[Congressional Record (Bound Edition), Volume 152 (2006), Part 6]
[House]
[Pages 7375-7468]
[From the U.S. Government Publishing Office, www.gpo.gov]




      CONFERENCE REPORT ON H.R. 4297, TAX INCREASE PREVENTION AND 
                       RECONCILIATION ACT OF 2005

  Mr. THOMAS submitted the following conference report and statement on 
the bill (H.R. 4297) to provide for reconciliation pursuant to section 
201(b) of the concurrent resolution on the budget for fiscal year 2006:

                  Conference Report (H. Rept. 109-455)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     4297), to provide for reconciliation pursuant to section 
     201(b) of the concurrent resolution on the budget for fiscal 
     year 2006, having met, after full and free conference, have 
     agreed to recommend and do recommend to their respective 
     Houses as follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

     SECTION 1. SHORT TITLE, ETC.

       (a) Short Title.--This Act may be cited as the ``Tax 
     Increase Prevention and Reconciliation Act of 2005''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title, etc.

       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

Sec. 101. Increased expensing for small business.
Sec. 102. Capital gains and dividends rates.
Sec. 103. Controlled foreign corporations.

                       TITLE II--OTHER PROVISIONS

Sec. 201. Clarification of taxation of certain settlement funds.
Sec. 202. Modification of active business definition under section 355.
Sec. 203. Veterans' mortgage bonds.
Sec. 204. Capital gains treatment for certain self-created musical 
              works.
Sec. 205. Vessel tonnage limit.
Sec. 206. Modification of special arbitrage rule for certain funds.
Sec. 207. Amortization of expenses incurred in creating or acquiring 
              music or music copyrights.
Sec. 208. Modification of effective date of disregard of certain 
              capital expenditures for purposes of qualified small 
              issue bonds.
Sec. 209. Modification of treatment of loans to qualified continuing 
              care facilities.

               TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

Sec. 301. Increase in alternative minimum tax exemption amount for 
              2006.
Sec. 302. Allowance of nonrefundable personal credits against regular 
              and alternative minimum tax liability.

              TITLE IV--CORPORATE ESTIMATED TAX PROVISIONS

Sec. 401. Time for payment of corporate estimated taxes.

                   TITLE V--REVENUE OFFSET PROVISIONS

Sec. 501. Application of earnings stripping rules to partners which are 
              corporations.
Sec. 502. Reporting of interest on tax-exempt bonds.
Sec. 503. 5-year amortization of geological and geophysical 
              expenditures for certain major integrated oil companies.
Sec. 504. Application of FIRPTA to regulated investment companies.
Sec. 505. Treatment of distributions attributable to FIRPTA gains.
Sec. 506. Prevention of avoidance of tax on investments of foreign 
              persons in United States real property through wash sale 
              transactions.
Sec. 507. Section 355 not to apply to distributions involving 
              disqualified investment companies.
Sec. 508. Loan and redemption requirements on pooled financing 
              requirements.

[[Page 7376]]

Sec. 509. Partial payments required with submission of offers-in-
              compromise.
Sec. 510. Increase in age of minor children whose unearned income is 
              taxed as if parent's income.
Sec. 511. Imposition of withholding on certain payments made by 
              government entities.
Sec. 512. Conversions to Roth IRAs.
Sec. 513. Repeal of FSC/ETI binding contract relief.
Sec. 514. Only wages attributable to domestic production taken into 
              account in determining deduction for domestic production.
Sec. 515. Modification of exclusion for citizens living abroad.
Sec. 516. Tax involvement of accommodation parties in tax shelter 
              transactions.
       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

     SEC. 101. INCREASED EXPENSING FOR SMALL BUSINESS.

       Subsections (b)(1), (b)(2), (b)(5), (c)(2), and 
     (d)(1)(A)(ii) of section 179 (relating to election to expense 
     certain depreciable business assets) are each amended by 
     striking ``2008'' and inserting ``2010''.

     SEC. 102. CAPITAL GAINS AND DIVIDENDS RATES.

       Section 303 of the Jobs and Growth Tax Relief 
     Reconciliation Act of 2003 is amended by striking ``December 
     31, 2008'' and inserting ``December 31, 2010''.

     SEC. 103. CONTROLLED FOREIGN CORPORATIONS.

       (a) Subpart F Exception for Active Financing.--
       (1) Exempt insurance income.--Paragraph (10) of section 
     953(e) (relating to application) is amended--
       (A) by striking ``January 1, 2007'' and inserting ``January 
     1, 2009'', and
       (B) by striking ``December 31, 2006'' and inserting 
     ``December 31, 2008''.
       (2) Exception to treatment as foreign personal holding 
     company income.--Paragraph (9) of section 954(h) (relating to 
     application) is amended by striking ``January 1, 2007'' and 
     inserting ``January 1, 2009''.
       (b) Look-Through Treatment of Payments Between Related 
     Controlled Foreign Corporations Under the Foreign Personal 
     Holding Company Rules.--
       (1) In general.--Subsection (c) of section 954 (relating to 
     foreign personal holding company income) is amended by adding 
     at the end the following new paragraph:
       ``(6) Look-thru rule for related controlled foreign 
     corporations.--
       ``(A) In general.--For purposes of this subsection, 
     dividends, interest, rents, and royalties received or accrued 
     from a controlled foreign corporation which is a related 
     person shall not be treated as foreign personal holding 
     company income to the extent attributable or properly 
     allocable (determined under rules similar to the rules of 
     subparagraphs (C) and (D) of section 904(d)(3)) to income of 
     the related person which is not subpart F income. For 
     purposes of this subparagraph, interest shall include 
     factoring income which is treated as income equivalent to 
     interest for purposes of paragraph (1)(E). The Secretary 
     shall prescribe such regulations as may be appropriate to 
     prevent the abuse of the purposes of this paragraph.
       ``(B) Application.--Subparagraph (A) shall apply to taxable 
     years of foreign corporations beginning after December 31, 
     2005, and before January 1, 2009, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2005, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.
                       TITLE II--OTHER PROVISIONS

     SEC. 201. CLARIFICATION OF TAXATION OF CERTAIN SETTLEMENT 
                   FUNDS.

       (a) In General.--Subsection (g) of section 468B (relating 
     to clarification of taxation of certain funds) is amended to 
     read as follows:
       ``(g) Clarification of Taxation of Certain Funds.--
       ``(1) In general.--Except as provided in paragraph (2), 
     nothing in any provision of law shall be construed as 
     providing that an escrow account, settlement fund, or similar 
     fund is not subject to current income tax. The Secretary 
     shall prescribe regulations providing for the taxation of any 
     such account or fund whether as a grantor trust or otherwise.
       ``(2) Exemption from tax for certain settlement funds.--An 
     escrow account, settlement fund, or similar fund shall be 
     treated as beneficially owned by the United States and shall 
     be exempt from taxation under this subtitle if--
       ``(A) it is established pursuant to a consent decree 
     entered by a judge of a United States District Court,
       ``(B) it is created for the receipt of settlement payments 
     as directed by a government entity for the sole purpose of 
     resolving or satisfying one or more claims asserting 
     liability under the Comprehensive Environmental Response, 
     Compensation, and Liability Act of 1980,
       ``(C) the authority and control over the expenditure of 
     funds therein (including the expenditure of contributions 
     thereto and any net earnings thereon) is with such government 
     entity, and
       ``(D) upon termination, any remaining funds will be 
     disbursed to such government entity for use in accordance 
     with applicable law.

     For purposes of this paragraph, the term `government entity' 
     means the United States, any State or political subdivision 
     thereof, the District of Columbia, any possession of the 
     United States, and any agency or instrumentality of any of 
     the foregoing.
       ``(3) Termination.--Paragraph (2) shall not apply to 
     accounts and funds established after December 31, 2010.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to accounts and funds established after the date 
     of the enactment of this Act.

     SEC. 202. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER 
                   SECTION 355.

       Subsection (b) of section 355 (defining active conduct of a 
     trade or business) is amended by adding at the end the 
     following new paragraph:
       ``(3) Special rule relating to active business 
     requirement.--
       ``(A) In general.--In the case of any distribution made 
     after the date of the enactment of this paragraph and on or 
     before December 31, 2010, a corporation shall be treated as 
     meeting the requirement of paragraph (2)(A) if and only if 
     such corporation is engaged in the active conduct of a trade 
     or business.
       ``(B) Affiliated group rule.--For purposes of subparagraph 
     (A), all members of such corporation's separate affiliated 
     group shall be treated as one corporation. For purposes of 
     the preceding sentence, a corporation's separate affiliated 
     group is the affiliated group which would be determined under 
     section 1504(a) if such corporation were the common parent 
     and section 1504(b) did not apply.
       ``(C) Transition rule.--Subparagraph (A) shall not apply to 
     any distribution pursuant to a transaction which is--
       ``(i) made pursuant to an agreement which was binding on 
     the date of the enactment of this paragraph and at all times 
     thereafter,
       ``(ii) described in a ruling request submitted to the 
     Internal Revenue Service on or before such date, or
       ``(iii) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission.

     The preceding sentence shall not apply if the distributing 
     corporation elects not to have such sentence apply to 
     distributions of such corporation. Any such election, once 
     made, shall be irrevocable.
       ``(D) Special rule for certain pre-enactment 
     distributions.--For purposes of determining the continued 
     qualification under paragraph (2)(A) of distributions made on 
     or before the date of the enactment of this paragraph as a 
     result of an acquisition, disposition, or other restructuring 
     after such date and on or before December 31, 2010, such 
     distribution shall be treated as made on the date of such 
     acquisition, disposition, or restructuring for purposes of 
     applying subparagraphs (A) through (C) of this paragraph.''.

     SEC. 203. VETERANS' MORTGAGE BONDS.

       (a) Expansion of Definition of Veterans Eligible for State 
     Home Loan Programs Funded by Qualified Veterans' Mortgage 
     Bonds.--
       (1) In general.--Paragraph (4) of section 143(l) (defining 
     qualified veteran) is amended to read as follows:
       ``(4) Qualified veteran.--For purposes of this subsection, 
     the term `qualified veteran' means--
       ``(A) in the case of the States of Alaska, Oregon, and 
     Wisconsin, any veteran--
       ``(i) who served on active duty, and
       ``(ii) who applied for the financing before the date 25 
     years after the last date on which such veteran left active 
     service, and
       ``(B) in the case of any other State, any veteran--
       ``(i) who served on active duty at some time before January 
     1, 1977, and
       ``(ii) who applied for the financing before the later of--

       ``(I) the date 30 years after the last date on which such 
     veteran left active service, or
       ``(II) January 31, 1985.''.

       (2) Effective date.--The amendments made by this subsection 
     shall apply to bonds issued on or after the date of the 
     enactment of this Act.
       (b) Revision of State Veterans Limit.--
       (1) In general.--Subparagraph (B) of section 143(l)(3) 
     (relating to volume limitation) is amended--
       (A) by redesignating clauses (i) and (ii) as subclauses (I) 
     and (II), respectively, and moving such clauses 2 ems to the 
     right,
       (B) by amending the matter preceding subclause (I), as 
     designated by subparagraph (A), to read as follows:
       ``(B) State veterans limit.--
       ``(i) In general.--In the case of any State to which clause 
     (ii) does not apply, the State veterans limit for any 
     calendar year is the amount equal to--'', and
       (C) by adding at the end the following new clauses:
       ``(ii) Alaska, oregon, and wisconsin.--In the case of the 
     following States, the State veterans limit for any calendar 
     year is the amount equal to--

       ``(I) $25,000,000 for the State of Alaska,
       ``(II) $25,000,000 for the State of Oregon, and
       ``(III) $25,000,000 for the State of Wisconsin.

       ``(iii) Phasein.--In the case of calendar years beginning 
     before 2010, clause (ii) shall be applied by substituting for 
     each of the dollar amounts therein an amount equal to the 
     applicable percentage of such dollar amount. For purposes of 
     the preceding sentence, the applicable percentage shall be 
     determined in accordance with the following table:

------------------------------------------------------------------------
            ``For Calendar Year:              Applicable percentage is:
------------------------------------------------------------------------
2006.......................................  20 percent

[[Page 7377]]

 
2007.......................................  40 percent
2008.......................................  60 percent
2009.......................................  80 percent.
------------------------------------------------------------------------

       ``(iv) Termination.--The State veterans limit for the 
     States specified in clause (ii) for any calendar year after 
     2010 is zero.''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to allocations of State volume limit after April 
     5, 2006.

     SEC. 204. CAPITAL GAINS TREATMENT FOR CERTAIN SELF-CREATED 
                   MUSICAL WORKS.

       (a) In General.--Subsection (b) of section 1221 (relating 
     to capital asset defined) is amended by redesignating 
     paragraph (3) as paragraph (4) and by inserting after 
     paragraph (2) the following new paragraph:
       ``(3) Sale or exchange of self-created musical works.--At 
     the election of the taxpayer, paragraphs (1) and (3) of 
     subsection (a) shall not apply to musical compositions or 
     copyrights in musical works sold or exchanged before January 
     1, 2011, by a taxpayer described in subsection (a)(3).''.
       (b) Limitation on Charitable Contributions.--Subparagraph 
     (A) of section 170(e)(1) is amended by inserting 
     ``(determined without regard to section 1221(b)(3))'' after 
     ``long-term capital gain''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales and exchanges in taxable years beginning 
     after the date of the enactment of this Act.

     SEC. 205. VESSEL TONNAGE LIMIT.

       (a) In General.--Paragraph (4) of section 1355(a) (relating 
     to qualifying vessel) is amended by inserting ``(6,000, in 
     the case of taxable years beginning after December 31, 2005, 
     and ending before January 1, 2011)'' after ``10,000''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 206. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN 
                   FUNDS.

       In the case of bonds issued after the date of the enactment 
     of this Act and before August 31, 2009--
       (1) the requirement of paragraph (1) of section 648 of the 
     Deficit Reduction Act of 1984 (98 Stat. 941) shall be treated 
     as met with respect to the securities or obligations referred 
     to in such section if such securities or obligations are held 
     in a fund the annual distributions from which cannot exceed 7 
     percent of the average fair market value of the assets held 
     in such fund except to the extent distributions are necessary 
     to pay debt service on the bond issue, and
       (2) paragraph (3) of such section shall be applied by 
     substituting ``distributions from'' for ``the investment 
     earnings of'' both places it appears.

     SEC. 207. AMORTIZATION OF EXPENSES INCURRED IN CREATING OR 
                   ACQUIRING MUSIC OR MUSIC COPYRIGHTS.

       (a) In General.--Section 167(g) (relating to depreciation 
     under income forecast method) is amended by adding at the end 
     the following new paragraph:
       ``(8) Special rules for certain musical works and 
     copyrights.--
       ``(A) In general.--If an election is in effect under this 
     paragraph for any taxable year, then, notwithstanding 
     paragraph (1), any expense which--
       ``(i) is paid or incurred by the taxpayer in creating or 
     acquiring any applicable musical property placed in service 
     during the taxable year, and
       ``(ii) is otherwise properly chargeable to capital account,

     shall be amortized ratably over the 5-year period beginning 
     with the month in which the property was placed in service. 
     The preceding sentence shall not apply to any expense which, 
     without regard to this paragraph, would not be allowable as a 
     deduction.
       ``(B) Exclusive method.--Except as provided in this 
     paragraph, no depreciation or amortization deduction shall be 
     allowed with respect to any expense to which subparagraph (A) 
     applies.
       ``(C) Applicable musical property.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `applicable musical property' 
     means any musical composition (including any accompanying 
     words), or any copyright with respect to a musical 
     composition, which is property to which this subsection 
     applies without regard to this paragraph.
       ``(ii) Exceptions.--Such term shall not include any 
     property--

       ``(I) with respect to which expenses are treated as 
     qualified creative expenses to which section 263A(h) applies,
       ``(II) to which a simplified procedure established under 
     section 263A(j)(2) applies, or
       ``(III) which is an amortizable section 197 intangible (as 
     defined in section 197(c)).

       ``(D) Election.--An election under this paragraph shall be 
     made at such time and in such form as the Secretary may 
     prescribe and shall apply to all applicable musical property 
     placed in service during the taxable year for which the 
     election applies.
       ``(E) Termination.--An election may not be made under this 
     paragraph for any taxable year beginning after December 31, 
     2010.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to expenses paid or incurred with respect to 
     property placed in service in taxable years beginning after 
     December 31, 2005.

     SEC. 208. MODIFICATION OF EFFECTIVE DATE OF DISREGARD OF 
                   CERTAIN CAPITAL EXPENDITURES FOR PURPOSES OF 
                   QUALIFIED SMALL ISSUE BONDS.

       (a) In General.--Section 144(a)(4)(G) is amended by 
     striking ``September 30, 2009'' and inserting ``December 31, 
     2006''.
       (b) Conforming Amendment.--Section 144(a)(4)(F) is amended 
     by striking ``September 30, 2009'' and inserting ``December 
     31, 2006''.

     SEC. 209. MODIFICATION OF TREATMENT OF LOANS TO QUALIFIED 
                   CONTINUING CARE FACILITIES.

       (a) In General.--Section 7872 is amended by redesignating 
     subsection (h) as subsection (i) and inserting after 
     subsection (g) the following new subsection:
       ``(h) Exception for Loans to Qualified Continuing Care 
     Facilities.--
       ``(1) In general.--This section shall not apply for any 
     calendar year to any below-market loan owed by a facility 
     which on the last day of such year is a qualified continuing 
     care facility, if such loan was made pursuant to a continuing 
     care contract and if the lender (or the lender's spouse) 
     attains age 62 before the close of such year.
       ``(2) Continuing care contract.--For purposes of this 
     section, the term `continuing care contract' means a written 
     contract between an individual and a qualified continuing 
     care facility under which--
       ``(A) the individual or individual's spouse may use a 
     qualified continuing care facility for their life or lives,
       ``(B) the individual or individual's spouse will be 
     provided with housing, as appropriate for the health of such 
     individual or individual's spouse--
       ``(i) in an independent living unit (which has additional 
     available facilities outside such unit for the provision of 
     meals and other personal care), and
       ``(ii) in an assisted living facility or a nursing 
     facility, as is available in the continuing care facility, 
     and
       ``(C) the individual or individual's spouse will be 
     provided assisted living or nursing care as the health of 
     such individual or individual's spouse requires, and as is 
     available in the continuing care facility.

     The Secretary shall issue guidance which limits such term to 
     contracts which provide only facilities, care, and services 
     described in this paragraph.
       ``(3) Qualified continuing care facility.--
       ``(A) In general.--For purposes of this section, the term 
     `qualified continuing care facility' means 1 or more 
     facilities--
       ``(i) which are designed to provide services under 
     continuing care contracts,
       ``(ii) which include an independent living unit, plus an 
     assisted living or nursing facility, or both, and
       ``(iii) substantially all of the independent living unit 
     residents of which are covered by continuing care contracts.
       ``(B) Nursing homes excluded.--The term `qualified 
     continuing care facility' shall not include any facility 
     which is of a type which is traditionally considered a 
     nursing home.
       ``(4) Termination.--This subsection shall not apply to any 
     calendar year after 2010.''.
       (b) Conforming Amendments.--
       (1) Section 7872(g) is amended by adding at the end the 
     following new paragraph:
       ``(6) Suspension of application.--Paragraph (1) shall not 
     apply for any calendar year to which subsection (h) 
     applies.''.
       (2) Section 142(d)(2)(B) is amended by striking ``Section 
     7872(g)'' and inserting ``Subsections (g) and (h) of section 
     7872''.
       (c) Effective Date.--The amendment made by this section 
     shall apply to calendar years beginning after December 31, 
     2005, with respect to loans made before, on, or after such 
     date.
               TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

     SEC. 301. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION 
                   AMOUNT FOR 2006.

       (a) In General.--Section 55(d)(1) (relating to exemption 
     amount for taxpayers other than corporations) is amended--
       (1) by striking ``$58,000'' and all that follows through 
     ``2005'' in subparagraph (A) and inserting ``$62,550 in the 
     case of taxable years beginning in 2006'', and
       (2) by striking ``$40,250'' and all that follows through 
     ``2005'' in subparagraph (B) and inserting ``$42,500 in the 
     case of taxable years beginning in 2006''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 302. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST 
                   REGULAR AND ALTERNATIVE MINIMUM TAX LIABILITY.

       (a) In General.--Paragraph (2) of section 26(a) is 
     amended--
       (1) by striking ``2005'' in the heading thereof and 
     inserting ``2006'', and
       (2) by striking ``or 2005'' and inserting ``2005, or 
     2006''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.
              TITLE IV--CORPORATE ESTIMATED TAX PROVISIONS

     SEC. 401. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

       Notwithstanding section 6655 of the Internal Revenue Code 
     of 1986--
       (1) in the case of a corporation with assets of not less 
     than $1,000,000,000 (determined as of the end of the 
     preceding taxable year)--
       (A) the amount of any required installment of corporate 
     estimated tax which is otherwise due in July, August, or 
     September of 2006 shall be 105 percent of such amount,

[[Page 7378]]

       (B) the amount of any required installment of corporate 
     estimated tax which is otherwise due in July, August, or 
     September of 2012 shall be 106.25 percent of such amount,
       (C) the amount of any required installment of corporate 
     estimated tax which is otherwise due in July, August, or 
     September of 2013 shall be 100.75 percent of such amount, and
       (D) the amount of the next required installment after an 
     installment referred to in subparagraph (A), (B), or (C) 
     shall be appropriately reduced to reflect the amount of the 
     increase by reason of such subparagraph,
       (2) 20.5 percent of the amount of any required installment 
     of corporate estimated tax which is otherwise due in 
     September 2010 shall not be due until October 1, 2010, and
       (3) 27.5 percent of the amount of any required installment 
     of corporate estimated tax which is otherwise due in 
     September 2011 shall not be due until October 1, 2011.
                   TITLE V--REVENUE OFFSET PROVISIONS

     SEC. 501. APPLICATION OF EARNINGS STRIPPING RULES TO PARTNERS 
                   WHICH ARE CORPORATIONS.

       (a) In General.--Section 163(j) (relating to limitation on 
     deduction for interest on certain indebtedness) is amended by 
     redesignating paragraph (8) as paragraph (9) and by inserting 
     after paragraph (7) the following new paragraph:
       ``(8) Treatment of corporate partners.--Except to the 
     extent provided by regulations, in applying this subsection 
     to a corporation which owns (directly or indirectly) an 
     interest in a partnership--
       ``(A) such corporation's distributive share of interest 
     income paid or accrued to such partnership shall be treated 
     as interest income paid or accrued to such corporation,
       ``(B) such corporation's distributive share of interest 
     paid or accrued by such partnership shall be treated as 
     interest paid or accrued by such corporation, and
       ``(C) such corporation's share of the liabilities of such 
     partnership shall be treated as liabilities of such 
     corporation.''.
       (b) Additional Regulatory Authority.--Section 163(j)(9) 
     (relating to regulations), as redesignated by subsection (a), 
     is amended by striking ``and'' at the end of subparagraph 
     (B), by striking the period at the end of subparagraph (C) 
     and inserting ``, and'', and by adding at the end the 
     following new subparagraph:
       ``(D) regulations providing for the reallocation of shares 
     of partnership indebtedness, or distributive shares of the 
     partnership's interest income or interest expense.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning on or after the date 
     of the enactment of this Act.

     SEC. 502. REPORTING OF INTEREST ON TAX-EXEMPT BONDS.

       (a) In General.--Section 6049(b)(2) (relating to 
     exceptions) is amended by striking subparagraph (B) and by 
     redesignating subparagraphs (C) and (D) as subparagraphs (B) 
     and (C), respectively.
       (b) Conforming Amendment.--Section 6049(b)(2)(C), as 
     redesignated by subsection (a), is amended by striking 
     ``subparagraph (C)'' and inserting ``subparagraph (B)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to interest paid after December 31, 2005.

     SEC. 503. 5-YEAR AMORTIZATION OF GEOLOGICAL AND GEOPHYSICAL 
                   EXPENDITURES FOR CERTAIN MAJOR INTEGRATED OIL 
                   COMPANIES.

       (a) In General.--Section 167(h) (relating to amortization 
     of geological and geophysical expenditures) is amended by 
     adding at the end the following new paragraph:
       ``(5) Special rule for major integrated oil companies.--
       ``(A) In general.--In the case of a major integrated oil 
     company, paragraphs (1) and (4) shall be applied by 
     substituting `5-year' for `24 month'.
       ``(B) Major integrated oil company.--For purposes of this 
     paragraph, the term `major integrated oil company' means, 
     with respect to any taxable year, a producer of crude oil--
       ``(i) which has an average daily worldwide production of 
     crude oil of at least 500,000 barrels for the taxable year,
       ``(ii) which had gross receipts in excess of $1,000,000,000 
     for its last taxable year ending during calendar year 2005, 
     and
       ``(iii) to which subsection (c) of section 613A does not 
     apply by reason of paragraph (4) of section 613A(d), 
     determined--

       ``(I) by substituting `15 percent' for `5 percent' each 
     place it occurs in paragraph (3) of section 613A(d), and
       ``(II) without regard to whether subsection (c) of section 
     613A does not apply by reason of paragraph (2) of section 
     613A(d).

     For purposes of clauses (i) and (ii), all persons treated as 
     a single employer under subsections (a) and (b) of section 52 
     shall be treated as 1 person and, in case of a short taxable 
     year, the rule under section 448(c)(3)(B) shall apply.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.

     SEC. 504. APPLICATION OF FIRPTA TO REGULATED INVESTMENT 
                   COMPANIES.

       (a) In General.--Subclause (II) of section 897(h)(4)(A)(i) 
     (defining qualified investment entity) is amended by 
     inserting ``which is a United States real property holding 
     corporation or which would be a United States real property 
     holding corporation if the exceptions provided in subsections 
     (c)(3) and (h)(2) did not apply to interests in any real 
     estate investment trust or regulated investment company'' 
     after ``regulated investment company''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the provisions of section 
     411 of the American Jobs Creation Act of 2004 to which it 
     relates.

     SEC. 505. TREATMENT OF DISTRIBUTIONS ATTRIBUTABLE TO FIRPTA 
                   GAINS.

       (a) Qualified Investment Entity.--
       (1) In general.--Section 897(h)(1) is amended--
       (A) by striking ``a nonresident alien individual or a 
     foreign corporation'' in the first sentence and inserting ``a 
     nonresident alien individual, a foreign corporation, or other 
     qualified investment entity'',
       (B) by striking ``such nonresident alien individual or 
     foreign corporation'' in the first sentence and inserting 
     ``such nonresident alien individual, foreign corporation, or 
     other qualified investment entity'', and
       (C) by striking the second sentence and inserting the 
     following new sentence: ``Notwithstanding the preceding 
     sentence, any distribution by a qualified investment entity 
     to a nonresident alien individual or a foreign corporation 
     with respect to any class of stock which is regularly traded 
     on an established securities market located in the United 
     States shall not be treated as gain recognized from the sale 
     or exchange of a United States real property interest if such 
     individual or corporation did not own more than 5 percent of 
     such class of stock at any time during the 1-year period 
     ending on the date of such distribution.''.
       (2) Exception to termination of application of section 897 
     rules to regulated investment companies.--Clause (ii) of 
     section 897(h)(4)(A) is amended by adding at the end the 
     following new sentence: ``Notwithstanding the preceding 
     sentence, an entity described in clause (i)(II) shall be 
     treated as a qualified investment entity for purposes of 
     applying paragraphs (1) and (5) and section 1445 with respect 
     to any distribution by the entity to a nonresident alien 
     individual or a foreign corporation which is attributable 
     directly or indirectly to a distribution to the entity from a 
     real estate investment trust.''.
       (b) Withholding on Distributions Treated as Gain From 
     United States Real Property Interests.--Section 1445(e) 
     (relating to special rules for distributions, etc. by 
     corporations, partnerships, trusts, or estates) is amended by 
     redesignating paragraph (6) as paragraph (7) and by inserting 
     after paragraph (5) the following new paragraph:
       ``(6) Distributions by regulated investment companies and 
     real estate investment trusts.--If any portion of a 
     distribution from a qualified investment entity (as defined 
     in section 897(h)(4)) to a nonresident alien individual or a 
     foreign corporation is treated under section 897(h)(1) as 
     gain realized by such individual or corporation from the sale 
     or exchange of a United States real property interest, the 
     qualified investment entity shall deduct and withhold under 
     subsection (a) a tax equal to 35 percent (or, to the extent 
     provided in regulations, 15 percent (20 percent in the case 
     of taxable years beginning after December 31, 2010)) of the 
     amount so treated.''.
       (c) Treatment of Certain Distributions as Dividends.--
       (1) In general.--Section 852(b)(3) (relating to capital 
     gains) is amended by adding at the end the following new 
     subparagraph:
       ``(E) Certain distributions.--In the case of a distribution 
     to which section 897 does not apply by reason of the second 
     sentence of section 897(h)(1), the amount of such 
     distribution which would be included in computing long-term 
     capital gains for the shareholder under subparagraph (B) or 
     (D) (without regard to this subparagraph)--
       ``(i) shall not be included in computing such shareholder's 
     long-term capital gains, and
       ``(ii) shall be included in such shareholder's gross income 
     as a dividend from the regulated investment company.''.
       (2) Conforming amendment.--Section 871(k)(2) (relating to 
     short-term capital gain dividends) is amended by adding at 
     the end the following new subparagraph:
       ``(E) Certain distributions.--In the case of a distribution 
     to which section 897 does not apply by reason of the second 
     sentence of section 897(h)(1), the amount which would be 
     treated as a short-term capital gain dividend to the 
     shareholder (without regard to this subparagraph)--
       ``(i) shall not be treated as a short-term capital gain 
     dividend, and
       ``(ii) shall be included in such shareholder's gross income 
     as a dividend from the regulated investment company.''.
       (d) Effective Dates.--The amendments made by this section 
     shall apply to taxable years of qualified investment entities 
     beginning after December 31, 2005, except that no amount 
     shall be required to be withheld under section 1441, 1442, or 
     1445 of the Internal Revenue Code of 1986 with respect to any 
     distribution before the date of the enactment of this Act if 
     such amount was not otherwise required to be withheld under 
     any such section as in effect before such amendments.

     SEC. 506. PREVENTION OF AVOIDANCE OF TAX ON INVESTMENTS OF 
                   FOREIGN PERSONS IN UNITED STATES REAL PROPERTY 
                   THROUGH WASH SALE TRANSACTIONS.

       (a) In General.--Section 897(h) (relating to special rules 
     for certain investment entities) is amended by adding at the 
     end the following new paragraph:

[[Page 7379]]

       ``(5) Treatment of certain wash sale transactions.--
       ``(A) In general.--If an interest in a domestically 
     controlled qualified investment entity is disposed of in an 
     applicable wash sale transaction, the taxpayer shall, for 
     purposes of this section, be treated as having gain from the 
     sale or exchange of a United States real property interest in 
     an amount equal to the portion of the distribution described 
     in subparagraph (B) with respect to such interest which, but 
     for the disposition, would have been treated by the taxpayer 
     as gain from the sale or exchange of a United States real 
     property interest under paragraph (1).
       ``(B) Applicable wash sales transaction.--For purposes of 
     this paragraph--
       ``(i) In general.--The term `applicable wash sales 
     transaction' means any transaction (or series of 
     transactions) under which a nonresident alien individual, 
     foreign corporation, or qualified investment entity--

       ``(I) disposes of an interest in a domestically controlled 
     qualified investment entity during the 30-day period 
     preceding the ex-dividend date of a distribution which is to 
     be made with respect to the interest and any portion of 
     which, but for the disposition, would have been treated by 
     the taxpayer as gain from the sale or exchange of a United 
     States real property interest under paragraph (1), and
       ``(II) acquires, or enters into a contract or option to 
     acquire, a substantially identical interest in such entity 
     during the 61-day period beginning with the 1st day of the 
     30-day period described in subclause (I).

     For purposes of subclause (II), a nonresident alien 
     individual, foreign corporation, or qualified investment 
     entity shall be treated as having acquired any interest 
     acquired by a person related (within the meaning of section 
     267(b) or 707(b)(1)) to the individual, corporation, or 
     entity, and any interest which such person has entered into 
     any contract or option to acquire.
       ``(ii) Application to substitute dividend and similar 
     payments.--Subparagraph (A) shall apply to--

       ``(I) any substitute dividend payment (within the meaning 
     of section 861), or
       ``(II) any other similar payment specified in regulations 
     which the Secretary determines necessary to prevent avoidance 
     of the purposes of this paragraph.

     The portion of any such payment treated by the taxpayer as 
     gain from the sale or exchange of a United States real 
     property interest under subparagraph (A) by reason of this 
     clause shall be equal to the portion of the distribution such 
     payment is in lieu of which would have been so treated but 
     for the transaction giving rise to such payment.
       ``(iii) Exception where distribution actually received.--A 
     transaction shall not be treated as an applicable wash sales 
     transaction if the nonresident alien individual, foreign 
     corporation, or qualified investment entity receives the 
     distribution described in clause (i)(I) with respect to 
     either the interest which was disposed of, or acquired, in 
     the transaction.
       ``(iv) Exception for certain publicly traded stock.--A 
     transaction shall not be treated as an applicable wash sales 
     transaction if it involves the disposition of any class of 
     stock in a qualified investment entity which is regularly 
     traded on an established securities market within the United 
     States but only if the nonresident alien individual, foreign 
     corporation, or qualified investment entity did not own more 
     than 5 percent of such class of stock at any time during the 
     1-year period ending on the date of the distribution 
     described in clause (i)(I).''.
       (b) No Withholding Required.--Section 1445(b) (relating to 
     exemptions) is amended by adding at the end the following new 
     paragraph:
       ``(8) Applicable wash sales transactions.--No person shall 
     be required to deduct and withhold any amount under 
     subsection (a) with respect to a disposition which is treated 
     as a disposition of a United States real property interest 
     solely by reason of section 897(h)(5).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005, except that such amendments shall not apply to any 
     distribution, or substitute dividend payment, occurring 
     before the date that is 30 days after the date of the 
     enactment of this Act.

     SEC. 507. SECTION 355 NOT TO APPLY TO DISTRIBUTIONS INVOLVING 
                   DISQUALIFIED INVESTMENT COMPANIES.

       (a) In General.--Section 355 (relating to distributions of 
     stock and securities of a controlled corporation) is amended 
     by adding at the end the following new subsection:
       ``(g) Section Not to Apply to Distributions Involving 
     Disqualified Investment Corporations.--
       ``(1) In general.--This section (and so much of section 356 
     as relates to this section) shall not apply to any 
     distribution which is part of a transaction if--
       ``(A) either the distributing corporation or controlled 
     corporation is, immediately after the transaction, a 
     disqualified investment corporation, and
       ``(B) any person holds, immediately after the transaction, 
     a 50-percent or greater interest in any disqualified 
     investment corporation, but only if such person did not hold 
     such an interest in such corporation immediately before the 
     transaction.
       ``(2) Disqualified investment corporation.--For purposes of 
     this subsection--
       ``(A) In general.--The term `disqualified investment 
     corporation' means any distributing or controlled corporation 
     if the fair market value of the investment assets of the 
     corporation is--
       ``(i) in the case of distributions after the end of the 1-
     year period beginning on the date of the enactment of this 
     subsection, \2/3\ or more of the fair market value of all 
     assets of the corporation, and
       ``(ii) in the case of distributions during such 1-year 
     period, \3/4\ or more of the fair market value of all assets 
     of the corporation.
       ``(B) Investment assets.--
       ``(i) In general.--Except as otherwise provided in this 
     subparagraph, the term `investment assets' means--

       ``(I) cash,
       ``(II) any stock or securities in a corporation,
       ``(III) any interest in a partnership,
       ``(IV) any debt instrument or other evidence of 
     indebtedness,
       ``(V) any option, forward or futures contract, notional 
     principal contract, or derivative,
       ``(VI) foreign currency, or
       ``(VII) any similar asset.

       ``(ii) Exception for assets used in active conduct of 
     certain financial trades or businesses.--Such term shall not 
     include any asset which is held for use in the active and 
     regular conduct of--

       ``(I) a lending or finance business (within the meaning of 
     section 954(h)(4)),
       ``(II) a banking business through a bank (as defined in 
     section 581), a domestic building and loan association 
     (within the meaning of section 7701(a)(19)), or any similar 
     institution specified by the Secretary, or
       ``(III) an insurance business if the conduct of the 
     business is licensed, authorized, or regulated by an 
     applicable insurance regulatory body.

     This clause shall only apply with respect to any business if 
     substantially all of the income of the business is derived 
     from persons who are not related (within the meaning of 
     section 267(b) or 707(b)(1)) to the person conducting the 
     business.
       ``(iii) Exception for securities marked to market.--Such 
     term shall not include any security (as defined in section 
     475(c)(2)) which is held by a dealer in securities and to 
     which section 475(a) applies.
       ``(iv) Stock or securities in a 20-percent controlled 
     entity.--

       ``(I) In general.--Such term shall not include any stock 
     and securities in, or any asset described in subclause (IV) 
     or (V) of clause (i) issued by, a corporation which is a 20-
     percent controlled entity with respect to the distributing or 
     controlled corporation.
       ``(II) Look-thru rule.--The distributing or controlled 
     corporation shall, for purposes of applying this subsection, 
     be treated as owning its ratable share of the assets of any 
     20-percent controlled entity.
       ``(III) 20-percent controlled entity.--For purposes of this 
     clause, the term `20-percent controlled entity' means, with 
     respect to any distributing or controlled corporation, any 
     corporation with respect to which the distributing or 
     controlled corporation owns directly or indirectly stock 
     meeting the requirements of section 1504(a)(2), except that 
     such section shall be applied by substituting `20 percent' 
     for `80 percent' and without regard to stock described in 
     section 1504(a)(4).

       ``(v) Interests in certain partnerships.--

       ``(I) In general.--Such term shall not include any interest 
     in a partnership, or any debt instrument or other evidence of 
     indebtedness, issued by the partnership, if 1 or more of the 
     trades or businesses of the partnership are (or, without 
     regard to the 5-year requirement under subsection (b)(2)(B), 
     would be) taken into account by the distributing or 
     controlled corporation, as the case may be, in determining 
     whether the requirements of subsection (b) are met with 
     respect to the distribution.

       ``(II) Look-thru rule.--The distributing or controlled 
     corporation shall, for purposes of applying this subsection, 
     be treated as owning its ratable share of the assets of any 
     partnership described in subclause (I).

       ``(3) 50-percent or greater interest.--For purposes of this 
     subsection--
       ``(A) In general.--The term `50-percent or greater 
     interest' has the meaning given such term by subsection 
     (d)(4).
       ``(B) Attribution rules.--The rules of section 318 shall 
     apply for purposes of determining ownership of stock for 
     purposes of this paragraph.
       ``(4) Transaction.--For purposes of this subsection, the 
     term `transaction' includes a series of transactions.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out, or prevent the 
     avoidance of, the purposes of this subsection, including 
     regulations--
       ``(A) to carry out, or prevent the avoidance of, the 
     purposes of this subsection in cases involving--
       ``(i) the use of related persons, intermediaries, pass-thru 
     entities, options, or other arrangements, and
       ``(ii) the treatment of assets unrelated to the trade or 
     business of a corporation as investment assets if, prior to 
     the distribution, investment assets were used to acquire such 
     unrelated assets,
       ``(B) which in appropriate cases exclude from the 
     application of this subsection a distribution which does not 
     have the character of a redemption which would be treated as 
     a sale or exchange under section 302, and
       ``(C) which modify the application of the attribution rules 
     applied for purposes of this subsection.''.
       (b) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to distributions after the date of the enactment of 
     this Act.

[[Page 7380]]

       (2) Transition rule.--The amendments made by this section 
     shall not apply to any distribution pursuant to a transaction 
     which is--
       (A) made pursuant to an agreement which was binding on such 
     date of enactment and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission.

     SEC. 508. LOAN AND REDEMPTION REQUIREMENTS ON POOLED 
                   FINANCING REQUIREMENTS.

