulf Opportunity Zone.
       Under the provision, the Hope credit is increased to 100 
     percent of the first $2,000 in qualified tuition and related 
     expenses and 50 percent of the next $2,000 of qualified 
     tuition and related expenses for a maximum credit of $3,000 
     per student. The Lifetime Learning credit rate is increased 
     from 20 percent to 40 percent. The provision expands the 
     definition of qualified expenses to mean qualified higher 
     education expenses as defined under the rules relating to 
     qualified tuition programs, including certain room and board 
     expenses for at least half-time students.
       The provision applies to taxable years beginning in 2005 or 
     2006.


                             Effective Date

       The provision is effective on the date of enactment.
     20. Housing relief for individuals affected by Hurricane 
         Katrina (new sec. 1400P of the Code)


                              Present Law

       Under present law, employer-provided housing is generally 
     includible in income as compensation and is wages for 
     purposes of social security and Medicare taxes and 
     unemployment tax (secs. 61, 3121(a), 3306(b)). Present law 
     provides an income and wage exclusion for the value of 
     lodging furnished to an employee, the employee's spouse, or 
     the employee's dependents by or on behalf of the employee's 
     employer, but generally only if the employee is required to 
     accept the lodging on the business premises of the employer 
     as a condition of employment (secs. 119, 3121(a)(19), and 
     3306(b)(14)). Reasonable expenses for employee compensation 
     are deductible by the employer (sec. 162(a)).


                        Explanation of Provision

       The provision provides a temporary income exclusion for the 
     value of in-kind lodging provided for a month to a qualified 
     employee (and the employee's spouse or dependents) by or on 
     behalf of a qualified employer. The amount of the exclusion 
     for any month for which lodging is furnished cannot exceed 
     $600. The exclusion does not apply for purposes of social 
     security and Medicare taxes or unemployment tax.
       The provision also provides a temporary credit to a 
     qualified employer of 30 percent of the value of lodging 
     excluded from the income of a qualified employee under the 
     provision. The amount taken as a credit is not deductible by 
     the employer.
       Qualified employee means, with respect to a month, an 
     individual who: (1) on August 28, 2005, had a principal 
     residence in the Gulf Opportunity (``GO'') Zone; and (2) 
     performs substantially all of his or her employment services 
     in the GO Zone for the qualified employer furnishing the 
     lodging. Qualified employer means any employer with a trade 
     or business located in the GO Zone.


                             Effective Date

       The provision applies to lodging provided during the period 
     beginning on the first day of the first month beginning after 
     the date of enactment and ending on the date that is six 
     months after such first day.
     21. Special rules for mortgage revenue bonds (sec. 404 of the 
         Katrina Emergency Tax Relief Act of 2005)


                              Present Law

     In general
       Under present law, gross income does not include interest 
     on State or local bonds (sec. 103). State and local bonds are 
     classified generally as either governmental bonds or private 
     activity bonds. Governmental bonds are bonds which are 
     primarily used to finance governmental functions or are 
     repaid with governmental funds. Private activity bonds are 
     bonds with respect to which the State or local government 
     serves as a conduit providing financing to nongovernmental 
     persons (e.g., private businesses or individuals). The 
     exclusion from income for State and local bonds does not 
     apply to private activity bonds, unless the bonds are issued 
     for certain permitted purposes (``qualified private activity 
     bonds'') (secs. 103(b)(1) and 141).
     Qualified mortgage bonds
       The definition of a qualified private activity bond 
     includes a qualified mortgage bond (sec. 143). Qualified 
     mortgage bonds are issued to make mortgage loans to qualified 
     mortgagors for the purchase, improvement, or rehabilitation 
     of owner-occupied residences. The Code imposes several 
     limitations on qualified mortgage bonds, including income 
     limitations for eligible mortgagors, purchase price 
     limitations on the home financed with bond proceeds, and a 
     ``first-time homebuyer'' requirement. The income limitations 
     are satisfied if all financing provided by an issue is 
     provided for mortgagors whose family income does not exceed 
     115 percent of the median family income for the metropolitan 
     area or State, whichever is greater, in which the financed 
     residences are located. The purchase price limitations 
     provide that a residence financed with qualified mortgage 
     bonds may not have a purchase price in excess of 90 percent 
     of the average area purchase price for that residence. The 
     first-time homebuyer requirement provides qualified mortgage 
     bonds generally cannot be used to finance a mortgage for a 
     homebuyer who had an ownership interest in a principal 
     residence in the three years preceding the execution of the 
     mortgage (the ``first-time homebuyer'' requirement).
       Special income and purchase price limitations apply to 
     targeted area residences. A targeted area residence is one 
     located in either (1) a census tract in which at least 70 
     percent of the families have an income which is 80 percent or 
     less of the state-wide median income or (2) an area of 
     chronic economic distress. For targeted area residences, the 
     income limitation is satisfied when no more than one-third of 
     the mortgages are made without regard to any income limits 
     and the remainder of the mortgages are made to mortgagors 
     whose family income is 140 percent or less of the 
     applicable median family income. The purchase price 
     limitation is raised from 90 percent to 110 percent of the 
     average area purchase price for targeted area residences. 
     In addition, the first-time homebuyer requirement does not 
     apply to targeted area residences.
       Qualified mortgage bonds also may be used to finance 
     qualified home-improvement loans. Qualified home-improvement 
     loans are defined as loans to finance alterations, repairs, 
     and improvements on an existing residence, but only if such 
     alterations, repairs, and improvements substantially protect 
     or improve the basic livability or energy efficiency of the 
     property. Qualified home-improvement loans may not exceed 
     $15,000.
       A temporary provision waived the first-time homebuyer 
     requirement for residences located in certain Presidentially 
     declared disaster areas (sec. 143(k)(11)). In addition, 
     residences located in such areas were treated as targeted 
     area residences for purposes of the income and purchase price 
     limitations. The special rule for residences located in 
     Presidentially declared disaster areas does not apply to 
     bonds issued after January 1, 1999.
       The Katrina Emergency Tax Relief Act (``KETRA'') waives the 
     first-time homebuyer requirement with respect to certain 
     residences located in an area with respect to which a major 
     disaster has been declared by the President before September 
     14, 2005, under section 401 of the Robert T. Stafford 
     Disaster Relief and Emergency Assistance Act by reason of 
     Hurricane Katrina (see sec. 404 of Pub. L. No. 109-73). The 
     waiver of the first-time homebuyer requirement does not apply 
     to financing provided after December 31, 2007. KETRA also 
     increases to $150,000 the permitted amount of a qualified 
     home-improvement loan with respect to residences located in 
     the Hurricane Katrina disaster area to the extent such loan 
     is for the repair of damage caused by Hurricane Katrina.


                        Explanation of Provision

       The proposal extends the waiver of the first-time homebuyer 
     requirement provided by KETRA to financing provided through 
     December 31, 2010.
       (For a description of additional mortgage revenue bond 
     rules applicable to the GO Zone, the Rita GO Zone and the 
     Wilma GO Zone, see II.H--Special Rules for Mortgage Revenue 
     Bonds, below)


                             Effective Date

       The provision is effective on the date of enactment.

[[Page S14040]]

     22. Treasury authority to grant bonus depreciation placed-in-
         service date relief (sec. 168(k) 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 range from three to 25 years. The depreciation 
     methods generally applicable to tangible personal property 
     are the 200-percent and 150-percent declining balance 
     methods, switching to the straight-line method for the 
     taxable year in which the depreciation deduction would be 
     maximized.
     Additional first year depreciation deduction
       Sec. 168(k) allows an additional first-year depreciation 
     deduction equal to 30 percent or 50 percent of the adjusted 
     basis of qualified property. In order for property to qualify 
     for the additional first-year depreciation deduction, it must 
     meet all of the following requirements. First, the property 
     must be (1) property to which MACRS applies with an 
     applicable recovery period of 20 years or less, (2) water 
     utility property (as defined in section 168(e)(5)), (3) 
     computer software other than computer software covered by 
     section 197, or (4) qualified leasehold improvement property 
     (as defined in section 168(k)(3)). Second, the original use 
     (the first use to which the property is put, whether or not 
     such use corresponds to the use of such property by the 
     taxpayer) of the property must commence with the taxpayer on 
     or after September 11, 2001. Third, the taxpayer must acquire 
     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., January 1, 2006) is provided for certain property with 
     a recovery period of ten years or longer and certain 
     transportation property. In order for property to qualify for 
     the extended placed-in-service date, the property must be 
     subject to section 263A and have an estimated production 
     period exceeding two years or an estimated production period 
     exceeding one year and a cost exceeding $1 million. 
     Transportation property is defined as tangible personal 
     property used in the trade or business of transporting 
     persons or property.
       The applicable time period for acquired property is (1) 
     after September 10, 2001, and before January 1, 2005, 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 January 1, 2005. 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. For property eligible for the 
     extended placed-in-service date, a special rule limits the 
     amount of costs eligible for the additional first year 
     depreciation. With respect to such property, only the portion 
     of the basis that is properly attributable to the costs 
     incurred before January 1, 2005 (``progress 
     expenditures'') is eligible for the additional first-year 
     depreciation. For purposes of determining the amount of 
     eligible progress expenditures, rules similar to sec. 
     46(d)(3) as in effect prior to the Tax Reform Act of 1986 
     apply.
       In addition, certain non-commercial aircraft can qualify 
     for the extended placed-inservice date. Qualifying aircraft 
     are eligible for the additional first-year depreciation 
     deduction if placed in service before January 1, 2006. In 
     order to qualify, the aircraft must:
       1. be acquired by the taxpayer during the applicable time 
     period as under present law;
       2. meet the appropriate placed-in-service date 
     requirements;
       3. not be tangible personal property used in the trade or 
     business of transporting persons or property (except for 
     agricultural or firefighting purposes);
       4. be purchased by a purchaser who, at the time of the 
     contract for purchase, has made a nonrefundable deposit of 
     the lesser of ten percent of the cost or $100,000; and
       5. have an estimated production period exceeding four 
     months and a cost exceeding $200,000.
       Aircraft qualifying under these rules are not subject to 
     the progress expenditures limitation.


                        Explanation of Provision

       The provision provides the Secretary with authority to 
     further extend the placed-inservice date (beyond December 31, 
     2005), on a case-by-case basis, for certain property eligible 
     for the December 31, 2005 placed-in-service date under 
     present law. The authority extends only to property placed in 
     service or manufactured in the Gulf Opportunity Zone, the 
     Rita GO Zone, or the Wilma GO Zone. In addition, the 
     authority extends only to circumstances in which the taxpayer 
     was unable to meet the December 31, 2005 deadline as a result 
     of Hurricanes Katrina, Rita, and/or Wilma. The extension 
     should be only for such additional time as is required as a 
     result of the hurricane(s) and in no case should extend the 
     deadline beyond December 31, 2006.


                             Effective Date

       The provision applies to property placed in service on or 
     after August 28, 2005, in taxable years ending on or after 
     such date.

      TITLE II--TAX BENEFITS RELATED TO HURRICANES RITA AND WILMA

   A. Special Rules for Use of Retirement Funds (new Code sec. 1400Q)

     1. Tax-favored withdrawals from retirement plans relating to 
         Hurricanes Rita and Wilma


                              Present Law

     In general
       Under present law, a distribution from a qualified 
     retirement plan under section 401(a), a qualified annuity 
     plan under section 403(a), a tax-sheltered annuity under 
     section 403(b) (a ``403(b) annuity''), an eligible deferred 
     compensation plan maintained by a State or local government 
     under section 457 (a ``governmental 457 plan''), or an 
     individual retirement arrangement under section 408 (an 
     ``IRA'') generally is included in income for the year 
     distributed (secs. 402(a), 403(a), 403(b), 408(d), and 
     457(a)). (These plans are referred to collectively as 
     ``eligible retirement plans''.) In addition, a distribution 
     from a qualified retirement or annuity plan, a 403(b) 
     annuity, or an IRA received before age 59\1/2\, death, or 
     disability generally is subject to a 10-percent early 
     withdrawal tax on the amount includible in income, unless an 
     exception applies (sec. 72(t)).
       An eligible rollover distribution from a qualified 
     retirement or annuity plan, a 403(b) annuity, or a 
     governmental 457 plan, or a distribution from an IRA, 
     generally can be rolled over within 60 days to another plan, 
     annuity, or IRA. The IRS has the authority to waive the 60-
     day requirement if failure to waive the requirement would be 
     against equity or good conscience, including cases of 
     casualty, disaster, or other events beyond the reasonable 
     control of the individual. Any amount rolled over is not 
     includible in income (and thus also not subject to the 10-
     percent early withdrawal tax).
       Distributions from a qualified retirement or annuity plan, 
     403(b) annuity, a governmental 457 plan, or an IRA are 
     generally subject to income tax withholding unless the 
     recipient elects otherwise. An eligible rollover distribution 
     from a qualified retirement or annuity plan, 403(b) annuity, 
     or governmental 457 plan is subject to income tax withholding 
     at a 20-percent rate unless the distribution is rolled over 
     to another plan, annuity or IRA by means of a direct 
     transfer.
       Certain amounts held in a qualified retirement plan that 
     includes a qualified cash-or-deferred arrangement (a ``401(k) 
     plan'') or in a 403(b) annuity may not be distributed before 
     severance from employment, age 59\1/2\, death, disability, or 
     financial hardship of the employee. Amounts deferred under a 
     governmental 457 plan may not be distributed before severance 
     from employment, age 70\1/2\, or an unforeseeable emergency 
     of the employee.
     Katrina Emergency Tax Relief Act of 2005
       The Katrina Emergency Tax Relief Act of 2005 (Public Law 
     109-73) provides an exception to the 10-percent early 
     withdrawal tax in the case of a qualified Hurricane 
     Katrina distribution from a qualified retirement or 
     annuity plan, a 403(b) annuity, or an IRA. In addition, as 
     discussed more fully below, income attributable to a 
     qualified Hurricane Katrina distribution may be included 
     in income ratably over three years, and the amount of a 
     qualified Hurricane Katrina distribution may be 
     recontributed to an eligible retirement plan within three 
     years.
       A qualified Hurricane Katrina distribution is a 
     distribution from an eligible retirement plan made on or 
     after August 25, 2005, and before January 1, 2007, to an 
     individual whose principal place of abode on August 28, 2005, 
     is located in the Hurricane Katrina disaster area and who has 
     sustained an economic loss by reason of Hurricane Katrina. 
     The total amount of qualified Hurricane Katrina distributions 
     that an individual can receive from all plans, annuities, or 
     IRAs is $100,000. Thus, any distributions in excess of 
     $100,000 during the applicable period are not qualified 
     Hurricane Katrina distributions.
       Any amount required to be included in income as a result of 
     a qualified Hurricane Katrina distribution is included in 
     income ratably over the three-year period beginning with the 
     year of distribution unless the individual elects not to have 
     ratable inclusion apply. Certain rules apply for purposes of 
     the ratable inclusion provision. For example, the amount 
     required to be included in income for any taxable year in the 
     three-year period cannot exceed the total amount to be 
     included in income with respect to the qualified Hurricane 
     Katrina distribution, reduced by amounts included in income 
     for preceding years in the period.
       Any portion of a qualified Hurricane Katrina distribution 
     may, at any time during the three-year period beginning the 
     day after the date on which the distribution was received, be 
     recontributed to an eligible retirement plan to which a 
     rollover can be made. Any amount recontributed within the 
     three-year period is treated as a rollover and thus is not 
     includible in income. For example, if an individual receives 
     a qualified Hurricane Katrina distribution in 2005, that 
     amount is included in income, generally ratably over the year 
     of the distribution and the following two years, but is not 
     subject to the 10-percent early withdrawal tax. If, in 2007, 
     the amount of the qualified Hurricane Katrina distribution is 
     recontributed to an eligible retirement plan, the individual 
     may

[[Page S14041]]

     file an amended return (or returns) to claim a refund of the 
     tax attributable to the amount previously included in income. 
     In addition, if, under the ratable inclusion provision, a 
     portion of the distribution has not yet been included in 
     income at the time of the contribution, the remaining amount 
     is not includible in income.
       A qualified Hurricane Katrina distribution is a permissible 
     distribution from a 401(k) plan, 403(b) annuity, or 
     governmental 457 plan, regardless of whether a distribution 
     would otherwise be permissible. A plan is not treated as 
     violating any Code requirement merely because it treats a 
     distribution as a qualified Hurricane Katrina distribution, 
     provided that the aggregate amount of such distributions from 
     plans maintained by the employer and members of the 
     employer's controlled group does not exceed $100,000. Thus, a 
     plan is not treated as violating any Code requirement merely 
     because an individual might receive total distributions in 
     excess of $100,000, taking into account distributions from 
     plans of other employers or IRAs.
       Qualified Hurricane Katrina distributions are subject to 
     the income tax withholding rules applicable to distributions 
     other than eligible rollover distributions. Thus, 20-percent 
     mandatory withholding does not apply.


                        Explanation of Provision

       The provision codifies and expands the relief provided 
     under the Katrina Emergency Tax Relief Act of 2005 in the 
     case of qualified Hurricane Katrina distributions to any 
     ``qualified hurricane distribution,'' which is defined to 
     include distributions relating to Hurricanes Rita and Wilma. 
     Under the provision, a qualified hurricane distribution 
     includes distributions that meet the definition of qualified 
     Hurricane Katrina distribution under the Katrina Emergency 
     Tax Relief Act of 2005, as well as any other distribution 
     from an eligible retirement plan made on or after September 
     23, 2005, and before January 1, 2007, to an individual whose 
     principal place of abode on September 23, 2005, is located in 
     the Hurricane Rita disaster area and who has sustained an 
     economic loss by reason of Hurricane Rita. A qualified 
     hurricane distribution also includes a distribution from an 
     eligible retirement plan made on or after October 23, 2005, 
     and before January 1, 2007, to an individual whose principal 
     place of abode on October 23, 2005, is located in the 
     Hurricane Wilma disaster area and who has sustained an 
     economic loss by reason of Hurricane Wilma.
       The total amount of qualified hurricane distributions that 
     an individual can receive from all plans, annuities, or IRAs 
     is $100,000.


                             Effective Date

       The provision is effective on the date of enactment.
     2. Recontributions of withdrawals for home purchases 
         cancelled due to Hurricanes Rita and Wilma


                              Present Law

     In general
       Under present law, a distribution from a qualified 
     retirement plan, a tax-sheltered annuity (a ``403(b) 
     annuity''), or an individual retirement arrangement (an 
     ``IRA'') generally is included in income for the year 
     distributed (secs. 402(a), 403(b), and 408(d)). In addition, 
     a distribution from a qualified retirement plan, a 403(b) 
     annuity, or an IRA received before age 59\1/2\, death, or 
     disability generally is subject to a 10-percent early 
     withdrawal tax on the amount includible in income, unless an 
     exception applies (sec. 72(t)). An exception to the 10-
     percent tax applies in the case of a qualified first-time 
     homebuyer distribution from an IRA, i.e., a distribution (not 
     to exceed $10,000) used within 120 days for the purchase or 
     construction of a principal residence of a first-time 
     homebuyer.
       An eligible rollover distribution from a qualified 
     retirement plan or a 403(b) annuity or a distribution from an 
     IRA generally can be rolled over within 60 days to another 
     plan, annuity, or IRA. The IRS has the authority to waive the 
     60-day requirement if failure to waive the requirement would 
     be against equity or good conscience, including cases of 
     casualty, disaster, or other events beyond the reasonable 
     control of the individual. Any amount rolled over is not 
     includible in income (and thus also not subject to the 10-
     percent early withdrawal tax).
       Certain amounts held in a qualified retirement plan that 
     includes a qualified cash-or-deferred arrangement (a ``401(k) 
     plan'') or a 403(b) annuity may not be distributed before 
     severance from employment, age 59\1/2\, death, disability, or 
     financial hardship of the employee. For this purpose, subject 
     to certain conditions, distributions for costs directly 
     related to the purchase of a principal residence by an 
     employee (excluding mortgage payments) are deemed to be 
     distributions on account of financial hardship.
     Katrina Emergency Tax Relief Act of 2005
       The Katrina Emergency Tax Relief Act of 2005 generally 
     provides that a distribution received from a 401(k) plan, 
     403(b) annuity, or IRA in order to purchase a home in the 
     Hurricane Katrina disaster area may be recontributed to such 
     a plan, annuity, or IRA in certain circumstances.
       The ability to recontribute applies to an individual who 
     receives a qualified distribution. A qualified distribution 
     is a hardship distribution from a 401(k) plan or 403(b) 
     annuity, or a qualified first-time homebuyer distribution 
     from an IRA: (1) that is received after February 28, 2005, 
     and before August 29, 2005; and (2) that was to be used to 
     purchase or construct a principal residence in the Hurricane 
     Katrina disaster area, but the residence is not purchased or 
     constructed on account of Hurricane Katrina.
       Any portion of a qualified distribution may, during the 
     period beginning on August 25, 2005, and ending on February 
     28, 2006, be recontributed to a plan, annuity or IRA to which 
     a rollover is permitted. Any amount recontributed is treated 
     as a rollover. Thus, that portion of the qualified 
     distribution is not includible in income (and also is not 
     subject to the 10-percent early withdrawal tax).


                        Explanation of Provision

       The provision codifies and expands the provision under the 
     Katrina Emergency Tax Relief Act of 2005 allowing 
     recontribution of certain distributions from a 401(k) plan, 
     403(b) annuity, or IRA to qualified Hurricane Rita 
     distributions and to qualified Hurricane Wilma distributions.
       A qualified Hurricane Rita distribution is a hardship 
     distribution from a 401(k) plan or 403(b) annuity, or a 
     qualified first-time homebuyer distribution from an IRA: (1) 
     that is received after February 28, 2005, and before 
     September 24, 2005; and (2) that was to be used to purchase 
     or construct a principal residence in the Hurricane Rita 
     disaster area, but the residence is not purchased or 
     constructed on account of Hurricane Rita. Any portion of a 
     qualified Hurricane Rita distribution may, during the period 
     beginning on September 23, 2005, and ending on February 28, 
     2006, be recontributed to a plan, annuity or IRA to which a 
     rollover is permitted.
       A qualified Hurricane Wilma distribution is a hardship 
     distribution from a 401(k) plan or 403(b) annuity, or a 
     qualified first-time homebuyer distribution from an IRA: (1) 
     that is received after February 28, 2005, and before October 
     24, 2005; and (2) that was to be used to purchase or 
     construct a principal residence in the Hurricane Wilma 
     disaster area, but the residence is not purchased or 
     constructed on account of Hurricane Wilma. Any portion of a 
     qualified Hurricane Wilma distribution may, during the period 
     beginning on October 23, 2005, and ending on February 28, 
     2006, be recontributed to a plan, annuity or IRA to which a 
     rollover is permitted.


                             Effective Date

       The provision is effective on the date of enactment.
     3. Loans from qualified plans to individuals sustaining an 
         economic loss due to Hurricane Rita or Wilma


                              Present Law

     In general
       An individual is permitted to borrow from a qualified plan 
     in which the individual participates (and to use his or her 
     accrued benefit as security for the loan) provided the loan 
     bears a reasonable rate of interest, is adequately secured, 
     provides a reasonable repayment schedule, and is not made 
     available on a basis that discriminates in favor of employees 
     who are officers, shareholders, or highly compensated.
       Subject to certain exceptions, a loan from a qualified 
     employer plan to a plan participant is treated as a taxable 
     distribution of plan benefits. A qualified employer plan 
     includes a qualified retirement plan under section 401(a), a 
     qualified annuity plan under section 403(a), a tax-deferred 
     annuity under section 403(b), and any plan that was (or was 
     determined to be) a qualified employer plan or a governmental 
     plan.
       An exception to this general rule of income inclusion is 
     provided to the extent that the loan (when added to the 
     outstanding balance of all other loans to the participant 
     from all plans maintained by the employer) does not exceed 
     the lesser of (1) $50,000 reduced by the excess of the 
     highest outstanding balance of loans from such plans during 
     the one-year period ending on the day before the date the 
     loan is made over the outstanding balance of loans from the 
     plan on the date the loan is made or (2) the greater of 
     $10,000 or one half of the participant's accrued benefit 
     under the plan (sec. 72(p)). This exception applies only if 
     the loan is required, by its terms, to be repaid within five 
     years. An extended repayment period is permitted for the 
     purchase of the principal residence of the participant. Plan 
     loan repayments (principal and interest) must be amortized in 
     level payments and made not less frequently than quarterly, 
     over the term of the loan.
     Katrina Emergency Tax Relief Act of 2005
       The Katrina Emergency Tax Relief Act of 2005 provides 
     special rules in the case of a loan from a qualified employer 
     plan to a qualified individual made after September 23, 2005, 
     and before January 1, 2007. A qualified individual is an 
     individual whose principal place of abode on August 28, 2005, 
     is located in the Hurricane Katrina disaster area and who has 
     sustained an economic loss by reason of Hurricane Katrina.
       The exception to the general rule of income inclusion is 
     provided to the extent that the loan (when added to the 
     outstanding balance of all other loans to the participant 
     from all plans maintained by the employer) does not exceed 
     the lesser of (1) $100,000 reduced by the excess of the 
     highest outstanding balance of loans from such plans 
     during the one-year period ending on the day before the 
     date the loan is made over the outstanding balance of 
     loans from the plan on the date the loan is made or (2) 
     the greater of $10,000 or the participant's accrued 
     benefit under the plan.
       In the case of a qualified individual with an outstanding 
     loan on or after August 25,

[[Page S14042]]

     2005, from a qualified employer plan, if the due date for any 
     repayment with respect to such loan occurs during the period 
     beginning on August 25, 2005, and ending on December 31, 
     2006, such due date is delayed for one year. Any subsequent 
     repayments with respect to such loan shall be appropriately 
     adjusted to reflect the delay in the due date and any 
     interest accruing during such delay. The period during which 
     required repayment is delayed is disregarded in complying 
     with the requirements that the loan be repaid within five 
     years and that level amortization payments be made.


                        Explanation of Provision

       The provision codifies and expands the special rules for 
     loans from a qualified employer plan provided under the 
     Katrina Emergency Tax Relief Act of 2005 to loans from a 
     qualified employer plan to a qualified Hurricane Rita or 
     Hurricane Wilma individual made on or after the date of 
     enactment and before January 1, 2007.
       A qualified Hurricane Rita individual includes an 
     individual whose principal place of abode on September 23, 
     2005, is located in a Hurricane Rita disaster area and who 
     has sustained an economic loss by reason of Hurricane Rita. 
     In the case of a qualified Hurricane Rita individual with an 
     outstanding loan on or after September 23, 2005, from a 
     qualified employer plan, if the due date for any repayment 
     with respect to such loan occurs during the period beginning 
     on September 23, 2005, and ending on December 31, 2006, such 
     due date is delayed for one year.
       A qualified Hurricane Wilma individual includes an 
     individual whose principal place of abode on October 23, 
     2005, is located in a Hurricane Wilma disaster area and who 
     has sustained an economic loss by reason of Hurricane Wilma. 
     In the case of a qualified Hurricane Wilma individual with an 
     outstanding loan on or after October 23, 2005, from a 
     qualified employer plan, if the due date for any repayment 
     with respect to such loan occurs during the period beginning 
     on October 23, 2005, and ending on December 31, 2006, such 
     due date is delayed for one year.
       An individual cannot be a qualified individual with respect 
     to more than one hurricane.


                             Effective Date

       The provision is effective on the date of enactment.
     4. Plan amendments relating to Hurricane Rita and Hurricane 
         Wilma relief


                              Present Law

     In general
       Present law provides a remedial amendment period during 
     which, under certain circumstances, a plan may be amended 
     retroactively in order to comply with the qualification 
     requirements (sec. 401(b)). In general, plan amendments to 
     reflect changes in the law generally must be made by the time 
     prescribed by law for filing the income tax return of the 
     employer for the employer's taxable year in which the change 
     in law occurs. The Secretary of the Treasury may extend the 
     time by which plan amendments need to be made.
     Katrina Emergency Tax Relief Act of 2005
       The Katrina Emergency Tax Relief Act of 2005 permits 
     certain plan amendments made pursuant to the changes made by 
     the provisions of Title I of the Act, or regulations issued 
     thereunder, to be retroactively effective. If the plan 
     amendment meets the requirements of the Act, then the plan 
     will be treated as being operated in accordance with its 
     terms. In order for this treatment to apply, the plan 
     amendment is required to be made on or before the last day of 
     the first plan year beginning on or after January 1, 2007, or 
     such later date as provided by the Secretary of the Treasury. 
     Governmental plans are given an additional two years in which 
     to make required plan amendments. If the amendment is 
     required to be made to retain qualified status as a result of 
     the changes made by Title I of the Act (or regulations), the 
     amendment is required to be made retroactively effective as 
     of the date on which the change became effective with respect 
     to the plan, and the plan is required to be operated in 
     compliance until the amendment is made. Amendments that are 
     not required to retain qualified status but that are made 
     pursuant to the changes made by Title I of the Act (or 
     regulations) may be made retroactively effective as of the 
     first day the plan is operated in accordance with the 
     amendment. A plan amendment will not be considered to be 
     pursuant to changes made by Title I of the Act (or 
     regulations) if it has an effective date before the effective 
     date of the provision under the Act (or regulations) to which 
     it relates.


                        Explanation of Provision

       The provision codifies and expands the ability to make 
     retroactive plan amendments under the Katrina Emergency Tax 
     Relief Act of 2005 to apply to changes made pursuant to new 
     section 1400Q of the Code, or regulations issued thereunder.


                             Effective Date

       The provision is effective on the date of enactment.

   B. Employee Retention Credit for Employers Affected by Hurricanes 
          Katrina, Rita and Wilma (New sec. 1400R of the Code)


                              Present Law

       The Katrina Emergency Tax Relief Act of 2005 provides a 
     credit of 40 percent of the qualified wages (up to a maximum 
     of $6,000 in qualified wages per employee) paid by an 
     eligible employer to an eligible employee.
       An eligible employer is any employer (1) that conducted an 
     active trade or business on August 28, 2005, in the core 
     disaster area and (2) with respect to which the trade or 
     business described in (1) is inoperable on any day after 
     August 28, 2005, and before January 1, 2006, as a result of 
     damage sustained by reason of Hurricane Katrina. An eligible 
     employer shall not include any trade or business for any 
     taxable year if such trade or business employed an average of 
     more than 200 employees on business days during the taxable 
     year.
       The term ``core disaster area'' means that portion of the 
     Hurricane Katrina disaster area determined by the President 
     to warrant individual or individual and public assistance 
     from the Federal Government under such Act. The term 
     ``Hurricane Katrina disaster area'' means an area with 
     respect to which a major disaster has been declared by the 
     President before September 14, 2005, under section 401 of the 
     Robert T. Stafford Disaster Relief and Emergency Assistance 
     Act by reason of Hurricane Katrina.
       An eligible employee is, with respect to an eligible 
     employer, an employee whose principal place of employment on 
     August 28, 2005, with such eligible employer was in a core 
     disaster area. An employee may not be treated as an eligible 
     employee for any period with respect to an employer if such 
     employer is allowed a credit under section 51 with respect to 
     the employee for the period.
       Qualified wages are wages (as defined in section 51(c)(1) 
     of the Code, but without regard to section 3306(b)(2)(B) of 
     the Code) paid or incurred by an eligible employer with 
     respect to an eligible employee on any day after August 28, 
     2005, and before January 1, 2006, during the period (1) 
     beginning on the date on which the trade or business first 
     became inoperable at the principal place of employment of the 
     employee immediately before Hurricane Katrina, and (2) ending 
     on the date on which such trade or business has resumed 
     significant operations at such principal place of employment. 
     Qualified wages include wages paid without regard to whether 
     the employee performs no services, performs services at a 
     different place of employment than such principal place of 
     employment, or performs services at such principal place of 
     employment before significant operations have resumed.
       The credit is a part of the current year business credit 
     under section 38(b) and therefore is subject to the tax 
     liability limitations of section 38(c). Rules similar to 
     sections 280C(a), 51(i)(1) and 52 apply to the credit.


                        Explanation of Provision

       The provision codifies the employee retention credit 
     provisions that were enacted in the Katrina Emergency Tax 
     Relief Act of 2005, and eliminates the provision that 
     restricted the credit to employers of not more than 200 
     employees.
       The provision extends the retention credit, as modified to 
     eliminate the employer size limitation, to employers affected 
     by Hurricanes Rita and Wilma and located in the Rita GO Zone 
     and Wilma GO Zone, respectively. The reference dates for 
     employers affected by Hurricane Rita and Hurricane Wilma, 
     comparable to the August 28, 2005 date of present law for 
     employers affected by Hurricane Katrina, are September 23, 
     2005, and October 23, 2005, respectively.