       (a) Strengthened Reasonable Expectation Requirement.--
     Subparagraph (A) of section 149(f)(2) (relating to reasonable 
     expectation requirement) is amended to read as follows:
       ``(A) In general.--The requirements of this paragraph are 
     met with respect to an issue if the issuer reasonably expects 
     that--
       ``(i) as of the close of the 1-year period beginning on the 
     date of issuance of the issue, at least 30 percent of the net 
     proceeds of the issue (as of the close of such period) will 
     have been used directly or indirectly to make or finance 
     loans to ultimate borrowers, and
       ``(ii) as of the close of the 3-year period beginning on 
     such date of issuance, at least 95 percent of the net 
     proceeds of the issue (as of the close of such period) will 
     have been so used.''.
       (b) Written Loan Commitment and Redemption Requirements.--
     Section 149(f) (relating to treatment of certain pooled 
     financing bonds) is amended by redesignating paragraphs (4) 
     and (5) as paragraphs (6) and (7), respectively, and by 
     inserting after paragraph (3) the following new paragraphs:
       ``(4) Written loan commitment requirement.--
       ``(A) In general.--The requirement of this paragraph is met 
     with respect to an issue if the issuer receives prior to 
     issuance written loan commitments identifying the ultimate 
     potential borrowers of at least 30 percent of the net 
     proceeds of such issue.
       ``(B) Exception.--Subparagraph (A) shall not apply with 
     respect to any issuer which--
       ``(i) is a State (or an integral part of a State) issuing 
     pooled financing bonds to make or finance loans to 
     subordinate governmental units of such State, or
       ``(ii) is a State-created entity providing financing for 
     water-infrastructure projects through the federally-sponsored 
     State revolving fund program.
       ``(5) Redemption requirement.--The requirement of this 
     paragraph is met if to the extent that less than the 
     percentage of the proceeds of an issue required to be used 
     under clause (i) or (ii) of paragraph (2)(A) is used by the 
     close of the period identified in such clause, the issuer 
     uses an amount of proceeds equal to the excess of--
       ``(A) the amount required to be used under such clause, 
     over
       ``(B) the amount actually used by the close of such period,

     to redeem outstanding bonds within 90 days after the end of 
     such period.''.
       (c) Elimination of Disregard of Pooled Bonds in Determining 
     Eligibility for Small Issuer Exception to Arbitrage Rebate.--
     Section 148(f)(4)(D)(ii) (relating to aggregation of issuers) 
     is amended by striking subclause (II) and by redesignating 
     subclauses (III) and (IV) as subclauses (II) and (III), 
     respectively.
       (d) Conforming Amendments.--
       (1) Section 149(f)(1) is amended by striking ``paragraphs 
     (2) and (3)'' and inserting ``paragraphs (2), (3), (4), and 
     (5)''.
       (2) Section 149(f)(7)(B), as redesignated by subsection 
     (b), is amended by striking ``paragraph (4)(A)'' and 
     inserting ``paragraph (6)(A)''.
       (3) Section 54(l)(2) is amended by striking ``section 
     149(f)(4)(A)'' and inserting ``section 149(f)(6)(A)''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after the date of the enactment 
     of this Act.

     SEC. 509. PARTIAL PAYMENTS REQUIRED WITH SUBMISSION OF 
                   OFFERS-IN-COMPROMISE.

       (a) In General.--Section 7122 (relating to compromises) is 
     amended by redesignating subsections (c) and (d) as 
     subsections (d) and (e), respectively, and by inserting after 
     subsection (b) the following new subsection:
       ``(c) Rules for Submission of Offers-in-Compromise.--
       ``(1) Partial payment required with submission.--
       ``(A) Lump-sum offers.--
       ``(i) In general.--The submission of any lump-sum offer-in-
     compromise shall be accompanied by the payment of 20 percent 
     of the amount of such offer.
       ``(ii) Lump-sum offer-in-compromise.--For purposes of this 
     section, the term `lump-sum offer-in-compromise' means any 
     offer of payments made in 5 or fewer installments.
       ``(B) Periodic payment offers.--
       ``(i) In general.--The submission of any periodic payment 
     offer-in-compromise shall be accompanied by the payment of 
     the amount of the first proposed installment.
       ``(ii) Failure to make installment during pendency of 
     offer.--Any failure to make an installment (other than the 
     first installment) due under such offer-in-compromise during 
     the period such offer is being evaluated by the Secretary may 
     be treated by the Secretary as a withdrawal of such offer-in-
     compromise.
       ``(2) Rules of application.--
       ``(A) Use of payment.--The application of any payment made 
     under this subsection to the assessed tax or other amounts 
     imposed under this title with respect to such tax may be 
     specified by the taxpayer.
       ``(B) Application of user fee.--In the case of any assessed 
     tax or other amounts imposed under this title with respect to 
     such tax which is the subject of an offer-in-compromise to 
     which this subsection applies, such tax or other amounts 
     shall be reduced by any user fee imposed under this title 
     with respect to such offer-in-compromise.
       ``(C) Waiver authority.--The Secretary may issue 
     regulations waiving any payment required under paragraph (1) 
     in a manner consistent with the practices established in 
     accordance with the requirements under subsection (d)(3).''.
       (b) Additional Rules Relating to Treatment of Offers.--
       (1) Unprocessable offer if payment requirements are not 
     met.--Paragraph (3) of section 7122(d) (relating to standards 
     for evaluation of offers), as redesignated by subsection (a), 
     is amended by striking ``; and'' at the end of subparagraph 
     (A) and inserting a comma, by striking the period at the end 
     of subparagraph (B) and inserting ``, and'', and by adding at 
     the end the following new subparagraph:
       ``(C) any offer-in-compromise which does not meet the 
     requirements of subparagraph (A)(i) or (B)(i), as the case 
     may be, of subsection (c)(1) may be returned to the taxpayer 
     as unprocessable.''.
       (2) Deemed acceptance of offer not rejected within certain 
     period.--Section 7122, as amended by subsection (a), is 
     amended by adding at the end the following new subsection:
       ``(f) Deemed Acceptance of Offer Not Rejected Within 
     Certain Period.--Any offer-in-compromise submitted under this 
     section shall be deemed to be accepted by the Secretary if 
     such offer is not rejected by the Secretary before the date 
     which is 24 months after the date of the submission of such 
     offer. For purposes of the preceding sentence, any period 
     during which any tax liability which is the subject of such 
     offer-in-compromise is in dispute in any judicial proceeding 
     shall not be taken into account in determining the expiration 
     of the 24-month period.''.
       (c) Conforming Amendment.--Section 6159(f) is amended by 
     striking ``section 7122(d)'' and inserting ``section 
     7122(e)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to offers-in-compromise submitted on and after 
     the date which is 60 days after the date of the enactment of 
     this Act.

     SEC. 510. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED 
                   INCOME IS TAXED AS IF PARENT'S INCOME.

       (a) In General.--Section 1(g)(2)(A) (relating to child to 
     whom subsection applies) is amended by striking ``age 14'' 
     and inserting ``age 18''.
       (b) Treatment of Distributions From Qualified Disability 
     Trusts.--Section 1(g)(4) (relating to net unearned income) is 
     amended by adding at the end the following new subparagraph:
       ``(C) Treatment of distributions from qualified disability 
     trusts.--For purposes of this subsection, in the case of any 
     child who is a beneficiary of a qualified disability trust 
     (as defined in section 642(b)(2)(C)(ii)), any amount included 
     in the income of such child under sections 652 and 662 during 
     a taxable year shall be considered earned income of such 
     child for such taxable year.''.
       (c) Conforming Amendment.--Section 1(g)(2) is amended by 
     striking ``and'' at the end of subparagraph (A), by striking 
     the period at the end of subparagraph (B) and inserting ``, 
     and'', and by inserting after subparagraph (B) the following 
     new subparagraph:
       ``(C) such child does not file a joint return for the 
     taxable year.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 511. IMPOSITION OF WITHHOLDING ON CERTAIN PAYMENTS MADE 
                   BY GOVERNMENT ENTITIES.

       (a) In General.--Section 3402 is amended by adding at the 
     end the following new subsection:
       ``(t) Extension of Withholding to Certain Payments Made by 
     Government Entities.--
       ``(1) General rule.--The Government of the United States, 
     every State, every political subdivision thereof, and every 
     instrumentality of the foregoing (including multi-State 
     agencies) making any payment to any person providing any 
     property or services (including any payment made in 
     connection with a government voucher or certificate program 
     which functions as a payment for property or services) shall 
     deduct and withhold from such payment a tax in an amount 
     equal to 3 percent of such payment.
       ``(2) Property and services subject to withholding.--
     Paragraph (1) shall not apply to any payment--
       ``(A) except as provided in subparagraph (B), which is 
     subject to withholding under any other provision of this 
     chapter or chapter 3,
       ``(B) which is subject to withholding under section 3406 
     and from which amounts are being withheld under such section,
       ``(C) of interest,
       ``(D) for real property,
       ``(E) to any governmental entity subject to the 
     requirements of paragraph (1), any tax-exempt entity, or any 
     foreign government,
       ``(F) made pursuant to a classified or confidential 
     contract described in section 6050M(e)(3),
       ``(G) made by a political subdivision of a State (or any 
     instrumentality thereof) which makes

[[Page 7381]]

     less than $100,000,000 of such payments annually,
       ``(H) which is in connection with a public assistance or 
     public welfare program for which eligibility is determined by 
     a needs or income test, and
       ``(I) to any government employee not otherwise excludable 
     with respect to their services as an employee.
       ``(3) Coordination with other sections.--For purposes of 
     sections 3403 and 3404 and for purposes of so much of 
     subtitle F (except section 7205) as relates to this chapter, 
     payments to any person for property or services which are 
     subject to withholding shall be treated as if such payments 
     were wages paid by an employer to an employee.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to payments made after December 31, 2010.

     SEC. 512. CONVERSIONS TO ROTH IRAS.

       (a) Repeal of Income Limitations.--
       (1) In general.--Paragraph (3) of section 408A(c) (relating 
     to limits based on modified adjusted gross income) is amended 
     by striking subparagraph (B) and redesignating subparagraphs 
     (C) and (D) as subparagraphs (B) and (C), respectively.
       (2) Conforming amendment.--Clause (i) of section 
     408A(c)(3)(B) (as redesignated by paragraph (1)) is amended 
     by striking ``except that--'' and all that follows and 
     inserting ``except that any amount included in gross income 
     under subsection (d)(3) shall not be taken into account, 
     and''.
       (b) Rollovers to a Roth IRA From an IRA Other Than a Roth 
     IRA.--
       (1) In general.--Clause (iii) of section 408A(d)(3)(A) 
     (relating to rollovers from an IRA other than a Roth IRA) is 
     amended to read as follows:
       ``(iii) unless the taxpayer elects not to have this clause 
     apply, any amount required to be included in gross income for 
     any taxable year beginning in 2010 by reason of this 
     paragraph shall be so included ratably over the 2-taxable-
     year period beginning with the first taxable year beginning 
     in 2011.''.
       (2) Conforming amendments.--
       (A) Clause (i) of section 408A(d)(3)(E) is amended to read 
     as follows:
       ``(i) Acceleration of inclusion.--

       ``(I) In general.--The amount otherwise required to be 
     included in gross income for any taxable year beginning in 
     2010 or the first taxable year in the 2-year period under 
     subparagraph (A)(iii) shall be increased by the aggregate 
     distributions from Roth IRAs for such taxable year which are 
     allocable under paragraph (4) to the portion of such 
     qualified rollover contribution required to be included in 
     gross income under subparagraph (A)(i).
       ``(II) Limitation on aggregate amount included.--The amount 
     required to be included in gross income for any taxable year 
     under subparagraph (A)(iii) shall not exceed the aggregate 
     amount required to be included in gross income under 
     subparagraph (A)(iii) for all taxable years in the 2-year 
     period (without regard to subclause (I)) reduced by amounts 
     included for all preceding taxable years.''.

       (B) The heading for section 408A(d)(3)(E) is amended by 
     striking ``4-year'' and inserting ``2-year''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2009.

     SEC. 513. REPEAL OF FSC/ETI BINDING CONTRACT RELIEF.

       (a) FSC Provisions.--Paragraph (1) of section 5(c) of the 
     FSC Repeal and Extraterritorial Income Exclusion Act of 2000 
     is amended by striking ``which occurs--'' and all that 
     follows and inserting ``which occurs before January 1, 
     2002.''.
       (b) ETI Provisions.--Section 101 of the American Jobs 
     Creation Act of 2004 is amended by striking subsection (f).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 514. ONLY WAGES ATTRIBUTABLE TO DOMESTIC PRODUCTION 
                   TAKEN INTO ACCOUNT IN DETERMINING DEDUCTION FOR 
                   DOMESTIC PRODUCTION.

       (a) In General.--Paragraph (2) of section 199(b) (relating 
     to W-2 wages) is amended to read as follows:
       ``(2) W-2 wages.--For purposes of this section--
       ``(A) In general.--The term `W-2 wages' means, with respect 
     to any person for any taxable year of such person, the sum of 
     the amounts described in paragraphs (3) and (8) of section 
     6051(a) paid by such person with respect to employment of 
     employees by such person during the calendar year ending 
     during such taxable year.
       ``(B) Limitation to wages attributable to domestic 
     production.--Such term shall not include any amount which is 
     not properly allocable to domestic production gross receipts 
     for purposes of subsection (c)(1).
       ``(C) Return requirement.--Such term shall not include any 
     amount which is not properly included in a return filed with 
     the Social Security Administration on or before the 60th day 
     after the due date (including extensions) for such return.''.
       (b) Simplification of Rules for Determining W-2 Wages of 
     Partners and S Corporation Shareholders.--
       (1) In general.--Clause (iii) of section 199(d)(1)(A) is 
     amended to read as follows:
       ``(iii) each partner or shareholder shall be treated for 
     purposes of subsection (b) as having W-2 wages for the 
     taxable year in an amount equal to such person's allocable 
     share of the W-2 wages of the partnership or S corporation 
     for the taxable year (as determined under regulations 
     prescribed by the Secretary).''.
       (2) Conforming amendment.--Paragraph (2) of section 199(a) 
     is amended by striking ``and subsection (d)(1)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 515. MODIFICATION OF EXCLUSION FOR CITIZENS LIVING 
                   ABROAD.

       (a) Inflation Adjustment of Foreign Earned Income 
     Limitation.--Clause (ii) of section 911(b)(2)(D) (relating to 
     inflation adjustment) is amended--
       (1) by striking ``2007'' and inserting ``2005'', and
       (2) by striking ``2006'' in subclause (II) and inserting 
     ``2004''.
       (b) Modification of Housing Cost Amount.--
       (1) Modification of housing cost floor.--Clause (i) of 
     section 911(c)(1)(B) is amended to read as follows:
       ``(i) 16 percent of the amount (computed on a daily basis) 
     in effect under subsection (b)(2)(D) for the calendar year in 
     which such taxable year begins, multiplied by''.
       (2) Maximum amount of exclusion.--
       (A) In general.--Subparagraph (A) of section 911(c)(1) is 
     amended by inserting ``to the extent such expenses do not 
     exceed the amount determined under paragraph (2)'' after 
     ``the taxable year''.
       (B) Limitation.--Subsection (c) of section 911 is amended 
     by redesignating paragraphs (2) and (3) as paragraphs (3) and 
     (4), respectively, and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Limitation.--
       ``(A) In general.--The amount determined under this 
     paragraph is an amount equal to the product of--
       ``(i) 30 percent (adjusted as may be provided under 
     subparagraph (B)) of the amount (computed on a daily basis) 
     in effect under subsection (b)(2)(D) for the calendar year in 
     which the taxable year of the individual begins, multiplied 
     by
       ``(ii) the number of days of such taxable year within the 
     applicable period described in subparagraph (A) or (B) of 
     subsection (d)(1).
       ``(B) Regulations.--The Secretary may issue regulations or 
     other guidance providing for the adjustment of the percentage 
     under subparagraph (A)(i) on the basis of geographic 
     differences in housing costs relative to housing costs in the 
     United States.''.
       (C) Conforming amendments.--
       (i) Section 911(d)(4) is amended by striking ``and 
     (c)(1)(B)(ii)'' and inserting ``, (c)(1)(B)(ii), and 
     (c)(2)(A)(ii)''.
       (ii) Section 911(d)(7) is amended by striking ``subsection 
     (c)(3)'' and inserting ``subsection (c)(4)''.
       (c) Rates of Tax Applicable to Nonexcluded Income.--Section 
     911 (relating to exclusion of certain income of citizens and 
     residents of the United States living abroad) is amended by 
     redesignating subsection (f) as subsection (g) and by 
     inserting after subsection (e) the following new subsection:
       ``(f) Determination of Tax Liability on Nonexcluded 
     Amounts.--For purposes of this chapter, if any amount is 
     excluded from the gross income of a taxpayer under subsection 
     (a) for any taxable year, then, notwithstanding section 1 or 
     55--
       ``(1) the tax imposed by section 1 on the taxpayer for such 
     taxable year shall be equal to the excess (if any) of--
       ``(A) the tax which would be imposed by section 1 for the 
     taxable year if the taxpayer's taxable income were increased 
     by the amount excluded under subsection (a) for the taxable 
     year, over
       ``(B) the tax which would be imposed by section 1 for the 
     taxable year if the taxpayer's taxable income were equal to 
     the amount excluded under subsection (a) for the taxable 
     year, and
       ``(2) the tentative minimum tax under section 55 for such 
     taxable year shall be equal to the excess (if any) of--
       ``(A) the amount which would be such tentative minimum tax 
     for the taxable year if the taxpayer's taxable excess were 
     increased by the amount excluded under subsection (a) for the 
     taxable year, over
       ``(B) the amount which would be such tentative minimum tax 
     for the taxable year if the taxpayer's taxable excess were 
     equal to the amount excluded under subsection (a) for the 
     taxable year.

     For purposes of this subsection, the amount excluded under 
     subsection (a) shall be reduced by the aggregate amount of 
     any deductions or exclusions disallowed under subsection 
     (d)(6) with respect to such excluded amount.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 516. TAX INVOLVEMENT OF ACCOMMODATION PARTIES IN TAX 
                   SHELTER TRANSACTIONS.

       (a) Imposition of Excise Tax.--
       (1) In general.--Chapter 42 (relating to private 
     foundations and certain other tax-exempt organizations) is 
     amended by adding at the end the following new subchapter:

                ``Subchapter F--Tax Shelter Transactions

``Sec. 4965. Excise tax on certain tax-exempt entities entering into 
              prohibited tax shelter transactions.

[[Page 7382]]



     ``SEC. 4965. EXCISE TAX ON CERTAIN TAX-EXEMPT ENTITIES 
                   ENTERING INTO PROHIBITED TAX SHELTER 
                   TRANSACTIONS.

       ``(a) Being a Party to and Approval of Prohibited 
     Transactions.--
       ``(1) Tax-exempt entity.--
       ``(A) In general.--If a transaction is a prohibited tax 
     shelter transaction at the time any tax-exempt entity 
     described in paragraph (1), (2), or (3) of subsection (c) 
     becomes a party to the transaction, such entity shall pay a 
     tax for the taxable year in which the entity becomes such a 
     party and any subsequent taxable year in the amount 
     determined under subsection (b)(1).
       ``(B) Post-transaction determination.--If any tax-exempt 
     entity described in paragraph (1), (2), or (3) of subsection 
     (c) is a party to a subsequently listed transaction at any 
     time during a taxable year, such entity shall pay a tax for 
     such taxable year in the amount determined under subsection 
     (b)(1).
       ``(2) Entity manager.--If any entity manager of a tax-
     exempt entity approves such entity as (or otherwise causes 
     such entity to be) a party to a prohibited tax shelter 
     transaction at any time during the taxable year and knows or 
     has reason to know that the transaction is a prohibited tax 
     shelter transaction, such manager shall pay a tax for such 
     taxable year in the amount determined under subsection 
     (b)(2).
       ``(b) Amount of Tax.--
       ``(1) Entity.--In the case of a tax-exempt entity--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the amount of the tax imposed under subsection (a)(1) with 
     respect to any transaction for a taxable year shall be an 
     amount equal to the product of the highest rate of tax under 
     section 11, and the greater of--
       ``(i) the entity's net income (after taking into account 
     any tax imposed by this subtitle (other than by this section) 
     with respect to such transaction) for such taxable year 
     which--

       ``(I) in the case of a prohibited tax shelter transaction 
     (other than a subsequently listed transaction), is 
     attributable to such transaction, or
       ``(II) in the case of a subsequently listed transaction, is 
     attributable to such transaction and which is properly 
     allocable to the period beginning on the later of the date 
     such transaction is identified by guidance as a listed 
     transaction by the Secretary or the first day of the taxable 
     year, or

       ``(ii) 75 percent of the proceeds received by the entity 
     for the taxable year which--

       ``(I) in the case of a prohibited tax shelter transaction 
     (other than a subsequently listed transaction), are 
     attributable to such transaction, or
       ``(II) in the case of a subsequently listed transaction, 
     are attributable to such transaction and which are properly 
     allocable to the period beginning on the later of the date 
     such transaction is identified by guidance as a listed 
     transaction by the Secretary or the first day of the taxable 
     year.

       ``(B) Increase in tax for certain knowing transactions.--In 
     the case of a tax-exempt entity which knew, or had reason to 
     know, a transaction was a prohibited tax shelter transaction 
     at the time the entity became a party to the transaction, the 
     amount of the tax imposed under subsection (a)(1)(A) with 
     respect to any transaction for a taxable year shall be the 
     greater of--
       ``(i) 100 percent of the entity's net income (after taking 
     into account any tax imposed by this subtitle (other than by 
     this section) with respect to the prohibited tax shelter 
     transaction) for such taxable year which is attributable to 
     the prohibited tax shelter transaction, or
       ``(ii) 75 percent of the proceeds received by the entity 
     for the taxable year which are attributable to the prohibited 
     tax shelter transaction.
     This subparagraph shall not apply to any prohibited tax 
     shelter transaction to which a tax-exempt entity became a 
     party on or before the date of the enactment of this section.
       ``(2) Entity manager.--In the case of each entity manager, 
     the amount of the tax imposed under subsection (a)(2) shall 
     be $20,000 for each approval (or other act causing 
     participation) described in subsection (a)(2).
       ``(c) Tax-Exempt Entity.--For purposes of this section, the 
     term `tax-exempt entity' means an entity which is--
       ``(1) described in section 501(c) or 501(d),
       ``(2) described in section 170(c) (other than the United 
     States),
       ``(3) an Indian tribal government (within the meaning of 
     section 7701(a)(40)),
       ``(4) described in paragraph (1), (2), or (3) of section 
     4979(e),
       ``(5) a program described in section 529,
       ``(6) an eligible deferred compensation plan described in 
     section 457(b) which is maintained by an employer described 
     in section 4457(e)(1)(A), or
       ``(7) an arrangement described in section 4973(a).
       ``(d) Entity Manager.--For purposes of this section, the 
     term `entity manager' means--
       ``(1) in the case of an entity described in paragraph (1), 
     (2), or (3) of subsection (c)--
       ``(A) the person with authority or responsibility similar 
     to that exercised by an officer, director, or trustee of an 
     organization, and
       ``(B) with respect to any act, the person having authority 
     or responsibility with respect to such act, and
       ``(2) in the case of an entity described in paragraph (4), 
     (5), (6), or (7) of subsection (c), the person who approves 
     or otherwise causes the entity to be a party to the 
     prohibited tax shelter transaction.
       ``(e) Prohibited Tax Shelter Transaction; Subsequently 
     Listed Transaction.--For purposes of this section--
       ``(1) Prohibited tax shelter transaction.--
       ``(A) In general.--The term `prohibited tax shelter 
     transaction' means--
       ``(i) any listed transaction, and
       ``(ii) any prohibited reportable transaction.
       ``(B) Listed transaction.--The term `listed transaction' 
     has the meaning given such term by section 6707A(c)(2).
       ``(C) Prohibited reportable transaction.--The term 
     `prohibited reportable transaction' means any confidential 
     transaction or any transaction with contractual protection 
     (as defined under regulations prescribed by the Secretary) 
     which is a reportable transaction (as defined in section 
     6707A(c)(1)).
       ``(2) Subsequently listed transaction.--The term 
     `subsequently listed transaction' means any transaction to 
     which a tax-exempt entity is a party and which is determined 
     by the Secretary to be a listed transaction at any time after 
     the entity has become a party to the transaction. Such term 
     shall not include a transaction which is a prohibited 
     reportable transaction at the time the entity became a party 
     to the transaction.
       ``(f) Regulatory Authority.--The Secretary is authorized to 
     promulgate regulations which provide guidance regarding the 
     determination of the allocation of net income or proceeds of 
     a tax-exempt entity attributable to a transaction to various 
     periods, including before and after the listing of the 
     transaction or the date which is 90 days after the date of 
     the enactment of this section.
       ``(g) Coordination With Other Taxes and Penalties.--The tax 
     imposed by this section is in addition to any other tax, 
     addition to tax, or penalty imposed under this title.''.
       (2) Conforming amendment.--The table of subchapters for 
     chapter 42 is amended by adding at the end the following new 
     item:


               ``Subchapter F. Tax Shelter Transactions.''.

       (b) Disclosure Requirements.--
       (1) Disclosure by entity to the internal revenue service.--
       (A) In general.--Section 6033(a) (relating to organizations 
     required to file) is amended by redesignating paragraph (2) 
     as paragraph (3) and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Being a party to certain reportable transactions.--
     Every tax-exempt entity described in section 4965(c) shall 
     file (in such form and manner and at such time as determined 
     by the Secretary) a disclosure of--
       ``(A) such entity's being a party to any prohibited tax 
     shelter transaction (as defined in section 4965(e)), and
       ``(B) the identity of any other party to such transaction 
     which is known by such tax-exempt entity.''.
       (B) Conforming amendment.--Section 6033(a)(1) is amended by 
     striking ``paragraph (2)'' and inserting ``paragraph (3)''.
       (2) Disclosure by other taxpayers to the tax-exempt 
     entity.--Section 6011 (relating to general requirement of 
     return, statement, or list) is amended by redesignating 
     subsection (g) as subsection (h) and by inserting after 
     subsection (f) the following new subsection:
       ``(g) Disclosure of Reportable Transaction to Tax-Exempt 
     Entity.--Any taxable party to a prohibited tax shelter 
     transaction (as defined in section 4965(e)(1)) shall by 
     statement disclose to any tax-exempt entity (as defined in 
     section 4965(c)) which is a party to such transaction that 
     such transaction is such a prohibited tax shelter 
     transaction.''.
       (c) Penalty for Nondisclosure.--
       (1) In general.--Section 6652(c) (relating to returns by 
     exempt organizations and by certain trusts) is amended by 
     redesignating paragraphs (3) and (4) as paragraphs (4) and 
     (5), respectively, and by inserting after paragraph (2) the 
     following new paragraph:
       ``(3) Disclosure under section 6033(a)(2).--
       ``(A) Penalty on entities.--In the case of a failure to 
     file a disclosure required under section 6033(a)(2), there 
     shall be paid by the tax-exempt entity (the entity manager in 
     the case of a tax-exempt entity described in paragraph (4), 
     (5), (6), or (7) of section 4965(c)) $100 for each day during 
     which such failure continues. The maximum penalty under this 
     subparagraph on failures with respect to any 1 disclosure 
     shall not exceed $50,000.
       ``(B) Written demand.--
       ``(i) In general.--The Secretary may make a written demand 
     on any entity or manager subject to penalty under 
     subparagraph (A) specifying therein a reasonable future date 
     by which the disclosure shall be filed for purposes of this 
     subparagraph.
       ``(ii) Failure to comply with demand.--If any entity or 
     manager fails to comply with any demand under clause (i) on 
     or before the date specified in such demand, there shall be 
     paid by such entity or manager failing to so comply $100 for 
     each day after the expiration of the time specified in such 
     demand during which such failure continues. The maximum 
     penalty imposed under this subparagraph on all entities and 
     managers for failures with respect to any 1 disclosure shall 
     not exceed $10,000.
       ``(C) Definitions.--Any term used in this section which is 
     also used in section 4965 shall have the meaning given such 
     term under section 4965.''.
       (2) Conforming amendment.--Paragraph (1) of section 6652(c) 
     is amended by striking ``6033'' each place it appears in the 
     text and heading thereof and inserting ``6033(a)(1)''.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section

[[Page 7383]]

     shall apply to taxable years ending after the date of the 
     enactment of this Act, with respect to transactions before, 
     on, or after such date, except that no tax under section 
     4965(a) of the Internal Revenue Code of 1986 (as added by 
     this section) shall apply with respect to income or proceeds 
     that are properly allocable to any period ending on or before 
     the date which is 90 days after such date of enactment.
       (2) Disclosure.--The amendments made by subsections (b) and 
     (c) shall apply to disclosures the due date for which are 
     after the date of the enactment of this Act.
       And the Senate agree to the same.

     William Thomas,
     Jim McCrery,
     Dave Camp,
                                Managers on the Part of the House.

     Chuck Grassley,
     Jon Kyl,
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate to the bill (H.R. 4297), to provide 
     for reconciliation pursuant to section 201(b) of the 
     concurrent resolution on the budget for fiscal year 2006, 
     submit the following joint statement to the House and the 
     Senate in explanation of the effect of the action agreed upon 
     by the managers and recommended in the accompanying 
     conference report:
       The Senate amendment struck all of the House bill after the 
     enacting clause and inserted a substitute text.
       The House recedes from its disagreement to the amendment of 
     the Senate with an amendment that is a substitute for the 
     House bill and the Senate amendment. The differences between 
     the House bill, the Senate amendment, and the substitute 
     agreed to in conference are noted below, except for clerical 
     corrections, conforming changes made necessary by agreements 
     reached by the conferees, and minor drafting and clarifying 
     changes.

       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

  A. Allowance of Nonrefundable Personal Credits Against Regular and 
                   Alternative Minimum Tax Liability

     (Sec. 101 of the House bill, sec. 107 of the Senate 
         amendment, and sec. 26 of the Code)


                              present law

       Present law provides for certain nonrefundable personal tax 
     credits (i.e., the dependent care credit, the credit for the 
     elderly and disabled, the adoption credit, the child tax 
     credit, the credit for interest on certain home mortgages, 
     the HOPE Scholarship and Lifetime Learning credits, the 
     credit for savers, the credit for certain nonbusiness energy 
     property, the credit for residential energy efficient 
     property, and the D.C. first-time homebuyer credit). The 
     Energy Tax Incentives Act of 2005 enacted, effective for 
     2006, nonrefundable tax credits for alternative motor 
     vehicles, and alternative motor vehicle refueling 
     property.\1\
---------------------------------------------------------------------------
     \1\The portion of these credits relating to personal use 
     property is subject to the same tax liability limitation as 
     the nonrefundable personal tax credits (other than the 
     adoption credit, child credit, and saver's credit).
---------------------------------------------------------------------------
       For taxable years beginning in 2005, the nonrefundable 
     personal credits are allowed to the extent of the full amount 
     of the individual's regular tax and alternative minimum tax.
       For taxable years beginning after 2005, the nonrefundable 
     personal credits (other than the adoption credit, child 
     credit and saver's credit) are allowed only to the extent 
     that the individual's regular income tax liability exceeds 
     the individual's tentative minimum tax, determined without 
     regard to the minimum tax foreign tax credit. The adoption 
     credit, child credit, and saver's credit are allowed to the 
     full extent of the individual's regular tax and alternative 
     minimum tax.
       The alternative minimum tax is the amount by which the 
     tentative minimum tax exceeds the regular income tax. An 
     individual's tentative minimum tax is the sum of (1) 26 
     percent of so much of the taxable excess as does not exceed 
     $175,000 ($87,500 in the case of a married individual filing 
     a separate return) and (2) 28 percent of the remaining 
     taxable excess. The taxable excess is so much of the 
     alternative minimum taxable income (``AMTI'') as exceeds the 
     exemption amount. The maximum tax rates on net capital gain 
     and dividends used in computing the regular tax are used in 
     computing the tentative minimum tax. AMTI is the individual's 
     taxable income adjusted to take account of specified 
     preferences and adjustments.
       The exemption amount is: (1) $45,000 ($58,000 for taxable 
     years beginning before 2006) in the case of married 
     individuals filing a joint return and surviving spouses; (2) 
     $33,750 ($40,250 for taxable years beginning before 2006) in 
     the case of other unmarried individuals; (3) $22,500 ($29,000 
     for taxable years beginning before 2006) in the case of 
     married individuals filing a separate return; and (4) $22,500 
     in the case of an estate or trust. The exemption amount is 
     phased out by an amount equal to 25 percent of the amount by 
     which the individual's AMTI exceeds (1) $150,000 in the case 
     of married individuals filing a joint return and surviving 
     spouses, (2) $112,500 in the case of other unmarried 
     individuals, and (3) $75,000 in the case of married 
     individuals filing separate returns, an estate, or a trust. 
     These amounts are not indexed for inflation.


                               House Bill

       The House bill extends for one year the present-law 
     provision allowing nonrefundable personal credits to the full 
     extent of the individual's regular tax and alternative 
     minimum tax (through taxable years beginning on or before 
     December 31, 2006).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                            senate amendment

       The Senate amendment extends for two years the present-law 
     provision allowing nonrefundable personal credits to the full 
     extent of the individual's regular tax and alternative 
     minimum tax (through taxable years beginning on or before 
     December 31, 2007).
       The provision also applies to the personal credits for 
     alternative motor vehicles, and alternative motor vehicle 
     refueling property.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                          conference agreement

       The conference agreement includes the House bill provision.

    B. Tax Incentives for Business Activities on Indian Reservations

     1. Indian employment tax credit (Sec. 102(a) of the House 
         bill, sec. 115 of the Senate amendment, and sec. 45A of 
         the Code)


                              Present Law

       In general, a credit against income tax liability is 
     allowed to employers for the first $20,000 of qualified wages 
     and qualified employee health insurance costs paid or 
     incurred by the employer with respect to certain employees 
     (sec. 45A).\2\ The credit is equal to 20 percent of the 
     excess of eligible employee qualified wages and health 
     insurance costs during the current year over the amount of 
     such wages and costs incurred by the employer during 1993. 
     The credit is an incremental credit, such that an employer's 
     current-year qualified wages and qualified employee health 
     insurance costs (up to $20,000 per employee) are eligible for 
     the credit only to the extent that the sum of such costs 
     exceeds the sum of comparable costs paid during 1993. No 
     deduction is allowed for the portion of the wages equal to 
     the amount of the credit.
---------------------------------------------------------------------------
     \2\All section references are to the Internal Revenue Code of 
     1986, unless otherwise indicated.
---------------------------------------------------------------------------
       Qualified wages means wages paid or incurred by an employer 
     for services performed by a qualified employee. A qualified 
     employee means any employee who is an enrolled member of an 
     Indian tribe or the spouse of an enrolled member of an Indian 
     tribe, who performs substantially all of the services within 
     an Indian reservation, and whose principal place of abode 
     while performing such services is on or near the reservation 
     in which the services are performed. An ``Indian 
     reservation'' is a reservation as defined in section 3(d) of 
     the Indian Financing Act of 1974 or section 4(1) of the 
     Indian Child Welfare Act of 1978. For purposes of the 
     preceding sentence, section 3(d) is applied by treating 
     ``former Indian reservations in Oklahoma'' as including only 
     lands that are (1) within the jurisdictional area of an 
     Oklahoma Indian tribe as determined by the Secretary of the 
     Interior, and (2) recognized by such Secretary as an area 
     eligible for trust land status under 25 C.F.R. Part 151 (as 
     in effect on August 5, 1997).
       An employee is not treated as a qualified employee for any 
     taxable year of the employer if the total amount of wages 
     paid or incurred by the employer with respect to such 
     employee during the taxable year exceeds an amount determined 
     at an annual rate of $30,000 (which after adjusted for 
     inflation after 1993 is currently $35,000). In addition, an 
     employee will not be treated as a qualified employee under 
     certain specific circumstances, such as where the employee is 
     related to the employer (in the case of an individual 
     employer) or to one of the employer's shareholders, partners, 
     or grantors. Similarly, an employee will not be treated as a 
     qualified employee where the employee has more than a 5 
     percent ownership interest in the employer. Finally, an 
     employee will not be considered a qualified employee to the 
     extent the employee's services relate to gaming activities or 
     are performed in a building housing such activities.
       The wage credit is available for wages paid or incurred on 
     or after January 1, 1994, in taxable years that begin before 
     January 1, 2006.


                               house bill

       The provision extends for one year the present-law 
     employment credit provision (through taxable years beginning 
     on or before December 31, 2006).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2005.


                            Senate Amendment

       The Senate amendment extends for two years the present-law 
     employment credit provision (through taxable years beginning 
     on or before December 31, 2007).

[[Page 7384]]

       Effective date.--Same as the House bill provision.


                          conference agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.
     2. Accelerated depreciation for business property on Indian 
         reservations (sec. 102(b) of the House bill, sec. 116 of 
         the Senate amendment, and sec. 168(j) of the Code)


                              present law

       With respect to certain property used in connection with 
     the conduct of a trade or business within an Indian 
     reservation, depreciation deductions under section 168(j) are 
     determined using the following recovery periods:


                                                                  Years
3-year property.......................................................2
5-year property.......................................................3
7-year property.......................................................4
10-year property......................................................6
15-year property......................................................9
20-year property.....................................................12
Nonresidential real property.........................................22

       ``Qualified Indian reservation property'' eligible for 
     accelerated depreciation includes property which is (1) used 
     by the taxpayer predominantly in the active conduct of a 
     trade or business within an Indian reservation, (2) not used 
     or located outside the reservation on a regular basis, (3) 
     not acquired (directly or indirectly) by the taxpayer from a 
     person who is related to the taxpayer (within the meaning of 
     section 465(b)(3)(C)), and (4) described in the recovery-
     period table above. In addition, property is not ``qualified 
     Indian reservation property'' if it is placed in service for 
     purposes of conducting gaming activities. Certain ``qualified 
     infrastructure property'' may be eligible for the accelerated 
     depreciation even if located outside an Indian reservation, 
     provided that the purpose of such property is to connect with 
     qualified infrastructure property located within the 
     reservation (e.g., roads, power lines, water systems, 
     railroad spurs, and communications facilities).
       An ``Indian reservation'' means a reservation as defined in 
     section 3(d) of the Indian Financing Act of 1974 or section 
     4(1) of the Indian Child Welfare Act of 1978. For purposes of 
     the preceding sentence, section 3(d) is applied by treating 
     ``former Indian reservations in Oklahoma'' as including only 
     lands that are (1) within the jurisdictional area of an 
     Oklahoma Indian tribe as determined by the Secretary of the 
     Interior, and (2) recognized by such Secretary as an area 
     eligible for trust land status under 25 CFR. Part 151 (as in 
     effect on August 5, 1997).
       The depreciation deduction allowed for regular tax purposes 
     is also allowed for purposes of the alternative minimum tax. 
     The accelerated depreciation for Indian reservations is 
     available with respect to property placed in service on or 
     after January 1, 1994, and before January 1, 2006.


                               House Bill

       The provision extends for one year the present-law 
     incentive relating to depreciation of qualified Indian 
     reservation property (to apply to property placed in service 
     through December 31, 2006).
       Effective date.--The provision applies to property placed 
     in service after December 31, 2005.