                             Effective Date

       The codification of the provision in the Katrina Emergency 
     Tax Relief Act of 2005 takes effect on the date of enactment. 
     The provision that repeals the employer size limitation is, 
     with respect to the Hurricane Katrina retention credit, 
     effective as if included in the Katrina Emergency Tax Relief 
     Act of 2005. The retention credit is effective for wages paid 
     after September 23, 2005 in the case of Hurricane Rita and 
     after October 23, 2005 in the case of Hurricane Wilma.

C. Temporary Suspension of Limitations on Charitable Contributions (New 
                       sec. 1400S(a) of the Code)


                              Present Law

     In general
       In general, an income tax deduction is permitted for 
     charitable contributions, subject to certain limitations that 
     depend on the type of taxpayer, the property contributed, and 
     the donee organization (sec. 170).
       Charitable contributions of cash are deductible in the 
     amount contributed. In general, contributions of capital gain 
     property to a qualified charity are deductible at fair market 
     value with certain exceptions. Capital gain property means 
     any capital asset or property used in the taxpayer's trade or 
     business the sale of which at its fair market value, at the 
     time of contribution, would have resulted in gain that would 
     have been long-term capital gain. Contributions of other 
     appreciated property generally are deductible at the donor's 
     basis in the property. Contributions of depreciated property 
     generally are deductible at the fair market value of the 
     property.
     Percentage limitations
       Contributions by individuals
       For individuals, in any taxable year, the amount deductible 
     as a charitable contribution is limited to a percentage of 
     the taxpayer's contribution base. The applicable percentage 
     of the contribution base varies depending on the type of 
     donee organization and property contributed. The contribution 
     base is defined as the taxpayer's adjusted

[[Page S14043]]

     gross income computed without regard to any net operating 
     loss carryback.
       Contributions by an individual taxpayer of property (other 
     than appreciated capital gain property) to a charitable 
     organization described in section 170(b)(1)(A) (e.g., public 
     charities, private foundations other than private non-
     operating foundations, and certain governmental units) may 
     not exceed 50 percent of the taxpayer's contribution base. 
     Contributions of this type of property to nonoperating 
     private foundations and certain other organizations generally 
     may be deducted up to 30 percent of the taxpayer's 
     contribution base.
       Contributions of appreciated capital gain property to 
     charitable organizations described in section 170(b)(1)(A) 
     generally are deductible up to 30 percent of the taxpayer's 
     contribution base. An individual may elect, however, to bring 
     all these contributions of appreciated capital gain property 
     for a taxable year within the 50-percent limitation category 
     by reducing the amount of the contribution deduction by the 
     amount of the appreciation in the capital gain property. 
     Contributions of appreciated capital gain property to 
     charitable organizations described in section 170(b)(1)(B) 
     (e.g., private nonoperating foundations) are deductible up to 
     20 percent of the taxpayer's contribution base.
       Contributions by corporations
       For corporations, in any taxable year, charitable 
     contributions are not deductible to the extent the aggregate 
     contributions exceed 10 percent of the corporation's taxable 
     income computed without regard to net operating loss or 
     capital loss carrybacks.
       For purposes of determining whether a corporation's 
     aggregate charitable contributions in a taxable year exceed 
     the applicable percentage limitation, contributions of 
     capital gain property are taken into account after other 
     charitable contributions.
       Carryforward of excess contributions
       Charitable contributions that exceed the applicable 
     percentage limitation may be carried forward for up to five 
     years (sec. 170(d)). The amount that may be carried forward 
     from a taxable year (``contribution year'') to a succeeding 
     taxable year may not exceed the applicable percentage of the 
     contribution base for the succeeding taxable year less the 
     sum of contributions made in the succeeding taxable year plus 
     contributions made in taxable years prior to the contribution 
     year and treated as paid in the succeeding taxable year under 
     this provision.
     Overall limitation on itemized deductions (``Pease'' 
         limitation)
       Under present law, the total amount of otherwise allowable 
     itemized deductions (other than medical expenses, investment 
     interest, and casualty, theft, or wagering losses) is reduced 
     by three percent of the amount of the taxpayer's adjusted 
     gross income in excess of a certain threshold. The otherwise 
     allowable itemized deductions may not be reduced by more than 
     80 percent. For 2005, the adjusted gross income threshold is 
     $145,950 ($72,975 for a married taxpayer filing a joint 
     return). These dollar amounts are adjusted for inflation.
       The otherwise applicable overall limitation on itemized 
     deductions is reduced by one-third in taxable years beginning 
     in 2006 and 2007, and by two-thirds in taxable years 
     beginning in 2008 and 2009. The overall limitation is 
     repealed for taxable years beginning after December 31, 2009, 
     and reinstated for taxable years beginning after December 31, 
     2010.
     Katrina Emergency Tax Relief Act of 2005--Increase in 
         percentage limitations
       Under section 301 of the Katrina Emergency Tax Relief Act 
     of 2005, in the case of an individual, the deduction for 
     qualified contributions is allowed up to the amount by which 
     the taxpayer's contribution base exceeds the deduction for 
     other charitable contributions. Contributions in excess of 
     this amount are carried over to succeeding taxable years as 
     contributions described in 170(b)(1)(A), subject to the 
     limitations of section 170(d)(1)(A)(i) and (ii).
       In the case of a corporation, the deduction for qualified 
     contributions is allowed up to the amount by which the 
     corporation's taxable income (as computed under section 
     170(b)(2)) exceeds the deduction for other charitable 
     contributions. Contributions in excess of this amount are 
     carried over to succeeding taxable years, subject to the 
     limitations of section 170(d)(2).
       In applying subsections (b) and (d) of section 170 to 
     determine the deduction for other contributions, qualified 
     contributions are not taken into account (except to the 
     extent qualified contributions are carried over to succeeding 
     taxable years under the rules described above).
       Qualified contributions are cash contributions made during 
     the period beginning on August 28, 2005, and ending on 
     December 31, 2005, to a charitable organization described in 
     section 170(b)(1)(A) (other than a supporting organization 
     described in section 509(a)(3)). Contributions of noncash 
     property, such as securities, are not qualified 
     contributions. Under the provision, qualified contributions 
     must be to an organization described in section 170(b)(1)(A); 
     thus, contributions to, for example, a charitable remainder 
     trust generally are not qualified contributions, unless the 
     charitable remainder interest is paid in cash to an eligible 
     charity during the applicable time period. In the case of a 
     corporation, qualified contributions must be for relief 
     efforts related to Hurricane Katrina. A taxpayer must elect 
     to have the contributions treated as qualified contributions.
       Qualified contributions do not include a contribution if 
     the contribution is for establishment of a new, or 
     maintenance in an existing, segregated fund or account with 
     respect to which the donor (or any person appointed or 
     designated by such donor) has, or reasonably expects to have, 
     advisory privileges with respect to distributions or 
     investments by reason of the donor's status as a donor. For 
     example, a segregated fund or account exists if a donor makes 
     a charitable contribution and the donee separately identifies 
     the donor's contribution on its books. The donor has advisory 
     privileges with respect to such segregated fund or account if 
     the donor, by written agreement or otherwise, reasonably 
     expects to provide advice to the donee as to the investment 
     or distribution of amounts from such fund or account. In 
     addition, a segregated fund or account also includes, but is 
     not limited to, a separate bank account or trust established 
     or maintained by a donee; however, in order for a 
     contribution to such account or fund necessarily to be not a 
     qualified contribution, the donor (or a person appointed or 
     designated by the donor) must have or reasonably expect to 
     have advisory privileges as to the investment or distribution 
     of amounts in such account or fund. For instance, a donor 
     reasonably expects to have advisory privileges with respect 
     to contributions made by the donor if the donor understands 
     that the donee will consider advice provided by the donor (or 
     a person appointed or designated by the donor) in making 
     investments or distributions. It is intended that a person 
     shall not be treated as having advisory privileges by virtue 
     of having a legal or contractual right or obligation, or a 
     fiduciary duty, with respect to a segregated fund or account. 
     If a donor makes a contribution for establishment of a new, 
     or maintenance in an existing segregated account or fund, and 
     the donor also provides advice with respect to amounts in 
     such account or fund by reason of the donor's position as an 
     officer, employee, or director of the donee, and not by 
     reason of the donor's status as a donor, then, under the 
     provision, the donor is not treated as having or reasonably 
     expecting to have advisory privileges with respect to such 
     fund or account. However, if by reason of a donor's 
     charitable contribution to a segregated account or fund, the 
     donor secured an appointment on a committee of the donee 
     organization that advised how to distribute or invest amounts 
     in such account or fund, the contribution would not be a 
     qualified contribution notwithstanding that the donor is an 
     officer, employee, or director of the donee organization.
       The Act requires that qualified contributions by a 
     corporation be made for relief efforts related to Hurricane 
     Katrina. Corporate taxpayers must substantiate that the 
     contribution is made for this purpose.
     Limitation on overall itemized deductions
       Under the Katrina Emergency Tax Relief Act of 2005, the 
     charitable contribution deduction up to the amount of 
     qualified contributions (as defined above) paid during the 
     year is not treated as an itemized deduction for purposes of 
     the overall limitation on itemized deductions.


                        Explanation of Provision

       The provision codifies the provisions in the Katrina 
     Emergency Tax Relief Act of 2005, and extends the definition 
     of qualified contributions (as described above), in the case 
     of corporations, to include contributions for relief efforts 
     related to Hurricane Rita and Hurricane Wilma.


                             Effective Date

       The codification of the provision in the Katrina Emergency 
     Tax Relief Act of 2005 takes effect on date of enactment. The 
     expansion of the provision applies to contributions made on 
     or after September 23, 2005.

 D. Suspension of Certain Limitations on Personal Casualty Losses (New 
                       sec. 1400S(b) of the Code)


                              Present Law

     In general
       Under present law, a taxpayer may generally claim a 
     deduction for any loss sustained during the taxable year and 
     not compensated by insurance or otherwise (sec. 165). For 
     individual taxpayers, deductible losses must be incurred in a 
     trade or business or other profit-seeking activity or consist 
     of property losses arising from fire, storm, shipwreck, or 
     other casualty, or from theft. Personal casualty or theft 
     losses are deductible only if they exceed $100 per casualty 
     or theft. In addition, aggregate net casualty and theft 
     losses are deductible only to the extent they exceed 10 
     percent of an individual taxpayer's adjusted gross income.
     Hurricane Katrina
       Under the Katrina Emergency Tax Relief Act of 2005, the two 
     limitations on personal casualty or theft losses do not apply 
     to the extent those losses arise in the Hurricane Katrina 
     disaster area on or after August 25, 2005, and are 
     attributable to Hurricane Katrina (``Katrina casualty 
     losses''). Specifically, Katrina casualty losses meeting the 
     above requirements need not exceed $100 per casualty or 
     theft. In addition, such losses are deductible without regard 
     to whether aggregate net losses exceed 10 percent of a 
     taxpayer's adjusted gross income. For purposes of applying 
     the 10 percent threshold to other personal casualty or theft 
     losses, Katrina casualty losses are disregarded. Thus, such 
     losses are effectively treated as a deduction separate from 
     all other casualty losses.

[[Page S14044]]

       For purposes of determining whether a loss is a Katrina 
     casualty loss, the term ``Hurricane Katrina disaster area'' 
     means an area with respect to which a major disaster had been 
     declared by the President before September 14, 2005, under 
     section 401 of the Robert T. Stafford Disaster Relief and 
     Emergency Assistance Act by reason of Hurricane Katrina. The 
     States for which such a disaster had been declared are 
     Alabama, Florida, Louisiana, and Mississippi.


                        Explanation of Provision

       The provision codifies the Katrina Emergency Tax Relief Act 
     of 2005 rule for Katrina casualty losses and expands it to 
     include losses that arise in the Hurricane Rita disaster area 
     and are attributable to Hurricane Rita and losses that arise 
     in the Hurricane Wilma disaster area and are attributable to 
     Hurricane Wilma.


                             Effective Date

       The codification of the provision in the Katrina Emergency 
     Tax Relief Act of 2005 takes effect on date of enactment. The 
     expansion of the provision applies to losses related to 
     Hurricane Rita arising on or after September 23, 2005, and to 
     losses related to Hurricane Wilma arising on or after October 
     23, 2005.

E. Required Exercise of IRS Administrative Authority (New sec. 1400S(c) 
                              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'' or when 
     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. The 
     suspension of time also applies to an individual serving in 
     support of such Armed Forces in the combat zone or 
     contingency operation, 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. A contingency operation is 
     defined 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.
       The suspension of time encompasses the period of service in 
     the combat zone during the period of combatant activities in 
     the zone or while participating in a contingency operation, 
     as well as (1) any time of continuous qualified 
     hospitalization resulting from injury received in the combat 
     zone or contingency operation or (2) time in missing in 
     action status, plus the next 180 days.
       The suspension of time applies to the following acts:
       1. Filing any return of income, estate, gift, employment or 
     excise taxes;
       2. Payment of any income, estate, gift, employment or 
     excise 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.
       In the case of a Presidentially declared disaster or a 
     terroristic or military action, the Secretary of the Treasury 
     also has authority to prescribe a period of up to one year 
     that may be disregarded for performing any of the acts listed 
     above. The Secretary also may suspend the accrual of any 
     interest, penalty, additional amount, or addition to tax for 
     taxpayers in the affected areas.


                        Explanation of Provision

       Under the provision, for taxpayers determined to be 
     affected by the Presidentially declared disaster relating to 
     Hurricanes Katrina, Rita, and Wilma, any administrative 
     relief from required acts, such as filing tax returns, paying 
     taxes, or filing a claim for credit or refund of tax, shall 
     be for a period ending not earlier than February 28, 2006.


                             Effective Date

       The provision is effective on the date of enactment.

  F. Special Look-Back Rule for Determining Earned Income Credit and 
        Refundable Child Credit (New sec. 1400S(d) of the Code)


                              Present Law

     In general
       Present law provides eligible taxpayers with an earned 
     income credit and a child credit. In general, the earned 
     income credit is a refundable credit for low-income workers 
     (sec. 32). 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. Earned income generally 
     includes wages, salaries, tips, and other employee 
     compensation, plus net earnings from self-employment.
       Taxpayers with incomes below certain threshold amounts are 
     eligible for a $1,000 credit for each qualifying child (sec. 
     24). The child credit is refundable to the extent of 15 
     percent of the taxpayer's earned income in excess of $10,000. 
     (The $10,000 income threshold is indexed for inflation and is 
     currently $11,000 for 2005.) 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 $10,000 (indexed for inflation).
     Hurricane Katrina
       Certain qualified individuals affected by Hurricane Katrina 
     may elect to calculate their earned income credit and 
     refundable child credit for the taxable year which includes 
     August 25, 2005, using their earned income from the prior 
     taxable year (a ``Katrina election''). Such qualified 
     individuals are permitted to make the election only if their 
     earned income for the taxable year which includes August 25, 
     2005, is less than their earned income for the preceding 
     taxable year.
       Individuals qualified to make a Katrina election are (1) 
     individuals who on August 25, 2005, had their principal place 
     of abode in the Hurricane Katrina ``core disaster area'' or 
     (2) individuals who on such date were not in the core 
     disaster area but lived in the Hurricane Katrina disaster 
     area and were displaced from their homes. For purposes of 
     this election, the term ``core disaster area'' means that 
     portion of the Hurricane Katrina disaster area determined by 
     the President to warrant individual or individual and public 
     assistance from the Federal Government under such Act. The 
     term ``Hurricane Katrina disaster area'' means an area with 
     respect to which a major disaster had been declared by the 
     President before September 14, 2005, under section 401 of the 
     Robert T. Stafford Disaster Relief and Emergency Assistance 
     Act by reason of Hurricane Katrina. The States for which such 
     a disaster had been declared are Alabama, Florida, Louisiana, 
     and Mississippi.
       In the case of a joint return for a taxable year which 
     includes August 25, 2005, a Katrina election may be made if 
     either spouse is a qualified individual. In such cases, the 
     earned income for the preceding taxable year which is 
     attributable to the taxpayer filing the joint return is the 
     sum of the earned income which is attributable to each spouse 
     for such preceding taxable year.
       Any Katrina election applies with respect to both the 
     earned income credit and refundable child credit. For 
     administrative purposes, the incorrect use on a return of 
     earned income pursuant to a Katrina election is treated as a 
     mathematical or clerical error. A Katrina election is 
     disregarded for purposes of calculating gross income in the 
     election year.