                            Senate Amendment

       The Senate amendment extends for two years the present-law 
     incentive relating to depreciation of qualified Indian 
     reservation property (to apply to property placed in service 
     through December 31, 2007).
       Effective date.--The Senate amendment is the same as the 
     House bill.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

     C. Work Opportunity Tax Credit and Welfare-To-Work Tax Credit

     (Secs. 103 and 104 of the House bill, sec. 109 of the Senate 
         amendment and secs. 51 and 51A of the Code)


                              Present Law

     Work opportunity tax credit
       Targeted groups eligible for the credit
       The work opportunity tax credit is available on an elective 
     basis for employers hiring individuals from one or more of 
     eight targeted groups. The eight targeted groups are: (1) 
     certain families eligible to receive benefits under the 
     Temporary Assistance for Needy Families Program; (2) high-
     risk youth; (3) qualified ex-felons; (4) vocational 
     rehabilitation referrals; (5) qualified summer youth 
     employees; (6) qualified veterans; (7) families receiving 
     food stamps; and (8) persons receiving certain Supplemental 
     Security Income (SSI) benefits.
       A high-risk youth is an individual aged 18 but not aged 25 
     on the hiring date who is certified by a designated local 
     agency as having a principal place of abode within an 
     empowerment zone, enterprise community, or renewal community. 
     The credit is not available if such youth's principal place 
     of abode ceases to be within an empowerment zone, enterprise 
     community, or renewal community.
       A qualified ex-felon is an individual certified by a 
     designated local agency as: (1) having been convicted of a 
     felony under State or Federal law; (2) being a member of an 
     economically disadvantaged family; and (3) having a hiring 
     date within one year of release from prison or conviction.
       A food stamp recipient is an individual aged 18 but not 
     aged 25 on the hiring date certified by a designated local 
     agency as being a member of a family either currently or 
     recently receiving assistance under an eligible food stamp 
     program.
       Qualified wages
       Generally, qualified wages are defined as cash wages paid 
     by the employer to a member of a targeted group. The 
     employer's deduction for wages is reduced by the amount of 
     the credit.
       Calculation of the credit
       The credit equals 40 percent (25 percent for employment of 
     400 hours or less) of qualified first-year wages. Generally, 
     qualified first-year wages are qualified wages (not in excess 
     of $6,000) attributable to service rendered by a member of a 
     targeted group during the one-year period beginning with the 
     day the individual began work for the employer. Therefore, 
     the maximum credit per employee is $2,400 (40 percent of the 
     first $6,000 of qualified first-year wages). With respect to 
     qualified summer youth employees, the maximum credit is 
     $1,200 (40 percent of the first $3,000 of qualified first-
     year wages).
       Minimum employment period
       No credit is allowed for qualified wages paid to employees 
     who work less than 120 hours in the first year of employment.
       Coordination of the work opportunity tax credit and the 
           welfare-to-work tax credit
       An employer cannot claim the work opportunity tax credit 
     with respect to wages of any employee on which the employer 
     claims the welfare-to-work tax credit.
       Other rules
       The work opportunity tax credit is not allowed for wages 
     paid to a relative or dependent of the taxpayer. Similarity 
     wages paid to replacement workers during a strike or lockout 
     are not eligible for the work opportunity tax credit. Wages 
     paid to any employee during any period for which the employer 
     received on-the-job training program payments with respect to 
     that employee are not eligible for the work opportunity tax 
     credit. The work opportunity tax credit generally is not 
     allowed for wages paid to individuals who had previously been 
     employed by the employer. In addition, many other technical 
     rules apply.
       Expiration
       The work opportunity tax credit is not available for 
     individuals who begin work for an employer after December 31, 
     2005.
     Welfare-to-work tax credit
       Targeted group eligible for the credit
       The welfare-to-work tax credit is available on an elective 
     basis to employers of qualified long-term family assistance 
     recipients. Qualified long-term family assistance recipients 
     are: (1) members of a family that has received family 
     assistance for at least 18 consecutive months ending on the 
     hiring date; (2) members of a family that has received such 
     family assistance for a total of at least 18 months (whether 
     or not consecutive) after August 5, 1997 (the date of 
     enactment of the welfare-to-work tax credit) if they are 
     hired within 2 years after the date that the 18-month total 
     is reached; and (3) members of a family who are no longer 
     eligible for family assistance because of either Federal or 
     State time limits, if they are hired within 2 years after the 
     Federal or State time limits made the family ineligible for 
     family assistance.
       Qualified wages
       Qualified wages for purposes of the welfare-to-work tax 
     credit are defined more broadly than the work opportunity tax 
     credit. Unlike the definition of wages for the work 
     opportunity tax credit which includes simply cash wages, the 
     definition of wages for the welfare-to-work tax credit 
     includes cash wages paid to an employee plus amounts paid by 
     the employer for: (1) educational assistance excludable under 
     a section 127 program (or that would be excludable but for 
     the expiration of sec. 127); (2) health plan coverage for the 
     employee, but not more than the applicable premium defined 
     under section 4980B(f)(4); and (3) dependent care assistance 
     excludable under section 129. The employer's deduction for 
     wages is reduced by the amount of the credit.
       Calculation of the credit
       The welfare-to-work tax credit is available on an elective 
     basis to employers of qualified long-term family assistance 
     recipients during the first two years of employment. The 
     maximum credit is 35 percent of the first $10,000 of 
     qualified first-year wages and 50 percent of the first 
     $10,000 of qualified second-year wages. Qualified first-year 
     wages are defined as qualified wages (not in excess of 
     $10,000) attributable to service rendered by a member of the 
     targeted group during the one-year period beginning with the 
     day the individual began work for the employer. Qualified 
     second-year wages are defined as qualified wages (not in 
     excess of $10,000) attributable to service rendered by a 
     member of the targeted group during the one-year period 
     beginning immediately after the first year of that 
     individual's employment for the

[[Page 7385]]

     employer. The maximum credit is $8,500 per qualified 
     employee.
       Minimum employment period
       No credit is allowed for qualified wages paid to a member 
     of the targeted group unless they work at least 400 hours or 
     180 days in the first year of employment.
       Coordination of the work opportunity tax credit and the 
           welfare-to-work tax credit
       An employer cannot claim the work opportunity tax credit 
     with respect to wages of any employee on which the employer 
     claims the welfare-to-work tax credit.
       Other rules
       The welfare-to-work tax credit incorporates directly or by 
     reference many of these other rules contained on the work 
     opportunity tax credit.
       Expiration
       The welfare-to-work credit is not available for individuals 
     who begin work for an employer after December 31, 2005.


                               House Bill

     Work opportunity tax credit
       The House bill extends the work opportunity credit for one 
     year (through December 31, 2006). Also, the House bill raises 
     the maximum age limit for the food stamp recipient category 
     to include individuals who are at least age 18 but under age 
     35 on the hiring date.
       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer after December 31, 2005, and before January 1, 2007.
     Welfare-to-work tax credit
       The House bill extends the welfare-to-work tax credit for 
     one year (through December 31, 2006).
       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer after December 31, 2005, and before January 1, 2007.


                            Senate Amendment

     In general
       The Senate amendment combines the work opportunity and 
     welfare-to-work tax credits and extends the combined credit 
     for one year. The welfare-to-work credit is repealed.
     Targeted groups eligible for the combined credit
       The combined credit is available on an elective basis for 
     employers hiring individuals from one or more of all nine 
     targeted groups. The nine targeted groups are the present-law 
     eight groups with the addition of the welfare-to-work credit/
     long-term family assistance recipient as the ninth targeted 
     group.
       The Senate amendment raises the age limit for the high-risk 
     youth category to include individuals aged 18 but not aged 40 
     on the hiring date. The Senate amendment also renames the 
     high-risk youth category to be the designated community 
     resident category.
       The Senate amendment repeals the requirement that a 
     qualified ex-felon be an individual certified as a member of 
     an economically disadvantaged family.
       The Senate amendment raises the age limit for the food 
     stamp recipient category to include individuals aged 18 but 
     not aged 40 on the hiring date.
     Qualified wages
       Qualified first-year wages for the eight work opportunity 
     tax credit categories remain capped at $6,000 ($3,000 for 
     qualified summer youth employees). No credit is allowed for 
     second-year wages. In the case of long-term family assistance 
     recipients, the cap is $10,000 for both qualified first-year 
     wages and qualified second-year wages. The combined credit 
     follows the work opportunity tax credit definition of wages 
     which does not include amounts paid by the employer for: (1) 
     educational assistance excludable under a section 127 program 
     (or that would be excludable but for the expiration of sec. 
     127); (2) health plan coverage for the employee, but not more 
     than the applicable premium defined under section 
     4980B(f)(4); and (3) dependent care assistance excludable 
     under section 129. For all targeted groups, the employer's 
     deduction for wages is reduced by the amount of the credit.
     Calculation of the credit
       First-year wages.--For the eight work opportunity tax 
     credit categories, the credit equals 40 percent (25 percent 
     for employment of 400 hours or less) of qualified first-year 
     wages. Generally, qualified first-year wages are qualified 
     wages (not in excess of $6,000) attributable to service 
     rendered by a member of a targeted group during the one-year 
     period beginning with the day the individual began work for 
     the employer. Therefore, the maximum credit per employee for 
     members of any of the eight work opportunity tax credit 
     targeted groups generally is $2,400 (40 percent of the first 
     $6,000 of qualified first-year wages). With respect to 
     qualified summer youth employees, the maximum credit remains 
     $1,200 (40 percent of the first $3,000 of qualified first-
     year wages). For the welfare-to-work/long-term family 
     assistance recipients, the maximum credit equals $4,000 per 
     employee (40 percent of $10,000 of wages).
       Second year wages.--In the case of long-term family 
     assistance recipients the maximum credit is $5,000 (50 
     percent of the first $10,000 of qualified second-year wages).
     Minimum employment period
       No credit is allowed for qualified wages paid to employees 
     who work less than 120 hours in the first year of employment.
     Coordination of the work opportunity tax credit and the 
         welfare-to-work tax credit
       Coordination is no longer necessary once the two credits 
     are combined.
       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer after December 31, 2005, and before January 1, 2007.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

    D. Deduction for Corporate Donations of Computer Technology and 
                               Equipment

     (Sec. 105 of the House bill, sec. 111 of the Senate amendment 
         and sec. 170 of the Code)


                              Present Law

       In the case of a charitable contribution of inventory or 
     other ordinary-income or short-term capital gain property, 
     the amount of the charitable deduction generally is limited 
     to the taxpayer's basis in the property. In the case of a 
     charitable contribution of tangible personal property, the 
     deduction is limited to the taxpayer's basis in such property 
     if the use by the recipient charitable organization is 
     unrelated to the organization's tax-exempt purpose. In cases 
     involving contributions to a private foundation (other than 
     certain private operating foundations), the amount of the 
     deduction is limited to the taxpayer's basis in the property.
       Under present law, a taxpayer's deduction for charitable 
     contributions of computer technology and equipment generally 
     is limited to the taxpayer's basis (typically, cost) in the 
     property. However, certain corporations may claim a deduction 
     in excess of basis for a ``qualified computer contribution.'' 
     This enhanced deduction is equal to the lesser of (1) basis 
     plus one-half of the item's appreciation (i.e., basis plus 
     one half of fair market value minus basis) or (2) two times 
     basis. The enhanced deduction for qualified computer 
     contributions expires for any contribution made during any 
     taxable year beginning after December 31, 2005.
       A qualified computer contribution means a charitable 
     contribution of any computer technology or equipment, which 
     meets standards of functionality and suitability as 
     established by the Secretary of the Treasury. The 
     contribution must be to certain educational organizations or 
     public libraries and made not later than three years after 
     the taxpayer acquired the property or, if the taxpayer 
     constructed the property, not later than the date 
     construction of the property is substantially completed. The 
     original use of the property must be by the donor or the 
     donee, and in the case of the donee, must be used 
     substantially for educational purposes related to the 
     function or purpose of the donee. The property must fit 
     productively into the donee's education plan. The donee may 
     not transfer the property in exchange for money, other 
     property, or services, except for shipping, installation, and 
     transfer costs. To determine whether property is constructed 
     by the taxpayer, the rules applicable to qualified research 
     contributions apply. That is, property is considered 
     constructed by the taxpayer only if the cost of the parts 
     used in the construction of the property (other than parts 
     manufactured by the taxpayer or a related person) does not 
     exceed 50 percent of the taxpayer's basis in the property. 
     Contributions may be made to private foundations under 
     certain conditions.


                               House Bill

       The present-law provision is extended for one year to apply 
     to contributions made during any taxable year beginning after 
     December 31, 2005, and before January 1, 2007.
       Effective date.--The provision is effective for 
     contributions made in taxable years beginning after December 
     31, 2005.


                            Senate Amendment

       Same as House bill.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

           E. Availability of Archer Medical Savings Accounts

     (Sec. 106 of the House bill and sec. 220 of the Code)


                              Present Law

     Archer medical savings accounts
       In general
       Within limits, contributions to an Archer medical savings 
     account (``Archer MSA'') are deductible in determining 
     adjusted gross income if made by an eligible individual and 
     are excludable from gross income and wages for employment tax 
     purposes if made by the employer of an eligible individual. 
     Earnings on amounts in an Archer MSA are not currently 
     taxable. Distributions from an Archer MSA for medical 
     expenses are not includible in gross income. Distributions 
     not used for

[[Page 7386]]

     medical expenses are includible in gross income. In addition, 
     distributions not used for medical expenses are subject to an 
     additional 15-percent tax unless the distribution is made 
     after age 65, death, or disability.
       Eligible individuals
       Archer MSAs are available to employees covered under an 
     employer-sponsored high deductible plan of a small employer 
     and self-employed individuals covered under a high deductible 
     health plan. An employer is a small employer if it employed, 
     on average, no more than 50 employees on business days during 
     either the preceding or the second preceding year. An 
     individual is not eligible for an Archer MSA if he or she is 
     covered under any other health plan in addition to the high 
     deductible plan.
       Tax treatment of and limits on contributions
       Individual contributions to an Archer MSA are deductible 
     (within limits) in determining adjusted gross income (i.e., 
     ``above-the-line''). In addition, employer contributions are 
     excludable from gross income and wages for employment tax 
     purposes (within the same limits), except that this exclusion 
     does not apply to contributions made through a cafeteria 
     plan. In the case of an employee, contributions can be made 
     to an Archer MSA either by the individual or by the 
     individual's employer.
       The maximum annual contribution that can be made to an 
     Archer MSA for a year is 65 percent of the deductible under 
     the high deductible plan in the case of individual coverage 
     and 75 percent of the deductible in the case of family 
     coverage.
       Definition of high deductible plan
       A high deductible plan is a health plan with an annual 
     deductible of at least $1,800 and no more than $2,700 in the 
     case of individual coverage and at least $3,650 and no more 
     than $5,450 in the case of family coverage (for 2006). In 
     addition, the maximum out-of-pocket expenses with respect to 
     allowed costs (including the deductible) must be no more than 
     $3,650 in the case of individual coverage and no more than 
     $6,650 in the case of family coverage (for 2006). A plan does 
     not fail to qualify as a high deductible plan merely because 
     it does not have a deductible for preventive care as required 
     by State law. A plan does not qualify as a high deductible 
     health plan if substantially all of the coverage under the 
     plan is for certain permitted coverage. In the case of a 
     self-insured plan, the plan must in fact be insurance (e.g., 
     there must be appropriate risk shifting) and not merely a 
     reimbursement arrangement.
       Cap on taxpayers utilizing Archer MSAs and expiration of 
           pilot program
       The number of taxpayers benefiting annually from an Archer 
     MSA contribution is limited to a threshold level (generally 
     750,000 taxpayers). The number of Archer MSAs established has 
     not exceeded the threshold level.
       After 2005, no new contributions may be made to Archer MSAs 
     except by or on behalf of individuals who previously made (or 
     had made on their behalf) Archer MSA contributions and 
     employees who are employed by a participating employer.
       Trustees of Archer MSAs are generally required to make 
     reports to the Treasury by August 1 regarding Archer MSAs 
     established by July 1 of that year. If the threshold level is 
     reached in a year, the Secretary is required to make and 
     publish such determination by October 1 of such year.
     Health savings accounts
       Health savings accounts (``HSAs'') were enacted by the 
     Medicare Prescription Drug, Improvement, and Modernization 
     Act of 2003. Like Archer MSAs, an HSA is a tax-exempt trust 
     or custodial account to which tax-deductible contributions 
     may be made by individuals with a high deductible health 
     plan. HSAs provide tax benefits similar to, but more 
     favorable than, those provide by Archer MSAs. HSAs were 
     established on a permanent basis.


                               House Bill

       The House bill extends for one year the present-law Archer 
     MSA provisions (through December 31, 2006).
       The report required by Archer MSA trustees is treated as 
     timely filed if made before the close of the 90-day period 
     beginning on the date of enactment. The determination and 
     publication whether the threshold level has been exceeded is 
     treated as timely if made before the close of the 120-day 
     period beginning on the date of enactment.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

  F. Fifteen-Year Straight-Line Cost Recovery for Qualified Leasehold 
           Improvements and Qualified Restaurant Improvements

     (Sec. 107 and sec. 108 of the House bill, sec. 117 of the 
         Senate amendment, and sec. 168 of the Code)


                              Present Law

     In general
       A taxpayer generally must capitalize the cost of property 
     used in a trade or business and recover such cost over time 
     through annual deductions for depreciation or amortization. 
     Tangible property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation by applying specific recovery 
     periods, placed-in-service conventions, and depreciation 
     methods to the cost of various types of depreciable property 
     (sec. 168). The cost of nonresidential real property is 
     recovered using the straight-line method of depreciation and 
     a recovery period of 39 years. Nonresidential real property 
     is subject to the mid-month placed-in-service convention. 
     Under the mid-month convention, the depreciation allowance 
     for the first year property is placed in service is based on 
     the number of months the property was in service, and 
     property placed in service at any time during a month is 
     treated as having been placed in service in the middle of the 
     month.
     Depreciation of leasehold improvements
       Generally, depreciation allowances for improvements made on 
     leased property are determined under MACRS, even if the MACRS 
     recovery period assigned to the property is longer than the 
     term of the lease. This rule applies regardless of whether 
     the lessor or the lessee places the leasehold improvements in 
     service. If a leasehold improvement constitutes an addition 
     or improvement to nonresidential real property already placed 
     in service, the improvement generally is depreciated using 
     the straight-line method over a 39-year recovery period, 
     beginning in the month the addition or improvement was placed 
     in service. However, exceptions exist for certain qualified 
     leasehold improvements and certain qualified restaurant 
     property.
     Qualified leasehold improvement property
       Section 168(e)(3)(E)(iv) provides a statutory 15-year 
     recovery period for qualified leasehold improvement property 
     placed in service before January 1, 2006. Qualified leasehold 
     improvement property is recovered using the straight-line 
     method. Leasehold improvements placed in service in 2006 and 
     later will be subject to the general rules described above.
       Qualified leasehold improvement property is any improvement 
     to an interior portion of a building that is nonresidential 
     real property, provided certain requirements are met. The 
     improvement must be made under or pursuant to a lease either 
     by the lessee (or sublessee), or by the lessor, of that 
     portion of the building to be occupied exclusively by the 
     lessee (or sublessee). The improvement must be placed in 
     service more than three years after the date the building was 
     first placed in service. Qualified leasehold improvement 
     property does not include any improvement for which the 
     expenditure is attributable to the enlargement of the 
     building, any elevator or escalator, any structural component 
     benefiting a common area, or the internal structural 
     framework of the building. However, if a lessor makes an 
     improvement that qualifies as qualified leasehold improvement 
     property, such improvement does not qualify as qualified 
     leasehold improvement property to any subsequent owner of 
     such improvement. An exception to the rule applies in the 
     case of death and certain transfers of property that qualify 
     for non-recognition treatment.
     Qualified restaurant property
       Section 168(e)(3)(E)(v) provides a statutory 15-year 
     recovery period for qualified restaurant property placed in 
     service before January 1, 2006. For purposes of the 
     provision, qualified restaurant property means any 
     improvement to a building if such improvement is placed in 
     service more than three years after the date such building 
     was first placed in service and more than 50 percent of the 
     building's square footage is devoted to the preparation of, 
     and seating for on-premises consumption of, prepared meals. 
     Qualified restaurant property is recovered using the 
     straight-line method.


                               House Bill

       Under the House bill, the present-law provisions relating 
     to qualified leasehold improvement property and qualified 
     restaurant improvement property are extended for one year 
     (through December 31, 2006).
       Effective date.--The House bill applies to property placed 
     in service after December 31, 2005.


                            Senate Amendment

       Under the Senate amendment, the present-law provisions are 
     extended for two years (through December 31, 2007).
       Effective date.--The Senate amendment applies to property 
     placed in service after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

G. Taxable Income Limit on Percentage Depletion for Oil and Natural Gas 
                   Produced From Marginal Properties

     (Sec. 109 of the House bill and sec. 613A(c)(6)(H) of the 
         Code)


                              Present Law

       The Code permits taxpayers to recover their investments in 
     oil and gas wells through depletion deductions. Two methods 
     of depletion are currently allowable under the Code: (1) the 
     cost depletion method, and (2) the percentage depletion 
     method. Under

[[Page 7387]]

     the cost depletion method, the taxpayer deducts that portion 
     of the adjusted basis of the depletable property which is 
     equal to the ratio of units sold from that property during 
     the taxable year to the number of units remaining as of the 
     end of taxable year plus the number of units sold during the 
     taxable year. Thus, the amount recovered under cost depletion 
     may never exceed the taxpayer's basis in the property.
       The Code generally limits the percentage depletion method 
     for oil and gas properties to independent producers and 
     royalty owners. Generally, under the percentage depletion 
     method, 15 percent of the taxpayer's gross income from an 
     oil- or gas-producing property is allowed as a deduction in 
     each taxable year. The amount deducted generally may not 
     exceed 100 percent of the taxable income from that property 
     in any year. For marginal production, the 100-percent taxable 
     income limitation has been suspended for taxable years 
     beginning after December 31, 1997, and before January 1, 
     2006.
       Marginal production is defined as domestic crude oil and 
     natural gas production from stripper well property or from 
     property substantially all of the production from which 
     during the calendar year is heavy oil. Stripper well property 
     is property from which the average daily production is 15 
     barrel equivalents or less, determined by dividing the 
     average daily production of domestic crude oil and domestic 
     natural gas from producing wells on the property for the 
     calendar year by the number of wells. Heavy oil is domestic 
     crude oil with a weighted average gravity of 20 degrees API 
     or less (corrected to 60 degrees Fahrenheit).


                               House Bill

       The provision extends for one year the present-law taxable 
     income limitation suspension provision for marginal 
     production (through taxable years beginning on or before 
     December 31, 2006).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

      H. Tax Incentives for Investment in the District of Columbia

     (Sec. 110 of the House bill, sec. 114 of the Senate amendment 
         and secs. 1400, 1400A, 1400B, and 1400C of the Code)


                              Present Law

     In general
       The Taxpayer Relief Act of 1997 designated certain 
     economically depressed census tracts within the District of 
     Columbia as the District of Columbia Enterprise Zone (the 
     ``D.C. Zone''), within which businesses and individual 
     residents are eligible for special tax incentives. The census 
     tracts that compose the D.C. Zone are (1) all census tracts 
     that presently are part of the D.C. enterprise community 
     designated under section 1391 (i.e., portions of Anacostia, 
     Mt. Pleasant, Chinatown, and the easternmost part of the 
     District), and (2) all additional census tracts within the 
     District of Columbia where the poverty rate is not less than 
     20 percent. The D.C. Zone designation remains in effect for 
     the period from January 1, 1998, through December 31, 2005. 
     In general, the tax incentives available in connection with 
     the D.C. Zone are a 20-percent wage credit, an additional 
     $35,000 of section 179 expensing for qualified zone property, 
     expanded tax-exempt financing for certain zone facilities, 
     and a zero-percent capital gains rate from the sale of 
     certain qualified D.C. zone assets.
     Wage credit
       A 20-percent wage credit is available to employers for the 
     first $15,000 of qualified wages paid to each employee (i.e., 
     a maximum credit of $3,000 with respect to each qualified 
     employee) who (1) is a resident of the D.C. Zone, and (2) 
     performs substantially all employment services within the 
     D.C. Zone in a trade or business of the employer.
       Wages paid to a qualified employee who earns more than 
     $15,000 are eligible for the wage credit (although only the 
     first $15,000 of wages is eligible for the credit). The wage 
     credit is available with respect to a qualified full-time or 
     part-time employee (employed for at least 90 days), 
     regardless of the number of other employees who work for the 
     employer. In general, any taxable business carrying out 
     activities in the D.C. Zone may claim the wage credit, 
     regardless of whether the employer meets the definition of a 
     ``D.C. Zone business.''\3\
---------------------------------------------------------------------------
     \3\However, the wage credit is not available for wages paid 
     in connection with certain business activities described in 
     section 144(c)(6)(B) or certain farming activities. In 
     addition, wages are not eligible for the wage credit if paid 
     to (1) a person who owns more than five percent of the stock 
     (or capital or profits interests) of the employer, (2) 
     certain relatives of the employer, or (3) if the employer is 
     a corporation or partnership, certain relatives of a person 
     who owns more than 50 percent of the business.
---------------------------------------------------------------------------
       An employer's deduction otherwise allowed for wages paid is 
     reduced by the amount of wage credit claimed for that taxable 
     year.\4\ Wages are not to be taken into account for purposes 
     of the wage credit if taken into account in determining the 
     employer's work opportunity tax credit under section 51 or 
     the welfare-to-work credit under section 51A.\5\ In addition, 
     the $15,000 cap is reduced by any wages taken into account in 
     computing the work opportunity tax credit or the welfare-to-
     work credit.\6\ The wage credit may be used to offset up to 
     25 percent of alternative minimum tax liability.\7\
---------------------------------------------------------------------------
     \4\Sec. 280C(a).
     \5\Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2).
     \6\Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2).
     \7\Sec. 38(c)(2).
---------------------------------------------------------------------------
     Section 179 expensing
       In general, a D.C. Zone business is allowed an additional 
     $35,000 of section 179 expensing for qualifying property 
     placed in service by a D.C. Zone business.\8\ The section 179 
     expensing allowed to a taxpayer is phased out by the amount 
     by which 50 percent of the cost of qualified zone property 
     placed in service during the year by the taxpayer exceeds 
     $200,000 ($400,000 for taxable years beginning after 2002 and 
     before 2008). The term ``qualified zone property'' is defined 
     as depreciable tangible property (including buildings), 
     provided that (1) the property is acquired by the taxpayer 
     (from an unrelated party) after the designation took effect, 
     (2) the original use of the property in the D.C. Zone 
     commences with the taxpayer, and (3) substantially all of the 
     use of the property is in the D.C. Zone in the active conduct 
     of a trade or business by the taxpayer.\9\ Special rules are 
     provided in the case of property that is substantially 
     renovated by the taxpayer.
---------------------------------------------------------------------------
     \8\Sec. 1397A.
     \9\Sec. 1397D.
---------------------------------------------------------------------------
     Tax-exempt financing
       A qualified D.C. Zone business is permitted to borrow 
     proceeds from tax-exempt qualified enterprise zone facility 
     bonds (as defined in section 1394) issued by the District of 
     Columbia.\10\ Such bonds are subject to the District of 
     Columbia's annual private activity bond volume limitation. 
     Generally, qualified enterprise zone facility bonds for the 
     District of Columbia are bonds 95 percent or more of the net 
     proceeds of which are used to finance certain facilities 
     within the D.C. Zone. The aggregate face amount of all 
     outstanding qualified enterprise zone facility bonds per 
     qualified D.C. Zone business may not exceed $15 million and 
     may be issued only while the D.C. Zone designation is in 
     effect.
---------------------------------------------------------------------------
     \10\Sec. 1400A.
---------------------------------------------------------------------------
     Zero-percent capital gains
       A zero-percent capital gains rate applies to capital gains 
     from the sale of certain qualified D.C. Zone assets held for 
     more than five years.\11\ In general, a qualified ``D.C. Zone 
     asset'' means stock or partnership interests held in, or 
     tangible property held by, a D.C. Zone business. For purposes 
     of the zero-percent capital gains rate, the D.C. Enterprise 
     Zone is defined to include all census tracts within the 
     District of Columbia where the poverty rate is not less than 
     10 percent.
---------------------------------------------------------------------------
     \11\Sec. 1400B.
---------------------------------------------------------------------------
       In general, gain eligible for the zero-percent tax rate 
     means gain from the sale or exchange of a qualified D.C. Zone 
     asset that is (1) a capital asset or property used in the 
     trade or business as defined in section 1231(b), and (2) 
     acquired before January 1, 2006. Gain that is attributable to 
     real property, or to intangible assets, qualifies for the 
     zero-percent rate, provided that such real property or 
     intangible asset is an integral part of a qualified D.C. Zone 
     business.\12\ However, no gain attributable to periods before 
     January 1, 1998, and after December 31, 2010, is qualified 
     capital gain.
---------------------------------------------------------------------------
     \12\However, sole proprietorships and other taxpayers selling 
     assets directly cannot claim the zero-percent rate on capital 
     gain from the sale of any intangible property (i.e., the 
     integrally related test does not apply).
---------------------------------------------------------------------------
     District of Columbia homebuyer tax credit
       First-time homebuyers of a principal residence in the 
     District of Columbia are eligible for a nonrefundable tax 
     credit of up to $5,000 of the amount of the purchase price. 
     The $5,000 maximum credit applies both to individuals and 
     married couples. Married individuals filing separately can 
     claim a maximum credit of $2,500 each. The credit phases out 
     for individual taxpayers with adjusted gross income between 
     $70,000 and $90,000 ($110,000-$130,000 for joint filers). For 
     purposes of eligibility, ``first-time homebuyer'' means any 
     individual if such individual did not have a present 
     ownership interest in a principal residence in the District 
     of Columbia in the one-year period ending on the date of the 
     purchase of the residence to which the credit applies. The 
     credit is scheduled to expire for residences purchased after 
     December 31, 2005.\13\
---------------------------------------------------------------------------
     \13\Sec. 1400C(i).
---------------------------------------------------------------------------


                               house bill

       The provision extends the designation of the D.C. Zone for 
     one year (through December 31, 2006), thus extending the wage 
     credit and section 179 expensing for one year.
       The provision extends the tax-exempt financing authority 
     for one year, applying to bonds issued during the period 
     beginning on January 1, 1998, and ending on December 31, 
     2006.
       The provision extends the zero-percent capital gains rate 
     applicable to capital gains from the sale of certain 
     qualified D.C. Zone assets for one year.

[[Page 7388]]

       The provision extends the first-time homebuyer credit for 
     one year, through December 31, 2006.
       Effective date.--The amendment generally is effective on 
     January 1, 2006, except the provision relating to bonds is 
     effective for obligations issued after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

        I. Possession Tax Credit With Respect to American Samoa

     (Sec. 111 of the House bill and sec. 936 of the Code)


                              Present Law

     In general
       Certain domestic corporations with business operations in 
     the U.S. possessions are eligible for the possession tax 
     credit.\14\ This credit offsets the U.S. tax imposed on 
     certain income related to operations in the U.S. 
     possessions.\15\ For purposes of the section 936 credit, 
     possessions include, among other places, American Samoa. 
     Income eligible for the section 936 credit includes non-U.S. 
     source income from (1) the active conduct of a trade or 
     business within a U.S. possession, (2) the sale or exchange 
     of substantially all of the assets that were used in such a 
     trade or business, or (3) certain possessions investments. 
     The section 936 credit expires for taxable years beginning 
     after December 31, 2005.
---------------------------------------------------------------------------
     \14\Secs. 27(b), 936.
     \15\Domestic corporations with activities in Puerto Rico are 
     eligible for the seciton 30A economic activity credit. That 
     credit is calculated under the rules set forth in section 
     936.
---------------------------------------------------------------------------
       To qualify for the possession tax credit for a taxable 
     year, a domestic corporation must satisfy two conditions. 
     First, the corporation must derive at least 80 percent of its 
     gross income for the three-year period immediately preceding 
     the close of the taxable year from sources within a 
     possession. Second, the corporation must derive at least 75 
     percent of its gross income for that same period from the 
     active conduct of a possession business. A domestic 
     corporation that has elected the possession tax credit and 
     that satisfies these two conditions for a taxable year 
     generally is entitled to a credit against the U.S. tax 
     attributable to the taxpayer's income that is eligible for 
     the section 936 credit.
       The possession tax credit applies only to a corporation 
     that qualifies as an existing credit claimant. The 
     determination of whether a corporation is an existing credit 
     claimant is made separately for each possession. The 
     possession tax credit is computed separately for each 
     possession with respect to which the corporation is an 
     existing credit claimant, and the credit is subject to either 
     an economic activity-based limitation or an income-based 
     limit.
     Qualification as existing credit claimant
       A corporation is an existing credit claimant with respect 
     to a possession if (1) the corporation was engaged in the 
     active conduct of a trade or business within the possession 
     on October 13, 1995, and (2) the corporation elected the 
     benefits of the possession tax credit in an election in 
     effect for its taxable year that included October 13, 
     1995.\16\ A corporation that adds a substantial new line of 
     business (other than in a qualifying acquisition of all the 
     assets of a trade or business of an existing credit claimant) 
     ceases to be an existing credit claimant as of the close of 
     the taxable year ending before the date on which that new 
     line of business is added.
---------------------------------------------------------------------------
     \16\A corporation will qualify as an existing credit claimant 
     if it acquired all the assets of a trade or business of a 
     corporation that (1) actively conducted that trade or 
     business in a possession on October 13, 1995, and (2) had 
     elected the benefits of the possession tax credit in an 
     election for the taxable year that includes October 13, 1995.
---------------------------------------------------------------------------
     Economic activity-based limit
       Under the economic activity-based limit, the amount of the 
     credit determined under the rules described above may not 
     exceed an amount equal to the sum of (1) 60 percent of the 
     taxpayer's qualifying possession wage and fringe benefit 
     expenses, (2) 15 percent of depreciation allowances with 
     respect to short-life qualifying tangible property, plus 40 
     percent of depreciation allowances with respect to medium-
     life qualifying tangible property, plus 65 percent of 
     depreciation allowances with respect to long-life tangible 
     property, and (3) in certain cases, a portion of the 
     taxpayer's possession income taxes.
     Income-based limit
       As an alternative to the economic activity-based limit, a 
     taxpayer may elect to apply a limit equal to the applicable 
     percentage of the credit that would otherwise be allowable 
     with respect to possession business income; the applicable 
     percentage currently is 40 percent.
     Repeal and phase out
       In 1996, the section 936 credit was repealed for new 
     claimants for taxable years beginning after 1995 and was 
     phased out for existing credit claimants over a period 
     including taxable years beginning before 2006. The amount of 
     the available credit during the phaseout period generally is 
     reduced by special limitation rules. These phaseout period 
     limitation rules do not apply to the credit available to 
     existing credit claimants for income from activities in Guam, 
     American Samoa, and the Northern Mariana Islands. The section 
     936 credit is repealed for all possessions, including Guam, 
     American Samoa, and the Northern Mariana Islands, for all 
     taxable years beginning after 2005.


                               house bill

       The House bill extends for one year the present-law section 
     936 credit as applied to American Samoa; it thus allows 
     existing credit claimants to claim the credit for income from 
     activities in American Samoa in taxable years beginning on or 
     before December 31, 2006.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

    J. Parity in the Application of Certain Limits to Mental Health 
                                Benefits

     (Sec. 112 of the House bill and sec. 9812 of the Code)


                            Present Law\17\

       The Code, the Employee Retirement Income Security Act of 
     1974 (``ERISA'') and the Public Health Service Act (``PHSA'') 
     contain provisions under which group health plans that 
     provide both medical and surgical benefits and mental health 
     benefits cannot impose aggregate lifetime or annual dollar 
     limits on mental health benefits that are not imposed on 
     substantially all medical and surgical benefits (``mental 
     health parity requirements''). In the case of a group health 
     plan which provides benefits for mental health, the mental 
     health parity requirements do not affect the terms and 
     conditions (including cost sharing, limits on numbers of 
     visits or days of coverage, and requirements relating to 
     medical necessity) relating to the amount, duration, or scope 
     of mental health benefits under the plan, except as 
     specifically provided in regard to parity in the imposition 
     of aggregate lifetime limits and annual limits.
---------------------------------------------------------------------------
     \17\This description of present law refers to the law in 
     effect at the time the bill passed the House of 
     Representatives, which was before the enactment of Pub. L. 
     No. 109-151, which extended the mental health parity 
     requirements of the Code, ERISA, and the PHSA through 
     December 31, 2006.
---------------------------------------------------------------------------
       The Code imposes an excise tax on group health plans which 
     fail to meet the mental health parity requirements. The 
     excise tax is equal to $100 per day during the period of 
     noncompliance and is generally imposed on the employer 
     sponsoring the plan if the plan fails to meet the 
     requirements. The maximum tax that can be imposed during a 
     taxable year cannot exceed the lesser of 10 percent of the 
     employer's group health plan expenses for the prior year or 
     $500,000. No tax is imposed if the Secretary determines that 
     the employer did not know, and in exercising reasonable 
     diligence would not have known, that the failure existed.
       The mental health parity requirements do not apply to group 
     health plans of small employers nor do they apply if their 
     application results in an increase in the cost under a group 
     health plan of at least one percent. Further, the mental 
     health parity requirements do not require group health plans 
     to provide mental health benefits.
       The Code, ERISA and PHSA mental health parity requirements 
     are scheduled to expire with respect to benefits for services 
     furnished after December 31, 2005.


                               house bill

       The House bill extends for one year the present-law Code 
     excise tax for failure to comply with the mental health 
     parity requirements (through December 31, 2006).
       Effective date.--The provision is effective on the date of 
     enactment.


                            senate amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

                           K. Research Credit

     (Sec. 113 of the House bill, sec. 108 of the Senate 
         amendment, and sec. 41 of the Code)


                              present law

     General rule
       Prior to January 1, 2006, a taxpayer could claim a research 
     credit equal to 20 percent of the amount by which the 
     taxpayer's qualified research expenses for a taxable year 
     exceeded its base amount for that year.\18\ Thus, the 
     research credit was generally available with respect to 
     incremental increases in qualified research.
---------------------------------------------------------------------------
     \18\Sec. 41.
---------------------------------------------------------------------------
       A 20-percent research tax credit was also available with 
     respect to the excess of (1) 100 percent of corporate cash 
     expenses (including grants or contributions) paid for basic 
     research conducted by universities (and certain nonprofit 
     scientific research organizations) over (2) the sum of (a) 
     the greater of

[[Page 7389]]

     two minimum basic research floors plus (b) an amount 
     reflecting any decrease in nonresearch giving to universities 
     by the corporation as compared to such giving during a fixed-
     base period, as adjusted for inflation. This separate credit 
     computation was commonly referred to as the university basic 
     research credit (see sec. 41(e)).
       Finally, a research credit was available for a taxpayer's 
     expenditures on research undertaken by an energy research 
     consortium. This separate credit computation was commonly 
     referred to as the energy research credit. Unlike the other 
     research credits, the energy research credit applied to all 
     qualified expenditures, not just those in excess of a base 
     amount.
       The research credit, including the university basic 
     research credit and the energy research credit, expired on 
     December 31, 2005.\19\
---------------------------------------------------------------------------
     \19\The research tax credit initially was enacted in the 
     Economic Recovery Tax Act of 1981 as a credit equal to 25 
     percent of the excess of qualified research expenses incurred 
     in the current taxable year over the average of qualified 
     research expenses incurred in the prior three taxable years. 
     The research tax credit was modified in the Tax Reform Act of 
     1986, which (1) extended the credit through December 31, 
     1988, (2) reduced the credit rate to 20 percent, (3) 
     tightened the definition of qualified research expenses 
     eligible for the credit, and (4) enacted the separate 
     university basic credit.
     The Technical and Miscellaneous Revenue Act of 1988 (``1988 
     Act'') extended the research tax credit for one additional 
     year, through December 31, 1989. The 1988 Act also reduced 
     the deduction allowed under section 174 (or any other 
     section) for qualified research expenses by an amount equal 
     to 50 percent of the research tax credit determined for the 
     year.
     The Omnibus Budget Reconciliation Act of 1989 (``1989 Act'') 
     effectively extended the research credit for nine months (by 
     prorating qualified expenses incurred before January 1, 
     1991). The 1989 Act also modified the method for calculating 
     a taxpayer's base amount (i.e., by substituting the present-
     law method which uses a fixed-base percentage for the prior-
     law moving base which was calculated by reference to the 
     taxpayer's average research expenses incurred ion the 
     preceding three taxable years). The 1989 Act further reduced 
     the deduction allowed under section 174 (or any other 
     section) for qualified research expenses by an amount equal 
     to 100 percent of the research tax credit determined for the 
     year.
     The Omnibus Budget Reconciliation Act of 1990 extended the 
     research tax credit through December 31, 1991 (and repealed 
     the special rule to prorate qualified expenses incurred 
     before January 1, 1991).
     The Tax Extension Act of 1991 extended the research tax 
     credit for six months (i.e., for qualified expenses incurred 
     through June 30, 1992).
     The Omnibus Budget Reconciliation Act of 1993 (``1993 Act'') 
     extended the research tax credit for three years--i.e., 
     retroactively from July 1, 1992 through June 30, 1995. The 
     1993 Act also provided a special rule for start-up firms, so 
     that the fixed-base ratio of such firms eventually will be 
     computed by reference to their actual research experience.
     Although the research tax credit expired during the period 
     July 1, 1995, through June 30, 1996, the Small Business Job 
     Protection Act of 1996 (``1996 Act'') extended the credit for 
     the period July 1, 1996, through May 31, 1997 (with a special 
     11-month extension for taxpayers that elect to be subject to 
     the alternative incremental research credit regime). In 
     addition, the 1996 Act expanded the definition of start-up 
     firms under section 41(c)(3)(B)(i), enacted a special rule 
     for certain research consortia payments under section 
     41(b)(3)(C), and provided that taxpayers may elect an 
     alternative research credit regime (under which the taxpayer 
     is assigned a three-tiered fixed-base percentage that is 
     lower than the fixed-base percentage otherwise applicable and 
     the credit rate likewise is reduced) for the taxpayer's first 
     taxable year beginning after June 30, 1996, and before July 
     1, 1997.
     The Taxpayer Relief Act of 1997 (``1997 Act'') extended the 
     research credit for 13 months--i.e, generally for the period 
     June 1, 1997, through June 30, 1998. The 1997 Act also 
     provided that taxpayers are permitted to elect the 
     alternative incremental research credit regime for any 
     taxable year beginning after June 30, 1996 (and such election 
     will apply to that taxable year and all subsequent taxable 
     years unless revoked with the consent of the Secretary of the 
     Treasury). The Tax and Trade Relief Extension Act of 1998 
     extended the research credit for 12 months, i.e., through 
     June 30, 1999.
     The Ticket to Work and Work Incentive Improvement Act of 1999 
     extended the research credit for five years, through June 30, 
     2004, increased the rates of credit under the alternative 
     incremental research credit regime, and expanded the 
     definition of research to include research undertaken in 
     Puerto Rico and possessions of the United States.
     The Working Families Tax Relief Act of 224 extended the 
     research credit through December 31, 2005.
     The Energy Tax Incentives Act of 2005 added the energy 
     research credit.
---------------------------------------------------------------------------
     Computation of allowable credit
       Except for energy research payments and certain university 
     basic research payments made by corporations, the research 
     tax credit applied only to the extent that the taxpayer's 
     qualified research expenses for the current taxable year 
     exceeded its base amount. The base amount for the current 
     year generally was computed by multiplying the taxpayer's 
     fixed-base percentage by the average amount of the taxpayer's 
     gross receipts for the four preceding years. If a taxpayer 
     both incurred qualified research expenses and had gross 
     receipts during each of at least three years from 1984 
     through 1988, then its fixed-base percentage was the ratio 
     that its total qualified research expenses for the 1984-1988 
     period bore to its total gross receipts for that period 
     (subject to a maximum fixed-base percentage of 16 percent). 
     All other taxpayers (so-called start-up firms) were assigned 
     a fixed-base percentage of three percent.\20\
---------------------------------------------------------------------------
     \20\The Small Business Job Protection Act of 1996 expanded 
     the definition of start-up firms under section 41(c)(3)(B)(i) 
     to include any firm if the first taxable year in which such 
     firm had both gross receipts and qualified research expenses 
     began after 1983. A special rule (enacted in 1993) was 
     designed to gradually recompute a start-up firm's fixed-base 
     percentage based on its actual research experience. Under 
     this special rule, a start-up firm would be assigned a fixed-
     base percentage of three percent for each of its first five 
     taxable years after 1993 in which it incurs qualified 
     research expenses. In the event that the research credit is 
     extended beyond its expiration date, a start-up date, a 
     start-up firm's fixed-base percentage for its sixth through 
     tenth taxable years after 1993 in which it incurs qualified 
     research expenses will be a phased-in ratio based on its 
     actual research experience. For all subsequent taxable years, 
     the taxpayer's fixed-base percentage will be its actual ratio 
     of qualified research expenses to gross receipts for any five 
     years selected by the taxpayer from its fifth through tenth 
     taxable years after 1993 (sec. 41(c)(3)(B)).
---------------------------------------------------------------------------
       In computing the credit, a taxpayer's base amount could not 
     be less than 50 percent of its current-year qualified 
     research expenses.
       To prevent artificial increases in research expenditures by 
     shifting expenditures among commonly controlled or otherwise 
     related entities, a special aggregation rule provided that 
     all members of the same controlled group of corporations were 
     treated as a single taxpayer (sec. 41(f)(1)). Under 
     regulations prescribed by the Secretary, special rules 
     applied for computing the credit when a major portion of a 
     trade or business (or unit thereof) changed hands, under 
     which qualified research expenses and gross receipts for 
     periods prior to the change of ownership of a trade or 
     business were treated as transferred with the trade or 
     business that gave rise to those expenses and receipts for 
     purposes of recomputing a taxpayer's fixed-base percentage 
     (sec. 41(f)(3)).
     Alternative incremental research credit regime
       Taxpayers were allowed to elect an alternative incremental 
     research credit regime.\21\ If a taxpayer elected to be 
     subject to this alternative regime, the taxpayer was assigned 
     a three-tiered fixed-base percentage (that was lower than the 
     fixed-base percentage otherwise applicable) and the credit 
     rate likewise was reduced. Under the alternative incremental 
     credit regime, a credit rate of 2.65 percent applied to the 
     extent that a taxpayer's current-year research expenses 
     exceeded a base amount computed by using a fixed-base 
     percentage of one percent (i.e., the base amount equaled one 
     percent of the taxpayer's average gross receipts for the four 
     preceding years) but did not exceed a base amount computed by 
     using a fixed-base percentage of 1.5 percent. A credit rate 
     of 3.2 percent applied to the extent that a taxpayer's 
     current-year research expenses exceeded a base amount 
     computed by using a fixed-base percentage of 1.5 percent but 
     did not exceed a base amount computed by using a fixed-base 
     percentage of two percent. A credit rate of 3.75 percent 
     applied to the extent that a taxpayer's current-year research 
     expenses exceeded a base amount computed by using a fixed-
     base percentage of two percent. An election to be subject to 
     this alternative incremental credit regime could be made for 
     any taxable year beginning after June 30, 1996, and such an 
     election applied to that taxable year and all subsequent 
     years unless revoked with the consent of the Secretary of the 
     Treasury.
---------------------------------------------------------------------------
     \21\Sec. 41(c)(4).
---------------------------------------------------------------------------
     Eligible expenses
       Qualified research expenses eligible for the research tax 
     credit consisted of: (1) in-house expenses of the taxpayer 
     for wages and supplies attributable to qualified research; 
     (2) certain time-sharing costs for computer use in qualified 
     research; and (3) 65 percent of amounts paid or incurred by 
     the taxpayer to certain other persons for qualified research 
     conducted on the taxpayer's behalf (so-called contract 
     research expenses).\22\ Notwithstanding the limitation for 
     contract research expenses, qualified research expenses 
     included 100 percent of amounts paid or incurred by the 
     taxpayer to an eligible small business, university, or 
     Federal laboratory for qualified energy research.
---------------------------------------------------------------------------
     \22\Under a special rule enacted as part of the Small 
     Business Job Protection Act of 1996, 75 percent of amounts 
     paid to a research consortium for qualified research were 
     treated as qualified research expenses eligible for the 
     research credit (rather than 65 percent under the general 
     rule under section 41(b)(3) governing contract research 
     expenses) if (1) such research consortium was a tax-exempt 
     organization that is described in section 501(c)(3) (other 
     than a private foundation) or section 501(c)(6) and was 
     organized and operated primarily to conduct scientific 
     research, and (2) such qualified research was conducted by 
     the consortium on behalf of the taxpayer and one or more 
     persons not related to the taxpayer. Sec. 41(b)(3)(C).
---------------------------------------------------------------------------
       To be eligible for the credit, the research did not only 
     have to satisfy the requirements of present-law section 174 
     (described below) but also had to be undertaken for the 
     purpose of discovering information that is technological in 
     nature, the application of which was intended to be useful in 
     the development of a new or improved business component of 
     the taxpayer, and substantially all of the activities of 
     which had to constitute elements of a process of 
     experimentation for functional aspects, performance, 
     reliability, or quality of a business component. Research did 
     not qualify for the credit if substantially all of the 
     activities related to style, taste, cosmetic, or seasonal 
     design factors (sec. 41(d)(3)). In addition, research did not 
     qualify for the credit: (1) if conducted after the beginning 
     of commercial production of the

[[Page 7390]]

     business component; (2) if related to the adaptation of an 
     existing business component to a particular customer's 
     requirements; (3) if related to the duplication of an 
     existing business component from a physical examination of 
     the component itself or certain other information; or (4) if 
     related to certain efficiency surveys, management function or 
     technique, market research, market testing, or market 
     development, routine data collection or routine quality 
     control (sec. 41(d)(4)). Research did not qualify for the 
     credit if it was conducted outside the United States, Puerto 
     Rico, or any U.S. possession.
     Relation to deduction
       Under section 174, taxpayers may elect to deduct currently 
     the amount of certain research or experimental expenditures 
     paid or incurred in connection with a trade or business, 
     notwithstanding the general rule that business expenses to 
     develop or create an asset that has a useful life extending 
     beyond the current year must be capitalized.\23\ While the 
     research credit was in effect, however, deductions allowed to 
     a taxpayer under section 174 (or any other section) were 
     reduced by an amount equal to 100 percent of the taxpayer's 
     research tax credit determined for the taxable year (sec. 
     280C(c)). Taxpayers could alternatively elect to claim a 
     reduced research tax credit amount (13 percent) under section 
     41 in lieu of reducing deductions otherwise allowed (sec. 
     280C(c)(3)).
---------------------------------------------------------------------------
     \23\Taxpayers may elect 10-year amortization of certain 
     research expenditures allowable as a deduction under section 
     174(a). Secs. 174(f)(2) and 59(e).
---------------------------------------------------------------------------


                               House Bill

       The provision extends for one year and modifies the 
     present-law research credit provision (for amounts paid or 
     incurred through December 31, 2006).
       The provision increases the rates of the alternative 
     incremental credit: (1) a credit rate of three percent 
     (rather than 2.65 percent) applies to the extent that a 
     taxpayer's current-year research expenses exceed a base 
     amount computed by using a fixed-base percentage of one 
     percent (i.e., the base amount equals one percent of the 
     taxpayer's average gross receipts for the four preceding 
     years) but do not exceed a base amount computed by using a 
     fixed-base percentage of 1.5 percent; (2) a credit rate of 
     four percent (rather than 3.2 percent) applies to the extent 
     that a taxpayer's current-year research expenses exceed a 
     base amount computed by using a fixed-base percentage of 1.5 
     percent but do not exceed a base amount computed by using a 
     fixed-base percentage of two percent; and (3) a credit rate 
     of 5 percent (rather than 3.75 percent) applies to the extent 
     that a taxpayer's current-year research expenses exceed a 
     base amount computed by using a fixed-base percentage of two 
     percent.
       The provision also creates, at the election of the 
     taxpayer, an alternative simplified credit for qualified 
     research expenses. The alternative simplified research is 
     equal to 12 percent of qualified research expenses that 
     exceed 50 percent of the average qualified research expenses 
     for the three preceding taxable years. The rate is reduced to 
     6 percent if a taxpayer has no qualified research expenses in 
     any one of the three preceding taxable years.
       An election to use the alternative simplified credit 
     applies to all succeeding taxable years unless revoked with 
     the consent of the Secretary. An election to use the 
     alternative simplified credit may not be made for any taxable 
     year for which an election to use the alternative incremental 
     credit is in effect. A special transition rule applies which 
     permits a taxpayer to elect to use the alternative simplified 
     credit in lieu of the alternative incremental credit if such 
     election is made during the taxable year which includes the 
     date of enactment of the provision. The transition rule only 
     applies to the taxable year which includes the date of 
     enactment.
       Effective date.--The extension of the research credit 
     applies to amounts paid or incurred after December 31, 2005. 
     The modification of the alternative incremental credit and 
     the creation of the alternative simplified credit are 
     effective for taxable years ending after date of enactment.


                            Senate Amendment

       The Senate amendment generally follows the House bill but 
     provides for a two-year extension of the modified research 
     credit. It also adds a provision that broadens the research 
     credit as it applies to research consortia. Under the Senate 
     amendment, a 20 percent credit would be available for a 
     taxpayer's expenditures on research carried out by any 
     research consortium, rather than being limited to research 
     carried out by an energy research consortium.
       Effective date.--The Senate amendment applies to amounts 
     paid or incurred after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

                    L. Qualified Zone Academy Bonds

     (Sec. 114 of the House bill, sec. 110 of the Senate amendment 
         and sec. 1397E of the Code)


                              Present Law

     Tax-exempt bonds
       Interest on State and local governmental bonds generally is 
     excluded from gross income for Federal income tax purposes if 
     the proceeds of the bonds are used to finance direct 
     activities of these governmental units or if the bonds are 
     repaid with revenues of these governmental units. Activities 
     that can be financed with these tax-exempt bonds include the 
     financing of public schools (sec. 103).
     Qualified zone academy bonds
       As an alternative to interest-bearing tax-exempt bonds, 
     States and local governments are given the authority to issue 
     ``qualified zone academy bonds'' (sec. 1397E). A total of 
     $400 million of qualified zone academy bonds may be issued 
     annually in calendar years 1998 through 2005. The $400 
     million aggregate bond cap is allocated each year to the 
     States according to their respective populations of 
     individuals below the poverty line. Each State, in turn, 
     allocates the credit authority to qualified zone academies 
     within such State.
       Financial institutions that hold qualified zone academy 
     bonds are entitled to a nonrefundable tax credit in an amount 
     equal to a credit rate multiplied by the face amount of the 
     bond. A taxpayer holding a qualified zone academy bond on the 
     credit allowance date is entitled to a credit. The credit is 
     includable in gross income (as if it were a taxable interest 
     payment on the bond), and may be claimed against regular 
     income tax and AMT liability.
       The Treasury Department sets the credit rate at a rate 
     estimated to allow issuance of qualified zone academy bonds 
     without discount and without interest cost to the issuer. The 
     maximum term of the bond is determined by the Treasury 
     Department, so that the present value of the obligation to 
     repay the bond is 50 percent of the face value of the bond.
       ``Qualified zone academy bonds'' are defined as any bond 
     issued by a State or local government, provided that: (1) at 
     least 95 percent of the proceeds are used for the purpose of 
     renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy'' (``qualified zone 
     academy property'') and (2) private entities have promised to 
     contribute to the qualified zone academy certain equipment, 
     technical assistance or training, employee services, or other 
     property or services with a value equal to at least 10 
     percent of the bond proceeds.
       A school is a ``qualified zone academy'' if: (1) the school 
     is a public school that provides education and training below 
     the college level, (2) the school operates a special academic 
     program in cooperation with businesses to enhance the 
     academic curriculum and increase graduation and employment 
     rates, and (3) either (a) the school is located in an 
     empowerment zone or enterprise community designated under the 
     Code or (b) it is reasonably expected that at least 35 
     percent of the students at the school will be eligible for 
     free or reduced-cost lunches under the school lunch program 
     established under the National School Lunch Act.
     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. 
     The arbitrage rules do not apply to qualified zone academy 
     bonds.


                               House Bill

       The House bill extends for one year the present-law 
     provision relating to qualified zone academy bonds (through 
     December 31, 2006).
       Effective date.--The provision is effective for bonds 
     issued after December 31, 2005.


                            Senate Amendment

       The Senate amendment extends for two years the present-law 
     provision relating to qualified zone academy bonds (through 
     December 31, 2007).
       In addition, the Senate amendment imposes the arbitrage 
     requirements of section 148 that apply to tax-exempt bonds to 
     qualified zone academy bonds. Principles under section 148 
     and the regulations thereunder shall apply for purposes of 
     determining the yield restriction and arbitrage rebate 
     requirements applicable to qualified zone academy bonds. For 
     example, for arbitrage purposes, the yield on an issue of 
     qualified zone academy bonds is computed by taking into 
     account all payments of interest, if any, on such bonds, 
     i.e., whether the bonds are issued at par, premium, or 
     discount. However, for purposes of determining yield, the 
     amount of the credit allowed to a taxpayer holding

[[Page 7391]]

     qualified zone academy bonds is not treated as interest, 
     although such credit amount is treated as interest income to 
     the taxpayer.
       The provision imposes new spending requirements for 
     qualified zone academy bonds. An issuer of qualified zone 
     academy bonds must reasonably expect to and actually spend 95 
     percent or more of the proceeds of such bonds on qualified 
     zone academy property within the five-year period that begins 
     on the date of issuance. To the extent less than 95 percent 
     of the proceeds are used to finance qualified zone academy 
     property during the five-year spending period, bonds will 
     continue to qualify as qualified zone academy bonds if 
     unspent proceeds are used within 90 days from the end of such 
     five-year period to redeem any ``nonqualified bonds.'' For 
     these purposes, the amount of nonqualified bonds is to be 
     determined in the same manner as Treasury regulations under 
     section 142. In addition, the provision provides that the 
     five-year spending period may be extended by the Secretary 
     upon the issuer's request if reasonable cause for such 
     extension is established.
       Under the provision, qualified private business 
     contributions must be in the form of cash or cash 
     equivalents, rather than property or services as permitted 
     under present law. The provision also requires an equal 
     amount of principal is to be paid by the issuer during each 
     calendar year that the issue is outstanding.
       Under the provision, issuers of qualified zone academy 
     bonds are required to report issuance to the IRS in a manner 
     similar to that required for tax-exempt bonds.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

  M. Above-the-Line Deduction for Certain Expenses of Elementary and 
                       Secondary School Teachers

     (Sec. 115 of the House bill, sec. 112 of the Senate amendment 
         and sec. 62 of the Code)


                              Present Law

       In general, ordinary and necessary business expenses are 
     deductible (sec. 162). However, in general, unreimbursed 
     employee business expenses are deductible only as an itemized 
     deduction and only to the extent that the individual's total 
     miscellaneous deductions (including employee business 
     expenses) exceed two percent of adjusted gross income. An 
     individual's otherwise allowable itemized deductions may be 
     further limited by the overall limitation on itemized 
     deductions, which reduces itemized deductions for taxpayers 
     with adjusted gross income in excess of $145,950 (for 2005). 
     In addition, miscellaneous itemized deductions are not 
     allowable under the alternative minimum tax.
       Certain expenses of eligible educators are allowed an 
     above-the-line deduction. Specifically, for taxable years 
     beginning prior to January 1, 2006, an above-the-line 
     deduction is allowed for up to $250 annually of expenses paid 
     or incurred by an eligible educator for books, supplies 
     (other than nonathletic supplies for courses of instruction 
     in health or physical education), computer equipment 
     (including related software and services) and other 
     equipment, and supplementary materials used by the eligible 
     educator in the classroom. To be eligible for this deduction, 
     the expenses must be otherwise deductible under 162 as a 
     trade or business expense. A deduction is allowed only to the 
     extent the amount of expenses exceeds the amount excludable 
     from income under section 135 (relating to education savings 
     bonds), 529(c)(1) (relating to qualified tuition programs), 
     and section 530(d)(2) (relating to Coverdell education 
     savings accounts).
       An eligible educator is a kindergarten through grade 12 
     teacher, instructor, counselor, principal, or aide in a 
     school for at least 900 hours during a school year. A school 
     means any school which provides elementary education or 
     secondary education, as determined under State law.
       The above-the-line deduction for eligible educators is not 
     allowed for taxable years beginning after December 31, 2005.


                               House Bill

       The present-law provision is extended for one year, through 
     December 31, 2006.
       Effective date.--The provision is effective for expenses 
     paid or incurred in taxable years beginning after December 
     31, 2005.


                            Senate Amendment

       The present-law provision is extended for two years, 
     through December 31, 2007.
       Effective date.--The provision is effective for expenses 
     paid or incurred in taxable years beginning after December 
     31, 2005.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

       N. Above-the-Line Deduction for Higher Education Expenses

     (Sec. 116 of the House bill, sec. 103 of the Senate amendment 
         and sec. 222 of the Code)


                              Present Law

       An individual is allowed an above-the-line deduction for 
     qualified tuition and related expenses for higher education 
     paid by the individual during the taxable year. Qualified 
     tuition and related expenses include tuition and fees 
     required for the enrollment or attendance of the taxpayer, 
     the taxpayer's spouse, or any dependent of the taxpayer with 
     respect to whom the taxpayer may claim a personal exemption, 
     at an eligible institution of higher education for courses of 
     instruction of such individual at such institution. Charges 
     and fees associated with meals, lodging, insurance, 
     transportation, and similar personal, living, or family 
     expenses are not eligible for the deduction. 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.
       The amount of qualified tuition and related expenses must 
     be reduced by certain scholarships, educational assistance 
     allowances, and other amounts paid for the benefit of such 
     individual, and by the amount of such expenses taken into 
     account for purposes of determining any exclusion from gross 
     income of: (1) income from certain United States Savings 
     Bonds used to pay higher education tuition and fees; and (2) 
     income from a Coverdell education savings account. 
     Additionally, such expenses must be reduced by the earnings 
     portion (but not the return of principal) of distributions 
     from a qualified tuition program if an exclusion under 
     section 529 is claimed with respect to expenses eligible for 
     exclusion under section 222. No deduction is allowed for any 
     expense for which a deduction is otherwise allowed or with 
     respect to an individual for whom a Hope credit or Lifetime 
     Learning credit is elected for such taxable year.
       The expenses must be in connection with enrollment at an 
     institution of higher education during the taxable year, or 
     with an academic term beginning during the taxable year or 
     during the first three months of the next taxable year. The 
     deduction is not available for tuition and related expenses 
     paid for elementary or secondary education.
       For taxable years beginning in 2004 and 2005, the maximum 
     deduction is $4,000 for an individual whose adjusted gross 
     income for the taxable year does not exceed $65,000 ($130,000 
     in the case of a joint return), or $2,000 for other 
     individuals whose adjusted gross income does not exceed 
     $80,000 ($160,000 in the case of a joint return). No 
     deduction is allowed for an individual whose adjusted gross 
     income exceeds the relevant adjusted gross income 
     limitations, for a married individual who does not file a 
     joint return, or for an individual with respect to whom a 
     personal exemption deduction may be claimed by another 
     taxpayer for the taxable year. The deduction is not available 
     for taxable years beginning after December 31, 2005.


                               House Bill

       The provision extends the tuition deduction for one year, 
     through December 31, 2006.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2005.


                            Senate Amendment

       The provision extends the tuition deduction for four years, 
     through December 31, 2009.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the House 
     provision or the Senate amendment provision.

          O. Deduction of State and Local General Sales Taxes

     (Sec. 117 of the House bill, sec. 105 of the Senate 
         amendment, and sec. 164 of the Code)


                              Present Law

       For purposes of determining regular tax liability, an 
     itemized deduction is permitted for certain State and local 
     taxes paid, including individual income taxes, real property 
     taxes, and personal property taxes. The itemized deduction is 
     not permitted for purposes of determining a taxpayer's 
     alternative minimum taxable income. For taxable years 
     beginning in 2004 and 2005, at the election of the taxpayer, 
     an itemized deduction may be taken for State and local 
     general sales taxes in lieu of the itemized deduction 
     provided under present law for State and local income taxes. 
     As is the case for State and local income taxes, the itemized 
     deduction for State and local general sales taxes is not 
     permitted for purposes of determining a taxpayer's 
     alternative minimum taxable income. Taxpayers have two 
     options with respect to the determination of the sales tax 
     deduction amount. Taxpayers may deduct the total amount of 
     general State and local sales taxes paid by accumulating 
     receipts showing general sales taxes paid. Alternatively, 
     taxpayers may use tables created by the Secretary of the 
     Treasury that show the allowable deduction. The tables are 
     based on average consumption by taxpayers on a State-by-State 
     basis taking into account filing status, number of 
     dependents, adjusted gross income and rates of State and 
     local general sales taxation. Taxpayers who use the tables 
     created by the Secretary may, in addition to the table 
     amounts, deduct eligible general sales taxes paid with 
     respect to the purchase of motor vehicles, boats and other 
     items specified by the Secretary. Sales taxes for items that 
     may be added to the tables are not reflected in the tables 
     themselves.

[[Page 7392]]

       The term ``general sales tax'' means a tax imposed at one 
     rate with respect to the sale at retail of a broad range of 
     classes of items. However, in the case of items of food, 
     clothing, medical supplies, and motor vehicles, the fact that 
     the tax does not apply with respect to some or all of such 
     items is not taken into account in determining whether the 
     tax applies with respect to a broad range of classes of 
     items, and the fact that the rate of tax applicable with 
     respect to some or all of such items is lower than the 
     general rate of tax is not taken into account in determining 
     whether the tax is imposed at one rate. Except in the case of 
     a lower rate of tax applicable with respect to food, 
     clothing, medical supplies, or motor vehicles, no deduction 
     is allowed for any general sales tax imposed with respect to 
     an item at a rate other than the general rate of tax. 
     However, in the case of motor vehicles, if the rate of tax 
     exceeds the general rate, such excess shall be disregarded 
     and the general rate is treated as the rate of tax.
       A compensating use tax with respect to an item is treated 
     as a general sales tax, provided such tax is complimentary to 
     a general sales tax and a deduction for sales taxes is 
     allowable with respect to items sold at retail in the taxing 
     jurisdiction that are similar to such item.


                               House Bill

       The present-law provision allowing taxpayers to elect to 
     deduct State and local sales taxes in lieu of State and local 
     income taxes is extended for one year (through December 31, 
     2006).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                            Senate Amendment

       The present-law provision allowing taxpayers to elect to 
     deduct State and local sales taxes in lieu of State and local 
     income taxes is extended for two years (through December 31, 
     2007).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

   P. Extension and Expansion to Petroleum Products of Expensing for 
                    Environmental Remediation Costs

     (Sec. 201 of the House bill, sec. 113 of the Senate 
         amendment, and sec. 198 of the Code)


                              Present Law

       Present law allows a deduction for ordinary and necessary 
     expenses paid or incurred in carrying on any trade or 
     business.\24\ Treasury regulations provide that the cost of 
     incidental repairs that neither materially add to the value 
     of property nor appreciably prolong its life, but keep it in 
     an ordinarily efficient operating condition, may be deducted 
     currently as a business expense. Section 263(a)(1) limits the 
     scope of section 162 by prohibiting a current deduction for 
     certain capital expenditures. Treasury regulations define 
     ``capital expenditures'' as amounts paid or incurred to 
     materially add to the value, or substantially prolong the 
     useful life, of property owned by the taxpayer, or to adapt 
     property to a new or different use. Amounts paid for repairs 
     and maintenance do not constitute capital expenditures. The 
     determination of whether an expense is deductible or 
     capitalizable is based on the facts and circumstances of each 
     case.
---------------------------------------------------------------------------
     \24\Sec. 162.
---------------------------------------------------------------------------
       Taxpayers may elect to treat certain environmental 
     remediation expenditures that would otherwise be chargeable 
     to capital account as deductible in the year paid or 
     incurred.\25\ The deduction applies for both regular and 
     alternative minimum tax purposes. The expenditure must be 
     incurred in connection with the abatement or control of 
     hazardous substances at a qualified contaminated site. In 
     general, any expenditure for the acquisition of depreciable 
     property used in connection with the abatement or control of 
     hazardous substances at a qualified contaminated site does 
     not constitute a qualified environmental remediation 
     expenditure. However, depreciation deductions allowable for 
     such property, which would otherwise be allocated to the site 
     under the principles set forth in Commissioner v. Idaho Power 
     Co.\26\ and section 263A, are treated as qualified 
     environmental remediation expenditures.
---------------------------------------------------------------------------
     \25\Sec. 198.
     \26\418 U.S. 1 (1974).
---------------------------------------------------------------------------
       A ``qualified contaminated site'' (a so-called 
     ``brownfield'') generally is any property that is held for 
     use in a trade or business, for the production of income, or 
     as inventory and is certified by the appropriate State 
     environmental agency to be an area at or on which there has 
     been a release (or threat of release) or disposal of a 
     hazardous substance. Both urban and rural property may 
     qualify. However, sites that are identified on the national 
     priorities list under the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980 
     (``CERCLA'')\27\ cannot qualify as targeted areas. Hazardous 
     substances generally are defined by reference to sections 
     101(14) and 102 of CERCLA, subject to additional limitations 
     applicable to asbestos and similar substances within 
     buildings, certain naturally occurring substances such as 
     radon, and certain other substances released into drinking 
     water supplies due to deterioration through ordinary use. 
     Petroleum products generally are not regarded as hazardous 
     substances for purposes of section 198 (except for purposes 
     of determining qualified environmental remediation 
     expenditures in the ``Gulf Opportunity Zone'' under section 
     1400N(g), as described below).\28\
---------------------------------------------------------------------------
     \27\Pub. L. No. 96-510 (1980).
     \28\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.''
---------------------------------------------------------------------------
       In the case of property to which a qualified environmental 
     remediation expenditure otherwise would have been 
     capitalized, any deduction allowed under section 198 is 
     treated as a depreciation deduction and the property is 
     treated as section 1245 property. Thus, deductions for 
     qualified environmental remediation expenditures are subject 
     to recapture as ordinary income upon a sale or other 
     disposition of the property. In addition, sections 280B 
     (demolition of structures) and 468 (special rules for mining 
     and solid waste reclamation and closing costs) do not apply 
     to amounts that are treated as expenses under this provision.
       Eligible expenditures are those paid or incurred before 
     January 1, 2006.
       Under section 1400N(g), the above provisions apply to 
     expenditures paid or incurred to abate contamination at 
     qualified contaminated sites in the Gulf Opportunity Zone 
     (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) before January 
     1, 2008; in addition, within the Gulf Opportunity Zone 
     section 1400N(g) broadens the definition of hazardous 
     substance to include petroleum products (defined by reference 
     to section 4612(a)(3)).


                               House Bill

       The House bill extends for two years the present-law 
     provisions relating to environmental remediation expenditures 
     (through December 31, 2007).
       In addition, the provision expands the definition of 
     hazardous substance to include petroleum products. Under the 
     provision, petroleum products are defined by reference to 
     section 4612(a)(3), and thus include crude oil, crude oil 
     condensates and natural gasoline.\29\
---------------------------------------------------------------------------
     \29\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).
---------------------------------------------------------------------------
       Effective date.--The provision applies to expenditures paid 
     or incurred after December 31, 2005.


                            Senate Amendment

       The Senate amendment modifies the House bill to provide for 
     only a one-year extension of the present-law provisions 
     relating to environmental remediation expenditures (through 
     December 31, 2006). The Senate amendment follows the House 
     bill in expanding the definition of hazardous substances to 
     include petroleum products.
       Effective date.--The provision applies to expenditures paid 
     or incurred after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

                   Q. Controlled Foreign Corporations

     1. Subpart F exception for active financing (Sec. 202(a) of 
         the House bill and secs. 953 and 954 of the Code)


                              Present Law

       Under the subpart F rules, 10-percent U.S. shareholders of 
     a controlled foreign corporation (``CFC'') are subject to 
     U.S. tax currently on certain income earned by the CFC, 
     whether or not such income is distributed to the 
     shareholders. The income subject to current inclusion under 
     the subpart F rules includes, among other things, insurance 
     income and foreign base company income. Foreign base company 
     income includes, among other things, foreign personal holding 
     company income and foreign base company services income 
     (i.e., income derived from services performed for or on 
     behalf of a related person outside the country in which the 
     CFC is organized).
       Foreign personal holding company income generally consists 
     of the following: (1) dividends, interest, royalties, rents, 
     and annuities; (2) net gains from the sale or exchange of (a) 
     property that gives rise to the preceding types of income, 
     (b) property that does not give rise to income, and (c) 
     interests in trusts, partnerships, and REMICs; (3) net gains 
     from commodities transactions; (4) net gains from certain 
     foreign currency transactions; (5) income that is equivalent 
     to interest; (6) income from notional principal contracts; 
     (7) payments in lieu of dividends;

[[Page 7393]]

     and (8) amounts received under personal service contracts.
       Insurance income subject to current inclusion under the 
     subpart F rules includes any income of a CFC attributable to 
     the issuing or reinsuring of any insurance or annuity 
     contract in connection with risks located in a country other 
     than the CFC's country of organization. Subpart F insurance 
     income also includes income attributable to an insurance 
     contract in connection with risks located within the CFC's 
     country of organization, as the result of an arrangement 
     under which another corporation receives a substantially 
     equal amount of consideration for insurance of other country 
     risks. Investment income of a CFC that is allocable to any 
     insurance or annuity contract related to risks located 
     outside the CFC's country of organization is taxable as 
     subpart F insurance income.\30\
---------------------------------------------------------------------------
     \30\Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
       Temporary exceptions from foreign personal holding company 
     income, foreign base company services income, and insurance 
     income apply for subpart F purposes for certain income that 
     is derived in the active conduct of a banking, financing, or 
     similar business, or in the conduct of an insurance business 
     (so-called ``active financing income'').\31\
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     \31\Temporary exceptions from the subpart F provisions for 
     certain active financing income applied only for taxable 
     years beginning in 1998. Those exceptions were modified and 
     extended for one year, applicable only for taxable years 
     beginning in 1999. The Tax Relief Extension Act of 1999 (Pub. 
     L. No. 106-170) clarified and extended the temporary 
     exceptions for two years, applicable only for taxable years 
     beginning after 1999 and before 2002. The Job Creation and 
     Worker Assistance Act of 2002 (Pub. L. No. 107-147) modified 
     and extended the temporary exceptions for five years, for 
     taxable years beginning after 2001 and before 2007.
---------------------------------------------------------------------------
       With respect to income derived in the active conduct of a 
     banking, financing, or similar business, a CFC is required to 
     be predominantly engaged in such business and to conduct 
     substantial activity with respect to such business in order 
     to qualify for the exceptions. In addition, certain nexus 
     requirements apply, which provide that income derived by a 
     CFC or a qualified business unit (``QBU'') of a CFC from 
     transactions with customers is eligible for the exceptions 
     if, among other things, substantially all of the activities 
     in connection with such transactions are conducted directly 
     by the CFC or QBU in its home country, and such income is 
     treated as earned by the CFC or QBU in its home country for 
     purposes of such country's tax laws. Moreover, the exceptions 
     apply to income derived from certain cross border 
     transactions, provided that certain requirements are met. 
     Additional exceptions from foreign personal holding company 
     income apply for certain income derived by a securities 
     dealer within the meaning of section 475 and for gain from 
     the sale of active financing assets.
       In the case of insurance, in addition to a temporary 
     exception from foreign personal holding company income for 
     certain income of a qualifying insurance company with respect 
     to risks located within the CFC's country of creation or 
     organization, certain temporary exceptions from insurance 
     income and from foreign personal holding company income apply 
     for certain income of a qualifying branch of a qualifying 
     insurance company with respect to risks located within the 
     home country of the branch, provided certain requirements are 
     met under each of the exceptions. Further, additional 
     temporary exceptions from insurance income and from foreign 
     personal holding company income apply for certain income of 
     certain CFCs or branches with respect to risks located in a 
     country other than the United States, provided that the 
     requirements for these exceptions are met.
       In the case of a life insurance or annuity contract, 
     reserves for such contracts are determined as follows for 
     purposes of these provisions. The reserves equal the greater 
     of: (1) the net surrender value of the contract (as defined 
     in section 807(e)(1)(A)), including in the case of pension 
     plan contracts; or (2) the amount determined by applying the 
     tax reserve method that would apply if the qualifying life 
     insurance company were subject to tax under Subchapter L of 
     the Code, with the following modifications. First, there is 
     substituted for the applicable Federal interest rate an 
     interest rate determined for the functional currency of the 
     qualifying insurance company's home country, calculated 
     (except as provided by the Treasury Secretary in order to 
     address insufficient data and similar problems) in the same 
     manner as the mid-term applicable Federal interest rate 
     (within the meaning of section 1274(d)). Second, there is 
     substituted for the prevailing State assumed rate the highest 
     assumed interest rate permitted to be used for purposes of 
     determining statement reserves in the foreign country for the 
     contract. Third, in lieu of U.S. mortality and morbidity 
     tables, mortality and morbidity tables are applied that 
     reasonably reflect the current mortality and morbidity risks 
     in the foreign country. Fourth, the Treasury Secretary may 
     provide that the interest rate and mortality and morbidity 
     tables of a qualifying insurance company may be used for one 
     or more of its branches when appropriate. In no event may the 
     reserve for any contract at any time exceed the foreign 
     statement reserve for the contract, reduced by any 
     catastrophe, equalization, or deficiency reserve or any 
     similar reserve.
       Present law permits a taxpayer in certain circumstances, 
     subject to approval by the IRS through the ruling process or 
     in published guidance, to establish that the reserve of a 
     life insurance company for life insurance and annuity 
     contracts is the amount taken into account in determining the 
     foreign statement reserve for the contract (reduced by 
     catastrophe, equalization, or deficiency reserve or any 
     similar reserve). IRS approval is to be based on whether the 
     method, the interest rate, the mortality and morbidity 
     assumptions, and any other factors taken into account in 
     determining foreign statement reserves (taken together or 
     separately) provide an appropriate means of measuring income 
     for Federal income tax purposes. In seeking a ruling, the 
     taxpayer is required to provide the IRS with necessary and 
     appropriate information as to the method, interest rate, 
     mortality and morbidity assumptions and other assumptions 
     under the foreign reserve rules so that a comparison can be 
     made to the reserve amount determined by applying the tax 
     reserve method that would apply if the qualifying insurance 
     company were subject to tax under Subchapter L of the Code 
     (with the modifications provided under present law for 
     purposes of these exceptions). The IRS also may issue 
     published guidance indicating its approval. Present law 
     continues to apply with respect to reserves for any life 
     insurance or annuity contract for which the IRS has not 
     approved the use of the foreign statement reserve. An IRS 
     ruling request under this provision is subject to the 
     present-law provisions relating to IRS user fees.


                               house bill

       The House bill extends for two years (for taxable years 
     beginning before 2009) the present-law temporary exceptions 
     from subpart F foreign personal holding company income, 
     foreign base company services income, and insurance income 
     for certain income that is derived in the active conduct of a 
     banking, financing, or similar business, or in the conduct of 
     an insurance business.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2006, and before January 1, 2009, and for taxable years of 
     U.S. shareholders with or within which such taxable years of 
     such foreign corporations end.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement includes the House bill provision.
     2. Look-through treatment of payments between related 
         controlled foreign corporations under foreign personal 
         holding company income rules (sec. 202(b) of the House 
         bill and sec. 954(c) of the Code)


                              present law

       In general, the rules of subpart F (secs. 951-964) require 
     U.S. shareholders with a
     10 percent or greater interest in a controlled foreign 
     corporation (``CFC'') to include certain income of the CFC 
     (referred to as ``subpart F income'') on a current basis for 
     U.S. tax purposes, regardless of whether the income is 
     distributed to the shareholders.
       Subpart F income includes foreign base company income. One 
     category of foreign base company income is foreign personal 
     holding company income. For subpart F purposes, foreign 
     personal holding company income generally includes dividends, 
     interest, rents, and royalties, among other types of income. 
     However, foreign personal holding company income does not 
     include dividends and interest received by a CFC from a 
     related corporation organized and operating in the same 
     foreign country in which the CFC is organized, or rents and 
     royalties received by a CFC from a related corporation for 
     the use of property within the country in which the CFC is 
     organized. Interest, rent, and royalty payments do not 
     qualify for this exclusion to the extent that such payments 
     reduce the subpart F income of the payor.