                        Explanation of Provision

       The provision codifies the Katrina election. It also 
     expands the rule governing Katrina elections to permit 
     certain qualified individuals affected by Hurricane Rita and 
     Hurricane Wilma to make similar elections.
       In the case of Hurricane Rita certain qualified individuals 
     may elect to calculate their earned income credit and 
     refundable child credit for the taxable year which includes 
     September 23, 2005, using their earned income from the prior 
     taxable year (a ``Rita election''). Qualified individuals for 
     purposes of a Rita election are (1) individuals who on 
     September 23, 2005, had their principal place

[[Page S14045]]

     of abode in the Rita GO Zone or (2) individuals who on such 
     date had their principal place of abode in the Hurricane Rita 
     disaster area but outside the Rita GO Zone and were displaced 
     from that residence.
       In the case of Hurricane Wilma certain qualified 
     individuals may elect to calculate their earned income credit 
     and refundable child credit for the taxable year which 
     includes October 23, 2005, using their earned income from the 
     prior taxable year (a ``Wilma election''). Qualified 
     individuals for purposes of a Wilma election are (1) 
     individuals who on October 23, 2005, had their principal 
     place of abode in the Wilma GO Zone or (2) individuals who on 
     such date had their principal place of abode in the Hurricane 
     Wilma disaster area but outside the Wilma GO Zone and were 
     displaced from that residence.
       Qualified individuals are permitted to make a Rita election 
     or Wilma election only if their earned income for the taxable 
     year which includes September 23, 2005 or October 23, 2005, 
     respectively, is less than their earned income for the 
     preceding taxable year.
       In other respects, a Rita election or Wilma election is the 
     same as a Katrina election under present law, except that the 
     reference dates are September 23, 2005 for Rita and October 
     23, 2005 for Wilma and not August 25, 2005.


                             Effective Date

       The codification of the provision in the Katrina Emergency 
     Tax Relief Act of 2005 takes effect on date of enactment. The 
     expansion of the provision applies to taxable years that 
     include September 23, 2005 in the case of Hurricane Rita and 
     October 23, 2005 in the case of Hurricane Wilma.

  G. Secretarial Authority to Make Adjustments Regarding Taxpayer and 
           Dependency Status (New sec. 1400S(e) of the Code)


                              Present Law

     In general
       In order to determine taxable income, an individual reduces 
     adjusted gross income (``AGI'') by any personal exemptions 
     and either the standard deduction or itemized deductions. 
     Personal exemptions generally are allowed for the taxpayer, 
     his or her spouse, and any dependents (as defined in sec. 
     151). Personal exemptions are not allowed for purposes of 
     determining a taxpayer's alternative minimum taxable income.
       For 2005, the amount deductible for each personal exemption 
     is $3,200. This amount is indexed annually for inflation. The 
     deduction for personal exemptions is phased out ratably for 
     taxpayers with AGI over certain thresholds. These thresholds 
     are indexed annually for inflation. Specifically, the total 
     amount of exemptions that may be claimed by a taxpayer is 
     reduced by two percent for each $2,500 (or portion thereof) 
     by which the taxpayer's AGI exceeds the applicable threshold. 
     (The phaseout rate is two percent for each $1,250 for married 
     taxpayers filing separate returns.) Thus, the personal 
     exemptions claimed are phased out over a $122,500 range 
     (which is not indexed for inflation), beginning at the 
     applicable threshold. The applicable thresholds for 2005 are 
     $145,900 for single individuals, $218,950 for married 
     individuals filing a joint return, $182,450 for heads of 
     households, and $109,475 for married individuals filing 
     separate returns. For 2005, the point at which a taxpayer's 
     personal exemptions are completely phased out is $268,450 for 
     single individuals, $341,450 for married individuals filing a 
     joint return, $304,950 for heads of households, and $170,725 
     for married individuals filing separate returns.
       Present law provides eligible taxpayers with an earned 
     income credit and a child credit. 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. Earned income generally includes 
     wages, salaries, tips, and other employee compensation, plus 
     net earnings from self-employment.
       Taxpayers with incomes below certain threshold amounts are 
     eligible for a $1,000 credit for each qualifying child. The 
     child credit is refundable to the extent of 15 percent of the 
     taxpayer's earned income in excess of $10,000. (The $10,000 
     income threshold is indexed for inflation and is currently 
     $11,000 for 2005.) 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 
     $10,000 (indexed for inflation).
     Hurricane Katrina
       With respect to taxable years beginning in 2005 and 2006, 
     the Secretary has authority to make such adjustments in the 
     application of the Federal tax laws as may be necessary to 
     ensure that taxpayers do not lose any deduction or credit or 
     experience a change of filing status by 62 reason of 
     temporary relocations caused by Hurricane Katrina. Such 
     adjustments may include, for example, addressing the 
     application of the residency requirements relating to 
     dependency exemptions in the case of relocations due to 
     Hurricane Katrina. Any adjustments made using this authority 
     must insure that an individual is not taken into account by 
     more than one taxpayer with respect to the same tax benefit.


                        Explanation of Provision

       The provision codifies the Secretarial authority with 
     respect to Hurricane Katrina. The provision also expands the 
     Secretary's authority to make adjustments in the application 
     of the Federal tax laws with respect to Hurricane Katrina to 
     include taxpayers affected by Hurricane Rita and Hurricane 
     Wilma.


                             Effective Date

       The provision is effective with respect to taxable years 
     beginning in 2005 or 2006.

  H. Special Rules for Mortgage Revenue Bonds (New sec. 1400T of the 
                                 Code)


                              Present Law

     In general
       Under present law, gross income does not include interest 
     on State or local bonds (sec. 103). State and local bonds are 
     classified generally as either governmental bonds or private 
     activity bonds. Governmental bonds are bonds which are 
     primarily used to finance governmental functions or are 
     repaid with governmental funds. Private activity bonds are 
     bonds with respect to which the State or local government 
     serves as a conduit providing financing to nongovernmental 
     persons (e.g., private businesses or individuals). The 
     exclusion from income for State and local bonds does not 
     apply to private activity bonds, unless the bonds are issued 
     for certain permitted purposes (``qualified private activity 
     bonds'') (secs. 103(b)(1) and 141).
     Qualified mortgage bonds
       The definition of a qualified private activity bond 
     includes a qualified mortgage bond (sec. 143). Qualified 
     mortgage bonds are issued to make mortgage loans to qualified 
     mortgagors for the purchase, improvement, or rehabilitation 
     of owner-occupied residences. The Code imposes several 
     limitations on qualified mortgage bonds, including income 
     limitations for eligible mortgagors, purchase price 
     limitations on the home financed with bond proceeds, and a 
     ``first-time homebuyer'' requirement. The income limitations 
     are satisfied if all financing provided by an issue is 
     provided for mortgagors whose family income does not exceed 
     115 percent of the median family income for the metropolitan 
     area or State, whichever is greater, in which the financed 
     residences are located. The purchase price limitations 
     provide that a residence financed with qualified mortgage 
     bonds may not have a purchase price in excess of 90 percent 
     of the average area purchase price for that residence. The 
     first-time homebuyer requirement provides qualified mortgage 
     bonds generally cannot be used to finance a mortgage for a 
     homebuyer who had an ownership interest in a principal 
     residence in the three years preceding the execution of the 
     mortgage (the ``first-time homebuyer'' requirement).
       Special income and purchase price limitations apply to 
     targeted area residences. A targeted area residence is one 
     located in either (1) a census tract in which at least 70 
     percent of the families have an income which is 80 percent or 
     less of the state-wide median income or (2) an area of 
     chronic economic distress. For targeted area residences, the 
     income limitation is satisfied when no more than one-third of 
     the mortgages are made without regard to any income limits 
     and the remainder of the mortgages are made to mortgagors 
     whose family income is 140 percent or less of the applicable 
     median family income. The purchase price limitation is raised 
     from 90 percent to 110 percent of the average area purchase 
     price for targeted area residences. In addition, the first-
     time homebuyer requirement does not apply to targeted area 
     residences.
       Qualified mortgage bonds also may be used to finance 
     qualified home-improvement loans. Qualified home-improvement 
     loans are defined as loans to finance alterations, repairs, 
     and improvements on an existing residence, but only if such 
     alterations, repairs, and improvements substantially protect 
     or improve the basic livability or energy efficiency of the 
     property. Qualified home-improvement loans may not exceed 
     $15,000.
       A temporary provision waived the first-time homebuyer 
     requirement for residences located in certain Presidentially 
     declared disaster areas (sec. 143(k)(11)). In addition, 
     residences located in such areas were treated as targeted 
     area residences for purposes of the income and purchase price 
     limitations. The special rule for residences located in 
     Presidentially declared disaster areas does not apply to 
     bonds issued after January 1, 1999.
       The Katrina Emergency Tax Relief Act (``KETRA'') waives the 
     first-time homebuyer requirement with respect to certain 
     residences located in an area with respect to which a major 
     disaster has been declared by the President before September 
     14, 2005, under section 401 of the Robert T. Stafford 
     Disaster Relief and Emergency Assistance Act by reason of 
     Hurricane Katrina (see sec. 404 of Pub. L. 109-73). KETRA 
     also increases to $150,000 the permitted amount of a 
     qualified home-improvement loans with respect to residences 
     located in the Hurricane Katrina disaster area to the extent 
     such loan is for the repair of damage caused by Hurricane 
     Katrina.


                        Explanation of Provision

       Under the provision, residences located in the GO Zone, the 
     Rita GO Zone, or the Wilma GO Zone are treated as targeted 
     area residences for purposes of section 143, with the 
     modifications described below. Thus, the first-time homebuyer 
     rule is waived and purchase and income rules for targeted 
     area residences apply to residences located in the

[[Page S14046]]

     specified areas that are financed with qualified mortgage 
     bonds. For these purposes, 100 percent of the mortgages must 
     be made to mortgagors whose family income is 140 percent or 
     less of the applicable median family income. Thus, the 
     present law rule allowing one-third of the mortgages to be 
     made without regard to any income limits does not apply. In 
     addition, the proposal increases from $15,000 to $150,000 the 
     amount of a qualified home-improvement loan with respect to 
     residences located in the specified disaster areas.
       The provision applies to residences financed before January 
     1, 2011.
       (For a description of the extension of KETRA mortgage 
     revenue bond rules, see I.A.20,--Special Rules for Mortgage 
     Revenue Bonds, above.)


                             Effective Date

       The provision is effective on the date of enactment with 
     respect to financing provided before January 1, 2011.

                      TITLE III--OTHER PROVISIONS

                      A. Gulf Coast Recovery Bonds


                              Present Law

       Under Title 31, the Secretary, with the approval of the 
     President, may issue savings bonds and savings certificates 
     of the United States Government (31 U.S.C. sec. 3105). 
     Proceeds from the bonds and certificates are used for 
     expenditures authorized by law. Savings bonds and 
     certificates may be issued on an interest-bearing basis, on a 
     discount basis, or on an interest-bearing and discount basis. 
     The difference between the price paid and the amount received 
     on redeeming a savings bond or certificate is interest under 
     the Code.


                        Explanation of Provision

       The provision expresses the sense of Congress that the 
     Secretary designate one or more series of obligations issued 
     under Title 31 as ``Gulf Coast Recovery Bonds'' in response 
     to Hurricanes Katrina, Rita, and Wilma.


                             Effective Date

       The provision is effective on the date of enactment.

 B. Election To Treat Combat Pay as Earned Income for Purposes of the 
               Earned Income Credit (Sec. 32 of the Code)


                              Present Law

     Child credit
       Combat pay that is otherwise excluded from gross income 
     under section 112 is treated as earned income which is taken 
     into account in computing taxable income for purposes of 
     calculating the refundable portion of the child credit.
     Earned income credit
       Any taxpayer may elect to treat combat pay that is 
     otherwise excluded from gross income under section 112 as 
     earned income for purposes of the earned income credit. This 
     election is available with respect to any taxable year ending 
     after the date of enactment and before January 1, 2006.


                        Explanation of Provision

       The provision extends the present-law rule relating to the 
     earned income credit for one year (through December 31, 
     2006).


                             Effective Date

       The provision is effective for taxable years beginning 
     after December 31, 2005.

C. Modifications of Suspension of Interest and Penalties Where Internal 
  Revenue Service Fails to Contact Taxpayer (Sec. 6404(g) of the Code)


                              Present Law

       In general, interest and penalties accrue during periods 
     for which taxes were unpaid without regard to whether the 
     taxpayer was aware that there was tax due. The Code suspends 
     the accrual of certain penalties and interest starting 18 
     months after the filing of the tax return if the IRS has not 
     sent the taxpayer a notice specifically stating the 
     taxpayer's liability and the basis for the liability within 
     the specified period. If the return is filed before the due 
     date, for this purpose it is considered to have been filed on 
     the due date. Interest and penalties resume 21 days after the 
     IRS sends the required notice to the taxpayer. The provision 
     is applied separately with respect to each item or 
     adjustment. The provision does not apply where a taxpayer has 
     self-assessed the tax. The suspension only applies to 
     taxpayers who file a timely tax return. The provision applies 
     only to individuals and does not apply to the failure to pay 
     penalty, in the case of fraud, or with respect to criminal 
     penalties.
       The suspension of interest does not apply to interest 
     accruing after October 3, 2004 with respect to underpayments 
     resulting from listed transactions or undisclosed reportable 
     transactions.
       On October 27, 2005, the IRS announced a settlement 
     initiative for 21 identified transactions. (See Internal 
     Revenue Service Announcement 2005-80.) Under the terms of the 
     settlement initiative, participants will be required to pay 
     100 percent of the taxes owed, interest and, depending on the 
     transaction, either a quarter or a half of the penalty the 
     IRS will otherwise seek. The IRS will grant penalty relief 
     for transactions disclosed to the IRS or where the taxpayer 
     got a tax opinion from an independent tax advisor. 
     Transaction costs paid by the taxpayer, including 
     professional and promoter fees, will be allowed. The 
     application deadline for the settlement initiative is January 
     23, 2006.


                        Explanation of Provision

       Under the provision, the exception for listed transactions 
     and undisclosed reportable transactions also applies to 
     interest accruing on or before October 3, 2004. However, 
     taxpayers remain eligible for the present-law suspension of 
     interest if the year in which the underpayment occurred is 
     barred by the statute of limitations (or a closing agreement) 
     as of December 14, 2005. Taxpayers may also remain eligible 
     with respect to any transactions if the Secretary determines 
     that the taxpayers have acted reasonably and in good faith 
     with respect to that transactions.
       In addition, under a special rule, taxpayers may remain 
     eligible for the present-law suspension of interest by 
     participating in the IRS settlement initiative described 
     above with respect to that transaction. In order to be 
     eligible under the special rule, the taxpayer must be 
     participating in the settlement initiative (or have entered 
     into a settlement agreement pursuant to the initiative) as of 
     January 23, 2006. Furthermore, a taxpayer's eligibility under 
     the special rule is revoked if the taxpayer ceases to 
     participate in the settlement initiative or the Treasury 
     determines that a settlement agreement will not be reached 
     within a reasonable period of time.
       The special rule applies on a transaction-by-transaction 
     basis. Thus, participation in the settlement initiative with 
     respect to an individual transaction qualifies the taxpayer 
     for the present-law suspension of interest only with respect 
     to interest and penalties on underpayments resulting from 
     that transaction. If the taxpayer has entered into other 
     listed or nondisclosed reportable transactions and is not 
     participating in the settlement initiative with respect to 
     those transactions, the special rule does not apply to 
     interest and penalties resulting from those transactions.
       The provision also provides that, if a taxpayer files an 
     amended return or other signed written document showing that 
     the taxpayer owes an additional amount of tax for the taxable 
     year, the relevant 18-month period is measured from the 
     latest date on which such documents were provided.


                             Effective Date

       The provision is effective as if included in the provisions 
     of the American Jobs Creation Act of 2004 to which it 
     relates, except that the rule relating to the restart of the 
     18-month period is effective for documents provided on or 
     after the date of enactment.