                               house bill

       Under the House bill, for taxable years beginning after 
     2005 and before 2009, dividends, interest,\32\ rents, and 
     royalties received by one CFC from a related CFC are not 
     treated as foreign personal holding company income to the 
     extent attributable or properly allocable to non-subpart-F 
     income of the payor. For this purpose, a related CFC is a CFC 
     that controls or is controlled by the other CFC, or a CFC 
     that is controlled by the same person or persons that control 
     the other CFC. Ownership of more than 50 percent of the CFC's 
     stock (by vote or value) constitutes control for these 
     purposes. The bill provides that the Secretary shall 
     prescribe such regulations as are appropriate to prevent the 
     abuse of the purposes of this provision.
---------------------------------------------------------------------------
     \32\Interest for this purpose includes factoring income which 
     is treated as equivalent to interest under sec. 954(c)(1)(E).
---------------------------------------------------------------------------
       The provision in the House bill is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2005, but before January 1, 2009, and for taxable years of 
     U.S. shareholders with or within which such taxable years of 
     such foreign corporations end.

[[Page 7394]]




                            senate amendment

       No provision.


                          conference agreement

       The conference agreement includes the House bill provision.

    R. Reduced Rates for Capital Gains and Dividends of Individuals

     (Sec. 203 of the House bill and sec. 1(h) of the Code)


                              present law

     Capital gains
       In general
       In general, gain or loss reflected in the value of an asset 
     is not recognized for income tax purposes until a taxpayer 
     disposes of the asset. On the sale or exchange of a capital 
     asset, any gain generally is included in income. Any net 
     capital gain of an individual is generally taxed at maximum 
     rates lower than the rates applicable to ordinary income. Net 
     capital gain is the excess of the net long-term capital gain 
     for the taxable year over the net short-term capital loss for 
     the year. Gain or loss is treated as long-term if the asset 
     is held for more than one year.
       Capital losses generally are deductible in full against 
     capital gains. In addition, individual taxpayers may deduct 
     capital losses against up to $3,000 of ordinary income in 
     each year. Any remaining unused capital losses may be carried 
     forward indefinitely to another taxable year.
       A capital asset generally means any property except (1) 
     inventory, stock in trade, or property held primarily for 
     sale to customers in the ordinary course of the taxpayer's 
     trade or business, (2) depreciable or real property used in 
     the taxpayer's trade or business, (3) specified literary or 
     artistic property, (4) business accounts or notes receivable, 
     (5) certain U.S. publications, (6) certain commodity 
     derivative financial instruments, (7) hedging transactions, 
     and (8) business supplies. In addition, the net gain from the 
     disposition of certain property used in the taxpayer's trade 
     or business is treated as long-term capital gain. Gain from 
     the disposition of depreciable personal property is not 
     treated as capital gain to the extent of all previous 
     depreciation allowances. Gain from the disposition of 
     depreciable real property is generally not treated as capital 
     gain to the extent of the depreciation allowances in excess 
     of the allowances that would have been available under the 
     straight-line method of depreciation.
       Tax rates before 2009
       Under present law, for taxable years beginning before 
     January 1, 2009, the maximum rate of tax on the adjusted net 
     capital gain of an individual is 15 percent. Any adjusted net 
     capital gain which otherwise would be taxed at a 10- or 15-
     percent rate is taxed at a 5-percent rate (zero for taxable 
     years beginning after 2007). These rates apply for purposes 
     of both the regular tax and the alternative minimum tax.
       Under present law, the ``adjusted net capital gain'' of an 
     individual is the net capital gain reduced (but not below 
     zero) by the sum of the 28-percent rate gain and the 
     unrecaptured section 1250 gain. The net capital gain is 
     reduced by the amount of gain that the individual treats as 
     investment income for purposes of determining the investment 
     interest limitation under section 163(d).
       The term ``28-percent rate gain'' means the amount of net 
     gain attributable to long-term capital gains and losses from 
     the sale or exchange of collectibles (as defined in section 
     408(m) without regard to paragraph (3) thereof), an amount of 
     gain equal to the amount of gain excluded from gross income 
     under section 1202 (relating to certain small business 
     stock), the net short-term capital loss for the taxable year, 
     and any long-term capital loss carryover to the taxable year.
       ``Unrecaptured section 1250 gain'' means any long-term 
     capital gain from the sale or exchange of section 1250 
     property (i.e., depreciable real estate) held more than one 
     year to the extent of the gain that would have been treated 
     as ordinary income if section 1250 applied to all 
     depreciation, reduced by the net loss (if any) attributable 
     to the items taken into account in computing 28-percent rate 
     gain. The amount of unrecaptured section 1250 gain (before 
     the reduction for the net loss) attributable to the 
     disposition of property to which section 1231 (relating to 
     certain property used in a trade or business) applies may not 
     exceed the net section 1231 gain for the year.
       An individual's unrecaptured section 1250 gain is taxed at 
     a maximum rate of 25 percent, and the 28-percent rate gain is 
     taxed at a maximum rate of 28 percent. Any amount of 
     unrecaptured section 1250 gain or 28-percent rate gain 
     otherwise taxed at a 10- or 15-percent rate is taxed at the 
     otherwise applicable rate.
       Tax rates after 2008
       For taxable years beginning after December 31, 2008, the 
     maximum rate of tax on the adjusted net capital gain of an 
     individual is 20 percent. Any adjusted net capital gain which 
     otherwise would be taxed at a 10- or 15-percent rate is taxed 
     at a 10-percent rate.
       In addition, any gain from the sale or exchange of property 
     held more than five years that would otherwise have been 
     taxed at the 10-percent rate is taxed at an 8-percent rate. 
     Any gain from the sale or exchange of property held more than 
     five years and the holding period for which began after 
     December 31, 2000, that would otherwise have been taxed at a 
     20-percent rate is taxed at an 18-percent rate.
       The tax rates on 28-percent gain and unrecaptured section 
     1250 gain are the same as for taxable years beginning before 
     2009.
     Dividends
       In general
       A dividend is the distribution of property made by a 
     corporation to its shareholders out of its after-tax earnings 
     and profits.
       Tax rates before 2009
       Under present law, dividends received by an individual from 
     domestic corporations and qualified foreign corporations are 
     taxed at the same rates that apply to capital gains. This 
     treatment applies for purposes of both the regular tax and 
     the alternative minimum tax. Thus, for taxable years 
     beginning before 2009, dividends received by an individual 
     are taxed at rates of five (zero for taxable years beginning 
     after 2007) and 15 percent.
       If a shareholder does not hold a share of stock for more 
     than 60 days during the 121-day period beginning 60 days 
     before the ex-dividend date (as measured under section 
     246(c)), dividends received on the stock are not eligible for 
     the reduced rates. Also, the reduced rates are not available 
     for dividends to the extent that the taxpayer is obligated to 
     make related payments with respect to positions in 
     substantially similar or related property.
       Qualified dividend income includes otherwise qualified 
     dividends received from qualified foreign corporations. The 
     term ``qualified foreign corporation'' includes a foreign 
     corporation that is eligible for the benefits of a 
     comprehensive income tax treaty with the United States which 
     the Treasury Department determines to be satisfactory and 
     which includes an exchange of information program. In 
     addition, a foreign corporation is treated as a qualified 
     foreign corporation with respect to any dividend paid by the 
     corporation with respect to stock that is readily tradable on 
     an established securities market in the United States.
       Dividends received from a corporation that is a passive 
     foreign investment company (as defined in section 1297) in 
     either the taxable year of the distribution, or the preceding 
     taxable year, are not qualified dividends.
       Special rules apply in determining a taxpayer's foreign tax 
     credit limitation under section 904 in the case of qualified 
     dividend income. For these purposes, rules similar to the 
     rules of section 904(b)(2)(B) concerning adjustments to the 
     foreign tax credit limitation to reflect any capital gain 
     rate differential will apply to any qualified dividend 
     income.
       If a taxpayer receives an extraordinary dividend (within 
     the meaning of section 1059(c)) eligible for the reduced 
     rates with respect to any share of stock, any loss on the 
     sale of the stock is treated as a long-term capital loss to 
     the extent of the dividend.
       A dividend is treated as investment income for purposes of 
     determining the amount of deductible investment interest only 
     if the taxpayer elects to treat the dividend as not eligible 
     for the reduced rates.
       The amount of dividends qualifying for reduced rates that 
     may be paid by a regulated investment company (``RIC'') for 
     any taxable year in which the qualified dividend income 
     received by the RIC is less than 95 percent of its gross 
     income (as specially computed) may not exceed the sum of (i) 
     the qualified dividend income of the RIC for the taxable year 
     and (ii) the amount of earnings and profits accumulated in a 
     non-RIC taxable year that were distributed by the RIC during 
     the taxable year.
       The amount of dividends qualifying for reduced rates that 
     may be paid by a real estate investment trust (``REIT'') for 
     any taxable year may not exceed the sum of (i) the qualified 
     dividend income of the REIT for the taxable year, (ii) an 
     amount equal to the excess of the income subject to the taxes 
     imposed by section 857(b)(1) and the regulations prescribed 
     under section 337(d) for the preceding taxable year over the 
     amount of these taxes for the preceding taxable year, and 
     (iii) the amount of earnings and profits accumulated in a 
     non-REIT taxable year that were distributed by the REIT 
     during the taxable year.
       The reduced rates do not apply to dividends received from 
     an organization that was exempt from tax under section 501 or 
     was a tax-exempt farmers' cooperative in either the taxable 
     year of the distribution or the preceding taxable year; 
     dividends received from a mutual savings bank that received a 
     deduction under section 591; or deductible dividends paid on 
     employer securities.\33\
---------------------------------------------------------------------------
     \33\In addition, for taxable years beginning before 2009, 
     amounts treated as ordinary income on the disposition of 
     certain preferred stock (sec. 306) are treated as dividends 
     for purposes of applying the reduced rates; the tax rate for 
     the accumulated earnings tax (sec. 531) and the personal 
     holding company tax (sec. 541) is reduced to 15 percent; and 
     the collapsible corporation rules (sec. 341) are repealed.
---------------------------------------------------------------------------
       Tax rates after 2008
       For taxable years beginning after 2008, dividends received 
     by an individual are taxed at ordinary income tax rates.

[[Page 7395]]




                               House Bill

       The House bill extends for two years the present-law 
     provisions relating to lower capital gain and dividend tax 
     rates (through taxable years beginning on or before December 
     31, 2010).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2008.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision.

 S. Credit for Elective Deferrals and IRA Contributions (the ``Saver's 
                               Credit'')

     (Sec. 204 of the House bill, sec. 102 of the Senate 
         amendment, and sec. 25B of the Code)


                              Present Law

       Present law provides a temporary nonrefundable tax credit 
     for eligible taxpayers for qualified retirement savings 
     contributions, referred to as the ``saver's credit.'' The 
     maximum annual contribution eligible for the credit is 
     $2,000. The credit rate depends on the adjusted gross income 
     (``AGI'') of the taxpayer. Taxpayers filing joint returns 
     with AGI of $50,000 or less, head of household returns of 
     $37,500 or less, and single returns of $25,000 or less are 
     eligible for the credit. The AGI limits applicable to single 
     taxpayers apply to married taxpayers filing separate returns. 
     The credit is in addition to any deduction or exclusion that 
     would otherwise apply with respect to the contribution. The 
     credit offsets minimum tax liability as well as regular tax 
     liability. The credit is available to individuals who are 18 
     or over, other than individuals who are full-time students or 
     claimed as a dependent on another taxpayer's return.
       The credit is available with respect to: (1) elective 
     deferrals to a qualified cash or deferred arrangement (a 
     ``section 401(k) plan''), a tax-sheltered annuity (a 
     ``section 403(b)'' annuity), an eligible deferred 
     compensation arrangement of a State or local government (a 
     ``governmental section 457 plan''), a SIMPLE plan, or a 
     simplified employee pension (``SEP''); (2) contributions to a 
     traditional or Roth IRA; and (3) voluntary after-tax employee 
     contributions to a tax-sheltered annuity or qualified 
     retirement plan.
       The amount of any contribution eligible for the credit is 
     generally reduced by distributions received by the taxpayer 
     (or by the taxpayer's spouse if the taxpayer filed a joint 
     return with the spouse) from any plan or IRA to which 
     eligible contributions can be made during the taxable year 
     for which the credit is claimed, the two taxable years prior 
     to the year the credit is claimed, and during the period 
     after the end of the taxable year for which the credit is 
     claimed and prior to the due date for filing the taxpayer's 
     return for the year. Distributions that are rolled over to 
     another retirement plan do not affect the credit.
       The credit rates based on AGI are provided below.

                                    TABLE 1.--CREDIT RATES FOR SAVER'S CREDIT
----------------------------------------------------------------------------------------------------------------
                                                                     Heads of                        Credit rate
                          Joint filers                              households     All other filers   (percent)
----------------------------------------------------------------------------------------------------------------
$0-$30,000.............................................        $0-$22,500        $0-$15,000           50
30,001-32,500..................................................     22,501-24,375     15,001-16,250           20
32,501--50,000.................................................     24,376-37,500     16,251-25,000           10
Over $50,000...................................................      Over $37,500      Over $25,000            0
----------------------------------------------------------------------------------------------------------------

       The credit does not apply to taxable years beginning after 
     December 31, 2006.\34\
---------------------------------------------------------------------------
     \34\The saver's credit was enacted as part of the Economic 
     Growth and Tax Relief Reconciliation Act of 2001 
     (``EGTRRA''), Pub. L. No. 107-16. The provisions of EGTRRA 
     generally do not apply for years beginning after December 31, 
     2010.
---------------------------------------------------------------------------


                               House Bill

       The House bill extends the saver's credit for two years, 
     through December 31, 2008.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       The Senate amendment extends the saver's credit for three 
     years, through December 31, 2009.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.

         T. Extension of Increased Expensing for Small Business

     (Sec. 205 of the House bill, sec. 101 of the Senate 
         amendment, and sec. 179 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.\35\ 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.
---------------------------------------------------------------------------
     \35\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).
---------------------------------------------------------------------------
       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.\36\
---------------------------------------------------------------------------
     \36\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. T.D. 9209, July 12, 2005.
---------------------------------------------------------------------------
       For taxable years beginning in 2008 and thereafter (or 
     before 2003), the following rules apply. 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 $25,000 and $200,000 amounts are 
     not indexed. 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 (not 
     including off-the-shelf computer software). An expensing 
     election may be revoked only with consent of the 
     Commissioner.\37\
---------------------------------------------------------------------------
     \37\Sec. 179(c)(2).
---------------------------------------------------------------------------


                               house bill

       The provision extends for two years the increased amount 
     that a taxpayer may deduct and the other section 179 rules 
     applicable in taxable years beginning before 2008. Thus, 
     under the provision, these present-law rules continue in 
     effect for taxable years beginning after 2007 and before 
     2010.
       Effective date.--The provision is effective for taxable 
     years beginning after 2007 and before 2010.


                            senate amendment

       The Senate amendment provision is the same as the House 
     bill.


                          conference agreement

       The conference agreement includes the provision in the 
     House bill and the Senate amendment.

  U. Extend and Increase Alternative Minimum Tax Exemption Amount for 
                              Individuals

     (Sec. 106 of the Senate amendment and sec. 55 of the Code)


                              present law

       Present law imposes an alternative minimum tax. The 
     alternative minimum tax is the amount by which the tentative 
     minimum tax exceeds the regular income tax. An individual's 
     tentative minimum tax is the sum of (1) 26 percent of so much 
     of the taxable excess as does not exceed $175,000 ($87,500 in 
     the case of a married individual filing a separate return) 
     and (2) 28 percent of the remaining taxable excess. The 
     taxable excess is so much of the alternative minimum taxable 
     income (``AMTI'') as exceeds the exemption amount. The 
     maximum tax rates on net capital gain and dividends used in 
     computing the regular tax are used in computing the tentative 
     minimum tax. AMTI is the individual's taxable income adjusted 
     to take account of specified preferences and adjustments.
       The exemption amount is: (1) $45,000 ($58,000 for taxable 
     years beginning before 2006) in the case of married 
     individuals filing a joint return and surviving spouses; (2) 
     $33,750 ($40,250 for taxable years beginning before 2006) in 
     the case of unmarried individuals other than surviving 
     spouses; (3) $22,500

[[Page 7396]]

     ($29,000 for taxable years beginning before 2006) in the case 
     of married individuals filing a separate return; and (4) 
     $22,500 in the case of estates and trusts. The exemption 
     amount is phased out by an amount equal to 25 percent of the 
     amount by which the individual's AMTI exceeds (1) $150,000 in 
     the case of married individuals filing a joint return and 
     surviving spouses, (2) $112,500 in the case of unmarried 
     individuals other than surviving spouses, and (3) $75,000 in 
     the case of married individuals filing separate returns, 
     estates, and trusts. These amounts are not indexed for 
     inflation.


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, for taxable years beginning in 
     2006, the exemption amounts are increased to: (1) $62,550 in 
     the case of married individuals filing a joint return and 
     surviving spouses; (2) $42,500 in the case of unmarried 
     individuals other than surviving spouses; and (3) $31,275 in 
     the case of married individuals filing a separate return.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                          conference agreement

       The conference agreement includes the provision in the 
     Senate amendment.

      V. Extension and Modification of the New Markets Tax Credit

     (Sec. 204 of the Senate amendment and sec. 45D of the Code)


                              present law

       Section 45D provides a new markets tax credit for qualified 
     equity investments made to acquire stock in a corporation, or 
     a capital interest in a partnership, that is a qualified 
     community development entity (``CDE'').\38\ 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.
---------------------------------------------------------------------------
     \38\Section 45D was added by section 121(a) of the Community 
     Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 
     21, 2000).
---------------------------------------------------------------------------
       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 
     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.\39\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.
---------------------------------------------------------------------------
     \39\12. U.S.C. 4702(17) (defines ``low-income'' for purposes 
     of 12 U.S.C. 4702(20)).
---------------------------------------------------------------------------
       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.


                               house bill

       No provision.


                            senate amendment

       The provision extends through 2008 the $3.5 billion maximum 
     annual amount of qualified equity investments. The provision 
     also requires that the Secretary prescribe regulations to 
     ensure that non-metropolitan counties receive a proportional 
     allocation of qualified equity investments.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

              W. Phasedown of Credit for Electric Vehicles

     (Sec. 118 of the Senate amendment and sec. 30 of the Code)


                              Present Law

       A 10-percent tax credit is provided for the cost of a 
     qualified electric vehicle, up to a maximum credit of $4,000. 
     A qualified electric vehicle generally is a motor vehicle 
     that is powered primarily by an electric motor drawing 
     current from rechargeable batteries, fuel cells, or other 
     portable sources of electrical current. The full amount of 
     the credit is available for purchases prior to 2006. The 
     credit is reduced to 25 percent of the otherwise allowable 
     amount for purchases in 2006, and is unavailable for 
     purchases after December 31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, the full amount of the credit 
     for qualified electric vehicles is available for purchases 
     prior to 2006. As under present law, the credit is 
     unavailable for purchases after December 31, 2006.
       Effective date.--The provision is effective for property 
     placed in service after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  X. Application of EGTRRA Sunset to Title II of the Senate Amendment

     (Sec. 231 of the Senate amendment)


                              Present Law

       Reconciliation is a procedure under the Congressional 
     Budget Act of 1974 (the ``Budget Act'') by which Congress 
     implements spending and tax policies contained in a budget 
     resolution. The Budget Act contains numerous rules enforcing 
     the scope of items permitted to be considered under the 
     budget reconciliation process. One such rule, the so-called 
     ``Byrd rule,'' was incorporated into the Budget Act in 1990. 
     The Byrd rule, named after its principal sponsor, Senator 
     Robert C. Byrd, is contained in section 313 of the Budget 
     Act. The Byrd rule generally permits members to raise a point 
     of order against extraneous provisions (those which are 
     unrelated to the goals of the reconciliation process) from 
     either a reconciliation bill or a conference report on such 
     bill.
       Under the Byrd rule, a provision is considered to be 
     extraneous if it falls under one or more of the following six 
     definitions:

[[Page 7397]]


       1. It does not produce a change in outlays or revenues;
       2. It produces an outlay increase or revenue decrease when 
     the instructed committee is not in compliance with its 
     instructions;
       3. It is outside of the jurisdiction of the committee that 
     submitted the title or provision for inclusion in the 
     reconciliation measure;
       4. It produces a change in outlays or revenues which is 
     merely incidental to the nonbudgetary components of the 
     provision;
       5. It would increase the deficit for a fiscal year beyond 
     those covered by the reconciliation measure; and
       6. It recommends changes in Social Security.
       The Economic Growth and Tax Relief Reconciliation Act of 
     2001 (EGTRRA) contains sunset provisions to ensure compliance 
     with the Budget Act. Under title IX of EGTRRA, the provisions 
     of, and amendments made by that Act that are in effect on 
     September 30, 2011, shall cease to apply as of the close of 
     September 30, 2011, except that all provisions of, and 
     amendments made by, the Act generally do not apply for 
     taxable, plan or limitation years beginning after December 
     31, 2010. With respect to the estate, gift, and generation-
     skipping provisions of the Act, the provisions do not apply 
     to estates of decedents dying, gifts made, or generation-
     skipping transfers, after December 31, 2010. The Code and the 
     Employee Retirement Income Security Act of 1974 are applied 
     to such years, estates, gifts and transfers after December 
     31, 2010, as if the provisions of and amendments made by the 
     Act had never been enacted.


                               House Bill

       No provision.


                            Senate Amendment

     Sunset of provisions
       To ensure compliance with the Budget Act, the Senate 
     amendment provides that all provisions of, and amendments 
     made by title II of the Senate amendment shall be subject to 
     the sunset provisions of EGTRRA to the same extent and in the 
     same manner as the provision of such Act to which the Senate 
     amendment provision relates.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                       TITLE II--OTHER PROVISONS

                A. Taxation of Certain Settlement Funds

     (Sec. 301 of the House bill and sec. 468B of the Code)


                              Present Law

       Present law provides that if a taxpayer makes a payment to 
     a designated settlement fund pursuant to a court order, the 
     deduction timing rules that require economic performance 
     generally are deemed to be met as the payments are made by 
     the taxpayer to the fund. A designated settlement fund means 
     a fund which: is established pursuant to a court order; 
     extinguishes completely the taxpayer's tort liability arising 
     out of personal injury, death or property damage; is 
     administered by persons a majority of whom are independent of 
     the taxpayer; and under the terms of the fund the taxpayer 
     (or any related person) may not hold any beneficial interest 
     in the income or corpus of the fund.
       Generally, a designated or qualified settlement fund is 
     taxed as a separate entity at the maximum trust rate on its 
     modified income. Modified income is generally gross income 
     less deductions for administrative costs and other incidental 
     expenses incurred in connection with the operation of the 
     settlement fund.
       The cleanup of hazardous waste sites is sometimes funded by 
     environmental ``settlement funds'' or escrow accounts. These 
     escrow accounts are established in consent decrees between 
     the Environmental Protection Agency (``EPA'') and the 
     settling parties under the jurisdiction of a Federal district 
     court. The EPA uses these accounts to resolve claims against 
     private parties under Comprehensive Environmental Response, 
     Compensation and Liability Act of 1980 (``CERCLA'').
       Present law provides that nothing in any provision of law 
     is to be construed as providing that an escrow account, 
     settlement fund, or similar fund is not subject to current 
     income tax.


                               House Bill

       The provision provides that certain settlement funds 
     established in consent decrees for the sole purpose of 
     resolving claims under CERCLA are to be treated as 
     beneficially owned by the United States government and 
     therefore not subject to Federal income tax.
       To qualify the settlement fund must be: (1) established 
     pursuant to a consent decree entered by a judge of a United 
     States District Court; (2) created for the receipt of 
     settlement payments for the sole purpose of resolving claims 
     under CERCLA; (3) controlled (in terms of expenditures of 
     contributions and earnings thereon) by the government or an 
     agency or instrumentality thereof; and (4) upon termination, 
     any remaining funds will be disbursed to such government 
     entity and used in accordance with applicable law. For 
     purposes of the provision, a government entity means the 
     United States, any State of political subdivision thereof, 
     the District of Columbia, any possession of the United 
     States, and any agency or instrumentality of the foregoing.
       The provision does not apply to accounts or funds 
     established after December 31, 2010.
       Effective date.--The provision is effective for accounts 
     and funds established after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision.

  B. Modifications to Rules Relating to Taxation of Distributions of 
            Stock and Securities of a Controlled Corporation

     (Sec. 302 of the House bill, sec. 467 of the Senate amendment 
         and sec. 355 of the Code)


                              Present Law

       A corporation generally is required to recognize gain on 
     the distribution of property (including stock of a 
     subsidiary) to its shareholders as if the corporation had 
     sold such property for its fair market value. In addition, 
     the shareholders receiving the distributed property are 
     ordinarily treated as receiving a dividend of the value of 
     the distribution (to the extent of the distributing 
     corporation's earnings and profits), or capital gain in the 
     case of a stock buyback that significantly reduces the 
     shareholder's interest in the parent corporation.
       An exception to these rules applies if the distribution of 
     the stock of a controlled corporation satisfies the 
     requirements of section 355 of the Code. If all the 
     requirements are satisfied, there is no tax to the 
     distributing corporation or to the shareholders on the 
     distribution.
       One requirement to qualify for tax-free treatment under 
     section 355 is that both the distributing corporation and the 
     controlled corporation must be engaged immediately after the 
     distribution in the active conduct of a trade or business 
     that has been conducted for at least five years and was not 
     acquired in a taxable transaction during that period (the 
     ``active business test'').\40\ For this purpose, a 
     corporation is engaged in the active conduct of a trade or 
     business only if (1) the corporation is directly engaged in 
     the active conduct of a trade or business, or (2) the 
     corporation is not directly engaged in an active business, 
     but substantially all its assets consist of stock and 
     securities of one or more corporations that it controls that 
     are engaged in the active conduct of a trade or business.\41\
---------------------------------------------------------------------------
     \40\Section 355(b).
     \41\Section 355(b)(2)(A). The IRS takes the position that the 
     statutory test requires that at least 90 percent of the fair 
     market value of the corporation's gross assets consist of 
     stock and securities of a controlled corporation that is 
     engaged in the active conduct of a trade or business. Rev. 
     Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. Proc. 77-37, 
     sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------
       In determining whether a corporation is directly engaged in 
     an active trade or business that satisfies the requirement, 
     old IRS guidelines for advance ruling purposes required that 
     the value of the gross assets of the trade or business being 
     relied on must ordinarily constitute at least five percent of 
     the total fair market value of the gross assets of the 
     corporation directly conducting the trade or business.\42\ 
     More recently, the IRS has suspended this specific rule in 
     connection with its general administrative practice of moving 
     IRS resources away from advance rulings on factual aspects of 
     section 355 transactions in general.\43\
---------------------------------------------------------------------------
     \42\Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
     \43\Rev. Proc. 2003-48, 2003-29 I.R.B. 86.
---------------------------------------------------------------------------
       If the distributing or controlled corporation is not 
     directly engaged in an active trade or business, then the IRS 
     takes the position that the ``substantially all'' test as 
     applied to that corporation requires that at least 90 percent 
     of the fair market value of the corporation's gross assets 
     consist of stock and securities of a controlled corporation 
     that is engaged in the active conduct of a trade or 
     business.\44\
---------------------------------------------------------------------------
     \44\Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. 
     Proc. 77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------
       In determining whether assets are part of a five-year 
     qualifying active business, assets acquired more recently 
     than five years prior to the distribution, in a taxable 
     transaction, are permitted to qualify as five-year ``active 
     business'' assets if they are considered to have been 
     acquired as part of an expansion of an existing business that 
     does so qualify.\45\
---------------------------------------------------------------------------
     \45\Treas. Reg. sec. 1.355-3(b)(ii).
---------------------------------------------------------------------------
       When a corporation holds an interest in a partnership, IRS 
     revenue rulings have allowed an active business of the 
     partnership to count as an active business of a corporate 
     partner in certain circumstances. One such case involved a 
     situation in which the corporation owned at least 20 percent 
     of the partnership, was actively engaged in management of the 
     partnership, and the partnership itself had an active 
     business.\46\
---------------------------------------------------------------------------
     \46\Rev. Rul. 92-17, 1002-1 C.B. 142; see also, Rev. Rul. 
     2002-49, 2002-2 C.B. 50.
---------------------------------------------------------------------------
       In addition to its active business requirements, section 
     355 does not apply to any transaction that is a ``device'' 
     for the distribution of earnings and profits to a shareholder 
     without the payment of tax on a dividend. A transaction is 
     ordinarily not considered a ``device'' to avoid dividend tax 
     if the

[[Page 7398]]

     distribution would have been treated by the shareholder as a 
     redemption that was a sale or exchange of its stock, rather 
     than as a dividend, if section 355 had not applied.\47\
---------------------------------------------------------------------------
     \47\Treas. Reg. sec. 1.355-2(d)(5)(iv).
---------------------------------------------------------------------------


                               House Bill

       Under the House bill provision, the active business test is 
     determined by reference to the relevant affiliated group. For 
     the distributing corporation, the relevant affiliated group 
     consists of the distributing corporation as the common parent 
     and all corporations affiliated with the distributing 
     corporation through stock ownership described in section 
     1504(a)(1)(B) (regardless of whether the corporations are 
     includible corporations under section 1504(b)), immediately 
     after the distribution. The relevant affiliated group for a 
     controlled corporation is determined in a similar manner 
     (with the controlled corporation as the common parent).
       Effective date.--The provision applies to distributions 
     after the date of enactment and before December 31, 2010, 
     with three exceptions. The provision does not apply to 
     distributions (1) made pursuant to an agreement which is 
     binding on the date of enactment and at all times thereafter, 
     (2) described in a ruling request submitted to the IRS on or 
     before the date of enactment, or (3) described on or before 
     the date of enactment in a public announcement or in a filing 
     with the Securities and Exchange Commission. The distributing 
     corporation may irrevocably elect not to have the exceptions 
     described above apply.
       The provision also applies, solely for the purpose of 
     determining whether, after the date of enactment, there is 
     continuing qualification under the requirements of section 
     355(b)(2)(A) of distributions made before such date, as a 
     result of an acquisition, disposition, or other restructuring 
     after such date and before December 31, 2010.\48\
---------------------------------------------------------------------------
     \48\For example, a holding company taxpayer that had 
     distributed a controlled corporation in a spin-off prior to 
     the date of enactment, in which spin-off the taxpayer 
     satisfied the ``substantially all'' active business stock 
     test of present law section 355(b)(2)(A) immediately after 
     the distribution, would not be deemed to have failed to 
     satisfy any requirement that it continue that same qualified 
     structure for any period of time after the distribution, 
     solely because of a restructuring that occurs after the date 
     of enactment and before January 1, 2010, and that would 
     satisfy the requirements of new section 355(b)(2)(A).
---------------------------------------------------------------------------


                            Senate Amendment

       The Senate amendment provision is the same as the House 
     bill with respect to the House bill provision described 
     above, except for the date on which that provision 
     sunsets.\49\
---------------------------------------------------------------------------
     \49\See ``Effective date'' for the Senate Amendment, infra.
---------------------------------------------------------------------------
       In addition, the Senate amendment contains another 
     provision that denies section 355 treatment if either the 
     distributing or distributed corporation is a disqualified 
     investment corporation immediately after the transaction 
     (including any series of related transactions) and any person 
     that did not hold 50 percent or more of the voting power or 
     value of stock of such distributing or controlled corporation 
     immediately before the transaction does hold such a 50 
     percent or greater interest immediately after such 
     transaction. The attribution rules of section 318 apply for 
     purposes of this determination.
       A disqualified investment corporation is any distributing 
     or controlled corporation if the fair market value of the 
     investment assets of the corporation is 75 percent or more of 
     the fair market value of all assets of the corporation. 
     Except as otherwise provided, the term ``investment assets'' 
     for this purpose means (i) cash, (ii) any stock or securities 
     in a corporation, (iii) any interest in a partnership, (iv) 
     any debt instrument or other evidence of indebtedness; (v) 
     any option, forward or futures contract, notional principal 
     contract, or derivative; (vi) foreign currency, or (vii) any 
     similar asset.
       The term ``investment assets'' does not include any asset 
     which is held for use in the active and regular conduct of 
     (i) a lending or finance business (as defined in section 
     954(h)(4)); (ii) a banking business through a bank (as 
     defined in section 581), a domestic building and loan 
     association (within the meaning of section 7701(a)(19), or 
     any similar institution specified by the Secretary; or (iii) 
     an insurance business if the conduct of the business is 
     licensed, authorized, or regulated by an applicable insurance 
     regulatory body. These exceptions only apply with respect to 
     any business if substantially all the income of the business 
     is derived from persons who are not related (within the 
     meaning of section 267(b) or 707(b)(1) to the person 
     conducting the business.
       The term ``investment assets'' also does not include any 
     security (as defined in section 475(c)(2)) which is held by a 
     dealer in securities and to which section 475(a) applies.
       The term ``investment assets'' also does not include any 
     stock or securities in, or any debt instrument, evidence of 
     indebtedness, option, forward or futures contract, notional 
     principal contract, or derivative issued by, a corporation 
     which is a 25-percent controlled entity with respect to the 
     distributing or controlled corporation. Instead, the 
     distributing or controlled corporation is treated as owning 
     its ratable share of the assets of any 25-percent controlled 
     entity.
       The term 25-percent controlled entity means any corporation 
     with respect to which the corporation in question 
     (distributing or controlled) owns directly or indirectly 
     stock possessing at least 25 percent of voting power and 
     value, excluding stock that is not entitled to vote, is 
     limited and preferred as to dividends and does not 
     participate in corporate growth to any significant extent, 
     has redemption and liquidation rights which do not exceed the 
     issue price of such stock (except for a reasonable redemption 
     or liquidation premium), and is not convertible into another 
     class of stock.
       The term ``investment assets'' also does not include any 
     interest in a partnership, or any debt instrument or other 
     evidence of indebtedness issued by the partnership, if one or 
     more trades or businesses of the partnership are, (or without 
     regard to the 5-year requirement of section 355(b)(2)(B), 
     would be) taken into account by the distributing or 
     controlled corporation, as the case may be, in determining 
     whether the active business test of section 355 is met by 
     such corporation.
       The Treasury department shall provide regulations as may be 
     necessary to carry out, or prevent the avoidance of, the 
     purposes of the provision, including regulations in cases 
     involving related persons, intermediaries, pass-through 
     entities, or other arrangements; and the treatment of assets 
     unrelated to the trade or business of a corporation as 
     investment assets if, prior to the distribution, investment 
     assets were used to acquire such assets. Regulations may also 
     in appropriate cases exclude from the application of the 
     provision a distribution which does not have the character of 
     a redemption and which would be treated as a sale or exchange 
     under section 302, and may modify the application of the 
     attribution rules.
       Effective date.--The effective date of the first provision 
     of the Senate amendment generally is the same as the 
     effective date of the identical provision of the House bill, 
     except that the Senate amendment provision sunsets for 
     distributions (and for acquisitions, dispositions, or other 
     restructurings as relating to continuing qualification of 
     pre-effective date distributions) after December 31, 2009, 
     rather than for distributions (and for acquisitions, 
     dispositions, or other restructurings as relating to 
     continuing qualification of pre-effective date distributions) 
     on or after December 31, 2010.
       The second provision of the Senate amendment is effective 
     for distributions after the date of enactment, except in 
     transactions which are (i) made pursuant to an agreement 
     which was binding on such date of enactment and at all times 
     thereafter; (ii) described in a ruling request submitted to 
     the Intetnal Revenue Service on or before such date, or (iii) 
     described on or before such date in a public announcement or 
     in a filing with the Securities and Exchange Commission.


                          Conference Agreement

       The conference agreement includes the House bill and the 
     Senate amendment with modifications.
       With respect to the provision that applies the active 
     business test by reference to the relevant affiliated group, 
     the conference agreement provision is the same as the House 
     bill and the Senate amendment except for the date on which 
     the conference agreement provision sunsets.\50\
---------------------------------------------------------------------------
     \50\See ``Effective date'' of the conference agreement 
     provision, infra.
---------------------------------------------------------------------------
       With respect to the provision that affects transactions 
     involving disqualified investment corporations, the 
     conference agreement reduces the percentage of investment 
     assets of a corporation that will cause such corporation to 
     be a disqualified investment corporation, from 75 percent 
     (three-quarters) to two-thirds of the fair market value of 
     the corporation's assets, for distributions occurring after 
     one year after the date of enactment.
       The conference agreement also reduces from 25 percent to 20 
     percent the percentage stock ownership in a corporation that 
     will cause such ownership to be disregarded as an investment 
     asset itself, instead requiring ``look-through'' to the 
     ratable share of the underlying assets of such corporation 
     attributable to such stock ownership.
       The conferees wish to clarify that the disqualified 
     investment corporation provision applies when a person 
     directly or indirectly holds 50 percent of either the vote or 
     the value of a company immediately following a distribution, 
     and such person did not hold such 50 percent interest 
     directly or indirectly prior to the distribution. As one 
     example, the provision applies if a person that held 50 
     percent or more of the vote, but not of the value, of a 
     distributing corporation immediately prior to a transaction 
     in which a controlled corporation that was 100 percent owned 
     by that distributing corporation is distributed, directly or 
     indirectly holds 50 percent of the value of either the 
     distributing or controlled corporation immediately following 
     such transaction.
       The conferees further wish to clarify that the enumeration 
     in subsection 355(g)(5)(A) through (C) of specific situations 
     that Treasury regulations may address is not intended to 
     restrict or limit any other situations that Treasury may 
     address under the general authority of new section 355(g)(5) 
     to carry out, or prevent the avoidance of, the purposes of

[[Page 7399]]

     the disqualified investment corporation provision.
       Effective date.--The starting effective date of the 
     provision that applies the active business test by reference 
     to the relevant affiliated group is the same as that of the 
     House bill and the Senate amendment provisions. The 
     conference agreement changes the date on which the provision 
     sunsets so that the provision does not apply for 
     distributions (or for acquisitions, dispositions, or other 
     restructurings as relating to continuing qualification of 
     pre-effective date distributions) occurring after December 
     31, 2010.
       The effective date of the provision that affects 
     transactions involving disqualified investment corporations 
     is the same as that of the Senate amendment provision, except 
     for the conference agreement reduction in the amount of 
     investment assets of a corporation that will cause it to be a 
     disqualified investment corporation, from three-quarters to 
     two thirds of the fair market value of all assets of the 
     corporation. The two-thirds test applies for distributions 
     occurring after one year after the date of enactment.

                 C. Qualified Veteran's Mortgage Bonds

     (Sec. 303 of the House bill and sec. 143 of the Code)


                              Present Law

       Private activity bonds are bonds that nominally are issued 
     by States or local governments, but the proceeds of which are 
     used (directly or indirectly) by a private person and payment 
     of which is derived from funds of such private person. 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''). The definition of a qualified private activity bond 
     includes both qualified mortgage bonds and qualified 
     veterans' mortgage bonds.
       Qualified veterans' mortgage bonds are private activity 
     bonds the proceeds of which are used to make mortgage loans 
     to certain veterans. Authority to issue qualified veterans' 
     mortgage bonds is limited to States that had issued such 
     bonds before June 22, 1984. Qualified veterans' mortgage 
     bonds are not subject to the State volume limitations 
     generally applicable to private activity bonds. Instead, 
     annual issuance in each State is subject to a State volume 
     limitation based on the volume of such bonds issued by the 
     State before June 22, 1984. The five States eligible to issue 
     these bonds are Alaska, California, Oregon, Texas, and 
     Wisconsin. Loans financed with qualified veterans' mortgage 
     bonds can be made only with respect to principal residences 
     and can not be made to acquire or replace existing mortgages. 
     Mortgage loans made with the proceeds of these bonds can be 
     made only to veterans who served on active duty before 1977 
     and who applied for the financing before the date 30 years 
     after the last date on which such veteran left active service 
     (the ``eligibility period'').
       Qualified mortgage bonds are issued to make mortgage loans 
     to qualified mortgagors for 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. 
     In addition, 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).


                               House Bill

       The House bill repeals the requirement that veterans 
     receiving loans financed with qualified veterans' mortgage 
     bonds must have served before 1977. It also reduces the 
     eligibility period to 25 years (rather than 30 years) 
     following release from the military service. The bill 
     provides new State volume limits for these bonds for the five 
     eligible States. In 2010, the new annual limit on the total 
     volume of veterans' bonds is $25 million for Alaska, $66.25 
     million for California, $25 million for Oregon, $53.75 
     million for Texas, and $25 million for Wisconsin. These 
     volume limits are phased-in over the four-year period 
     immediately preceding 2010 by allowing the applicable 
     percentage of the 2010 volume limits. The following table 
     provides those percentages.
       Calendar Year:                         Applicable Percentage is:
2006.................................................................20
2007.................................................................40
2008.................................................................60
2009.................................................................80

       The volume limits are zero for 2011 and each year 
     thereafter. Unused allocation cannot be carried forward to 
     subsequent years.
       Effective date.--The provision generally applies to bonds 
     issued after December 31, 2005. The provision expanding the 
     definition of eligible veterans applies to financing provided 
     after date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill with the 
     following modifications. The conference agreement does not 
     amend present law as it relates to qualified veterans' 
     mortgage bonds issued by the States of California and Texas. 
     In the case of qualified veterans' mortgage bonds issued by 
     the States of Alaska, Oregon, and Wisconsin, (1) the 
     requirement that veterans must have served before 1977 is 
     repealed and (2) the eligibility period for applying for a 
     loan following release from the military service is reduced 
     from 30 years to 25 years.
       In addition, the annual issuance of qualified veterans' 
     mortgage bonds in the States of Alaska, Oregon and Wisconsin 
     is subject to new State volume limitations which are phased 
     in between the years 2006 and 2010. The State volume limit in 
     these States for any calendar year after 2010 is zero.
       Effective date.--The provision expanding the definition of 
     eligible veterans applies to bonds issued on or after date of 
     enactment. The provision amending State volume limitations 
     applies to allocations of volume limitation made after April 
     5, 2006.

   D. Capital Gains Treatment for Certain Self-Created Musical Works

     (Sec. 304 of the House bill and sec. 1221 of the Code)


                              present law

     Capital gains
       The maximum tax rate on the net capital gain income of an 
     individual is 15 percent for taxable years beginning in 2006. 
     By contrast, the maximum tax rate on an individual's ordinary 
     income is 35 percent. The reduced 15-percent rate generally 
     is available for gain from the sale or exchange of a capital 
     asset for which the taxpayer has satisfied a holding-period 
     requirement. Capital assets generally include all property 
     held by a taxpayer with certain specified exclusions.
       An exclusion from the definition of a capital asset applies 
     to inventory property or property held by a taxpayer 
     primarily for sale to customers in the ordinary course of the 
     taxpayer's trade or business. Another exclusion from capital 
     asset status applies to copyrights, literary, musical, or 
     artistic compositions, letters or memoranda, or similar 
     property held by a taxpayer whose personal efforts created 
     the property (or held by a taxpayer whose basis in the 
     property is determined by reference to the basis of the 
     taxpayer whose personal efforts created the property). 
     Consequently, when a taxpayer that owns copyrights in, for 
     example, books, songs, or paintings that the taxpayer created 
     (or when a taxpayer to which the copyrights have been 
     transferred by the works' creator in a substituted basis 
     transaction) sells the copyrights, gain from the sale is 
     treated as ordinary income, not capital gain.
     Charitable contributions
       A taxpayer generally is allowed a deduction for the fair 
     market value of property contributed to a charity. If a 
     taxpayer makes a contribution of property that would have 
     generated ordinary income (or short-term capital gain), the 
     taxpayer's charitable contribution deduction generally is 
     limited to the property's adjusted basis.


                               House Bill

       The House bill provides that at the election of a taxpayer, 
     the sale or exchange before January 1, 2011 of musical 
     compositions or copyrights in musical works created by the 
     taxpayer's personal efforts (or having a basis determined by 
     reference to the basis in the hands of the taxpayer whose 
     personal efforts created the compositions or copyrights) is 
     treated as the sale or exchange of a capital asset. The House 
     bill provision does not change the present law limitation on 
     a taxpayer's charitable deduction for the contribution of 
     those compositions or copyrights.
       Effective date.--The provision is effective for sales or 
     exchanges in taxable years beginning after the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision.

   E. Decrease Minimum Vessel Tonnage Limit to 6,000 Deadweight Tons

     (Sec. 305 of the House bill and sec. 1355 of the Code)


                              Present Law

       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, including income from shipping operations, whether 
     derived in the United States or abroad. In order to mitigate 
     double taxation, a foreign tax credit for income taxes paid 
     to foreign countries is provided to reduce or eliminate the 
     U.S. tax owed on such income, subject to certain limitations.
       Generally, the United States taxes foreign corporations 
     only on income that has a sufficient nexus to the United 
     States. Thus, a foreign corporation is generally subject to 
     U.S. tax only on income, including income from shipping 
     operations, which is ``effectively connected'' with the 
     conduct of a trade or business in the United States (sec. 
     882). Such ``effectively connected income'' generally is 
     taxed in the same manner and at the same rates as the income 
     of a U.S. corporation.
       The United States imposes a four percent tax on the amount 
     of a foreign corporation's U.S. source gross transportation 
     income (sec. 887). Transportation income includes income

[[Page 7400]]

     from the use (or hiring or leasing for use) of a vessel and 
     income from services directly related to the use of a vessel. 
     Fifty percent of the transportation income attributable to 
     transportation that either begins or ends (but not both) in 
     the United States is treated as U.S. source gross 
     transportation income. The tax does not apply, however, to 
     U.S. source gross transportation income that is treated as 
     income effectively connected with the conduct of a U.S. trade 
     or business. U.S. source gross transportation income is not 
     treated as effectively connected income unless (1) the 
     taxpayer has a fixed place of business in the United States 
     involved in earning the income, and (2) substantially all the 
     income is attributable to regularly scheduled transportation.
       The tax imposed by section 882 or 887 on income from 
     shipping operations may be limited by an applicable U.S. 
     income tax treaty or by an exemption of a foreign 
     corporation's international shipping operations income in 
     instances where a foreign country grants an equivalent 
     exemption (sec. 883).
       Notwithstanding the general rules described above, the 
     American Jobs Creation Act of 2004 (``AJCA'')\51\ generally 
     allows corporations that are qualifying vessel operators\52\ 
     to elect a ``tonnage tax'' in lieu of the corporate income 
     tax on taxable income from certain shipping activities. 
     Accordingly, an electing corporation's gross income does not 
     include its income from qualifying shipping activities (and 
     items of loss, deduction, or credit are disallowed with 
     respect to such excluded income), and electing corporations 
     are only subject to tax on these activities at the maximum 
     corporate income tax rate on their notional shipping income, 
     which is based on the net tonnage of the corporation's 
     qualifying vessels.\53\ No deductions are allowed against the 
     notional shipping income of an electing corporation, and no 
     credit is allowed against the notional tax imposed under the 
     tonnage tax regime. In addition, special deferral rules apply 
     to the gain on the sale of a qualifying vessel, if such 
     vessel is replaced during a limited replacement period.
---------------------------------------------------------------------------
     \51\Pub. L. No. 108-357, sec. 248. The tonnage tax regime is 
     effective for taxable years beginning after the date of 
     enactment of AJCA (October 22, 2004).
     \52\Generally, a qualifying vessel operator is a corporation 
     that (1) operates one or more qualifying vessels and (2) 
     meets certain requirements with respect to its shipping 
     activities.
     \53\An electing corporation's notional shipping income for 
     the taxable year is the product of the following amounts for 
     each of the qualifying vessels it operates: (1) the daily 
     notional shipping income from the operation of the qualifying 
     vessel, and (2) the number of days during the taxable year 
     that the electing corporation operated such vessel as a 
     qualifying vessel in the United States foreign trade. The 
     daily notional shipping income from the operation of a 
     qualifying vessel is (1) 40 cents for each 100 tons of so 
     much of the net tonnage of the vessel as does not exceed 
     25,000 net tons, and (2) 20 cents for each 100 tons of so 
     much of the net tonnage of the vessel as exceeds 25,000 net 
     tons. ``United States foreign trade'' means the 
     transportation of goods or passengers between a place in the 
     United States and a foreign place or between foreign places. 
     The temporary use in the United States domestic trade (i.e., 
     the transportation of goods or passengers between places in 
     the United States) of any qualifying vessel or the temporary 
     ceasing to use a qualifying vessel may be disregarded, under 
     special rules.
---------------------------------------------------------------------------
       Generally, a ``qualifying vessel'' is defined as a self-
     propelled (or a combination of self-propelled and non-self-
     propelled) U.S.-flag vessel of not less than 10,000 
     deadweight tons\54\ that is used exclusively in the U.S. 
     foreign trade.
---------------------------------------------------------------------------
     \54\Deadweight measures the lifting capacity of a ship 
     expressed in long tons (2,240 lbs.), including cargo, crew, 
     and consumables such as fuel, lube oil, drinking water, and 
     stores. It is the difference between the number of tons of 
     water a vessel displaces without such items on board and the 
     number of tons it displaces when fully loaded.
---------------------------------------------------------------------------


                               House Bill

       The House bill expands the definition of ``qualifying 
     vessel'' to include self-propelled (or a combination of self-
     propelled and non-self-propelled) U.S. flag vessels of not 
     less than 6,000 deadweight tons used exclusively in the 
     United States foreign trade. The modified definition applies 
     for taxable years beginning after December 31, 2005 and 
     ending before January 1, 2011.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005 and ending before January 
     1, 2011.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.

      F. Modification of Special Arbitrage Rule for Certain Funds

     (Sec. 306 of the House bill and sec. 307 of the Senate 
         amendment)


                              Present Law

       In general, present-law tax-exempt bond arbitrage 
     restrictions provide that interest on a State or local 
     government bond is not eligible for tax-exemption if the 
     proceeds are invested, directly or indirectly, in materially 
     higher yielding investments or if the debt service on the 
     bond is secured by or paid from (directly or indirectly) such 
     investments. An exception to the arbitrage restrictions, 
     enacted in 1984, provides that the pledge of income from 
     investments in the Texas Permanent University Fund (the 
     ``Fund'') as security for a limited amount of tax-exempt 
     bonds will not cause interest on those bonds to be taxable. 
     The terms of this exception are limited to State 
     constitutional or statutory restrictions continuously in 
     effect since October 9, 1969. In addition, the exception only 
     applies to an amount of tax-exempt bonds that does not exceed 
     20 percent of the value of the Fund.
       The Fund consists of certain State lands that were set 
     aside for the benefit of higher education, the income from 
     mineral rights to these lands, and certain other earnings on 
     Fund assets. The Texas constitution directs that monies held 
     in the Fund are to be invested in interest-bearing 
     obligations and other securities. Income from the Fund is 
     apportioned between two university systems operated by the 
     State. Tax-exempt bonds issued by the university systems to 
     finance buildings and other permanent improvements were 
     secured by and payable from the income of the Fund.
       Prior to 1999, the constitution did not permit the 
     expenditure or mortgage of the Fund for any purpose. In 1999, 
     the State constitutional rules governing the Fund were 
     modified with regard to the manner in which amounts in the 
     Fund are distributed for the benefit of the two university 
     systems. The State constitutional amendments allow for the 
     possibility that in the event investment earnings are less 
     than annual debt service on the bonds some of the debt 
     service could be considered as having been paid with the Fund 
     corpus. The 1984 exception refers only to bonds secured by 
     investment earnings on securities or obligations held by the 
     Fund. Despite the constitutional amendments, the IRS has 
     agreed to continue to apply the 1984 exception to the Fund 
     through August 31, 2007, if clarifying legislation is 
     introduced in the 109th Congress prior to August 31, 2005. 
     Clarifying legislation was introduced in the 109th Congress 
     on May 26, 2005.\55\
---------------------------------------------------------------------------
     \55\H.R. 2661.
---------------------------------------------------------------------------


                               House Bill

       The provision codifies and extends the IRS agreement until 
     August 31, 2009. The 1984 exception is conformed to the State 
     constitutional amendments to permit its continued 
     applicability to bonds of the two university systems. The 
     limitation on the aggregate amount of bonds which may benefit 
     from the exception is not modified, and remains at 20 percent 
     of the value of the Fund. The provision sunsets August 31, 
     2009.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment and before August 31, 
     2009.


                            Senate Amendment

       The Senate amendment follows the House bill provision, and 
     also increases the amount of bonds that may benefit from the 
     exception to 30 percent of the value of the Fund.
       Effective date.--The Senate amendment is the same as the 
     House bill.


                          Conference Agreement

       The conference agreement includes the House bill provision.

G. Amortization of Expenses Incurred in Creating or Acquiring Music or 
                            Music Copyrights

     (Sec. 468 of the Senate amendment and secs. 167(g) and 263A 
         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. Section 
     167(g) provides that the cost of motion picture films, sound 
     recordings, copyrights, books, patents, and other property 
     specified in regulations is eligible to be recovered using 
     the income forecast method of depreciation.
       Under the income forecast method, the depreciation 
     deduction with respect to eligible property for a taxable 
     year is determined by multiplying the adjusted basis of the 
     property by a fraction, the numerator of which is the income 
     generated by the property during the year, and the 
     denominator of which is the total forecasted or estimated 
     income expected to be generated prior to the close of the 
     tenth taxable year after the year the property was placed in 
     service. Any costs that are not recovered by the end of the 
     tenth taxable year after the property was placed in service 
     may be taken into account as depreciation in such year.
       The adjusted basis of property that may be taken into 
     account under the income forecast method includes only 
     amounts that satisfy the economic performance standard of 
     section 461(h) (except in the case of certain participations 
     and residuals). In addition, taxpayers that claim 
     depreciation deductions under the income forecast method are 
     required to pay (or receive) interest based on a 
     recalculation of depreciation under a ``look-back'' method.
       The ``look-back'' method is applied in any ``recomputation 
     year'' by (1) comparing depreciation deductions that had been 
     claimed in prior periods to depreciation deductions that 
     would have been claimed had the taxpayer used actual, rather 
     than estimated, total income from the property; (2) 
     determining the hypothetical overpayment or underpayment of 
     tax based on this recalculated depreciation; and (3) applying 
     the overpayment rate of section 6621 of the Code. Except

[[Page 7401]]

     as provided in Treasury regulations, a ``recomputation year'' 
     is the third and tenth taxable year after the taxable year 
     the property was placed in service, unless the actual income 
     from the property for each taxable year ending with or before 
     the close of such years was within 10 percent of the 
     estimated income from the property for such years.
       A special rule is provided under Treasury guidance in the 
     case of certain authors and other taxpayers, with respect to 
     their capitalization of costs under section 263A and with 
     respect to the recovery or amortization of such costs. 
     Specifically, IRS Notice 88-62 (1988-1 C.B. 548) provides an 
     elective safe harbor under which eligible taxpayers 
     capitalize qualified created costs incurred during the 
     taxable year and amortize 50 percent of the costs in the 
     taxable year incurred, and 25 percent in each of the two 
     successive taxable years. Under the Notice, qualified 
     creative costs generally are those incurred by a self-
     employed individual in the production of creative properties 
     (such as films, sound recordings, musical and dance 
     compositions including accompanying words, and other similar 
     properties), provided the personal efforts of the individual 
     predominantly create the properties. An eligible taxpayer is 
     an individual, and also a corporation or partnership, 
     substantially all of which is owned by one qualified employee 
     owner (an individual and family members).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that if any expense is paid 
     or incurred by the taxpayer in creating or acquiring any 
     musical composition (including accompanying words) or any 
     copyright with respect to a musical composition that is 
     required to be capitalized, then the income forecast method 
     does not apply to such expenses, but rather, the expenses are 
     amortized over a five-year period. The five-year period is 
     the period beginning with the month in which the composition 
     or copyright was acquired (or if created, the five-taxable-
     year period beginning with the taxable year in which the 
     expenses were paid or incurred).
       The provision does not apply to certain expenses. The 
     expenses to which it does not apply are expenses: (1) that 
     are qualified creative expenses under section 263A(h); (2) to 
     which a simplified procedure established under section 
     263A(j)(2) applies; (3) that are an amortizable section 197 
     intangible; or (4) that, without regard to this provision, 
     would not be allowable as a deduction.
       Effective date.--The provision is effective for expenses 
     paid or incurred after December 31, 2005, in taxable years 
     ending after that date.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision with the following modifications. Under the 
     conference agreement, the five-year amortization period is 
     elective for the taxable year. Thus, a taxpayer that places 
     in service any musical composition or copyright with respect 
     to a musical composition in a taxable year may elect to apply 
     the provision with respect to all musical compositions and 
     musical composition copyrights placed in service in that 
     taxable year. An eligible taxpayer that does not make the 
     election may recover the costs under any method allowable 
     under present law, including the income forecast method.
       Under the conference agreement, the election may be made 
     for any taxable year which begins before January 1, 2011.
       In addition, the conference agreement provides that the 
     five-year amortization period begins in the month the 
     property is placed in service.
       Effective date.--The conference agreement is effective for 
     expenses paid or incurred with respect to property placed in 
     service in taxable years beginning after December 31, 2005 
     and before January 1, 2011.

                    TITLE III--CHARITABLE PROVISIONS

                    A. Charitable Giving Incentives

       1. Charitable deduction for nonitemizers; floor on 
     deductions for itemizers (Sec. 201 of the Senate amendment 
     and secs. 63 and 170 of the Code)


                              Present Law

       In computing taxable income, an individual taxpayer who 
     itemizes deductions generally is allowed to deduct the amount 
     of cash and up to the fair market value of property 
     contributed to a charity described in section 501(c)(3), to 
     certain veterans' organizations, fraternal societies, and 
     cemetery companies,\56\ or to a Federal, State, or local 
     governmental entity for exclusively public purposes.\57\ The 
     deduction also is allowed for purposes of calculating 
     alternative minimum taxable income.
---------------------------------------------------------------------------
     \56\Secs. 170(c)(3)-(5).
     \57\Sec. 170(c)(1).
---------------------------------------------------------------------------
       The amount of the deduction allowable for a taxable year 
     with respect to a charitable contribution of property may be 
     reduced depending on the type of property contributed, the 
     type of charitable organization to which the property is 
     contributed, and the income of the taxpayer.\58\
---------------------------------------------------------------------------
     \58\Secs. 170(b) and (e).
---------------------------------------------------------------------------
       A taxpayer who takes the standard deduction (i.e., who does 
     not itemize deductions) may not take a separate deduction for 
     charitable contributions.\59\
---------------------------------------------------------------------------
     \59\Sec. 170(a). The Economic Recovery Tax Act of 1981 
     adopted a temporary provision that permitted individual 
     taxpayers who did not itemize income tax deductions to claim 
     a deduction from gross income for a specified percentage of 
     their charitable contributions. The maximum deduction was $25 
     for 1982 and 1983, $75 for 1984, 50 percent of the amount of 
     the contribution for 1985, and 100 percent of the amount of 
     the contribution for 1986. The nonitemizer deduction 
     terminated for contributions made after 1986.
---------------------------------------------------------------------------
       A payment to a charity (regardless of whether it is termed 
     a ``contribution'') in exchange for which the donor receives 
     an economic benefit is not deductible, except to the extent 
     that the donor can demonstrate that the payment exceeds the 
     fair market value of the benefit received from the charity. 
     To facilitate distinguishing charitable contributions from 
     purchases of goods or services from charities, present law 
     provides that no charitable contribution deduction is allowed 
     for a separate contribution of $250 or more unless the donor 
     obtains a contemporaneous written acknowledgement of the 
     contribution from the charity indicating whether the charity 
     provided any good or service (and an estimate of the value of 
     any such good or service) to the taxpayer in consideration 
     for the contribution.\60\ In addition, present law requires 
     that any charity that receives a contribution exceeding $75 
     made partly as a gift and partly as consideration for goods 
     or services furnished by the charity (a ``quid pro quo'' 
     contribution) is required to inform the contributor in 
     writing of an estimate of the value of the goods or services 
     furnished by the charity and that only the portion exceeding 
     the value of the goods or services is deductible as a 
     charitable contribution.\61\
---------------------------------------------------------------------------
     \60\Sec. 170(f)(8).
     \61\Sec. 6115.
---------------------------------------------------------------------------
       Under present law, total deductible contributions of an 
     individual taxpayer to public charities, private operating 
     foundations, and certain types of private nonoperating 
     foundations may not exceed 50 percent of the taxpayer's 
     contribution base, which is the taxpayer's adjusted gross 
     income for a taxable year (disregarding any net operating 
     loss carryback). To the extent a taxpayer has not exceeded 
     the 50-percent limitation, (1) contributions of capital gain 
     property to public charities generally may be deducted up to 
     30 percent of the taxpayer's contribution base, (2) 
     contributions of cash to private foundations and certain 
     other charitable organizations generally may be deducted up 
     to 30 percent of the taxpayer's contribution base, and (3) 
     contributions of capital gain property to private foundations 
     and certain other charitable organizations generally may be 
     deducted up to 20 percent of the taxpayer's contribution 
     base.
       Contributions by individuals in excess of the 50-percent, 
     30-percent, and 20-percent limit may be carried over and 
     deducted over the next five taxable years, subject to the 
     relevant percentage limitations on the deduction in each of 
     those years.
       In addition to the percentage limitations imposed 
     specifically on charitable contributions, present law imposes 
     a reduction on most itemized deductions, including charitable 
     contribution deductions, for taxpayers with adjusted gross 
     income in excess of a threshold amount, which is indexed 
     annually for inflation. The threshold amount for 2006 is 
     $150,500 ($77,250 for married individuals filing separate 
     returns). For those deductions that are subject to the limit, 
     the total amount of itemized deductions is reduced by three 
     percent of adjusted gross income over the threshold amount, 
     but not by more than 80 percent of itemized deductions 
     subject to the limit. Beginning in 2006, the overall 
     limitation on itemized deductions phases out for all 
     taxpayers. The 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 on itemized deductions is 
     eliminated for taxable years beginning after December 31, 
     2009; however, this elimination of the limitation sunsets on 
     December 31, 2010.


                               House Bill

       No provision.


                            Senate Amendment

     Deduction for nonitemizers
       In the case of an individual taxpayer who does not itemize 
     deductions, the provision allows a ``direct charitable 
     deduction'' from adjusted gross income for charitable 
     contributions paid in cash during the taxable year. This 
     deduction is allowed in addition to the standard deduction. 
     The direct charitable deduction is the amount of the 
     deduction allowable under section 170(a) for the taxable year 
     for cash contributions (determined without regard to any 
     carryover). The amount deductible under the provision is 
     subject to the rules normally governing charitable 
     contribution deductions, such as the substantiation 
     requirements. In addition, the amount of the deduction is 
     available only to the extent that the otherwise allowable 
     direct charitable deduction exceeds the floor on charitable 
     contributions, described below (i.e., $210 ($420 in the case 
     of a joint return)). The deduction is allowed in computing 
     alternative minimum taxable income.
       The provision does not change the present-law rules 
     regarding the carryover of charitable contributions to or 
     from a taxable

[[Page 7402]]

     year, including a taxable year in which the taxpayer is 
     allowed the direct contribution deduction.
     Floor on itemized deductions
       Under the provision, the amount of an individual's 
     charitable contribution deduction (cash and noncash) is 
     subject to a floor. The floor is $210 ($420 in the case of a 
     joint return). In the case of an individual who elects to 
     itemize deductions, the floor applies to the deduction 
     otherwise allowed under section 170 for all contributions. In 
     the case of an individual who does not elect to itemize 
     deductions, the floor applies in determining the amount of 
     the direct charitable deduction. The provision does not 
     otherwise change the present-law rules pertaining to 
     charitable contributions.
       Effective date.--The provision is effective for 
     contributions made in taxable years beginning after December 
     31, 2005, and before January 1, 2008.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Tax-free distributions from individual retirement plans 
         for charitable purposes (Sec. 202 of the Senate amendment 
         and secs. 408, 6034, 6104, and 6652 of the Code)


                              Present Law

     In general
       If an amount withdrawn from a traditional individual 
     retirement arrangement (``IRA'') or a Roth IRA is donated to 
     a charitable organization, the rules relating to the tax 
     treatment of withdrawals from IRAs apply to the amount 
     withdrawn and the charitable contribution is subject to the 
     normally applicable limitations on deductibility of such 
     contributions.
     Charitable contributions
       In computing taxable income, an individual taxpayer who 
     itemizes deductions generally is allowed to deduct the amount 
     of cash and up to the fair market value of property 
     contributed to a charity described in section 501(c)(3), to 
     certain veterans' organizations, fraternal societies, and 
     cemetery companies,\62\ or to a Federal, State, or local 
     governmental entity for exclusively public purposes.\63\ The 
     deduction also is allowed for purposes of calculating 
     alternative minimum taxable income.
---------------------------------------------------------------------------
     \62\Secs. 170(c)(3)-(5).
     \63\Sec. 170(c)(1).
---------------------------------------------------------------------------
       The amount of the deduction allowable for a taxable year 
     with respect to a charitable contribution of property may be 
     reduced depending on the type of property contributed, the 
     type of charitable organization to which the property is 
     contributed, and the income of the taxpayer.\64\
---------------------------------------------------------------------------
     \64\Secs. 170(b) and (e).
---------------------------------------------------------------------------
       A taxpayer who takes the standard deduction (i.e., who does 
     not itemize deductions) may not take a separate deduction for 
     charitable contributions.\65\
---------------------------------------------------------------------------
     \65\Sec. 170(a).
---------------------------------------------------------------------------
       A payment to a charity (regardless of whether it is termed 
     a ``contribution'') in exchange for which the donor receives 
     an economic benefit is not deductible, except to the extent 
     that the donor can demonstrate, among other things, that the 
     payment exceeds the fair market value of the benefit received 
     from the charity. To facilitate distinguishing charitable 
     contributions from purchases of goods or services from 
     charities, present law provides that no charitable 
     contribution deduction is allowed for a separate contribution 
     of $250 or more unless the donor obtains a contemporaneous 
     written acknowledgement of the contribution from the charity 
     indicating whether the charity provided any good or service 
     (and an estimate of the value of any such good or service) to 
     the taxpayer in consideration for the contribution.\66\ In 
     addition, present law requires that any charity that receives 
     a contribution exceeding $75 made partly as a gift and partly 
     as consideration for goods or services furnished by the 
     charity (a ``quid pro quo'' contribution) is required to 
     inform the contributor in writing of an estimate of the value 
     of the goods or services furnished by the charity and that 
     only the portion exceeding the value of the goods or services 
     may be deductible as a charitable contribution.\67\
---------------------------------------------------------------------------
     \66\Sec. 170(f)(8).
     \67\Sec. 6115.
---------------------------------------------------------------------------
       Under present law, total deductible contributions of an 
     individual taxpayer to public charities, private operating 
     foundations, and certain types of private nonoperating 
     foundations may not exceed 50 percent of the taxpayer's 
     contribution base, which is the taxpayer's adjusted gross 
     income for a taxable year (disregarding any net operating 
     loss carryback). To the extent a taxpayer has not exceeded 
     the 50-percent limitation, (1) contributions of capital gain 
     property to public charities generally may be deducted up to 
     30 percent of the taxpayer's contribution base, (2) 
     contributions of cash to private foundations and certain 
     other charitable organizations generally may be deducted up 
     to 30 percent of the taxpayer's contribution base, and (3) 
     contributions of capital gain property to private foundations 
     and certain other charitable organizations generally may be 
     deducted up to 20 percent of the taxpayer's contribution 
     base.
       Contributions by individuals in excess of the 50-percent, 
     30-percent, and 20-percent limits may be carried over and 
     deducted over the next five taxable years, subject to the 
     relevant percentage limitations on the deduction in each of 
     those years.
       In addition to the percentage limitations imposed 
     specifically on charitable contributions, present law imposes 
     a reduction on most itemized deductions, including charitable 
     contribution deductions, for taxpayers with adjusted gross 
     income in excess of a threshold amount, which is indexed 
     annually for inflation. The threshold amount for 2006 is 
     $150,500 ($75,250 for married individuals filing separate 
     returns). For those deductions that are subject to the limit, 
     the total amount of itemized deductions is reduced by three 
     percent of adjusted gross income over the threshold amount, 
     but not by more than 80 percent of itemized deductions 
     subject to the limit. Beginning in 2006, the overall 
     limitation on itemized deductions phases-out for all 
     taxpayers. The 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 on itemized deductions is 
     eliminated for taxable years beginning after December 31, 
     2009; however, this elimination of the limitation sunsets on 
     December 31, 2010.
       In general, a charitable deduction is not allowed for 
     income, estate, or gift tax purposes if the donor transfers 
     an interest in property to a charity (e.g., a remainder) 
     while also either retaining an interest in that property 
     (e.g., an income interest) or transferring an interest in 
     that property to a noncharity for less than full and adequate 
     consideration.\68\ Exceptions to this general rule are 
     provided for, among other interests, remainder interests in 
     charitable remainder annuity trusts, charitable remainder 
     unitrusts, and pooled income funds, and present interests in 
     the form of a guaranteed annuity or a fixed percentage of the 
     annual value of the property.\69\ For such interests, a 
     charitable deduction is allowed to the extent of the present 
     value of the interest designated for a charitable 
     organization.
---------------------------------------------------------------------------
     \68\Secs. 170(f), 2055(e)(2), and 2522(c)(2).
     \69\Sec. 170(f)(2).
---------------------------------------------------------------------------
     IRA rules
       Within limits, individuals may make deductible and 
     nondeductible contributions to a traditional IRA. Amounts in 
     a traditional IRA are includible in income when withdrawn 
     (except to the extent the withdrawal represents a return of 
     nondeductible contributions). Individuals also may make 
     nondeductible contributions to a Roth IRA. Qualified 
     withdrawals from a Roth IRA are excludable from gross income. 
     Withdrawals from a Roth IRA that are not qualified 
     withdrawals are includible in gross income to the extent 
     attributable to earnings. Includible amounts withdrawn from a 
     traditional IRA or a Roth IRA before attainment of age 59\1/
     2\ are subject to an additional 10-percent early withdrawal 
     tax, unless an exception applies. Under present law, minimum 
     distributions are required to be made from tax-favored 
     retirement arrangements, including IRAs. Minimum required 
     distributions from a traditional IRA must generally begin by 
     the April 1 of the calendar year following the year in which 
     the IRA owner attains age 70\1/2\.\70\
---------------------------------------------------------------------------
     \70\Minimum distribution rules also apply in the case of 
     distributions after the death of a traditional or Roth IRA 
     owner.
---------------------------------------------------------------------------
       If an individual has made nondeductible contributions to a 
     traditional IRA, a portion of each distribution from an IRA 
     is nontaxable until the total amount of nondeductible 
     contributions has been received. In general, the amount of a 
     distribution that is nontaxable is determined by multiplying 
     the amount of the distribution by the ratio of the remaining 
     nondeductible contributions to the account balance. In making 
     the calculation, all traditional IRAs of an individual are 
     treated as a single IRA, all distributions during any taxable 
     year are treated as a single distribution, and the value of 
     the contract, income on the contract, and investment in the 
     contract are computed as of the close of the calendar year.
       In the case of a distribution from a Roth IRA that is not a 
     qualified distribution, in determining the portion of the 
     distribution attributable to earnings, contributions and 
     distributions are deemed to be distributed in the following 
     order: (1) regular Roth IRA contributions; (2) taxable 
     conversion contributions;\71\ (3) nontaxable conversion 
     contributions; and (4) earnings. In determining the amount of 
     taxable distributions from a Roth IRA, all Roth IRA 
     distributions in the same taxable year are treated as a 
     single distribution, all regular Roth IRA contributions for a 
     year are treated as a single contribution, and all conversion 
     contributions during the year are treated as a single 
     contribution.
---------------------------------------------------------------------------
     \71\Conversion contributions refer to conversions of amounts 
     in a traditional IRA to a Roth IRA.
---------------------------------------------------------------------------
       Distributions from an IRA (other than a Roth IRA) are 
     generally subject to withholding unless the individual elects 
     not to have withholding apply.\72\ Elections not to have 
     withholding apply are to be made in the

[[Page 7403]]

     time and manner prescribed by the Secretary.
---------------------------------------------------------------------------
     \72\Sec. 3405.
---------------------------------------------------------------------------
     Split-interest trust filing requirements
       Split-interest trusts, including charitable remainder 
     annuity trusts, charitable remainder unitrusts, and pooled 
     income funds, are required to file an annual information 
     return (Form 1041A).\73\ Trusts that are not split-interest 
     trusts but that claim a charitable deduction for amounts 
     permanently set aside for a charitable purpose\74\ also are 
     required to file Form 1041A. The returns are required to be 
     made publicly available.\75\ A trust that is required to 
     distribute all trust net income currently to trust 
     beneficiaries in a taxable year is exempt from this return 
     requirement for such taxable year. A failure to file the 
     required return may result in a penalty on the trust of $10 a 
     day for as long as the failure continues, up to a maximum of 
     $5,000 per return.
---------------------------------------------------------------------------
     \73\Sec. 6034. This requirement applies to all split-interest 
     trusts described in section 4947(a)(2).
     \74\Sec. 642(c).
     \75\Sec. 6104(b).
---------------------------------------------------------------------------
       In addition, split-interest trusts are required to file 
     annually Form 5227.\76\ Form 5227 requires disclosure of 
     information regarding a trust's noncharitable beneficiaries. 
     The penalty for failure to file this return is calculated 
     based on the amount of tax owed. A split-interest trust 
     generally is not subject to tax and therefore, in general, a 
     penalty may not be imposed for the failure to file Form 5227. 
     Form 5227 is not required to be made publicly available.
---------------------------------------------------------------------------
     \76\Sec. 6011; Treas. Reg. sec. 53.6011-1(d).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Qualified charitable distributions from IRAs
       The provision provides an exclusion from gross income for 
     otherwise taxable IRA distributions from a traditional or a 
     Roth IRA in the case of qualified charitable 
     distributions.\77\ Special rules apply in determining the 
     amount of an IRA distribution that is otherwise taxable. The 
     present-law rules regarding taxation of IRA distributions and 
     the deduction of charitable contributions continue to apply 
     to distributions from an IRA that are not qualified 
     charitable distributions. Qualified charitable distributions 
     are taken into account for purposes of the minimum 
     distribution rules applicable to traditional IRAs to the same 
     extent the distribution would have been taken into account 
     under such rules had the distribution not been directly 
     distributed under the provision. An IRA does not fail to 
     qualify as an IRA merely because qualified charitable 
     distributions have been made from the IRA. It is intended 
     that the Secretary will prescribe rules under which IRA 
     owners are deemed to elect out of withholding if they 
     designate that a distribution is intended to be a qualified 
     charitable distribution.
---------------------------------------------------------------------------
     \77\The provision does not apply to distributions from 
     employer-sponsored retirements plans, including SIMPLE IRAs 
     and simplified employee pensions (``SEPs'').
---------------------------------------------------------------------------
       A qualified charitable distribution is any distribution 
     from an IRA that is made after December 31, 2005, and before 
     January 1, 2008, directly by the IRA trustee either to (1) an 
     organization to which deductible contributions can be made (a 
     ``direct distribution'') or (2) a ``split-interest entity.'' 
     A split-interest entity means a charitable remainder annuity 
     trust or charitable remainder unitrust (together referred to 
     as a ``charitable remainder trust''), a pooled income fund, 
     or a charitable gift annuity. Direct distributions are 
     eligible for the exclusion only if made on or after the date 
     the IRA owner attains age 70\1/2\. Distributions to a split 
     interest entity are eligible for the exclusion only if made 
     on or after the date the IRA owner attains age 59\1/2\. In 
     the case of distributions to split-interest distributions, no 
     person may hold an income interest in the amounts in the 
     split-interest entity attributable to the charitable 
     distribution other than the IRA owner, the IRA owner's 
     spouse, or a charitable organization.
       The exclusion applies to direct distributions only if a 
     charitable contribution deduction for the entire distribution 
     otherwise would be allowable (under present law), determined 
     without regard to the generally applicable percentage 
     limitations. Thus, for example, if the deductible amount is 
     reduced because of a benefit received in exchange, or if a 
     deduction is not allowable because the donor did not obtain 
     sufficient substantiation, the exclusion is not available 
     with respect to any part of the IRA distribution. Similarly, 
     the exclusion applies in the case of a distribution directly 
     to a split-interest entity only if a charitable contribution 
     deduction for the entire present value of the charitable 
     interest (for example, a remainder interest) otherwise would 
     be allowable, determined without regard to the generally 
     applicable percentage limitations.
       If the IRA owner has any IRA that includes nondeductible 
     contributions, a special rule applies in determining the 
     portion of a distribution that is includible in gross income 
     (but for the provision) and thus is eligible for qualified 
     charitable distribution treatment. Under the special rule, 
     the distribution is treated as consisting of income first, up 
     to the aggregate amount that would be includible in gross 
     income (but for the provision) if the aggregate balance of 
     all IRAs having the same owner were distributed during the 
     same year. In determining the amount of subsequent IRA 
     distributions includible in income, proper adjustments are to 
     be made to reflect the amount treated as a qualified 
     charitable distribution under the special rule.
       Special rules apply for distributions to split-interest 
     entities. For distributions to charitable remainder trusts, 
     the provision provides that subsequent distributions from the 
     charitable remainder trust are treated as ordinary income in 
     the hands of the beneficiary, notwithstanding how such 
     amounts normally are treated under section 664(b). In 
     addition, for a charitable remainder trust to be eligible to 
     receive qualified charitable distributions, the charitable 
     remainder trust has to be funded exclusively by such 
     distributions. For example, an IRA owner may not make 
     qualified charitable distributions to an existing charitable 
     remainder trust any part of which was funded with assets that 
     were not qualified charitable distributions.
       Under the provision, a pooled income fund is eligible to 
     receive qualified charitable distributions only if the fund 
     accounts separately for amounts attributable to such 
     distributions. In addition, all distributions from the pooled 
     income fund that are attributable to qualified charitable 
     distributions are treated as ordinary income to the 
     beneficiary. Qualified charitable distributions to a pooled 
     income fund are not includible in the fund's gross income.
       In determining the amount includible in gross income by 
     reason of a payment from a charitable gift annuity purchased 
     with a qualified charitable distribution from an IRA, the 
     portion of the distribution from the IRA used to purchase the 
     annuity is not an investment in the annuity contract.
       Any amount excluded from gross income by reason of the 
     provision is not taken into account in determining the 
     deduction for charitable contributions under section 170.
     Qualified charitable distribution examples
       The following examples illustrate the determination of the 
     portion of an IRA distribution that is a qualified charitable 
     distribution and the application of the special rules for a 
     qualified charitable distribution to a split-interest entity. 
     In each example, it is assumed that the requirements for 
     qualified charitable distribution treatment are otherwise met 
     (e.g., the applicable age requirement and the requirement 
     that contributions are otherwise deductible) and that no 
     other IRA distributions occur during the year.
       Example 1.--Individual A has a traditional IRA with a 
     balance of $100,000, consisting solely of deductible 
     contributions and earnings. Individual A has no other IRA. 
     The entire IRA balance is distributed in a direct 
     distribution to a charitable organization. Under present law, 
     the entire distribution of $100,000 would be includible in 
     Individual A's income. Accordingly, under the provision, the 
     entire distribution of $100,000 is a qualified charitable 
     distribution. As a result, no amount is included in 
     Individual A's income as a result of the distribution and the 
     distribution is not taken into account in determining the 
     amount of Individual A's charitable deduction for the year.
       Example 2.--The facts are the same as in Example 1, except 
     that the entire IRA balance of $100,000 is distributed to a 
     charitable remainder unitrust, which contains no other assets 
     and which must be funded exclusively by qualified charitable 
     distributions. Under the terms of the trust, Individual A is 
     entitled to receive five percent of the net fair market value 
     of the trust assets each year. As explained in Example 1, the 
     entire $100,000 distribution is a qualified charitable 
     distribution, no amount is included in Individual A's income 
     as a result of the distribution, and the distribution is not 
     taken into account in determining the amount of Individual 
     A's charitable deduction for the year. In addition, under a 
     special rule in the provision for charitable remainder 
     trusts, any distribution from the charitable remainder 
     unitrust to Individual A is includible in gross income as 
     ordinary income, regardless of the character of the 
     distribution under the usual rules for the taxation of 
     distributions from such a trust.
       Example 3.--Individual B has a traditional IRA with a 
     balance of $100,000, consisting of $20,000 of nondeductible 
     contributions and $80,000 of deductible contributions and 
     earnings. Individual B has no other IRA. In a direct 
     distribution to a charitable organization, $80,000 is 
     distributed from the IRA. Under present law, a portion of the 
     distribution from the IRA would be treated as a nontaxable 
     return of nondeductible contributions. The nontaxable portion 
     of the distribution would be $16,000, determined by 
     multiplying the amount of the distribution ($80,000) by the 
     ratio of the nondeductible contributions to the account 
     balance ($20,000/$100,000). Accordingly, under present law, 
     $64,000 of the distribution ($80,000 minus $16,000) would be 
     includible in Individual B's income.
       Under the provision, notwithstanding the present-law tax 
     treatment of IRA distributions, the distribution is treated 
     as consisting of income first, up to the total