     D. Authority for Undercover Operations (Sec. 7608 of the Code)


                              Present Law

       IRS undercover operations are exempt from the otherwise 
     applicable statutory restrictions controlling the use of 
     Government funds (which generally provide that all receipts 
     must be deposited in the general fund of the Treasury and all 
     expenses paid out of appropriated funds). In general, the 
     exemption permits the IRS to use proceeds from an undercover 
     operation to pay additional expenses incurred in the 
     undercover operation. The IRS is required to conduct a 
     detailed financial audit of large undercover operations in 
     which the IRS is using proceeds from such operations and to 
     provide an annual audit report to the Congress on all such 
     large undercover operations.
       The provision was originally enacted in The Anti-Drug Abuse 
     Act of 1988. The exemption originally expired on December 31, 
     1989, and was extended by the Comprehensive Crime Control Act 
     of 1990 to December 31, 1991. There followed a gap of 
     approximately four and a half years during which the 
     provision had lapsed. In the Taxpayer Bill of Rights II, the 
     authority to use proceeds from undercover operations was 
     extended for five years, through 2000. The Community Renewal 
     Tax Relief Act of 2000 extended the authority of the IRS to 
     use proceeds from undercover operations for an additional 
     five years, through 2005.


                        Explanation of Provision

       The provision extends for one year the present-law 
     authority of the IRS to use proceeds from undercover 
     operations to pay additional expenses incurred in conducting 
     undercover operations (through December 31, 2006).


                             Effective Date

       The provision is effective on the date of enactment.

            E. Disclosures of Certain Tax Return Information

     1. Disclosure of tax information to facilitate combined 
         employment tax reporting (sec. 6103(d)(5) of the Code)


                              Present Law

       Traditionally, Federal tax forms are filed with the Federal 
     government and State tax forms are filed with individual 
     States. This necessitates duplication of items common to both 
     returns. The Code permits the IRS to disclose taxpayer 
     identity information and signatures to any agency, body, or 
     commission of any State for the purpose of carrying out with 
     such agency, body or commission a combined Federal and State 
     employment tax reporting program approved by the Secretary. 
     The Federal disclosure restrictions, safeguard requirements, 
     and criminal penalties for unauthorized disclosure and 
     unauthorized inspection do not apply with respect to 
     disclosures or inspections made pursuant to this authority.
       The authority for this program expires December 31, 2005.
       Under section 6103(c), the IRS may disclose a taxpayer's 
     return or return information to

[[Page S14047]]

     such person or persons as the taxpayer may designate in a 
     request for or consent to such disclosure. Pursuant to 
     Treasury regulations, a taxpayer's participation in a 
     combined return filing program between the IRS and a State 
     agency, body or commission constitutes a consent to the 
     disclosure by the IRS to the State agency of taxpayer 
     identity information, signature and items of common data 
     contained on the return. No disclosures may be made under 
     this authority unless there are provisions of State law 
     protecting the confidentiality of such items of common data.


                        Explanation of Provision

       The provision extends for one year the present-law 
     authority for the combined employment tax reporting program 
     (through December 31, 2006).


                             Effective Date

       The provision applies to disclosures after December 31, 
     2005.
     2. Disclosure of return information regarding terrorist 
         activities (sec. 6103(i)(3) and (i)(7) of the Code)


                              Present Law

     In general
       Section 6103 provides that returns and return information 
     may not be disclosed by the IRS, other Federal employees, 
     State employees, and certain others having access to the 
     information except as provided in the Internal Revenue Code. 
     Section 6103 contains a number of exceptions to this general 
     rule of nondisclosure that authorize disclosure in 
     specifically 71 identified circumstances (including nontax 
     criminal investigations) when certain conditions are 
     satisfied.
       Among the disclosures permitted under the Code is 
     disclosure of returns and return information for purposes of 
     investigating terrorist incidents, threats, or activities, 
     and for analyzing intelligence concerning terrorist 
     incidents, threats, or activities. The term ``terrorist 
     incident, threat, or activity'' is statutorily defined to 
     mean an incident, threat, or activity involving an act of 
     domestic terrorism or international terrorism, as both of 
     those terms are defined in the USA PATRIOT Act (see sec. 
     6103(b)(11) and 18 U.S.C. secs. 2331(1) and 2331(5)). In 
     general, returns and taxpayer return information must be 
     obtained pursuant to an ex parte court order. Return 
     information, other than taxpayer return information, 
     generally is available upon a written request meeting 
     specific requirements. The IRS also is permitted to make 
     limited disclosures of such information on its own initiative 
     to the appropriate Federal law enforcement agency.
       No disclosures may be made under these provisions after 
     December 31, 2005.
     Disclosure of returns and return information--by ex parte 
         court order
       Ex parte court orders sought by Federal law enforcement and 
           Federal intelligence agencies
       The Code permits, pursuant to an ex parte court order, the 
     disclosure of returns and return information (including 
     taxpayer return information) to certain officers and 
     employees of a Federal law enforcement agency or Federal 
     intelligence agency. These officers and employees are 
     required to be personally and directly engaged in any 
     investigation of, response to, or analysis of intelligence 
     and counterintelligence information concerning any terrorist 
     incident, threat, or activity. These officers and employees 
     are permitted to use this information solely for their use in 
     the investigation, response, or analysis, and in any 
     judicial, administrative, or grand jury proceeding, 
     pertaining to any such terrorist incident, threat, or 
     activity.
       The Attorney General, Deputy Attorney General, Associate 
     Attorney General, an Assistant Attorney General, or a United 
     States attorney, may authorize the application for the ex 
     parte court order to be submitted to a Federal district court 
     judge or magistrate. The Federal district court judge or 
     magistrate would grant the order if based on the facts 
     submitted he or she determines that: (1) there is reasonable 
     cause to believe, based upon information believed to be 
     reliable, that the return or return information may be 
     relevant to a matter relating to such terrorist incident, 
     threat, or activity; and (2) the return or return information 
     is sought exclusively for the use in a Federal investigation, 
     analysis, or proceeding concerning any terrorist incident, 
     threat, or activity.
       Special rule for ex parte court ordered disclosure 
           initiated by the IRS
       If the Secretary of Treasury possesses returns or return 
     information that may be related to a terrorist incident, 
     threat, or activity, the Secretary of the Treasury (or his 
     delegate), may on his own initiative, authorize an 
     application for an ex parte court order to permit disclosure 
     to Federal law enforcement. In order to grant the order, the 
     Federal district court judge or magistrate must determine 
     that there is reasonable cause to believe, based upon 
     information believed to be reliable, that the return or 
     return information may be relevant to a matter relating to 
     such terrorist incident, threat, or activity. The 
     information may be disclosed only to the extent necessary 
     to apprise the appropriate Federal law enforcement agency 
     responsible for investigating or responding to a terrorist 
     incident, threat, or activity and for officers and 
     employees of that agency to investigate or respond to such 
     terrorist incident, threat, or activity. Further, use of 
     the information is limited to use in a Federal 
     investigation, analysis, or proceeding concerning a 
     terrorist incident, threat, or activity. Because the 
     Department of Justice represents the Secretary of the 
     Treasury in Federal district court, the Secretary is 
     permitted to disclose returns and return information to 
     the Department of Justice as necessary and solely for the 
     purpose of obtaining the special IRS ex parte court order.
     Disclosure of return information other than by ex parte court 
         order
       Disclosure by the IRS without a request
       The Code permits the IRS to disclose return information, 
     other than taxpayer return information, related to a 
     terrorist incident, threat, or activity to the extent 
     necessary to apprise the head of the appropriate Federal law 
     enforcement agency responsible for investigating or 
     responding to such terrorist incident, threat, or activity. 
     The IRS on its own initiative and without a written request 
     may make this disclosure. The head of the Federal law 
     enforcement agency may disclose information to officers and 
     employees of such agency to the extent necessary to 
     investigate or respond to such terrorist incident, threat, or 
     activity. A taxpayer's identity is not treated as return 
     information supplied by the taxpayer or his or her 
     representative.
       Disclosure upon written request of a Federal law 
           enforcement agency
       The Code permits the IRS to disclose return information, 
     other than taxpayer return information, to officers and 
     employees of Federal law enforcement upon a written request 
     satisfying certain requirements. The request must: (1) be 
     made by the head of the Federal law enforcement agency (or 
     his delegate) involved in the response to or investigation of 
     terrorist incidents, threats, or activities, and (2) set 
     forth the specific reason or reasons why such disclosure may 
     be relevant to a terrorist incident, threat, or activity. The 
     information is to be disclosed to officers and employees of 
     the Federal law enforcement agency who would be personally 
     and directly involved in the response to or investigation of 
     terrorist incidents, threats, or activities. The information 
     is to be used by such officers and employees solely for such 
     response or investigation.
       The Code permits the redisclosure by a Federal law 
     enforcement agency to officers and employees of State and 
     local law enforcement personally and directly engaged in the 
     response to or investigation of the terrorist incident, 
     threat, or activity. The State or local law enforcement 
     agency must be part of an investigative or response team with 
     the Federal law enforcement agency for these disclosures to 
     be made.
       Disclosure upon request from the Departments of Justice or 
           Treasury for intelligence analysis of terrorist 
           activity
       Upon written request satisfying certain requirements 
     discussed below, the IRS is to disclose return information 
     (other than taxpayer return information) to officers and 
     employees of the Department of Justice, Department of 
     Treasury, and other Federal intelligence agencies, who are 
     personally and directly engaged in the collection or analysis 
     of intelligence and counterintelligence or investigation 
     concerning terrorist incidents, threats, or activities. Use 
     of the information is limited to use by such officers and 
     employees in such investigation, collection, or analysis.
       The written request is to set forth the specific reasons 
     why the information to be disclosed is relevant to a 
     terrorist incident, threat, or activity. The request is to be 
     made by an individual who is: (1) an officer or employee of 
     the Department of Justice or the Department of Treasury, (2) 
     appointed by the President with the advice and consent of the 
     Senate, and (3) responsible for the collection, and analysis 
     of intelligence and counterintelligence information 
     concerning terrorist incidents, threats, or activities. The 
     Director of the United States Secret Service also is an 
     authorized requester under the Act.


                        Explanation of Provision

       The provision extends for one year the present-law 
     terrorist activity disclosure provisions (through December 
     31, 2006).


                             Effective Date

       The provision applies to disclosures after December 31, 
     2005.
     3. Disclosure of return information to carry out income 
         contingent repayment of student loans (sec. 6103(l)(13) 
         of the Code)


                              Present Law

       Present law prohibits the disclosure of returns and return 
     information, except to the extent specifically authorized by 
     the Code. An exception is provided for disclosure to the 
     Department of Education (but not to contractors thereof) of a 
     taxpayer's filing status, adjusted gross income and identity 
     information (i.e., name, mailing address, taxpayer 
     identifying number) to establish an appropriate repayment 
     amount for an applicable student loan. The disclosure 
     authority for the income-contingent loan repayment program is 
     scheduled to expire after December 31, 2005.
       The Department of Education utilizes contractors for the 
     income-contingent loan verification program. The specific 
     disclosure exception for the program does not permit 
     disclosure of return information to contractors. As a result, 
     the Department of Education obtains return information from 
     the Internal Revenue Service by taxpayer consent (under 
     section 6103(c)), rather than under the specific exception 
     for the income-contingent loan verification program (sec. 
     6103(l)(13)).

[[Page S14048]]

                        Explanation of Provision

       The provision extends for one year the present law 
     authority to disclose return information for purposes of the 
     income-contingent loan repayment program (through December 
     31, 2006).


                             Effective Date

       The provision applies to requests made after December 31, 
     2005.

                  TITLE IV--TAX TECHNICAL CORRECTIONS

       The bill includes technical corrections and other 
     corrections to recently enacted tax legislation. Except as 
     otherwise provided, the amendments made by the technical 
     corrections and other corrections contained in the bill take 
     effect as if included in the original legislation to which 
     each amendment relates.


                        A. Technical Corrections

     Amendments Related to the Energy Policy Act of 2005
       Repeal of the Public Utility Holding Company Act of 1935 
     (Act sec. 1263).--The provision repeals sections 1081-1083 of 
     the Code (relating to exchanges in obedience to SEC orders) 
     to conform to the repeal of the Public Utility Holding 
     Company Act of 1935. The repeal does not apply to any 
     exchange, expenditure, investment, distribution, or sale made 
     in obedience to an order of the Securities and Exchange 
     Commission.
       Extension and modification of renewable electricity 
     production credit (Act sec. 1301).--The provision makes a 
     technical amendment to Code section 45(c)(3)(A)(ii) to change 
     the wording of the reference to ``nonhazardous lignin waste 
     material'' to ``lignin material'' so as not to infer that 
     lignin is hazardous or waste.
       Clean renewable energy bonds (Act sec. 1303).--Section 
     54(1)(5) treats the credits received by a holder of clean 
     renewable energy bonds as payments of estimated tax for 
     purposes of sections 6654 and 6655. Under the provision, 
     section 54(1)(5) is repealed, as it may provide a double 
     benefit when computing the estimated tax penalty in the 
     manner prescribed under sections 6654(f) and 6655(g). The 
     conforming amendments to the Act section are made for taxable 
     years beginning after 2005.
       Credit for production from advanced nuclear power 
     facilities (Act sec. 1306).--The provision clarifies the 
     production credit for advanced nuclear power (sec. 45J) to 
     carry out the intent that the phase-out is indexed for 
     inflation but the credit rate is not. Specifically, it is not 
     intended that the inflation adjustment rule referred to in 
     section 45J(e) be interpreted to apply to the credit rate in 
     section 45J(a)(1) as well as the phase-out referred to in 
     section 45J(c)(2). The provision clarifies that the phase-out 
     is indexed but the credit rate is not.
       Expansion of amortization for certain atmospheric pollution 
     control facilities in connection with plants first placed in 
     service after 1975 (Act sec. 1309).--The provision clarifies 
     that the 84-month amortization period only applies to 
     facilities used in connection with a plant or other property 
     placed in service after December 31, 1975.
       Five-year net operating loss carryover for certain losses 
     (Act sec. 1311).--A number of clerical amendments are made to 
     section 172(b)(1)(I).
       Modification of credit for producing fuel from a 
     nonconventional source (Act sec. 1322).--The provision 
     clarifies that the credit is allowable without the 
     requirement to make an election.
       Energy efficient commercial buildings deduction (Act sec. 
     1331).--The provision repeals as deadwood certain language in 
     section 1250.
       Credit for residential energy efficient property (Act sec. 
     1335).--The provision clarifies that the dollar limitations 
     are applied without regard to carryovers of the credit from 
     prior taxable years.
       Under the provision, the joint occupancy rule is redrafted 
     to apply to expenditures with respect to a dwelling unit 
     rather than the credit allowed with respect to the unit.
       The rules relating to the carryover of unused personal 
     credits (including the new credit for residential energy 
     efficient property) are redrafted so as to include in the 
     Code rules for both the taxable years in which the credits 
     are allowed against the alternative minimum tax, and the 
     taxable years in which the credits are not so allowed. The 
     provision is effective for taxable years beginning after 
     2005.
       Alternative motor vehicle credit and credit for 
     installation of alternative fueling stations (Act secs. 1341 
     and 1342).--Sections 30B(h)(6) and 30C(e)(2) separate 
     business and personal credits for purposes of applying 
     limitations on the credits. Credit property is treated as 
     subject to the business credit limitations if it is 
     depreciable property. Each of these rules provides that the 
     seller of property to a tax-exempt entity can claim the 
     credit. The provision provides that the credits for property 
     sold to a tax-exempt entity are subject to the business 
     credit limitations.
       Expansion of research credit (Act sec. 1351).--The research 
     credit has an explicit rule preventing amounts from being 
     taken into account more than once under the credit (i.e., 
     preventing double benefits). The provision clarifies that the 
     rule preventing amounts from being taken into account more 
     than once also applies to the provisions of the research 
     credit relating to energy research consortia.
       The provision clarifies that qualified research with 
     respect to energy research consortia must be conducted in the 
     United States or Puerto Rico. This conforms the treatment of 
     such qualified research to the treatment of other qualified 
     research under the research credit in this respect.
     Amendments Related to the American Jobs Creation Act of 2004
       Deduction relating to income attributable to domestic 
     production activities (manufacturing deduction) (Act sec. 
     102).--With respect to the W-2 wage limitation on the 
     allowable amount of the domestic production activities 
     deduction, the Act does not require Forms W-2 actually to be 
     filed, and does not specify whether the employees must be the 
     common law employees of the taxpayer. The provision clarifies 
     that a taxpayer may take into account only wages that are 
     paid to the common law employees of the taxpayer and that are 
     reported on a Form W-2 filed with the Social Security 
     Administration no later than 60 days after the extended due 
     date for the Form W-2. Thus, the taxpayer may not take into 
     account wages that were not actually reported. The provision 
     also addresses situations in which the employer uses an agent 
     to report its wages.
       The provision clarifies that, in computing qualified 
     production activities income, the domestic production 
     activities deduction itself is not an allocable deduction. 
     The provision also clarifies that no inference is intended 
     with regard to the interpretive relationship between the cost 
     allocation rules provided with respect to the domestic 
     production activities deduction and the cost allocation rules 
     provided with respect to provisions elsewhere in the Act 
     (e.g., incentives to reinvest foreign earnings in the United 
     States). The provision also corrects a reference to ``income 
     attributable to domestic production activities'' to refer to 
     the defined term ``qualified production activities income.''
       With regard to the definition of ``domestic production 
     gross receipts'' as it relates to construction performed in 
     the United States and engineering or architectural services 
     performed in the United States for construction projects in 
     the United States, the provision clarifies that the term 
     refers only to gross receipts derived from the construction 
     of real property by a taxpayer engaged in the active conduct 
     of a construction trade or business, or from engineering or 
     architectural services performed with respect to real 
     property by a taxpayer engaged in the active conduct of an 
     engineering or architectural services trade or business.
       The provision clarifies that the term does not include 
     gross receipts derived from the lease, rental, license, sale, 
     exchange or other disposition of land.
       The provision provides that gross receipts derived from 
     certain contracts (or subcontracts) to manufacture or produce 
     property for the Federal government are derived from the sale 
     of such property and, therefore, are domestic production 
     gross receipts. (Another section of the provision clarifies 
     the authority of the Secretary to prescribe rules to prevent 
     the domestic production activities deduction from being 
     claimed by more than one taxpayer with respect to the same 
     economic activity described in section 199(c)(4)(A)(i).)
       The provision provides that, for purposes of determining 
     the domestic production gross receipts of a partnership and 
     its partners, provided all of the interests in the capital 
     and profits of the partnership are owned by members of the 
     same expanded affiliated group at all times during the 
     taxable year of the partnership, then the partnership and all 
     members of that expanded affiliated group are treated as a 
     single taxpayer during such period. Thus, for example, assume 
     such a partnership engages in an activity with respect to 
     property manufactured by the partners that are members of the 
     same expanded affiliated group, and the activity would be 
     treated as a manufacturing activity, but for the fact that 
     the partnership (rather than the partner) conducts the 
     activity. Under this provision, then, the gross receipts 
     derived from the activity are treated as domestic production 
     gross receipts of the partnership for such taxable year. Once 
     the partnership has determined its domestic production gross 
     receipts in this manner, such receipts and the expenses, 
     losses or deductions that are properly allocable to such 
     receipts, and any other items that are allocated to partners, 
     are allocated among the partners in accordance with the 
     requirements of section 199(d)(1) (as amended). Similarly, if 
     a partner engages in such an activity with respect to 
     property manufactured by the partnership, then the gross 
     receipts derived from the activity are treated as domestic 
     production gross receipts of the partner. The treatment of 
     the partners and the partnership as a single taxpayer under 
     this rule is only for the purpose of determining domestic 
     production gross receipts.
       The provision clarifies that, with respect to the domestic 
     production activities of a partnership or S corporation, the 
     deduction under the Act is determined at the partner or 
     shareholder level. In performing the calculation, each 
     partner or shareholder generally will take into account such 
     person's allocable share of the components of the calculation 
     (including domestic production gross receipts; the cost of 
     goods sold allocable to such receipts; and other expenses, 
     losses, or deductions allocable to such receipts) from the 
     partnership or S corporation as well as any items relating to 
     the partner

[[Page S14049]]

     or shareholder's own qualified production activities, if any.
       The provision clarifies the treatment provided under the 
     Act of cooperatives and patrons with respect to the deduction 
     under section 199. The provision clarifies that a patron who 
     receives certain payments from an agricultural or 
     horticultural cooperative that are attributable to qualified 
     production activities income is allowed a deduction equal to 
     the portion of the deduction allowed to the cooperative that 
     is attributable to such income. The provision also clarifies 
     that the patron's deduction is allowed in the year that the 
     payment attributable to qualified production activities 
     income is received. The cooperative's taxable income is not 
     reduced under section 1382 by the portion of the payment that 
     does not exceed the portion so deductible by the patron. For 
     purposes of the deduction under section 199, the provision 
     clarifies that agricultural or horticultural marketing 
     cooperatives are treated as having manufactured, produced, 
     grown, or extracted any qualifying production property 
     marketed by the organization which its patrons have so 
     manufactured, produced, grown, or extracted. For purposes of 
     the deduction under section 199, an agricultural or 
     horticultural cooperative is a cooperative engaged in the 
     manufacturing, production, growth, or extraction in whole or 
     significant part of any agricultural or horticultural 
     products, or in the marketing of agricultural or 
     horticultural products.
       The provision clarifies the definition of an expanded 
     affiliated group, so that a corporation eligible for the 
     deduction with respect to income of a subsidiary must own 
     more than 50 percent, rather than 50 percent or more, of the 
     subsidiary's stock by vote and value.
       The provision rewrites the rule that the deduction under 
     section 199 in computing alternative minimum taxable income 
     (``AMTI'') is the same as in computing the regular tax, 
     except that, in the case of a corporation, the taxable income 
     limitation is the corporation's AMTI.
       The provision clarifies that unrelated business taxable 
     income, rather than taxable income, applies for purposes of 
     section 199(a)(1)(B) in computing the unrelated business 
     income tax under section 511. (In computing AMTI of an 
     organization which is a corporation subject to tax under 
     section 511(a), AMTI applies for purposes of section 
     199(a)(1)(B). In computing AMTI of an organization other than 
     a corporation, the section 199 deduction is the same as for 
     the regular tax. See sec. 199(d)(6).)
       The provision clarifies that the manufacturing deduction is 
     not taken into account in computing any net operating loss or 
     the amount of any net operating loss carryback or carryover. 
     Thus, the deduction under section 199 cannot create, or 
     increase, the amount of a net operating loss deduction.
       The provision clarifies the authority of the Secretary to 
     prescribe rules to prevent the domestic production activities 
     deduction from being claimed by more than one taxpayer with 
     respect to the same economic activity described in section 
     199(c)(4)(A)(i).
       The provision clarifies that the manufacturing deduction is 
     not taken into account in determining the amount of the 
     alternative tax net operating loss deduction. For example, 
     assume that for the calendar year 2005, a corporation has 
     AMTI (before the NOL deduction and before the manufacturing 
     deduction) and qualified production activities income of $1 
     million, and has an alternative tax net operating loss 
     (``ATNOL'') carryover to 2005 of $5 million. Assume that the 
     taxpayer has sufficient W-2 wages so as not to be limited 
     under that rule. The ATNOL deduction for 2005 is $900,000 (90 
     percent of $1 million), reducing AMTI to $100,000. The 
     taxpayer must then further reduce the AMTI by a manufacturing 
     deduction of $3,000 (three percent of the lesser of $1 
     million or $100,000) to $97,000. The ATNOL carryover to 2006 
     is $4,100,000.
       The provision coordinates the computation of adjusted 
     taxable income of a corporation for purposes of computing a 
     corporation's limitation on the deduction for interest on 
     certain indebtedness with the deduction under section 199. 
     The provision also coordinates the computation of taxable 
     income for purposes of computing a corporation's charitable 
     contribution deduction and a taxpayer's deduction for 
     percentage depletion with respect to oil and gas wells with 
     the deduction under section 199.
       The provision clarifies that, in applying the effective 
     date of the deduction under section 199, items arising from a 
     taxable year of a partnership, S corporation, estate, or 
     trust beginning before 2005 are not taken into account for 
     purposes of the rules providing that the deduction is 
     determined at the shareholder, partner or similar level and 
     the application of the wage limitation with respect to such 
     entities.
       Family members treated as one shareholder of an S 
     corporation election (Act sec. 231).--The provision repeals 
     the requirement that a family must elect to be treated as one 
     shareholder for purposes of determining the number of 
     shareholders for purposes of subchapter S. The provision also 
     provides that the determination of whether a common ancestor 
     is more that six generations removed from the youngest 
     generation of shareholders is made at the latest of (i) the 
     date the subchapter S election is made; (ii) the date a 
     family member first holds stock in the S corporation; or 
     (iii) October 22, 2004.
       The provision treats the estate of a family member as a 
     member of the family for purposes of determining the number 
     of shareholders.
       The provision also conforms the provision relating to 
     certain adopted individuals and foster children with the 
     amendments made by title II of the Working Families Tax 
     Relief Act of 2004.
       Transfer of suspended losses incident to divorce (Act sec. 
     235).--The effective date of section 235 of the Act is 
     corrected to provide that it is effective for transfers after 
     December 31, 2004.
       REIT provisions (Act sec. 243).--The provision clarifies 
     that a REIT may cure de minimis failures of asset 
     requirements (other than the requirement that the REIT may 
     not hold more than 10 percent (five percent for certain prior 
     years) of the value of securities of a single issuer, for 
     which failure-specific procedures are provided) by using the 
     same procedures as the REIT may use for larger failures of 
     asset tests.
       The provision clarifies that the new rules that permit the 
     curing of certain REIT failures apply to failures with 
     respect to which the requirements of the new rules are 
     satisfied in taxable years of the REIT beginning after the 
     date of enactment. Similarly, the provision clarifies that 
     the new rules governing deficiency dividends that allow the 
     taxpayer to make a determination by filing a statement with 
     the IRS apply to statements filed in taxable years of the 
     REIT beginning after the date of enactment.
       It is intended that the provisions of the Act that allow a 
     REIT to correct failures of REIT qualification without losing 
     its REIT status apply to corrections of failures for which 
     the requirements for correction are satisfied after the date 
     of enactment, regardless of whether such failures occurred in 
     taxable years beginning on, before, or after the date of 
     enactment. Similarly, it is intended that the provisions of 
     the Act that allow deficiency dividends under section 860 to 
     correct distribution failures, provided the deficiency is 
     identified in a statement filed after the date of enactment 
     in accordance with the provisions of the Act, apply to 
     failures occurring in taxable years beginning on, before, or 
     after the date of enactment.
       The provision clarifies that the new hedging rules apply to 
     transactions entered into in taxable years beginning after 
     the date of enactment.
       The provision clarifies that securities of a partnership 
     held by a REIT prior to the date of enactment of the Act, 
     that would have qualified as straight debt securities if the 
     Act had never been enacted by virtue of the prior law 
     requirement that the REIT hold at least 20 percent of the 
     partnership equity, will continue to qualify (regardless of 
     whether they were disposed of before the date of enactment or 
     whether the REIT has disposed of its interest in the 
     partnership equity to the 1-percent-or-less interest required 
     by the Act) while held by the REIT (or its successor) until 
     the earlier of the disposition or the original maturity date 
     of such securities.
       Expensing of certain films and television production costs 
     (Act sec. 244).--The provision clarifies that the $15 million 
     production cost limitation and the 75 percent qualified 
     compensation requirement are determined on an episode-by-
     episode basis (not an aggregate basis).
       The provision adds rules for recapture as ordinary income 
     of the deduction for expensing of certain films and 
     television production costs in a manner similar to the 
     recapture rules applicable to expensing under Code section 
     179.
       Railroad track maintenance credit (Act sec. 245).--For 
     purposes of the rule that prevents the claiming of the credit 
     by more than one eligible taxpayer with respect to the same 
     mile of track, the provision clarifies that Class II and 
     Class III railroads that operate track under a lease are not 
     required to obtain assignment from the track owner in order 
     to utilize or assign the credit. Under the provision, the 
     credit is limited in respect of the total number of miles of 
     track (1) owned or leased by the Class II or Class III 
     railroad and (2) assigned by the Class II or Class III 
     railroad for purposes of the credit.
       The provision clarifies that a Class I railroad is not 
     treated as a Class II or III railroad for purposes of the 
     credit (and it is not eligible to claim the credit with 
     respect to track it owns) by reason of performing track 
     maintenance services (on the same or different track) for a 
     Class II or III railroad.
       The provision also clarifies the rules governing the 
     assignment of track by Class II or III railroads. A track 
     mile may be assigned only once per tax year, effective at the 
     close of the tax year, and any track mile assigned may not 
     also be taken into account by the assignor taxpayer for the 
     tax year. An assigned track mile is taken into account by the 
     assignee in the tax year which includes the effective date of 
     the assignment.
       Election to determine corporate tax on certain 
     international shipping activities using per ton rate (Act 
     sec. 248).--The provision strikes as deadwood the rule added 
     by the Act regarding the operation of a qualifying vessel by 
     a non-electing corporation that is a member of an electing 
     group.
       The provision clarifies section 1354(b) to provide that an 
     election to determine income tax on certain international 
     shipping activities using a per ton rate is timely if made on 
     or before the due date (including extensions) for filing the 
     tax return for the relevant taxable year.
       The provision clarifies the treatment of operating 
     agreements under the tonnage tax rules. An operating 
     agreement is not a charter, but is instead an agreement with 
     an

[[Page S14050]]