[[Page 7404]]

     amount that would be includible in gross income (but for the 
     provision) if all amounts were distributed from all IRAs 
     otherwise taken into account in determining the amount of IRA 
     distributions. The total amount that would be includible in 
     income if all amounts were distributed from the IRA is 
     $80,000. Accordingly, under the provision, the entire $80,000 
     distributed to the charitable organization is treated as 
     includible in income (before application of the provision) 
     and is a qualified charitable distribution. As a result, no 
     amount is included in Individual B's income as a result of 
     the distribution and the distribution is not taken into 
     account in determining the amount of Individual B's 
     charitable deduction for the year. In addition, for purposes 
     of determining the tax treatment of other distributions from 
     the IRA, $20,000 of the amount remaining in the IRA is 
     treated as Individual B's nondeductible contributions (i.e., 
     not subject to tax upon distribution).
     Split-interest trust filing requirements
       The provision increases the penalty on split-interest 
     trusts for failure to file a return and for failure to 
     include any of the information required to be shown on such 
     return and to show the correct information. The penalty is 
     $20 for each day the failure continues up to $10,000 for any 
     one return. In the case of a split-interest trust with gross 
     income in excess of $250,000, the penalty is $100 for each 
     day the failure continues up to a maximum of $50,000. In 
     addition, if a person (meaning any officer, director, 
     trustee, employee, or other individual who is under a duty to 
     file the return or include required information)\78\ 
     knowingly failed to file the return or include required 
     information, then that person is personally liable for such a 
     penalty, which would be imposed in addition to the penalty 
     that is paid by the organization. Information regarding 
     beneficiaries that are not charitable organizations as 
     described in section 170(c) is exempt from the requirement to 
     make information publicly available. In addition, the 
     provision repeals the present-law exception to the filing 
     requirement for split-interest trusts that are required in a 
     taxable year to distribute all net income currently to 
     beneficiaries. Such exception remains available to trusts 
     other than split-interest trusts that are otherwise subject 
     to the filing requirement.
---------------------------------------------------------------------------
     \78\Sec. 6652(c)(4)(C).
---------------------------------------------------------------------------
     Effective date
       The provision relating to qualified charitable 
     distributions is effective for distributions made in taxable 
     years beginning after December 31, 2005, and before January 
     1, 2008. The provision relating to information returns of 
     split-interest trusts is effective for returns for taxable 
     years beginning after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Charitable deduction for contributions of food inventory 
         (sec. 203 of the Senate amendment and sec. 170 of the 
         Code)


                              Present Law

       Under present law, a taxpayer's deduction for charitable 
     contributions of inventory generally is limited to the 
     taxpayer's basis (typically, cost) in the inventory, or if 
     less the fair market value of the inventory.
       For certain contributions of inventory, C corporations may 
     claim an enhanced deduction equal to the lesser of (1) basis 
     plus one-half of the item's appreciation (i.e., basis plus 
     one half of fair market value in excess of basis) or (2) two 
     times basis (sec. 170(e)(3)). In general, a C corporation's 
     charitable contribution deductions for a year may not exceed 
     10 percent of the corporation's taxable income (sec. 
     170(b)(2)). To be eligible for the enhanced deduction, the 
     contributed property generally must be inventory of the 
     taxpayer, contributed to a charitable organization described 
     in section 501(c)(3) (except for private nonoperating 
     foundations), and the donee must (1) use the property 
     consistent with the donee's exempt purpose solely for the 
     care of the ill, the needy, or infants, (2) not transfer the 
     property in exchange for money, other property, or services, 
     and (3) provide the taxpayer a written statement that the 
     donee's use of the property will be consistent with such 
     requirements. In the case of contributed property subject to 
     the Federal Food, Drug, and Cosmetic Act, the property must 
     satisfy the applicable requirements of such Act on the date 
     of transfer and for 180 days prior to the transfer.
       A donor making a charitable contribution of inventory must 
     make a corresponding adjustment to the cost of goods sold by 
     decreasing the cost of goods sold by the lesser of the fair 
     market value of the property or the donor's basis with 
     respect to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
     Accordingly, if the allowable charitable deduction for 
     inventory is the fair market value of the inventory, the 
     donor reduces its cost of goods sold by such value, with the 
     result that the difference between the fair market value and 
     the donor's basis may still be recovered by the donor other 
     than as a charitable contribution.
       To use the enhanced deduction, the taxpayer must establish 
     that the fair market value of the donated item exceeds basis. 
     The valuation of food inventory has been the subject of 
     disputes between taxpayers and the IRS.\79\
---------------------------------------------------------------------------
     \79\Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) 
     (holding that the value of surplus bread inventory donated to 
     charity was the full retail price of the bread rather than 
     half the retail price, as the IRS asserted).
---------------------------------------------------------------------------
       Under the Katrina Emergency Tax Relief Act of 2005, any 
     taxpayer, whether or not a C corporation, engaged in a trade 
     or business is eligible to claim the enhanced deduction for 
     certain donations made after August 28, 2005, and before 
     January 1, 2006, of food inventory. For taxpayers other than 
     C corporations, the total deduction for donations of food 
     inventory in a taxable year generally may not exceed 10 
     percent of the taxpayer's net income for such taxable year 
     from all sole proprietorships, S corporations, or 
     partnerships (or other entity that is not a C corporation) 
     from which contributions of ``apparently wholesome food'' are 
     made. ``Apparently wholesome food'' is defined as food 
     intended for human consumption that meets all quality and 
     labeling standards imposed by Federal, State, and local laws 
     and regulations even though the food may not be readily 
     marketable due to appearance, age, freshness, grade, size, 
     surplus, or other conditions.


                               House Bill

       No provision.


                            Senate Amendment

     Extension of Katrina Emergency Tax Relief Act of 2005
       The provision extends the provision enacted as part of the 
     Katrina Emergency Tax Relief Act of 2005. As under such Act, 
     under the provision, any taxpayer, whether or not a C 
     corporation, engaged in a trade or business is eligible to 
     claim the enhanced deduction for donations of food inventory. 
     For taxpayers other than C corporations, the total deduction 
     for donations of food inventory in a taxable year generally 
     may not exceed 10 percent of the taxpayer's net income for 
     such taxable year from all sole proprietorships, S 
     corporations, or partnerships (or other non C corporation) 
     from which contributions of apparently wholesome food are 
     made. For example, as under the Katrina Emergency Tax Relief 
     Act of 2005, if a taxpayer is a sole proprietor, a 
     shareholder in an S corporation, and a partner in a 
     partnership, and each business makes charitable contributions 
     of food inventory, the taxpayer's deduction for donations of 
     food inventory is limited to 10 percent of the taxpayer's net 
     income from the sole proprietorship and the taxpayer's 
     interests in the S corporation and partnership. However, if 
     only the sole proprietorship and the S corporation made 
     charitable contributions of food inventory, the taxpayer's 
     deduction would be limited to 10 percent of the net income 
     from the trade or business of the sole proprietorship and the 
     taxpayer's interest in the S corporation, but not the 
     taxpayer's interest in the partnership.\80\
---------------------------------------------------------------------------
     \80\The 10 percent limitation does not affect the application 
     of the generally applicable percentage limitations. For 
     example, if 10 percent of a sole proprietor's net income from 
     the proprietor's trade or business was greater than 50 
     percent of the proprietor's contribution base, the available 
     deduction for the taxable year (with respect to contributions 
     to public charities) would be 50 percent of the proprietor's 
     contribution base. Consistent with present law, such 
     contributions may be carried forward because they exceed the 
     50 percent limitation. Contributions of food inventory by a 
     taxpayer that is not a C corporation that exceed the 10 
     percent limitation but not the 50 percent limitation could 
     not be carried forward.
---------------------------------------------------------------------------
       Under the provision, the enhanced deduction for food is 
     available only for food that qualifies as ``apparently 
     wholesome food.'' ``Apparently wholesome food'' is defined as 
     it is defined under the Katrina Emergency Tax Relief Act of 
     2005.
     Modifications to enhanced deduction for food inventory
       Under the provision, for purposes of calculating the 
     enhanced deduction, taxpayers that do not account for 
     inventories under section 471 and that are not required to 
     capitalize indirect costs under section 263A are able to 
     elect to treat the basis of the contributed food as being 
     equal to 25 percent of the food's fair market value.\81\
---------------------------------------------------------------------------
     \81\This includes, for example, taxpayers who are eligible 
     for administrative relief under Revenue Procedures 2002-28 
     and 2001-10.
---------------------------------------------------------------------------
       The provision changes the amount of the enhanced deduction 
     for eligible contributions of food inventory to the lesser of 
     fair market value or twice the taxpayer's basis in the 
     inventory. For example, a taxpayer who makes an eligible 
     donation of food that has a fair market value of $10 and a 
     basis of $4 could take a deduction of $8 (twice basis). If 
     the taxpayer's basis is $6 instead of $4, then the deduction 
     would be $10 (fair market value). By contrast, under present 
     law, a C corporation's deduction in the first example would 
     be $7 (fair market value less half the appreciation) and in 
     the second example would be $8. (Except for contributions 
     made after August 28, 2005, and before January 1, 2006, 
     taxpayers other than C corporations generally could take a 
     deduction for a contribution of food inventory only for the 
     $4 basis in either example.)
       The provision provides that the fair market value of 
     donated apparently wholesome

[[Page 7405]]

     food that cannot or will not be sold solely due to internal 
     standards of the taxpayer or lack of market is determined 
     without regard to such internal standards or lack of market 
     and by taking into account the price at which the same or 
     substantially the same food items (as to both type and 
     quality) are sold by the taxpayer at the time of the 
     contribution or, if not so sold at such time, in the recent 
     past.
       Effective date.--The provision is effective for 
     contributions made in taxable years beginning after December 
     31, 2005, and before January 1, 2008.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Basis adjustment to stock of S corporation contributing 
         property (Sec. 204 of the Senate amendment and sec. 1367 
         of the Code)


                              Present Law

       Under present law, if an S corporation contributes money or 
     other property to a charity, each shareholder takes into 
     account the shareholder's pro rata share of the contribution 
     in determining its own income tax liability.\82\ A 
     shareholder of an S corporation reduces the basis in the 
     stock of the S corporation by the amount of the charitable 
     contribution that flows through to the shareholder.\83\
---------------------------------------------------------------------------
     \82\Sec. 1366(a)(1)(A).
     \83\Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides that the amount of a shareholder's 
     basis reduction in the stock of an S corporation by reason of 
     a charitable contribution made by the corporation will be 
     equal to the shareholder's pro rata share of the adjusted 
     basis of the contributed property.\84\
---------------------------------------------------------------------------
     \84\See Rev. Rul. 96-11 (1996-1 C.B. 140) for a rule reaching 
     a similar result in the case of charitable contributions made 
     by a partnership.
---------------------------------------------------------------------------
       Thus, for example, assume an S corporation with one 
     individual shareholder makes a charitable contribution of 
     stock with a basis of $200 and a fair market value of $500. 
     The shareholder will be treated as having made a $500 
     charitable contribution (or a lesser amount if the special 
     rules of section 170(e) apply), and will reduce the basis of 
     the S corporation stock by $200.\85\
---------------------------------------------------------------------------
     \85\This example assumes that basis of the S corporation 
     stock (before reduction) is at least $200.
---------------------------------------------------------------------------
       Effective date.--The provision applies to contributions 
     made in taxable years beginning after December 31, 2005, and 
     before January 1, 2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Charitable deduction for contributions of book inventory 
         (Sec. 205 of the Senate amendment and sec. 170 of the 
         Code)


                              present law

       Under present law, a taxpayer's deduction for charitable 
     contributions of inventory generally is limited to the 
     taxpayer's basis (typically, cost) in the inventory, or if 
     less the fair market value of the inventory.
       For certain contributions of inventory, C corporations may 
     claim an enhanced deduction equal to the lesser of (1) basis 
     plus one-half of the item's appreciation (i.e., basis plus 
     one half of fair market value in excess of basis) or (2) two 
     times basis (sec. 170(e)(3)). In general, a C corporation's 
     charitable contribution deductions for a year may not exceed 
     10 percent of the corporation's taxable income (sec. 
     170(b)(2)). To be eligible for the enhanced deduction, the 
     contributed property generally must be inventory of the 
     taxpayer, contributed to a charitable organization described 
     in section 501(c)(3) (except for private nonoperating 
     foundations), and the donee must (1) use the property 
     consistent with the donee's exempt purpose solely for the 
     care of the ill, the needy, or infants, (2) not transfer the 
     property in exchange for money, other property, or services, 
     and (3) provide the taxpayer a written statement that the 
     donee's use of the property will be consistent with such 
     requirements. In the case of contributed property subject to 
     the Federal Food, Drug, and Cosmetic Act, the property must 
     satisfy the applicable requirements of such Act on the date 
     of transfer and for 180 days prior to the transfer.
       A donor making a charitable contribution of inventory must 
     make a corresponding adjustment to the cost of goods sold by 
     decreasing the cost of goods sold by the lesser of the fair 
     market value of the property or the donor's basis with 
     respect to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
     Accordingly, if the allowable charitable deduction for 
     inventory is the fair market value of the inventory, the 
     donor reduces its cost of goods sold by such value, with the 
     result that the difference between the fair market value and 
     the donor's basis may still be recovered by the donor other 
     than as a charitable contribution.
       To use the enhanced deduction, the taxpayer must establish 
     that the fair market value of the donated item exceeds basis.
       The Katrina Emergency Tax Relief Act of 2005 extended the 
     present-law enhanced deduction for C corporations to certain 
     qualified book contributions made after August 28, 2005, and 
     before January 1, 2006. For such purposes, a qualified book 
     contribution means a charitable contribution of books to a 
     public school that provides elementary education or secondary 
     education (kindergarten through grade 12) and that is an 
     educational organization that normally maintains a regular 
     faculty and curriculum and normally has a regularly enrolled 
     body of pupils or students in attendance at the place where 
     its educational activities are regularly carried on. The 
     enhanced deduction under the Katrina Emergency Tax Relief Act 
     of 2005 is not allowed unless the donee organization 
     certifies in writing that the contributed books are suitable, 
     in terms of currency, content, and quantity, for use in the 
     donee's educational programs and that the donee will use the 
     books in such educational programs.


                               house bill

       No provision.


                            senate amendment

       The provision modifies the present-law enhanced deduction 
     for C corporations so that it is equal to the lesser of fair 
     market value or twice the taxpayer's basis in the case of 
     qualified book contributions. The provision provides that the 
     fair market value for this purpose is determined by reference 
     to a bona fide published market price for the book. Under the 
     provision, a bona fide published market price of a book is a 
     price of a book, determined using the same printing and same 
     edition, published within seven years preceding the 
     contribution, determined as a result of an arm's length 
     transaction, and for which the book was customarily sold. For 
     example, a publisher's listed retail price for a book would 
     not meet the standard if the publisher could not demonstrate 
     to the satisfaction of the Secretary that the price was one 
     at which the book was customarily sold and was the result of 
     an arm's length transaction. If a publisher entered into a 
     contract with a local school district to sell newly published 
     textbooks six years prior to making a qualified book 
     contribution of such textbooks, the publisher could use as a 
     bona fide published market price, the price at which such 
     books regularly were sold to the school district under the 
     contract. By contrast, if a publisher listed in a catalogue 
     or elsewhere a ``suggested retail price,'' but books were not 
     in fact customarily sold at such price, the publisher could 
     not use the ``suggested retail price'' to determine the fair 
     market value of the book for purposes of the enhanced 
     deduction. Thus, in general, a bona fide published market 
     price must be independently verifiable by reference to actual 
     sales within the seven-year period preceding the 
     contribution, and not to a publisher's own price list.
       As an illustration of the mechanics of calculating the 
     enhanced deduction under the provision, a C corporation that 
     made a qualified book contribution with a bona fide published 
     market price of $10 and a basis of $4 could take a deduction 
     of $8 (twice basis). If the taxpayer's basis is $6 instead of 
     $4, then the deduction is $10. Also, in such latter case, if 
     the book's bona fide published market price was $5 at the 
     time of the contribution but was $10 five years before the 
     contribution, then the deduction is $10.
       A qualified book contribution means a charitable 
     contribution of books to: (1) an educational organization 
     that normally maintains a regular faculty and curriculum and 
     normally has a regularly enrolled body of pupils or students 
     in attendance at the place where its educational activities 
     are regularly carried on; (2) a public library; or (3) an 
     organization described in section 501(c)(3) (except for 
     private nonoperating foundations), that is organized 
     primarily to make books available to the general public at no 
     cost or to operate a literacy program. The donee must: (1) 
     use the property consistent with the donee's exempt purpose; 
     (2) not transfer the property in exchange for money, other 
     property, or services; and (3) provide the taxpayer a written 
     statement that the donee's use of the property will be 
     consistent with such requirements and also that the books are 
     suitable, in terms of currency, content, and quantity, for 
     use in the donee's educational programs and that the donee 
     will use the books in such educational programs.
       Effective date.--The provision is effective for 
     contributions made in taxable years beginning after December 
     31, 2005, and before January 1, 2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Modify tax treatment of certain payments to controlling 
         exempt organizations and public disclosure of information 
         relating to UBIT (Sec. 206 of the Senate amendment and 
         secs. 512, 6011, 6104, and new sec. 6720C of the Code)


                              present law

     Payments to controlling exempt organizations
       In general, interest, rents, royalties, and annuities are 
     excluded from the unrelated business income of tax-exempt 
     organizations. However, section 512(b)(13) generally treats 
     otherwise excluded rent, royalty, annuity, and interest 
     income as unrelated business income if such income is 
     received from

[[Page 7406]]

     a taxable or tax-exempt subsidiary that is 50 percent 
     controlled by the parent tax-exempt organization. In the case 
     of a stock subsidiary, ``control'' means ownership by vote or 
     value of more than 50 percent of the stock. In the case of a 
     partnership or other entity, control means ownership of more 
     than 50 percent of the profits, capital or beneficial 
     interests. In addition, present law applies the constructive 
     ownership rules of section 318 for purposes of section 
     512(b)(13). Thus, a parent exempt organization is deemed to 
     control any subsidiary in which it holds more than 50 percent 
     of the voting power or value, directly (as in the case of a 
     first-tier subsidiary) or indirectly (as in the case of a 
     second-tier subsidiary).
       Under present law, interest, rent, annuity, or royalty 
     payments made by a controlled entity to a tax-exempt 
     organization are includable in the latter organization's 
     unrelated business income and are subject to the unrelated 
     business income tax to the extent the payment reduces the net 
     unrelated income (or increases any net unrelated loss) of the 
     controlled entity (determined as if the entity were tax 
     exempt).
       The Taxpayer Relief Act of 1997 (the ``1997 Act'') made 
     several modifications to the control requirement of section 
     512(b)(13). In order to provide transitional relief, the 
     changes made by the 1997 Act do not apply to any payment 
     received or accrued during the first two taxable years 
     beginning on or after the date of enactment of the 1997 
     Act (August 5, 1997) if such payment is received or 
     accrued pursuant to a binding written contract in effect 
     on June 8, 1997, and at all times thereafter before such 
     payment (but not pursuant to any contract provision that 
     permits optional accelerated payments).
     Public disclosure of returns
       In general, an organization described in section 501(c) or 
     (d) is required to make available for public inspection a 
     copy of its annual information return (Form 990) and 
     exemption application materials.\86\ A penalty may be imposed 
     on any person who does not make an organization's annual 
     returns or exemption application materials available for 
     public inspection. The penalty amount is $20 for each day 
     during which a failure occurs. If more than one person fails 
     to comply, each person is jointly and severally liable for 
     the full amount of the penalty. The maximum penalty that may 
     be imposed on all persons for any one annual return is 
     $10,000. There is no maximum penalty amount for failing to 
     make exemption application materials available for public 
     inspection. Any person who willfully fails to comply with the 
     public inspection requirements is subject to an additional 
     penalty of $5,000.\87\
---------------------------------------------------------------------------
     \86\Sec. 6104(d).
     \87\Sec. 6685.
---------------------------------------------------------------------------
       These requirements do not apply to an organization's annual 
     return for unrelated business income tax (generally Form 990-
     T).\88\
---------------------------------------------------------------------------
     \88\Treas. Reg. sec. 301.6104(d)-1(b)(4)(ii).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

     Payments to controlling exempt organizations
       The provision provides that the general rule of section 
     512(b)(13), which includes interest, rent, annuity, or 
     royalty payments made by a controlled entity to a tax-exempt 
     organization in the latter organization's unrelated business 
     income to the extent the payment reduces the net unrelated 
     income (or increases any net unrelated loss) of the 
     controlled entity, applies only to the portion of payments 
     received or accrued in a taxable year that exceed the amount 
     of the specified payment that would have been paid or accrued 
     if such payment had been determined under the principles of 
     section 482. Thus, if a payment of rent by a controlled 
     subsidiary to its tax-exempt parent organization exceeds fair 
     market value, the excess amount of such payment over fair 
     market value (as determined in accordance with section 482) 
     is included in the parent organization's unrelated business 
     income, to the extent that such excess reduced the net 
     unrelated income (or increased any net unrelated loss) of the 
     controlled entity (determined as if the entity were tax 
     exempt). In addition, the provision imposes a 20-percent 
     penalty on the larger of such excess determined without 
     regard to any amendment or supplement to a return of tax, or 
     such excess determined with regard to all such amendments and 
     supplements.
       The provision provides that if modifications to section 
     512(b)(13) made by the 1997 Act did not apply to a contract 
     because of the transitional relief provided by the 1997 Act, 
     then such modifications also do not apply to amounts received 
     or accrued under such contract before January 1, 2001.
     Require public availability of unrelated business income tax 
         returns
       The provision extends the present-law public inspection and 
     disclosure requirements and penalties applicable to the Form 
     990 to the unrelated business income tax return (Form 990-T) 
     of organizations described in section 501(c)(3). The 
     provision provides that certain information may be withheld 
     by the organization from public disclosure and inspection if 
     public availability would adversely affect the organization, 
     similar to the information that may be withheld under present 
     law with respect to applications for tax exemption and the 
     Form 990 (e.g., information relating to a trade secret, 
     patent, process, style of work, or apparatus of the 
     organization, if the Secretary determines that public 
     disclosure of such information would adversely affect the 
     organization).
     Require a UBIT certification for certain large charitable 
         organizations
       Under the provision, a charitable organization that has 
     annual total gross income and receipts (including, e.g., 
     contributions and grants, program service revenue, investment 
     income, and revenues from an unrelated trade or business or 
     other sources) or gross assets of at least $10 million on the 
     last day of the taxable year must include with its Form 990 
     and Form 990-T filings (if any) a statement by an independent 
     auditor or an independent counsel that (1) contains a 
     certification that the information contained in the return 
     has been reviewed by the auditor or counsel and, to the best 
     of his or her knowledge, is accurate; (2) to the best of the 
     auditor's or counsel's knowledge, the allocation of expenses 
     between the exempt and the unrelated business income 
     activities of the organization comply with the requirements 
     set forth by the Secretary under section 512; and (3) 
     indicates whether the auditor or counsel has provided a tax 
     opinion to the organization regarding the classification of 
     any trade or business of the organization as an unrelated 
     trade or business or the treatment of any income as unrelated 
     business taxable income and a description of any material 
     facts with respect to any such opinion.
       Failure to file the required statement results in a 
     penalty, imposed on the organization, of one half of one 
     percent (0.5 percent) of the organization's total gross 
     revenues for the taxable year, excluding revenues from 
     contributions and grants. No penalty is imposed with respect 
     to any failure that is due to reasonable cause.
       Effective date.--The provision related to payments to 
     controlling organizations applies to payments received or 
     accrued after December 31, 2000. The public availability 
     requirements of the provision apply to returns filed after 
     the date of enactment. The certification requirement applies 
     to returns for taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Encourage contributions of real property made for 
         conservation purposes (Sec. 207 of the Senate amendment 
         and sec. 170 of the Code)


                              Present Law

     Charitable contributions generally
       In general, a deduction is permitted for charitable 
     contributions, subject to certain limitations that depend on 
     the type of taxpayer, the property contributed, and the donee 
     organization. The amount of deduction generally equals the 
     fair market value of the contributed property on the date of 
     the contribution. Charitable deductions are provided for 
     income, estate, and gift tax purposes.\89\
---------------------------------------------------------------------------
     \89\Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
       In general, in any taxable year, charitable contributions 
     by a corporation are not deductible to the extent the 
     aggregate contributions exceed 10 percent of the 
     corporation's taxable income computed without regard to net 
     operating or capital loss carrybacks. For individuals, the 
     amount deductible is a percentage of the taxpayer's 
     contribution base, which is the taxpayer's adjusted gross 
     income computed without regard to any net operating loss 
     carryback. The applicable percentage of the contribution base 
     varies depending on the type of donee organization and 
     property contributed. Cash contributions of an individual 
     taxpayer to public charities, private operating foundations, 
     and certain types of private nonoperating foundations may not 
     exceed 50 percent of the taxpayer's contribution base. Cash 
     contributions to private foundations and certain other 
     organizations generally may be deducted up to 30 percent of 
     the taxpayer's contribution base.
       In general, a charitable deduction is not allowed for 
     income, estate, or gift tax purposes if the donor transfers 
     an interest in property to a charity while also either 
     retaining an interest in that property or transferring an 
     interest in that property to a noncharity for less than full 
     and adequate consideration. Exceptions to this general rule 
     are provided for, among other interests, remainder interests 
     in charitable remainder annuity trusts, charitable remainder 
     unitrusts, and pooled income funds, present interests in the 
     form of a guaranteed annuity or a fixed percentage of the 
     annual value of the property, and qualified conservation 
     contributions.
     Capital gain property
       Capital gain property means any capital asset or property 
     used in the taxpayer's trade or business the sale of which at 
     its fair market value, at the time of contribution, would 
     have resulted in gain that would have been long-term capital 
     gain. Contributions

[[Page 7407]]

     of capital gain property to a qualified charity are 
     deductible at fair market value within certain limitations. 
     Contributions of capital gain property to charitable 
     organizations described in section 170(b)(1)(A) (e.g., public 
     charities, private foundations other than private non-
     operating foundations, and certain governmental units) 
     generally are deductible up to 30 percent of the taxpayer's 
     contribution base. An individual may elect, however, to bring 
     all these contributions of capital gain property for a 
     taxable year within the 50-percent limitation category by 
     reducing the amount of the contribution deduction by the 
     amount of the appreciation in the capital gain property. 
     Contributions of capital gain property to charitable 
     organizations described in section 170(b)(1)(B) (e.g., 
     private non-operating foundations) are deductible up to 20 
     percent of the taxpayer's contribution base.
       For purposes of determining whether a taxpayer's aggregate 
     charitable contributions in a taxable year exceed the 
     applicable percentage limitation, contributions of capital 
     gain property are taken into account after other charitable 
     contributions. Contributions of capital gain property that 
     exceed the percentage limitation may be carried forward for 
     five years.
     Qualified conservation contributions
       Qualified conservation contributions are not subject to the 
     ``partial interest'' rule, which generally bars deductions 
     for charitable contributions of partial interests in 
     property. A qualified conservation contribution is a 
     contribution of a qualified real property interest to a 
     qualified organization exclusively for conservation purposes. 
     A qualified real property interest is defined as: (1) the 
     entire interest of the donor other than a qualified mineral 
     interest; (2) a remainder interest; or (3) a restriction 
     (granted in perpetuity) on the use that may be made of the 
     real property. Qualified organizations include certain 
     governmental units, public charities that meet certain public 
     support tests, and certain supporting organizations. 
     Conservation purposes include: (1) the preservation of land 
     areas for outdoor recreation by, or for the education of, the 
     general public; (2) the protection of a relatively natural 
     habitat of fish, wildlife, or plants, or similar ecosystem; 
     (3) the preservation of open space (including farmland and 
     forest land) where such preservation will yield a significant 
     public benefit and is either for the scenic enjoyment of the 
     general public or pursuant to a clearly delineated Federal, 
     State, or local governmental conservation policy; and (4) the 
     preservation of an historically important land area or a 
     certified historic structure.
       Qualified conservation contributions of capital gain 
     property are subject to the same limitations and carryover 
     rules of other charitable contributions of capital gain 
     property.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       Under the provision, the 30-percent contribution base 
     limitation on contributions of capital gain property by 
     individuals does not apply to qualified conservation 
     contributions (as defined under present law). Instead, 
     individuals may deduct the fair market value of any qualified 
     conservation contribution to an organization described in 
     section 170(b)(1)(A) to the extent of the excess of 50 
     percent of the contribution base over the amount of all other 
     allowable charitable contributions. These contributions are 
     not taken into account in determining the amount of other 
     allowable charitable contributions.
       Individuals are allowed to carryover any qualified 
     conservation contributions that exceed the 50-percent 
     limitation for up to 15 years.
       For example, assume an individual with a contribution base 
     of $100 makes a qualified conservation contribution of 
     property with a fair market value of $80 and makes other 
     charitable contributions subject to the 50-percent limitation 
     of $60. The individual is allowed a deduction of $50 in the 
     current taxable year for the non-conservation contributions 
     (50 percent of the $100 contribution base) and is allowed to 
     carryover the excess $10 for up to 5 years. No current 
     deduction is allowed for the qualified conservation 
     contribution, but the entire $80 qualified conservation 
     contribution may be carried forward for up to 15 years.
     Farmers and ranchers
       Individuals
       In the case of an individual who is a qualified farmer or 
     rancher for the taxable year in which the contribution is 
     made, a qualified conservation contribution is allowable up 
     to 100 percent of the excess of the taxpayer's contribution 
     base over the amount of all other allowable charitable 
     contributions.
       In the above example, if the individual is a qualified 
     farmer or rancher, in addition to the $50 deduction for non-
     conservation contributions, an additional $50 for the 
     qualified conservation contribution is allowed and $30 may be 
     carried forward for up to 15 years as a contribution subject 
     to the 100-percent limitation.
       Corporations
       In the case of a corporation (other than a publicly traded 
     corporation) that is a qualified farmer or rancher for the 
     taxable year in which the contribution is made, any qualified 
     conservation contribution is allowable up to 100 percent of 
     the excess of the corporation's taxable income (as computed 
     under section 170(b)(2)) over the amount of all other 
     allowable charitable contributions. Any excess may be carried 
     forward for up to 15 years as a contribution subject to the 
     100-percent limitation.
       Definition
       A qualified farmer or rancher means a taxpayer whose gross 
     income from the trade of business of farming (within the 
     meaning of section 2032A(e)(5)) is greater than 50 percent of 
     the taxpayer's gross income for the taxable year.
       Effective date.--The provision applies to contributions 
     made in taxable years beginning after December 31, 2005, and 
     before January 1, 2008.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Enhanced deduction for charitable contributions of 
         literary, musical, artistic, and scholarly compositions 
         (sec. 208 of the Senate amendment and sec. 170 of the 
         Code)


                              Present Law

       In the case of a charitable contribution of inventory or 
     other ordinary-income or short-term capital gain property, 
     the amount of the deduction generally is limited to the 
     taxpayer's basis in the property.\90\ In the case of a 
     charitable contribution of tangible personal property, the 
     deduction is limited to the taxpayer's basis in such property 
     if the use by the recipient charitable organization is 
     unrelated to the organization's tax-exempt purpose. In cases 
     involving contributions of tangible personal property to a 
     private foundation (other than certain private 
     foundations),\91\ the amount of the deduction is limited to 
     the taxpayer's basis in the property.
---------------------------------------------------------------------------
     \90\Sec. 170(e)(1).
     \91\Sec. 170(e)(1)(B)(ii).
---------------------------------------------------------------------------
       Under present law, charitable contributions of literary, 
     musical, and artistic compositions created or prepared by the 
     donor are considered ordinary income property and a 
     taxpayer's deduction of such property is limited to the 
     taxpayer's basis (typically, cost) in the property. A 
     charitable contribution of a literary, musical, or artistic 
     composition by a person other than the person who created or 
     prepared the work generally is eligible for a fair market 
     value deduction if the donee organization's use of the 
     property is related to such organization's exempt purposes.
       To be eligible for the deduction, the contribution must be 
     of an undivided portion of the donor's entire interest in the 
     property.\92\ For purposes of the charitable income tax 
     deduction, the copyright and the work in which the copyright 
     is embodied are not treated as separate property interests. 
     Accordingly, if a donor owns a work of art and the copyright 
     to the work of art, a gift of the artwork without the 
     copyright or the copyright without the artwork will 
     constitute a gift of a ``partial interest'' and will not 
     qualify for the income tax charitable deduction.
---------------------------------------------------------------------------
     \92\Sec. 170(f)(3).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides that a deduction for ``qualified 
     artistic charitable contributions'' generally is increased 
     from the value under present law (generally, basis) to the 
     fair market value of the property contributed, measured at 
     the time of the contribution. However, the amount of the 
     increase of the deduction provided by the provision may not 
     exceed the amount of the donor's adjusted gross income for 
     the taxable year attributable to: (1) income from the sale or 
     use of property created by the personal efforts of the donor 
     that is of the same type as the donated property; and (2) 
     income from teaching, lecturing, performing, or similar 
     activities with respect to such property. In addition, the 
     increase to the present-law deduction provided by the 
     provision may not be carried over and deducted in other 
     taxable years.
       The provision defines a qualified artistic charitable 
     contribution to mean a charitable contribution of any 
     literary, musical, artistic, or scholarly composition, or 
     similar property, or the copyright thereon (or both) that 
     meets certain requirements. First, the contributed property 
     must have been created by the personal efforts of the donor 
     at least 18 months prior to the date of contribution. Second, 
     the donor must obtain a qualified appraisal of the 
     contributed property, a copy of which is required to be 
     attached to the donor's income tax return for the taxable 
     year in which such contribution is made. The appraisal must 
     include evidence of the extent (if any) to which property 
     created by the personal efforts of the taxpayer and of the 
     same type as the donated property is or has been owned, 
     maintained, and displayed by certain charitable organizations 
     and sold to or exchanged by persons other than the taxpayer,

[[Page 7408]]

     donee, or any related person. Third, the contribution must be 
     made to a public charity or to certain limited types of 
     private foundations (i.e., an organization described in 
     section 170(b)(1)(A)). Finally, the use of donated property 
     by the recipient organization must be related to the 
     organization's charitable purpose or function, and the donor 
     must receive a written statement from the organization 
     verifying such use.
       Under the provision, the tangible property and the 
     copyright on such property are treated as separate properties 
     for purposes of the ``partial interest'' rule; thus, a gift 
     of artwork without the copyright or a copyright without the 
     artwork does not constitute a gift of a partial interest and 
     is deductible. Contributions of letters, memoranda, or 
     similar property that are written, prepared, or produced by 
     or for an individual while the individual is an officer or 
     employee of any person (including a government agency or 
     instrumentality) do not qualify for a fair market value 
     deduction unless the contributed property is entirely 
     personal.
       Effective date.--The deduction for qualified artistic 
     charitable contributions applies to contributions made after 
     December 31, 2005, and before January 1, 2008.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Mileage reimbursements to charitable volunteers excluded 
         from gross income (sec. 209 of the Senate amendment and 
         new sec. 139B of the Code)


                              Present Law

       In general, an itemized deduction is permitted for 
     charitable contributions, subject to certain limitations that 
     depend on the type of taxpayer, the property contributed, and 
     the donee organization. Unreimbursed out-of-pocket 
     expenditures made incident to providing donated services to a 
     qualified charitable organization--such as out-of-pocket 
     transportation expenses necessarily incurred in performing 
     donated services--may qualify as a charitable 
     contribution.\93\ No charitable contribution deduction is 
     allowed for traveling expenses (including expenses for meals 
     and lodging) while away from home, whether paid directly or 
     by reimbursement, unless there is no significant element of 
     personal pleasure, recreation, or vacation in such 
     travel.\94\
---------------------------------------------------------------------------
     \93\Treas. Reg. sec. 1.170A-1(g).
     \94\Sec. 170(j).
---------------------------------------------------------------------------
       In determining the amount treated as a charitable 
     contribution where a taxpayer operates a vehicle to provide 
     donated services to a charity, the taxpayer either may deduct 
     actual out-of-pocket expenditures or, in the case of a 
     passenger automobile, may use the charitable standard mileage 
     rate. The charitable standard mileage rate is set by statute 
     at 14 cents per mile.\95\ The taxpayer may also deduct (under 
     either computation method), any parking fees and tolls 
     incurred in rendering the services, but may not deduct any 
     amount (regardless of the computation method used) for 
     general repair or maintenance expenses, depreciation, 
     insurance, registration fees, etc. Regardless of the 
     computation method used, the taxpayer must keep reliable 
     written records of expenses incurred. For example, where a 
     taxpayer uses the charitable standard mileage rate to 
     determine a deduction, the IRS has stated that the taxpayer 
     generally must maintain records of miles driven, time, place 
     (or use), and purpose of the mileage. If the charitable 
     standard mileage rate is not used to determine the deduction, 
     the taxpayer generally must maintain reliable written records 
     of actual expenses incurred.
---------------------------------------------------------------------------
     \95\Sec. 170(i).
---------------------------------------------------------------------------
       In lieu of actual operating expenses, an optional standard 
     mileage rate may be used in computing the deductible costs of 
     business use of an automobile. The business standard mileage 
     rate is determined by the IRS and updated periodically. For 
     business use occurring on or after January 1, 2006, the 
     business standard mileage rate specified by the IRS is 44.5 
     cents per mile.
       The standard mileage rate for charitable purposes is lower 
     than the standard business rate because the charitable rate 
     covers only the out-of-pocket operating expenses (including 
     gasoline and oil) directly related to the use of the 
     automobile in performing the donated services that a taxpayer 
     may deduct as a charitable contribution. The charitable rate 
     does not include costs that are not deductible as a 
     charitable contribution such as general repair or maintenance 
     expenses, depreciation, insurance, and registration fees. 
     Such costs are, however, included in computing the business 
     standard mileage rate.
       Volunteer drivers who are reimbursed for mileage expenses 
     have taxable income to the extent the reimbursement exceeds 
     deductible travel expenses. Employees who are reimbursed for 
     mileage expenses under a qualified arrangement that pays a 
     mileage allowance in lieu of reimbursing actual expenses 
     generally have taxable income to the extent the reimbursement 
     exceeds the amount of the business standard mileage rate 
     multiplied by the actual business miles.
       Under section 6041, information reporting generally is 
     required with respect to payments of $600 or more in any 
     taxable year.
       Under the Katrina Emergency Tax Relief Act of 2005, 
     reimbursement by an organization described in section 170(c) 
     (including public charities and private foundations) to a 
     volunteer for the costs of using a passenger automobile in 
     providing donated services to charity solely for the 
     provision of relief related to Hurricane Katrina is 
     excludable from the gross income of the volunteer up to an 
     amount that does not exceed the business standard mileage 
     rate prescribed for business use (as periodically adjusted), 
     provided that recordkeeping requirements applicable to 
     deductible business expenses are satisfied. The Katrina 
     Emergency Tax Relief Act of 2005 does not permit a volunteer 
     to claim a deduction or credit with respect to such amounts 
     excluded. The provision applies for purposes of use of a 
     passenger automobile during the period beginning on August 
     25, 2005, and ending on December 31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       The provision extends the provision enacted as part of the 
     Katrina Emergency Tax Relief Act of 2005. Under the 
     provision, reimbursement by an organization described in 
     section 170(c) (including public charities and private 
     foundations) to a volunteer for the costs of using a 
     passenger automobile in providing donated services to charity 
     is excludable from the gross income of the volunteer up to an 
     amount that does not exceed the business standard mileage 
     rate prescribed for business use (as periodically adjusted), 
     provided that recordkeeping requirements applicable to 
     deductible business expenses are satisfied. Unlike the 
     provision enacted as part of the Katrina Emergency Tax Relief 
     Act of 2005, the provision is not limited to use solely for 
     the provision of relief related to Hurricane Katrina. The 
     provision does not permit a volunteer to claim a deduction or 
     credit with respect to amounts excluded under the provision. 
     Information reporting required by section 6041 is not 
     required with respect to reimbursements excluded under the 
     provision.
       Effective date.--The provision applies for taxable years 
     beginning after December 31, 2005, and beginning before 
     January 1, 2008.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Alternative percentage limitation for corporate 
         charitable contributions to the mathematics and science 
         partnership program (sec. 210 of the Senate amendment and 
         sec. 170 of the Code)