     owner or charterer of a qualifying vessel to provide 
     operating or management services in respect of a qualifying 
     vessel, for example, crew, technical, or commercial services. 
     The provision makes clear that a person providing services 
     for a vessel under an operating agreement is treated as 
     operating the vessel and may elect tonnage tax treatment, 
     assuming the other requirements for such treatment are met. 
     However, a subcontractor to a person providing services under 
     an operating agreement is neither treated as providing 
     services under an operating agreement nor as operating a 
     vessel for purposes of the tonnage tax. The provision of 
     equipment, tools, provisions, or supplies would not be 
     considered an operating agreement or part of an operating 
     agreement unless such equipment, tools, provisions, or 
     supplies are provided by the person providing the services 
     under the operating agreement, and such equipment, tools, 
     provisions, or supplies are provided in connection with such 
     services.
       Present law provides that in order to elect tonnage tax 
     treatment, a person must meet a shipping activity requirement 
     as well as ``operate'' a qualifying vessel. In general, the 
     shipping activity requirement is met for a taxable year if, 
     on average during such year, at least 25 percent of the 
     aggregate tonnage of qualifying vessels ``used'' by the 
     corporation (or controlled group) are owned by such 
     corporation (or controlled group) or are chartered to such 
     corporation (or controlled group) on bareboat charter terms. 
     It is intended that a person providing services under an 
     operating agreement is deemed to be ``using'' tonnage of 
     qualifying vessels, and the appropriate amount of such 
     tonnage is taken into account for purposes of this test. For 
     example, if a corporation (not a member of a controlled 
     group) meets the shipping activity requirement by owning or 
     bareboat chartering sufficient tonnage of other qualifying 
     vessels, it will qualify for 82 the tonnage tax provisions in 
     respect of any qualifying vessel that it is treated as 
     operating by reason of providing services under an operating 
     agreement.
       The provision clarifies that interests in operating 
     agreements are taken into account for purposes of allocating 
     the notional shipping income from the operation of qualifying 
     vessels among respective ownership, charter, and operating 
     agreement interests. In addition, in the case of a 
     partnership operating a vessel, the extent of a partner's 
     ownership, charter, or operating agreement interest is 
     determined on the basis of the partner's interest in the 
     partnership.
       The provision makes a clerical amendment by eliminating 
     subparagraph (B) of section 1355(c)(3) of the Code, because 
     the rule of subparagraph (B) is encompassed in subparagraph 
     (A).
       Computation of foreign tax credit in determining 
     alternative minimum tax by farmers and fisherman using income 
     averaging (Act sec. 314).--The provision clarifies that in 
     computing the regular tax for purposes of determining the 
     alternative minimum tax of a farmer or fisherman using income 
     averaging, the foreign tax credit does not need to be 
     recomputed.
       Reforestation expensing recapture (Act sec. 322).--The 
     provision clarifies that the amortization provision applies 
     to trusts and estates, but the deduction applies to estates 
     (and not to trusts).
       The provision provides that Code section 1245 is expanded 
     to provide recapture rules for the new expensing provisions 
     of Code section 194(b) (reforestation).
       Depreciation allowance for aircraft (Act sec. 336).--
     Present-law rules for additional first-year depreciation 
     provide criteria under which certain noncommercial aircraft, 
     and certain property having longer production periods (as 
     described in Code section 168(k)(2)(B)), can qualify for the 
     extended placed-in-service date. The provision clarifies that 
     either noncommercial aircraft or property having a longer 
     production period can qualify.
       Recharacterization of overall domestic loss (Act sec. 
     402)--The provision clarifies that, in a case in which an 
     overall domestic loss is used as a carryback, the requirement 
     in Code section 904(g)(2) that the taxpayer have elected the 
     benefits of the foreign tax credit applies to the taxable 
     year in which the loss is used.
       Look-through rules to apply to dividends from noncontrolled 
     section 902 corporations (Act sec. 403).--The provision adds 
     a transition rule under which a taxpayer may elect not to 
     apply the Act's look-through rules to taxable years beginning 
     before January 1, 2005.
       Look-through treatment for sales of partnership interests 
     (Act sec. 412).--The provision clarifies that constructive 
     ownership is taken into account in determining whether a 
     controlled foreign corporation is a 25-percent owner of a 
     partnership for purposes of the rule treating a sale of a 
     partnership interest as a sale of a proportionate share of 
     the assets of the partnership. This provision conforms the 
     statutory language to the legislative history of the Act.
       Repeal of foreign personal holding company rules and 
     foreign investment company rules (Act sec. 413).--The 
     provision repeals as deadwood Code section 532(b)(2), 
     which coordinated the foreign personal holding company and 
     accumulated earnings tax regimes, and instead provides 
     that in computing a corporation's accumulated taxable 
     income, a deduction is allowed in the amount of any income 
     of the corporation that resulted in an inclusion for a 
     U.S. shareholder under Code section 951(a). In the case of 
     a corporation that is otherwise subject to the accumulated 
     earnings tax on a gross basis (under Treas. Reg. sec. 
     1.535-1(b)), appropriate adjustments are made to this 
     deductible amount to take into account deductions that may 
     have reduced the inclusion under Code section 951(a), but 
     which would not otherwise have been allowable in computing 
     accumulated taxable income. For example, in the case of a 
     corporation that is generally subject to the accumulated 
     earnings tax on a gross basis, if Code section 954(b)(5) 
     has had the effect of reducing the amount of a subpart F 
     inclusion, it would be appropriate to reduce accumulated 
     taxable income by the amount that would have been included 
     under Code section 951(a) without applying Code section 
     954(b)(5).
       The provision also repeals as deadwood Code section 6683, 
     which addresses the failure of a foreign corporation to file 
     a required personal holding company return, a rule that is no 
     longer needed in light of the provision of the Act exempting 
     foreign corporations from the personal holding company rules.
       Modifications to treatment of aircraft leasing and shipping 
     (Act. sec. 415).--The provision clarifies that, for purposes 
     of the foreign tax credit limitation as in effect for taxable 
     years beginning before January 1, 2007, shipping income was 
     defined to include income that meets the definition of 
     foreign base company shipping income as in effect before the 
     definition was repealed under section 415 of the Act. The 
     repeal is effective for taxable years of foreign corporations 
     beginning after December 31, 2004, and taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.
       Application of FIRPTA to distributions from REITS (Act sec. 
     418).--The provision clarifies that the new rules providing 
     an exception from FIRPTA do not apply to regulated investment 
     companies (``RICs''), but only to real estate investment 
     trusts (``REITs'').
       The provision clarifies that the period of time during 
     which a foreign shareholder may not have held more than five 
     percent of the class of stock with respect to which the 
     distribution is made is the one-year period ending on the 
     date of the distribution.
       The provision clarifies that the new rules apply to any 
     distribution of a REIT that is treated as a deduction for a 
     taxable year of the REIT beginning after the date of 
     enactment.
       The provision clarifies that the new rules also apply to 
     deficiency dividends under section 860 that are paid after 
     the date of enactment but that are treated as deductible in 
     taxable years beginning on or prior to the date of enactment. 
     Such dividends qualify for the exclusion from FIRPTA 
     treatment under the Act if the other requirements of the Act 
     are met.
       Incentives to reinvest foreign earnings in the United 
     States (Act sec. 422).--The provision amends Code section 
     965(a)(2)(B) to clarify that distributions made indirectly 
     through tiers of controlled foreign corporations are eligible 
     for the benefits of Code section 965 only if they originate 
     with a dividend received by one controlled foreign 
     corporation from another controlled foreign corporation in 
     the same chain of ownership described in Code section 958(a). 
     Thus, the first dividend in the sequence cannot be a 
     portfolio dividend received by a controlled foreign 
     corporation, for example.
       The provision clarifies that for purposes of determining 
     the amount of excess dividends eligible for the deduction, 
     only cash dividends received during the elected taxable year 
     are taken into account under Code section 965(b)(2)(A). (The 
     base-period amounts described in Code section 965(b)(2)(B) 
     include non-cash dividends, as well as cash dividends and 
     certain other amounts.)
       The provision also provides the Treasury Secretary with 
     explicit regulatory authority to prevent the avoidance of the 
     purposes of Code section 965(b)(3), which reduces the amount 
     of eligible dividends in certain cases in which an increase 
     in related-party indebtedness has occurred after October 3, 
     2004. Regulations issued pursuant to this authority may 
     include rules to provide that cash dividends are not taken 
     into account under Code section 965(a) to the extent 
     attributable to the direct or indirect transfer of cash or 
     other property from a related person to a controlled foreign 
     corporation (including through the use of intervening 
     entities or capital contributions). It is expected that this 
     authority, which supplements existing principles relating to 
     the treatment of circular flows of cash, would be used to 
     prevent the application of the deduction in the case of a 
     dividend that is effectively funded by the U.S. shareholder 
     or its affiliates that are not controlled foreign 
     corporations. It is anticipated that dividends would be 
     treated as attributable to a related-party transfer of cash 
     or other property under this authority only in cases in which 
     the transfer is part of an arrangement undertaken with a 
     principal purpose of avoiding the purposes of the related-
     party debt rule of Code section 965(b)(3).
       For example, if a U.S. shareholder, as part of a plan to 
     avoid the purposes of Code section 965(b)(3), contributes 
     cash or other property to a controlled foreign corporation 
     and then has the controlled foreign corporation pay a 
     dividend to the U.S. shareholder (either to meet the base 
     period repatriation level or as a dividend described in Code 
     section 965(a)), or has the controlled foreign corporation 
     lend the cash or other property to another controlled foreign 
     corporation which

[[Page S14051]]

     then pays a dividend to the U.S. shareholder, regulations 
     issued under this authority may require the U.S. shareholder 
     to reduce its Code section 965(a) qualifying dividends by the 
     amount of cash or other property contributed. In addition, if 
     as part of a plan to avoid the purposes of Code section 
     965(b)(3), a U.S. shareholder makes a loan to a controlled 
     foreign corporation after October 3, 2004, such controlled 
     foreign corporation pays a dividend to the U.S. shareholder, 
     and then the U.S. shareholder disposes of the stock of the 
     controlled foreign corporation, such that the U.S. 
     shareholder is not related to the controlled foreign 
     corporation on the last day of the U.S. shareholder's 
     election year, regulations issued under this authority may 
     require the U.S. shareholder to reduce its Code section 
     965(a) qualifying dividends by the amount of the loan.
       It is anticipated that many other transfers of cash or 
     other property will not be regarded as effectively funding 
     dividend repatriations for purposes of this regulatory 
     authority. For example, if a U.S. shareholder, in the 
     ordinary course of its trade or business, transfers cash or 
     other property to a controlled foreign corporation in 
     exchange for property or the provision of services, such a 
     transfer will not be considered to have a principal purpose 
     of avoiding the purposes of Code section 965(b)(3). Likewise, 
     if a related person transfers cash to a controlled foreign 
     corporation in a sale of assets by the controlled foreign 
     corporation to the related person for non- tax business 
     purposes, such a transfer will not be considered to have a 
     principal purpose of avoiding the purposes of Code section 
     965(b)(3). Similarly, a transfer of cash or other property 
     to a controlled foreign corporation for purposes of 
     providing initial or ongoing working capital to the 
     controlled foreign corporation or expanding the controlled 
     foreign corporation's operations will not be considered to 
     have a principal purpose of avoiding the purposes of Code 
     section 965(b)(3). In addition, a transfer by a U.S. 
     shareholder in repayment of an obligation owed to a 
     controlled foreign corporation will not be considered to 
     have a principal purpose of avoiding the purposes of Code 
     section 965(b)(3), absent special circumstances indicating 
     that the U.S. shareholder is using the repayment 
     effectively to fund the dividend repatriation. It is 
     expected that these special circumstances would not be 
     found to exist in cases involving the repayment of short-
     term debt (i.e., debt with a term of no more than three 
     years).
       In light of the timing of this bill and the fact that Code 
     section 965 will expire for many affected taxpayers at the 
     end of 2005, it is understood that the Treasury Department in 
     all likelihood will not issue regulations under this 
     authority. If no such regulations are issued, it would be 
     expected that generally applicable tax principles would be 
     invoked to reach results consistent with the principles and 
     examples described above.
       The provision also clarifies the definition of ``applicable 
     financial statement'' under Code section 965(c)(1). In the 
     case of a U.S. shareholder that is required to file a 
     financial statement with the Securities and Exchange 
     Commission (or is included in such a statement filed by 
     another person), the provision clarifies that the applicable 
     financial statement is the most recent audited annual 
     statement that was so filed and certified on or before June 
     30, 2003. For purposes of this rule, a restatement of a 
     previously filed and certified financial statement that 
     occurs after June 30, 2003 does not alter the statement's 
     status as having been filed and certified on or before June 
     30, 2003. In addition, the provision clarifies that the term 
     ``applicable financial statement'' includes the notes that 
     form an integral part of the financial statement; other 
     materials, including work papers or materials that may be 
     filed for some purposes with a financial statement but that 
     do not form an integral part of such statement, may not be 
     relied upon for purposes of producing an earnings or tax 
     number under the provision. For example, if a note that is an 
     integral part of an applicable financial statement states 
     that the U.S. shareholder has not provided for deferred taxes 
     on $1 billion of undistributed earnings of foreign 
     subsidiaries because such earnings are intended to be 
     reinvested permanently (or indefinitely) abroad, the U.S. 
     shareholder's limit under Code section 965(b)(1) is $1 
     billion. If an applicable financial statement does not show a 
     specific earnings or tax amount described in Code section 
     965(b)(1)(B) or (C), a taxpayer cannot rely on underlying 
     work papers or other materials that are not a part of the 
     financial statement to derive such an amount. If an 
     applicable financial statement states that an earnings or tax 
     amount is indeterminate (or that determination of a specific 
     amount of earnings or taxes is not feasible), then the 
     earnings or tax amount so described is treated as being zero. 
     A specific earnings or tax amount can be relied upon for 
     purposes of Code section 965(b)(1) as long as such amount is 
     presented on the applicable financial statement as satisfying 
     the indefinite reversal criterion of Accounting Principles 
     Board Opinion 23 (``APB 23'') relating to deferred taxes on 
     undistributed foreign earnings, and is disclosed as required 
     under Financial Accounting Standards Board Statement 109 
     (``FAS 109''), regardless of whether the exact words 
     ``permanently reinvested'' are used, and regardless of 
     whether APB 23 or FAS 109 is cited by name.
       The provision also clarifies that the expense disallowance 
     rule of Code section 965(d)(2) applies only to deductions for 
     expenses that are directly allocable to the deductible 
     portion of the dividend. For these purposes, an expense is 
     ``directly allocable'' if it relates directly to generating 
     the dividend income in question. Thus, deductions for direct 
     expenses such as certain legal and accounting fees and 
     stewardship costs are disallowed under this provision. 
     Deductions for indirect expenses such as interest, research 
     and experimentation costs, sales and marketing costs, state 
     and local taxes, general and administrative costs, and 
     depreciation and amortization are not disallowed under this 
     provision.
       In addition, the provision clarifies that foreign taxes 
     that are not allowed as foreign tax credits by reason of Code 
     section 965(d) do not give rise to income inclusions under 
     Code section 78.
       The provision also clarifies that under Code section 
     965(e)(1), the only foreign tax credits that may be used to 
     reduce the tax on the nondeductible portion of a dividend are 
     credits for foreign taxes that are attributable to the 
     nondeductible portion of the dividend. Credits for other 
     foreign taxes cannot be used to reduce the tax on the 
     nondeductible portion of the dividend.
       The provision also clarifies Code section 965(f) to provide 
     that an election to apply Code section 965 is timely if made 
     on or before the due date (including extensions) for filing 
     the tax return for the relevant taxable year.
       Treatment of deduction for State and local sales taxes 
     under the alternative minimum tax (Act sec. 501).--The 
     provision clarifies that the itemized deduction for State and 
     local sales taxes does not apply in calculating alternative 
     minimum taxable income.
       Naval shipbuilding (Act sec. 708).--The provision provides 
     that the five-taxable year period for use of the 40/60 
     percentage-of-completion/capitalized cost method is 
     determined with respect to the construction commencement 
     date, not the contract commencement date. The provision 
     further provides that any change of accounting method 
     required by the provision is not subject to section 481.
       Credit for production of refined coal (Act sec. 710).--The 
     provision strikes the word ``synthetic'' from the definition 
     of refined coal to carry out the intent that qualifying solid 
     fuels produced from coal (including lignite) meet two new 
     primary standards, an emissions reduction test and a value 
     enhancement test, and not also be subject to a ``chemical 
     change'' test promulgated under Treasury guidance for certain 
     fuels from coal to qualify for credit under Code sec. 29.
       Tax treatment of expatriated entities and their foreign 
     parents (Act sec. 801).--The provision clarifies that the 
     inversion gain rule of Code section 7874(a)(1) does not apply 
     to an entity that is an expatriated entity with respect to an 
     entity that is treated as a domestic corporation under Code 
     section 7874(b).
       Expatriation of individuals (Act sec. 804).--The provision 
     clarifies that the exception to the requirement of minimal 
     prior physical presence in the United States is both for (i) 
     teachers, students, athletes, and foreign government 
     individuals, and (ii) individuals receiving medical 
     attention.
       The provision clarifies that the Act does not create an 
     additional requirement that an individual file a statement 
     under section 6039G if such a filing was not already required 
     under present law.
       The provision clarifies that taxpayers who lose citizenship 
     or terminate long-term resident status will continue to be 
     treated for Federal tax purposes as citizens or long-term 
     residents until they meet the notice and information 
     reporting requirements of section 7701(n).
       Penalty for failure to disclose reportable transactions 
     (Act sec. 811).--The provision clarifies that the penalty for 
     failing to disclose participation in a reportable transaction 
     applies to returns and statements that are filed after the 
     date of enactment, without regard to the original or extended 
     due date for such return or statement.
       Accuracy-related penalties for listed transactions and 
     reportable transactions with a significant tax avoidance 
     purpose (Act sec. 812).--The provision clarifies that 
     underpayments attributable to an understatement resulting 
     from participation in a listed transaction or a reportable 
     transaction with a significant tax avoidance purpose are not 
     subject to accuracy-related penalties under section 6662 to 
     the extent that an accuracy-related penalty under section 
     6662A is imposed upon such underpayment. (However, in the 
     case of underpayments resulting from substantial valuation 
     misstatements, the accuracy-related penalty under section 
     6662A does not apply to the extent that the accuracy-related 
     penalty under section 6662 is applied to such underpayments 
     (i.e., the section 6662 penalty amount is increased under 
     section 6662(h) because the substantial valuation 
     misstatement is determined to be a gross valuation 
     misstatement).) The provision clarifies that accuracy-related 
     penalties under section 6662A do not apply to underpayments 
     to which a fraud penalty under section 6663 is applied.
       The provision clarifies that, with respect to disqualified 
     opinions, the strengthened reasonable cause exception to 
     section 6662A penalties does not apply to the opinion of a 
     tax advisor if (1) the opinion was provided to the taxpayer 
     before the date of enactment, (2) the opinion relates to a 
     transaction entered into before the date of enactment, and 
     (3) the tax treatment of items relating to the transaction 
     was included on a return or

[[Page S14052]]

     statement filed by the taxpayer before the date enactment.
       Statute of limitations for unreported listed transactions 
     (Act sec. 814).--The Act provides that the statute of 
     limitations with respect to an undisclosed listed transaction 
     does not expire until one year after the earlier of (1) the 
     date on which the Secretary is furnished the required 
     information, or (2) the date on which a material advisor 
     satisfies the list maintenance requirements with respect to a 
     request by the Secretary. The provision clarifies that a 
     ``material advisor'' for this purpose includes either a 
     material advisor as defined in section 6111(b)(1) or, in the 
     case of material aid, assistance, or advice rendered on or 
     before the date of enactment, a material advisor as defined 
     in Treasury regulations under section 6112. (See Treas. Reg. 
     sec. 301.6112-1(c)(2).)
       Material advisor list maintenance requirement and penalty 
     (Act sec. 815).--The provision clarifies that the penalty 
     under section 6708 for failing to comply with the section 
     6112 list maintenance requirements applies to both (1) 
     material advisors with respect to reportable transactions 
     under present-law section 6112, and (2) organizers and 
     sellers of potentially abusive 88 tax shelters under prior-
     law section 6112. (This provision also would clarify the 
     determination of the date on which a material advisor 
     satisfies the list maintenance requirements for purposes of 
     the extended statute of limitations for undisclosed listed 
     transactions under section 814 of the Act.)
       Minimum holding period for withholding taxes on gain and 
     income other than dividends (Act sec. 832).--The provision 
     clarifies that the exception from the minimum holding period 
     for certain withholding taxes paid by registered or licensed 
     brokers and dealers on income and gain from securities also 
     apply to gain from the sale of stock.
       Disallowance of certain partnership loss transfers (Act 
     sec. 833).--The provision redrafts the wording of the 
     provision relating to basis adjustments to undistributed 
     partnership property in Code section 734(b) to clarify that 
     it applies in the case of a distribution of property to a 
     partner by a partnership with respect to which there is a 
     substantial basis reduction.
       Repeal of special rules for FASITs and modifications to 
     rules for REMICs (Act sec. 835).--The provision clarifies 
     that, if more than 50 percent of the obligations transferred 
     to, or purchased by, a REMIC are originated by a government 
     entity and are principally secured by an interest in real 
     property, then each obligation originated by a government 
     entity and transferred to, or purposed by, the REMIC is 
     treated as principally secured by an interest in real 
     property. Thus, the provision more closely aligns this rule 
     with the ``principally secured'' standard that generally is 
     provided by the definition of a qualified mortgage, and the 
     provision clarifies that the treatment of obligations as 
     principally secured by an interest in real property under 
     this rule does not extend to obligations that are not 
     originated by a government entity.
       Importation or transfer of built-in losses (Act sec. 
     836).--The provision provides that on the tax-free 
     liquidation of a corporation, the fair market value basis 
     rule applies only to property described in section 
     362(e)(1)(B), i.e., property which became subject to U.S. 
     income tax on the liquidation. The provision is drafted to 
     conform the scope of the liquidation rule to the rule 
     applicable to transfers of property by shareholders to 
     corporations.
       The provision provides that the election under section 
     362(e)(2)(C) to apply the basis limitation to the 
     transferor's stock basis is made at such time and in such 
     form and manner as the Secretary may prescribe, and, once 
     made, is irrevocable.
       Sale of principal residence following section 1031 exchange 
     (Act sec. 840).--The provision clarifies that the exclusion 
     under section 121 is denied on the sale or exchange of a 
     principal residence by a taxpayer who did not recognize gain 
     under section 1031 on the exchange in which the residence was 
     acquired (or a by person whose basis in the residence is 
     determined in whole or in part with reference to the basis of 
     the residence in the hands of that taxpayer). The provision 
     also makes a clerical change to the numbering of paragraphs.
       Limitation on deductions allocable to property used by tax-
     exempt entities (Act sec. 849).--The Act establishes rules to 
     limit deductions that are allocable to tax-exempt use 
     property. For this purpose, the Act generally defines ``tax-
     exempt use property'' by reference to the definition provided 
     in section 168(h). Section 168(h) generally provides that 
     tax-exempt use property includes tangible property that is 
     leased to a tax-exempt entity, as well as certain property 
     owned by a partnership that has a tax-exempt partner and 
     provides for certain special allocations. The provision 
     clarifies that the deduction limitation rules established 
     by the Act apply without regard to whether the tax-exempt 
     use property is treated as such by reason of a lease or 
     otherwise (e.g., because the property is owned by a 
     partnership that has a tax-exempt partner and provides for 
     certain special allocations). In the case of property 
     treated as tax-exempt use property other than by reason of 
     a lease, the provision clarifies that the deduction 
     limitation rules generally are effective for property 
     acquired after March 12, 2004.
       Reporting with respect to donations of motor vehicles, 
     boats and airplanes (Act sec. 884).--The provision clarifies 
     that the acknowledgement by the donee organization is to 
     include whether the donee organization provided any goods or 
     services in consideration of the vehicle, and a description 
     and good faith estimate of the value of any such goods or 
     services, or, if the goods or services consist solely of 
     intangible religious benefits, a statement to that effect.
       Nonqualified deferred compensation plans (Act sec. 885).--
     The provision clarifies that the additional tax and interest 
     under the nonqualified deferred compensation provision of the 
     Act are not treated as payments of regular tax for 
     alternative minimum tax purposes. The provision also 
     clarifies that the application of the rule providing that 
     certain additional deferrals must be for a period of not less 
     than five years is not limited to the first payment for which 
     deferral is made. The provision also clarifies that Treasury 
     Department guidance providing a limited period during which 
     plans can conform to the requirements applies to plans 
     adopted before January 1, 2005. The provision also clarifies 
     that the effective date of the funding provisions relating to 
     offshore trusts and financial triggers is January 1, 2005. 
     Thus, for example, amounts set aside in an offshore trust 
     before such date for the purpose of paying deferred 
     compensation and plans providing for the restriction of 
     assets in connection with a change in the employer's 
     financial health are subject to the funding provisions on 
     January 1, 2005. Under the provision, not later than 90 days 
     after the date of enactment of this provision, the Secretary 
     of the Treasury shall issue guidance under which a 
     nonqualified deferred compensation plan which is in violation 
     of the requirements of the funding provisions relating to 
     offshore trusts and financial triggers will be treated as not 
     violating such requirements if the plan comes into 
     conformance with such requirements during a limited period as 
     specified by the Secretary in guidance. For example, trusts 
     or assets set aside outside of the United States that would 
     otherwise result in income inclusion and interest under the 
     provision as of January 1, 2005, may be modified to come into 
     conformance with the provision during the limited period of 
     time as specified by the Secretary.
       Identified straddles (Act sec. 888).--The provision 
     clarifies that taxpayers are permitted to identify a straddle 
     as an identified straddle under section 1092(a)(2)(B) (by 
     making a clear and unambiguous identification on their books 
     and records) without regard to whether the Secretary has 
     prescribed regulations under the mandate in that section. The 
     provision provides that the Secretary's mandate under the 
     provision is to issue guidance in the form of regulations or 
     in another form.
       Modification of treatment of transfers to creditors in 
     divisive reorganizations (Act sec. 898).--The provision 
     clarifies that the amount of the adjusted basis of property 
     that is taken into account for purposes of Code section 
     361(b)(3) is reduced by the liabilities assumed (within the 
     meaning of Code section 357(c)).
       Nonqualified preferred stock (Act sec. 899).--The provision 
     clarifies that the ``real and meaningful likelihood'' 
     requirement under the Act (which applies so that stock shall 
     not be treated as participating in corporate growth to any 
     significant extent unless there is a ``real and meaningful 
     likelihood'' of the shareholder actually participating in the 
     earnings and growth of the corporation) applies also for 
     purposes of determining whether stock is not stock that is 
     ``limited and preferred as to dividends.''
       Consistent amortization period for intangibles and 
     treatment of partnership organizational expenses (Act sec. 
     902).--The provision corrects the reference to ``taxpayers'' 
     to refer to ``partnerships'' in the rules relating to 
     deduction or amortization of partnership organizational 
     expenses.
       Limitation of employer deduction for certain entertainment 
     expenses (Act sec. 907).--Section 907 of the Act limits the 
     deduction for certain entertainment expenses with respect to 
     specified individuals. A specified individual is defined as 
     any individual subject to the requirements of section 16(a) 
     of the Securities Act of 1934 with respect to the taxpayer or 
     who would be subject to such requirements if the taxpayer 
     were an issuer of equity securities. The provision clarifies 
     that a specified individual includes an individual who is 
     subject to the requirements of section 16(a) of the 
     Securities Act of 1934 with respect to a related entity of 
     the taxpayer or who would be subject to such requirements if 
     the related entity were an issuer of equity securities.
     Amendment Related to the Working Families Tax Relief Act of 
         2004
       Uniform definition of child (Act secs. 201, 203 and 207).--
     The provision makes conforming amendments, consistent with 
     those enacted with respect to various other provisions, for 
     purposes of health savings accounts, the dependent care 
     credit, and dependent care assistance programs. Under the 
     conforming amendments, an individual may qualify as a 
     dependent for these limited purposes without regard to 
     whether the individual has gross income that exceeds an 
     otherwise applicable gross income limitation or is married 
     and files a joint return. In addition, such an individual who 
     is treated as a dependent under these conforming amendment 
     provisions is not subject to the general rule that a 
     dependent of a taxpayer shall be treated as having no 
     dependents for the taxable year of such individual beginning 
     in such calendar year.

[[Page S14053]]

       The provision clarifies Code section 152(e) to permit a 
     divorced or legally separated custodial parent to waive, by 
     written declaration, his or her right to claim a child as a 
     dependent for purposes of the dependency exemption and child 
     credit (but not with respect to other child-related tax 
     benefits). By means of the waiver, the noncustodial parent is 
     granted the right to claim the child as a dependent for these 
     purposes. The provision clarifies that the waiver rules under 
     the uniform definition of qualifying child operate as under 
     prior law.
     Amendment Related to the Jobs and Growth Tax Relief 
         Reconciliation Act of 2003
       Bonus depreciation (Act sec. 201).--Present-law rules for 
     additional first-year depreciation provide criteria under 
     which certain noncommercial aircraft, and certain property 
     having longer production periods (as described in Code 
     section 168(k)(2)(B)), can qualify for the extended placed-
     in-service date. The provision clarifies that property 
     acquired and placed in service during 2005 pursuant to a 
     written binding contract which was entered into after May 
     5, 2003, and before January 1, 2005, is eligible for 50-
     percent additional first-year depreciation deduction.
       The provision corrects the reference to a date in the rules 
     applicable to qualified New York Liberty Zone property so 
     that it refers to the January 1, 2005, date in the 
     corresponding rule for additional first-year depreciation in 
     Code section 168(k).
     Amendments Related to the Victims of Terrorism Tax Relief Act 
         of 2001
       Rules relating to disclosure of taxpayer return information 
     (Act sec. 201).--The provision corrects cross references 
     within the disclosure rules (Code section 6103) relating to 
     disclosure to the National Archives and Records 
     Administration.
     Amendments Related to the Economic Growth and Tax Relief 
         Reconciliation Act of 2001
       Option to treat elective deferral as after-tax Roth 
     contributions (Act sec. 617).--A special rule allows 
     employees with at least 15 years of service with certain 
     organizations to make additional elective deferrals to a tax-
     deferred annuity, subject to an annual and cumulative limit. 
     The cumulative limit is $15,000, reduced by any additional 
     pretax elective deferrals made for preceding years. For 
     taxable years beginning after 2005, plans may allow employees 
     to designate pretax elective deferrals as Roth contributions. 
     Under the provision, the $15,000 cumulative limit is reduced 
     also by designated Roth contributions made for preceding 
     years.
       Equitable treatment for contributions to defined 
     contribution plans (Act sec. 632).--Under the law as in 
     effect before the Act, a special limit applied to 
     contributions to tax-sheltered annuities for foreign 
     missionaries with adjusted gross income not exceeding 
     $17,000. The special limit was inadvertently dropped by the 
     Act. The special limit was restored in a technical correction 
     in the Job Creation and Worker Assistance Act of 2002, but 
     did not accurately reflect the pre-Act rule. The provision 
     revises the special limit to reflect the pre-Act rule.
     Amendments Related to the Internal Revenue Service 
         Restructuring and Reform Act of 1998
       Special procedures for third-party summons (Act sec. 
     3415).--Code section 7609(c)(2)(F) provides that section 7609 
     does not apply to a summons described in subsection (f) or 
     (g), which refers to a John Doe summons and certain emergency 
     summonses, respectively. The provision corrects this 
     reference, so as to make only the notice procedures of 
     section 7609(a) inapplicable to a John Doe summons or an 
     emergency summons, rather than making the entire section 7609 
     inapplicable.
     Amendments Related to the Taxpayer Relief Act of 1997
       Tentative carryback and refund adjustments and treatment of 
     carrybacks or adjustments for certain unused deductions (Act 
     sec. 1055).--The provision corrects a reference in rules 
     relating to tentative carryback and refund adjustments to 
     refer to coordination rules in Code section 6611(f)(4)(B). 
     The provision also corrects a reference in rules relating to 
     92 carrybacks or adjustments of certain unused deductions to 
     refer to the filing date within the meaning of Code section 
     6611(f)(4)(B).
       Adjustments to basis of stock in controlled foreign 
     corporations (Act sec. 1112(b)).--The provision clarifies 
     that the basis adjustments of Code section 961(c) apply not 
     only with respect to the stock of the controlled foreign 
     corporation that earns the subpart F income that gives rise 
     to the basis adjustments, but also with respect to the stock 
     of higher-tier controlled foreign corporations in the same 
     chain of ownership.
       Notice of certain transfers to foreign persons (Act sec. 
     1144).--The provision corrects the omission of a conjunction 
     in the description of transfers that are generally subject to 
     certain information reporting requirements.
     Amendment Related to the Omnibus Budget Reconciliation Act of 
         1990
       Depreciation of certain solar- or wind-powered equipment 
     (Act sec. 11813).--The provision clarifies that 5-year 
     property includes certain heating, cooling, and other 
     equipment using solar or wind (rather than solar and wind) 
     energy.
     Amendment Related to the Omnibus Budget Reconciliation Act of 
         1987
       Clarification of earnings and profits and stock basis where 
     LIFO recapture tax applies (Act sec. 10227).--Under present 
     law, the LIFO recapture amount is included in the income of a 
     C corporation that becomes an S corporation for its last 
     taxable year that it was a C corporation (sec. 1363(d)). Any 
     increase in tax by reason of this inclusion is payable in 
     four equal annual installments. The provision provides that 
     the rules relating to (1) the prohibition on adjustments of 
     earnings and profits of an S corporation and (2) the 
     requirement to reduce the basis of stock of the S corporation 
     by reason of nondeductible expenses do not apply to any 
     corporate tax imposed by reason of section 1363(d). No 
     inference is intended as to the treatment of other corporate 
     taxes.
     Clerical amendments
       The provisions include clerical and typographical 
     amendments to the Code, which are effective upon enactment.


                          B. Other Corrections

     Amendments Related to the American Jobs Creation Act of 2004
       Expansion of bank S corporation eligible shareholders to 
     include IRAs (Act sec. 233).--The provision expands the 
     provision in the Act allowing certain bank stock to be held 
     by an IRA (or to be sold by an IRA to the beneficiary) to 
     include stock in a depository holding company (as defined in 
     section 3(w)(1) of the Federal Deposit Insurance Act). A 
     depository holding company includes a bank holding company 
     and a thrift holding company.
       Exclusion of investment securities income from passive 
     income test for bank S corporations (Act sec. 237).--The 
     provision expands the rule in the Act which provides that, in 
     the case of a bank, bank holding company, or financial 
     holding company, certain interest and dividend income is not 
     treated as passive under the S corporation passive investment 
     income rules. Under the provision, this rule applies to a 
     bank and to a depository holding company (as defined in 
     section 3(w)(1) of the Federal Deposit Insurance Act). A 
     depository holding company includes a bank holding company 
     and a thrift holding company.
       Information returns for qualified subchapter S subsidiaries 
     (Act sec. 239).--The provision provides that an S corporation 
     and a qualified subchapter S subsidiary are recognized as 
     separate entities for purposes of making information returns, 
     except as otherwise provided by the Treasury Department.

                          ____________________