                              Present Law

       Under present law, a corporation is allowed to deduct 
     charitable contributions up to 10 percent of the 
     corporation's modified taxable income for the year. For this 
     purpose, taxable income is determined without regard to (1) 
     the charitable contributions deduction, (2) any net operating 
     loss carryback, (3) deductions for dividends received, and 
     (4) any capital loss carryback for the taxable year.\96\ Any 
     charitable contribution by a corporation that is not 
     currently deductible because of the percentage limitation may 
     be carried forward for up to five taxable years.
---------------------------------------------------------------------------
     \96\Sec. 170(b)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the provision, the corporate percentage limitation is 
     applied separately to eligible mathematics and science 
     contributions and to all other charitable contributions. In 
     addition, the applicable percentage limitation for purposes 
     of eligible mathematics and science contributions is 15 
     percent; the applicable percentage limitation for all other 
     corporate charitable contributions remains 10 percent.
       In general, an eligible mathematics and science 
     contribution is a charitable contribution (other than a 
     contribution of used equipment) to a qualified partnership 
     for the purpose of an activity described in section 2202(c) 
     of the Elementary and Secondary Education Act of 1965. Such 
     activities include, for example, creating opportunities for 
     enhanced and ongoing professional development of mathematics 
     and science teachers and promoting strong teaching skills for 
     mathematics and science teachers and teacher educators. A 
     qualified partnership is an eligible partnership within the 
     meaning of section 2201(b)(1) of the Elementary and Secondary 
     Education Act of 1965, but only to the extent that such 
     partnership does not include a person other than a person 
     described in section 170(b)(1)(A) (describing organizations 
     to which individuals may make charitable contributions 
     deductible up to 50 percent of such individual's contribution 
     base).
       Effective date.--The provision applies for contributions 
     made in taxable years beginning after December 31, 2005, and 
     beginning before January 1, 2007.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page 7409]]



                 B. Reforming Charitable Organizations

     1. Tax involvement of accommodation parties in tax-shelter 
         transactions (Sec. 211 of the Senate amendment and secs. 
         6011, 6033, 6652, and new sec. 4965 of the Code)


                              Present Law

     Disclosure of listed and other reportable transactions by 
         taxpayers
       Present law provides that a taxpayer that participates in a 
     reportable transaction (including a listed transaction) and 
     that is required to file a tax return must attach to its 
     return a disclosure statement in the form prescribed by the 
     Secretary.\97\ For this purpose, the term taxpayer includes 
     any person, including an individual, trust, estate, 
     partnership, association, company, or corporation.\98\
---------------------------------------------------------------------------
     \97\Treas. Reg. sec. 1.6011-4(a).
     \98\Sec. 7701(a)(1); Treas. Reg. sec. 1.6011-4(c)(1).
---------------------------------------------------------------------------
       Under present Treasury regulations, a reportable 
     transaction includes a listed transaction and five other 
     categories of transactions: (1) confidential transactions, 
     which are transactions offered to a taxpayer under conditions 
     of confidentiality and for which the taxpayer has paid an 
     advisor a minimum fee; (2) transactions with contractual 
     protection, which include transactions for which the taxpayer 
     or a related party has the right to a full or partial refund 
     of fees if all or part of the intended tax consequences from 
     the transaction are not sustained, or for which fees are 
     contingent on the taxpayer's realization of tax benefits from 
     the transaction; (3) loss transactions, which are 
     transactions resulting in the taxpayer claiming a loss under 
     section 165 that exceeds certain thresholds, depending upon 
     the type of taxpayer; (4) transactions with a significant 
     book-tax difference; and (5) transactions involving a brief 
     asset holding period.\99\ A listed transaction means a 
     reportable transaction which is the same as, or substantially 
     similar to, a transaction specifically identified by the 
     Secretary as a tax avoidance transaction for purposes of 
     section 6011 (relating to the filing of returns and 
     statements), and identified by notice, regulation, or other 
     form of published guidance as a listed transaction.\100\ The 
     fact that a transaction is a reportable transaction does not 
     affect the legal determination of whether the taxpayer's 
     treatment of the transaction is proper.\101\ Present law 
     authorizes the Secretary to define a reportable transaction 
     on the basis of such transaction being of a type which the 
     Secretary determines as having a potential for tax avoidance 
     or evasion.\102\
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     \99\Treas. Reg. sec. 1.6011-4(b). In Notice 2006-6 (January 
     6, 2006), the Service indicated that it was removing 
     transactions with a significant book-tax difference from the 
     categories of reportable transactions.
     \100\Sec. 6707A(c)(2); Treas. Reg. sec. 1.6011-4(b)(2).
     \101\Treas. Reg. sec. 1.6011-4(a).
     \102\Sec. 6707A(c)(1).
---------------------------------------------------------------------------
       Treasury regulations provide guidance regarding the 
     determination of when a taxpayer participates in a 
     transaction for these purposes.\103\ A taxpayer has 
     participated in a listed transaction if the taxpayer's tax 
     return reflects tax consequences or a tax strategy described 
     in the published guidance that lists the transaction, or if 
     the taxpayer knows or has reason to know that the taxpayer's 
     tax benefits are derived directly or indirectly from tax 
     consequences of a tax strategy described in published 
     guidance that lists a transaction. A taxpayer has 
     participated in a confidential transaction if the taxpayer's 
     tax return reflects a tax benefit from the transaction and 
     the taxpayer's disclosure of the tax treatment or tax 
     structure of the transaction is limited under conditions of 
     confidentiality. A taxpayer has participated in a transaction 
     with contractual protection if the taxpayer's tax return 
     reflects a tax benefit from the transaction, and the taxpayer 
     has the right to the full or partial refund of fees or the 
     fees are contingent.
---------------------------------------------------------------------------
     \103\Treas. Reg. sec. 1.6011-4(c)(3).
---------------------------------------------------------------------------
       Present law provides a penalty for any person who fails to 
     include on any return or statement any required information 
     with respect to a reportable transaction.\104\ The penalty 
     applies without regard to whether the transaction ultimately 
     results in an understatement of tax, and applies in addition 
     to any other penalty that may be imposed.
---------------------------------------------------------------------------
     \104\Sec. 6707A.
---------------------------------------------------------------------------
       The penalty for failing to disclose a reportable 
     transaction is $10,000 in the case of a natural person and 
     $50,000 in any other case. The amount is increased to 
     $100,000 and $200,000, respectively, if the failure is with 
     respect to a listed transaction. The penalty cannot be waived 
     with respect to a listed transaction. As to reportable 
     transactions, the IRS Commissioner may rescind all or a 
     portion of the penalty if rescission would promote compliance 
     with the tax laws and effective tax administration.
     Disclosure of listed and other reportable transactions by 
         material advisors
       Present law requires each material advisor with respect to 
     any reportable transaction (including any listed transaction) 
     to timely file an information return with the Secretary (in 
     such form and manner as the Secretary may prescribe).\105\ 
     The information return must include (1) information 
     identifying and describing the transaction, (2) information 
     describing any potential tax benefits expected to result from 
     the transaction, and (3) such other information as the 
     Secretary may prescribe. The return must be filed by the date 
     specified by the Secretary.
---------------------------------------------------------------------------
     \105\Sec. 6707(a), as added by the American Jobs Creation Act 
     of 2004, Pub. L. No. 108-357, sec. 816(a).
---------------------------------------------------------------------------
       A ``material advisor'' means any person (1) who provides 
     material aid, assistance, or advice with respect to 
     organizing, managing, promoting, selling, implementing, 
     insuring, or carrying out any reportable transaction, and (2) 
     who directly or indirectly derives gross income in excess of 
     $250,000 ($50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons) or such other amount as may be prescribed 
     by the Secretary for such advice or assistance.\106\
---------------------------------------------------------------------------
     \106\Sec. 6707(b)(1).
---------------------------------------------------------------------------
       The Secretary may prescribe regulations which provide (1) 
     that only one material advisor is required to file an 
     information return in cases in which two or more material 
     advisors would otherwise be required to file information 
     returns with respect to a particular reportable transaction, 
     (2) exemptions from the requirements of this section, and (3) 
     other rules as may be necessary or appropriate to carry out 
     the purposes of this section.\107\
---------------------------------------------------------------------------
     \107\Sec. 6707(c).
---------------------------------------------------------------------------
       Present law imposes a penalty on any material advisor who 
     fails to timely file an information return, or who files a 
     false or incomplete information return, with respect to a 
     reportable transaction (including a listed transaction).\108\ 
     The amount of the penalty is $50,000. If the penalty is with 
     respect to a listed transaction, the amount of the penalty is 
     increased to the greater of (1) $200,000, or (2) 50 percent 
     of the gross income derived by such person with respect to 
     aid, assistance, or advice which is provided with respect to 
     the transaction before the date the information return that 
     includes the transaction is filed. An intentional failure or 
     act by a material advisor with respect to the requirement to 
     disclose a listed transaction increases the penalty to 75 
     percent of the gross income derived from the transaction.
---------------------------------------------------------------------------
     \108\Sec. 6707(b).
---------------------------------------------------------------------------
       The penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the IRS 
     Commissioner can rescind all or a portion of the penalty if 
     rescission would promote compliance with the tax laws and 
     effective tax administration.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       In general, under the provision, certain tax-exempt 
     entities are subject to penalties for being a party to a 
     prohibited tax shelter transaction. A prohibited tax shelter 
     transaction is a transaction that the Secretary determines is 
     a listed transaction (as defined in section 6707A(c)(2)) or a 
     prohibited transaction. A prohibited reportable transaction 
     is a confidential transaction or a transaction with 
     contractual protection (as defined by the Secretary in 
     regulations) which is a reportable transaction as defined in 
     sec. 6707A(c)(1). Under the provision, a tax-exempt entity is 
     an entity that is described in section 501(c), 501(d), or 
     170(c) (not including the United States), Indian tribal 
     governments, and tax qualified pension plans, individual 
     retirement arrangements (``IRAs''), and similar tax-favored 
     savings arrangements (such as Coverdell education savings 
     accounts, health savings accounts, and qualified tuition 
     plans).
     Entity level tax
       Under the provision, if a tax-exempt entity is a party at 
     any time to a transaction during a taxable year and knows or 
     has reason to know that the transaction is a prohibited tax 
     shelter transaction, the entity is subject to a tax for such 
     year equal to the greater of (1) 100 percent of the entity's 
     net income (after taking into account any tax imposed with 
     respect to the transaction) for such year that is 
     attributable to the transaction or (2) 75 percent of the 
     proceeds received by the entity that are attributable to the 
     transaction.
       In addition, if a transaction is not a listed transaction 
     at the time a tax-exempt entity enters into the transaction 
     (and is not otherwise a prohibited tax shelter transaction), 
     but the transaction subsequently is determined by the 
     Secretary to be a listed transaction (a ``subsequently listed 
     transaction''), the entity must pay each taxable year an 
     excise tax at the highest unrelated business taxable income 
     rate times the greater of (1) the entity's net income (after 
     taking into account any tax imposed) that is attributable to 
     the subsequently listed transaction and that is properly 
     allocable to the period beginning on the later of the date 
     such transaction is listed by the Secretary or the first day 
     of the taxable year or (2) 75 percent of the proceeds 
     received by the entity that are attributable to the 
     subsequently listed transaction and that are properly 
     allocable to the period beginning on the later of the date 
     such transaction is listed by the Secretary or the first day 
     of the taxable year. The Secretary has the authority to 
     promulgate regulations that provide guidance regarding the 
     determination of the allocation of net income of a tax-exempt 
     entity that is attributable to a transaction to various 
     periods, including before and after the listing of

[[Page 7410]]

     the transaction or the date which is 90 days after the date 
     of enactment of the provision.
       The entity level tax does not apply if the entity's 
     participation is not willful and is due to reasonable cause, 
     except that the willful and reasonable cause exception does 
     not apply to the tax imposed for subsequently listed 
     transactions. The entity level taxes do not apply to tax 
     qualified pension plans, IRAs, and similar tax-favored 
     savings arrangements (such as Coverdell education savings 
     accounts, health savings accounts, and qualified tuition 
     plans).
     Disclosure of participation in prohibited tax shelter 
         transactions
       The provision requires that a taxable party to a prohibited 
     tax shelter transaction disclose to the tax-exempt entity 
     that the transaction is a prohibited tax shelter transaction. 
     Failure to make such disclosure is subject to the present-law 
     penalty for failure to include reportable transaction 
     information under section 6707A. Thus, the penalty is $10,000 
     in the case of a natural person or $50,000 in any other case, 
     except that if the transaction is a listed transaction, the 
     penalty is $100,000 in the case of a natural person and 
     $200,000 in any other case.\109\
---------------------------------------------------------------------------
     \109\The IRS Commissioner may rescind all or any portion of 
     any such penalty if the violation is with respect to a 
     prohibited tax shelter transaction other than a listed 
     transaction and doing so would promote compliance with the 
     requirements of the Code and effective tax administration. 
     See sec. 6707A(d).
---------------------------------------------------------------------------
       The provision requires disclosure by a tax-exempt entity to 
     the IRS of each participation in a prohibited tax shelter 
     transaction and disclosure of other known parties to the 
     transaction. The penalty for failure to disclose is imposed 
     on the entity (or entity manager, in the case of qualified 
     pension plans and similar tax favored retirement 
     arrangements) at $100 per day the failure continues, not to 
     exceed $50,000. If any person fails to comply with a demand 
     on the tax-exempt entity by the Secretary for disclosure, 
     such person or persons shall pay a penalty of $100 per day 
     (beginning on the date of the failure to comply) not to 
     exceed $10,000 per prohibited tax shelter transaction. As 
     under present-law section 6652, no penalty is imposed with 
     respect to any failure if it is shown that the failure is due 
     to reasonable cause.
     Penalty on entity managers
       A tax of $20,000 is imposed on an entity manager that 
     approves or otherwise causes a tax-exempt entity to be a 
     party to a prohibited tax shelter transaction at any time 
     during the taxable year, knowing or with reason to know that 
     the transaction is a prohibited tax shelter transaction. An 
     entity manager is defined as a person with authority or 
     responsibility similar to that exercised by an officer, 
     director, or trustee of an organization, except: (1) in the 
     case of an entity described in section 501(c)(3) or (c)(4) 
     (other than a private foundation), an entity manager is an 
     organization manager as defined in section 4958(f)(2); and 
     (2) in the case of a private foundation, an entity manager is 
     a foundation manager as defined in section 4946(b). The 
     reasonable cause (or no willful participation) exception 
     applies to this tax.
       Effective date.--The provision generally is effective for 
     transactions after the date of enactment, except that no tax 
     applies with respect to income that is properly allocable to 
     any period on or before the date that is 90 days after the 
     date of enactment. The disclosure provisions apply to 
     disclosures the due date for which are after the date of 
     enactment.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision, with modifications.
       The conference agreement does not include the provision 
     that the entity level or entity manager tax does not apply if 
     the entity's participation is not willful and is due to 
     reasonable cause.
       In addition, the conference agreement adds a tax in the 
     event that a tax-exempt entity becomes a party to a 
     prohibited tax shelter transaction without knowing or having 
     reason to know that the transaction is a prohibited tax 
     shelter transaction. In that case, the tax-exempt entity is 
     subject to a tax in the taxable year the entity becomes a 
     party and any subsequent taxable year of the highest 
     unrelated business taxable income rate times the greater of 
     (1) the entity's net income (after taking into account any 
     tax imposed with respect to the transaction) for such year 
     that is attributable to the transaction or (2) 75 percent of 
     the proceeds received by the entity that are attributable to 
     the transaction for such year.\110\
---------------------------------------------------------------------------
     \110\The conference agreement clarifies that in all cases the 
     75 percent of proceeds received by the entity that are 
     attributable to the transaction are with respect to the 
     taxable year.
---------------------------------------------------------------------------
       The conference agreement clarifies that the entity level 
     tax rate that applies if the entity knows or has reason to 
     know that a transaction is a prohibited tax shelter 
     transaction does not apply to subsequently listed 
     transactions.
       The conference agreement modifies the definition of an 
     entity manager to provide that: (1) in the case of tax 
     qualified pension plans, IRAs, and similar tax-favored 
     savings arrangements (such as Coverdell education savings 
     accounts, health savings accounts, and qualified tuition 
     plans) an entity manager is the person that approves or 
     otherwise causes the entity to be a party to a prohibited tax 
     shelter transaction, and (2) in all other cases the entity 
     manager is the person with authority or responsibility 
     similar to that exercised by an officer, director, or trustee 
     of an organization, and with respect to any act, the person 
     having authority or responsibility with respect to such act.
       In the case of a qualified pension plan, IRA, or similar 
     tax-favored savings arrangement (such as a Coverdell 
     education savings account, health savings account, or 
     qualified tuition plan), the conferees intend that, in 
     general, a person who decides that assets of the plan, IRA, 
     or other savings arrangement are to be invested in a 
     prohibited tax shelter transaction is the entity manager 
     under the provision. Except in the case of a fully self-
     directed plan or other savings arrangement with respect to 
     which a participant or beneficiary decides to invest in the 
     prohibited tax shelter transaction, a participant or 
     beneficiary generally is not an entity manager under the 
     provision. Thus, for example, a participant or beneficiary is 
     not an entity manager merely by reason of choosing among pre-
     selected investment options (as is typically the case if a 
     qualified retirement plan provides for participant-directed 
     investments).\111\ Similarly, if an individual has an IRA and 
     may choose among various mutual funds offered by the IRA 
     trustee, but has no control over the investments held in the 
     mutual funds, the individual is not an entity manager under 
     the provision.
---------------------------------------------------------------------------
     \111\Depending on the circumstances, the person who is 
     responsible for determining the pre-selected investment 
     options may be an entity manager under the provision.
---------------------------------------------------------------------------
       Under the provision, certain taxes are imposed if the 
     entity or entity manager knows or has reason to know that a 
     transaction is a prohibited tax shelter transaction. In 
     general, the conferees intend that in order for an entity or 
     entity manager to have reason to know that a transaction is a 
     prohibited tax shelter transaction, the entity or entity 
     manager must have knowledge of sufficient facts that would 
     lead a reasonable person to conclude that the transaction is 
     a prohibited tax shelter transaction. If there is justifiable 
     reliance on a reasoned written opinion of legal counsel 
     (including in-house counsel) or of an independent accountant 
     with expertise in tax matters, after making full disclosure 
     of relevant facts about a transaction to such counsel or 
     accountant, that a transaction is not a prohibited tax 
     shelter transaction, then absent knowledge of facts not 
     considered in the reasoned written opinion that would lead a 
     reasonable person to conclude that the transaction is a 
     prohibited tax shelter transaction, the reason to know 
     standard is not met.
       Not obtaining a reasoned written opinion of legal counsel 
     does not alone indicate whether a person has reason to know. 
     However, if a transaction is extraordinary for the entity, 
     promises a return for the organization that is exceptional 
     considering the amount invested by, the participation of, or 
     the absence of risk to the organization, or the transaction 
     is of significant size, either in an absolute sense or 
     relative to the receipts of the entity, then, in general, the 
     presence of such factors may indicate that the entity or 
     entity manager has a responsibility to inquire further about 
     whether a transaction is a prohibited tax shelter 
     transaction, or, absent such inquiry, that the reason to know 
     standard is satisfied. For example, if a tax-exempt entity's 
     investment in a transaction is $1,000, and the entity is 
     promised or expects to receive $10,000 in the near term, in 
     general, the rate of return would be considered exceptional 
     and the entity should make inquiries with respect to the 
     transaction. As another example, if a tax-exempt entity's 
     expected income from a transaction is greater than five 
     percent of the entity's annual receipts, or is in excess of 
     $1,000,000, and the entity fails to make appropriate 
     inquiries with respect to its participation in such 
     transaction, such failure is a factor tending to show that 
     the reason to know standard is met. Appropriate inquiries 
     need not involve obtaining a reasoned written opinion. In 
     general, if a transaction does not present the factors 
     described above and the organization is small (measured by 
     receipts and assets) and described in section 501(c)(3), it 
     is expected that the reason to know standard will not be met.
       In general, the conferees intend that in determining 
     whether a tax-exempt entity is a ``party'' to a prohibited 
     tax shelter transaction all the facts and circumstances 
     should be taken into account. Absence of a written agreement 
     is not determinative. Certain indirect involvement in a 
     prohibited tax shelter transaction would not result in an 
     entity being considered a party to the transaction. For 
     example, investment by a tax-exempt entity in a mutual fund 
     that in turn invests in or participates in a prohibited tax 
     shelter transaction does not, in general, make the tax-exempt 
     entity a party to such transaction, absent facts or 
     circumstances that indicate that the purpose of the tax 
     exempt entity's investment in the mutual fund was 
     specifically to participate in such a transaction. However, 
     whether a tax-exempt entity is a party to such a transaction 
     will be informed by whether the entity or entity manager knew 
     or had reason to know that an investment of the entity would 
     be used in a

[[Page 7411]]

     prohibited tax shelter transaction. Presence of such 
     knowledge or reason to know may indicate that the purpose of 
     the investment was to participate in the prohibited tax 
     shelter transaction and that the tax-exempt entity is a party 
     to such transaction.
       The conference agreement clarifies that a subsequently 
     listed transaction means any transaction to which a tax-
     exempt entity is a party and which is determined by the 
     Secretary to be a listed transaction at any time after the 
     entity has ``become a party to'' the transaction, and not, as 
     under the Senate amendment, when the entity ``entered into'' 
     the transaction. The conference agreement provides that a 
     subsequently listed transaction does not include a 
     transaction that is a prohibited reportable transaction. The 
     conference agreement provides that the Secretary has the 
     authority to allocate proceeds as well as income of a tax-
     exempt entity to various periods. The conference agreement 
     also provides that the disclosure by tax-exempt entities to 
     the Internal Revenue Service required under the provision is 
     based on an entity's being a party to a prohibited tax 
     shelter transaction and not, as under the Senate amendment, 
     on an entity's ``participation'' in a prohibited tax shelter 
     transaction. The conference agreement further provides that 
     the Secretary may make a demand for disclosure on any entity 
     manager subject to the tax, as well as on any tax exempt 
     entity, and also provides that such managers and entities and 
     not, as under the Senate amendment, ``persons'' are subject 
     to the penalty for failure to comply with the demand.
       Effective date.--In general, the provision is effective for 
     taxable years ending after the date of enactment, with 
     respect to transactions before, on, or after such date, 
     except that no tax shall apply with respect to income or 
     proceeds that are properly allocable to any period ending on 
     or before the date that is 90 days after the date of 
     enactment. The tax on certain knowing transactions does not 
     apply to any prohibited tax shelter transaction to which a 
     tax-exempt entity became a party on or before the date of 
     enactment. The disclosure provisions apply to disclosures the 
     due date for which are after the date of enactment.
     2. Apply an excise tax to acquisitions of interests in 
         insurance contracts in which certain exempt organizations 
         hold interests (sec. 212 of the Senate amendment and new 
         secs. 4966 and 6050V of the Code)


                              Present Law

     Amounts received under a life insurance contract
       Amounts received under a life insurance contract paid by 
     reason of the death of the insured are not includible in 
     gross income for Federal tax purposes.\112\ No Federal income 
     tax generally is imposed on a policyholder with respect to 
     the earnings under a life insurance contract (inside 
     buildup).\113\
---------------------------------------------------------------------------
     \112\Sec. 101(a).
     \113\This favorable tax treatment is available only if a life 
     insurance contract meets certain requirements designed to 
     limit the investment character of the contract. Sec. 7702.
---------------------------------------------------------------------------
       Distributions from a life insurance contract (other than a 
     modified endowment contract) that are made prior to the death 
     of the insured generally are includible in income to the 
     extent that the amounts distributed exceed the taxpayer's 
     investment in the contract (i.e., basis). Such distributions 
     generally are treated first as a tax-free recovery of basis, 
     and then as income.\114\
---------------------------------------------------------------------------
     \114\Sec. 72(e). In the case of a modified endowment 
     contract, however, in general, distributions are treated as 
     income first, loans are treated as distributions (i.e., 
     income rather than basis recovery first), and an additional 
     10-percent tax is imposed on the income portion of 
     distributions made before age 59\1/2\ and in certain other 
     circumstances. Secs. 72(e) and (v). A modified endowment 
     contract is a life insurance contract that does not meet a 
     statutory ``7-pay'' test, i.e., generally is funded more 
     rapidly than seven annual level premiums. Sec. 7702A.
---------------------------------------------------------------------------
     Transfers for value
       A limitation on the exclusion for amounts received under a 
     life insurance contract is provided in the case of transfers 
     for value. If a life insurance contract (or an interest in 
     the contract) is transferred for valuable consideration, the 
     amount excluded from income by reason of the death of the 
     insured is limited to the actual value of the consideration 
     plus the premiums and other amounts subsequently paid by the 
     acquiror of the contract.\115\
---------------------------------------------------------------------------
     \115\Section 101(a)(2). The transfer-for-value rule does not 
     apply, however, in the case of a transfer in which the life 
     insurance contract (or interest in the contract) transferred 
     has a basis in the hands of the transferee that is determined 
     by reference to the transferor's basis. Similarly, the 
     transfer-for-value rule generally does not apply if the 
     transfer is between certain parties (specifically, if the 
     transfer is to the insured, a partner of the insured, a 
     partnership in which the insured is a partner, or a 
     corporation in which the insured is a shareholder or 
     officer).
---------------------------------------------------------------------------
     Tax treatment of charitable organizations and donors
       Present law generally provides tax-exempt status for 
     charitable, educational and certain other organizations, no 
     part of the net earnings of which inures to the benefit of 
     any private shareholder or individual, and which meet certain 
     other requirements.\116\ Governmental entities, including 
     some educational organizations, are exempt from tax on income 
     under other tax rules providing that gross income does not 
     include income derived from the exercise of any essential 
     governmental function and accruing to a State or any 
     political subdivision thereof.\117\
---------------------------------------------------------------------------
     \116\Section 501(c)(3).
     \117\Section 115.
---------------------------------------------------------------------------
       In computing taxable income, a taxpayer who itemizes 
     deductions generally is allowed to deduct the amount of cash 
     and the fair market value of property contributed to an 
     organization described in section 501(c)(3) or to a Federal, 
     State, or local governmental entity for exclusively public 
     purposes.\118\
---------------------------------------------------------------------------
     \118\Section 170.
---------------------------------------------------------------------------
     State-law insurable interest rules
       State laws generally provide that the owner of a life 
     insurance contract must have an insurable interest in the 
     insured person when the life insurance contract is issued. 
     State laws vary as to the insurable interest of a charitable 
     organization in the life of any individual. Some State laws 
     provide that a charitable organization meeting the 
     requirements of section 501(c)(3) of the Code is treated as 
     having an insurable interest in the life of any donor,\119\ 
     or, in other States, in the life of any individual who 
     consents (whether or not the individual is a donor).\120\ 
     Other States' insurable interest rules permit the purchase of 
     a life insurance contract even though the person paying the 
     consideration has no insurable interest in the life of the 
     person insured if a charitable, benevolent, educational or 
     religious institution is designated irrevocably as the 
     beneficiary.\121\
---------------------------------------------------------------------------
     \119\See, e.g., Mass. Gen. Laws Ann. ch. 175, sec. 123A(2) 
     (West 2005); Iowa Code Ann. sec. 511.39 (West 2004) (``a 
     person who, when purchasing a life insurance policy, makes a 
     donation to the charitable organization or makes the 
     charitable organization the beneficiary of all or a part of 
     the proceeds of the policy . . . ).
     \120\See, e.g., Cal. Ins. Code sec. 10110.1(f) (West 2005); 
     40 Pa. Cons. Stat. Ann. sec. 40-512 (2004); Fla. Stat. Ann. 
     sec. 27.404 (2) (2004); Mich. Comp. Laws Ann. sec. 500.2212 
     (West 2004).
     \121\Or. Rev. Stat. sec. 743.030 (2003); Del. Code Ann. Tit. 
     18, sec. 2705(a) (2004).
---------------------------------------------------------------------------
     Transactions involving charities and non-charities acquiring 
         life insurance
       Recently, there has been an increase in transactions 
     involving the acquisition of life insurance contracts using 
     arrangements in which both exempt organizations, primarily 
     charities, and private investors have an interest in the 
     contract.\122\ The exempt organization has an insurable 
     interest in the insured individuals, either because they are 
     donors, because they consent, or otherwise under applicable 
     State insurable interest rules. Private investors provide 
     capital used to fund the purchase of the life insurance 
     contracts, sometimes together with annuity contracts. Both 
     the private investors and the charity have an interest in the 
     contracts, directly or indirectly, through the use of trusts, 
     partnerships, or other arrangements for sharing the rights to 
     the contracts. Both the charity and the private investors 
     receive cash amounts in connection with the investment in the 
     contracts while the life insurance is in force or as the 
     insured individuals die.
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     \122\Davis, Wendy, ``Death-Pool Donations,'' Trusts and 
     Estates, May 2004, 55; Francis, Theo, ``Tax May Thwart 
     Investment Plans Enlisting Charities,'' Wall St. J., Feb. 8, 
     2005, A-10.
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                               House Bill

       No provision.


                            Senate Amendment

       The provision imposes an excise tax, equal to 100 percent 
     of the acquisition costs, on the taxable acquisition of any 
     interest in an applicable insurance contract. An applicable 
     insurance contract is any life insurance, annuity or 
     endowment contract in which both an applicable exempt 
     organization and any person that is not an applicable exempt 
     organization have, directly or indirectly, held an interest 
     in the contract (whether or not the interests are held at the 
     same time).
       An applicable exempt organization is any organization 
     described in section 170(c), 168(h)(2)(A)(iv), 2055(a), or 
     2522(a). Thus, for example, an applicable exempt organization 
     generally includes an organization that is exempt from 
     Federal income tax by reason of being described in section 
     501(c)(3) (including one organized outside the United 
     States), a government or political subdivision of a 
     government, and an Indian tribal government.
       A taxable acquisition is the acquisition of any direct or 
     indirect interest in an applicable insurance contract by an 
     applicable exempt organization, or by any other person if the 
     interest in the contract in that person's hands is not 
     described in the specific exceptions to ``applicable 
     insurance contract.''
       Under the provision, acquisition costs mean the direct or 
     indirect costs (including premiums, commissions, fees, 
     charges, or other amounts) of acquiring or maintaining an 
     interest in an applicable insurance contract. Except as 
     provided in regulations, if acquisition costs of any taxable 
     acquisition are paid or incurred in more than one calendar 
     year, the excise tax under the provision is imposed each time 
     such costs are paid or incurred. In the case of an 
     acquisition of an interest in an entity that directly or 
     indirectly holds an interest in an applicable insurance 
     contract, acquisition costs are intended to include the 
     amount of money or value of property (including an applicable 
     insurance contract) contributed to an entity or

[[Page 7412]]

     otherwise transferred or paid to acquire or increase an 
     interest in the entity, that directly or indirectly holds an 
     interest in an applicable insurance contract.
       For example, acquisition costs include (1) each premium, 
     commission, or fee with respect to the contract, (2) each 
     amount paid or incurred to acquire or increase an interest in 
     the contract, (3) each amount paid or incurred to acquire or 
     increase an interest in an entity (such as a partnership, 
     trust, corporation, or other type of entity or arrangement) 
     that has a direct or indirect interest in the contract, and 
     (4) if the contract is contributed to an entity, the greater 
     of the value of the contract or the total amount of premiums, 
     commissions, and fees paid or incurred to acquire and 
     maintain the insurance contract. It is intended that, under 
     regulatory authority provided as necessary to carry out the 
     purposes of the provision, any other similar or economically 
     equivalent amount paid or incurred is to be treated as 
     acquisition costs.
       Under the provision, an interest in an applicable insurance 
     contract includes any right with respect to the contract, 
     whether as an owner, beneficiary, or otherwise. An indirect 
     interest in a contract includes an interest in an entity 
     that, directly or indirectly, holds an interest in the 
     contract. In the case of a section 1035 exchange of an 
     applicable insurance contract, any interest in any of the 
     contracts involved in the exchange is treated as an interest 
     in all such contracts. An increase in an interest in an 
     applicable insurance contract is treated as a separate 
     acquisition, for purposes of application of the excise tax 
     under the provision.
       If an interest of an applicable exempt organization exists 
     solely because the organization holds, as part of a 
     diversified investment strategy, a de minimis interest in an 
     entity which directly or indirectly holds an interest in the 
     contract, such interest is not taken into account for 
     purposes of the provision. For example, if an applicable 
     exempt organization owns a de minimis amount of stock in a 
     corporation which in turn owns life insurance contracts 
     covering key employees, the excise tax under the provision 
     does not apply because the stock ownership is not treated as 
     an indirect interest in this circumstance. It is intended 
     that Treasury regulations provide guidance as to the 
     application of this rule so that it does not permit 
     circumvention of the provision.
       Except as provided in regulations, if a person acquires an 
     interest in a contract before the contract is treated as an 
     applicable insurance contract, the acquisition is treated as 
     a taxable acquisition of an interest in applicable insurance 
     contract as of the date the contract becomes an applicable 
     insurance contract.
       It is intended that an interest in an applicable insurance 
     contract includes, for example, (1) a right with respect to 
     the applicable insurance contract pursuant to a side contract 
     or other similar arrangement, (2) an interest as a trust 
     beneficiary in distributions from or income of a trust 
     holding an interest in a contract, and (3) a right to 
     distributions, guaranteed payments, or income of a 
     partnership that holds an interest in a contract. It is not 
     intended that a right with respect to the contract include 
     typical rights of issuers of applicable insurance contracts.
       Exceptions to the term ``applicable insurance contract'' 
     apply under the provision. First, the term does not apply if 
     each person (other than an applicable exempt organization) 
     with a direct or indirect interest in the contract has an 
     insurable interest in the insured independent of any interest 
     of the exempt organization in the contract. Second, the term 
     does not apply if the sole interest in the contract of each 
     person other than the applicable exempt organization is as a 
     named beneficiary. Third, the term does not apply if the sole 
     interest in the contract of each person other than the 
     applicable exempt organization is either (1) as a beneficiary 
     of a trust holding an interest in the contract, but only if 
     the person's designation as such a beneficiary was made 
     without consideration and solely on a purely gratuitous 
     basis, or (2) as a trustee who holds an interest in the 
     contract in a fiduciary capacity solely for the benefit of 
     applicable exempt organizations or of persons otherwise 
     meeting one of the first two exceptions.
       An exception to the term ``applicable insurance contract'' 
     also is provided under the provision in certain cases in 
     which a person other than an applicable exempt organization 
     has an interest solely as a lender\123\ with respect to the 
     contract, and the contract covers only one individual who is 
     an officer, director, or employee of the applicable exempt 
     organization with an interest in the contract, provided other 
     requirements are met. This exception applies only if the 
     number of insured persons under loans by such lenders with 
     respect to such contracts does not exceed the greater of: (1) 
     the lesser of five percent of the total officers, directors, 
     and employees of the organization or 20, or (2) five. Under 
     this exception, the aggregate amount of indebtedness with 
     respect to 1 or more contracts covering a single individual 
     may not exceed $50,000.
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     \123\For this purpose, an interest as a lender includes a 
     security interest in the insurance contract to which the loan 
     relates.
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       In addition, Treasury regulatory authority is provided to 
     except certain contracts from treatment as applicable 
     insurance contracts. Contracts may be excepted based on 
     specific factors including (1) whether the transaction is at 
     arms' length, (2) whether the economic benefits to the 
     applicable exempt organization substantially exceed the 
     economic benefits to all other persons with an interest in 
     the contract (determined without regard to whether, or the 
     extent to which, such organization has paid or contributed 
     with respect to the contract), and (3) the likelihood of 
     abuse.
       The application of the exceptions can be illustrated as 
     follows. Assume that an individual acquires a life insurance 
     contract in which the individual is the insured person, and 
     the named beneficiaries are the individual's son and a 
     university that is an organization described in section 
     170(c). The contract is not an applicable insurance contract 
     because the first exception applies. That is, because both 
     the individual and his son have an insurable interest in the 
     individual, all persons holding any interest in the contract 
     (other than applicable exempt organizations) have an 
     insurable interest in the insured independent of any interest 
     of an applicable exempt organization in the contract. The 
     second exception also applies in this situation.
       As another example, assume that the three named 
     beneficiaries are the insured's son, an unrelated friend, and 
     a charity. The contract is not an applicable insurance 
     contract because the second exception applies. That is, each 
     beneficiary's sole interest is as a named beneficiary. In 
     addition, the first exception also applies in this situation.
       As a further example, assume that the insured individual 
     creates an irrevocable trust for the benefit of the insured's 
     descendants, and that the trustee of the trust uses trust 
     funds to purchase a life insurance policy on the insured's 
     life, and the trust is both the owner and beneficiary of the 
     insurance policy. The insured individual's naming of his or 
     her descendants as trust beneficiaries is a gratuitous act, 
     done without consideration. As a result, the contract is not 
     an applicable insurance contract under the third exception.
       No Federal income tax deduction is permitted for the excise 
     tax payable under the provision, as provided under the rule 
     of Code section 275(a)(6). The amount of the excise tax 
     payable under the provision is not included in the investment 
     in the contract for purposes of section 72.
       Treasury regulatory authority is provided to carry out the 
     purposes of the provision. This includes authority to provide 
     appropriate rules in the case in which a person acquires an 
     interest before a contract is treated as an applicable 
     insurance contract. This also includes authority to prevent, 
     in cases the Treasury Secretary determines appropriate, the 
     imposition of more than one tax if the same interest is 
     acquired more than once (otherwise, the tax under the 
     provision applies to each acquisition). Treasury regulatory 
     authority is also provided to prevent avoidance of the 
     provision, including through the use of intermediaries.
       The provision provides reporting rules requiring an 
     applicable exempt organization or other person that makes a 
     taxable acquisition of an applicable insurance contract to 
     file a return containing required information and such other 
     information as is prescribed by the Treasury Secretary. Under 
     these rules, a statement is required to be furnished to each 
     person whose taxpayer identification information is required 
     to be reported on the return. Penalties apply for failure to 
     file the return or furnish the statement, including, in the 
     case of intentional disregard of the return filing 
     requirement, a penalty equal to the amount of the excise tax 
     that has not been paid with respect to the items required to 
     be included on the return.
       Effective date.--The provision is effective for contracts 
     issued after May 3, 2005.
       The application of the effective date with respect to prior 
     acquisitions of interests may be illustrated as follows. 
     Assume that an exempt organization and a person that is not 
     an exempt organization described in section 170(c) form a 
     partnership before May 3, 2005. After May 3, 2005, the 
     partnership acquires an interest in a life insurance contract 
     that is issued after May 3, 2005. The acquisition by the 
     partnership of the interest in the contract is treated as a 
     taxable acquisition under the provision by each of the 
     partners (i.e., the exempt organization and the other 
     person).
       The provision also requires reporting of existing life 
     insurance, endowment and annuity contracts issued on or 
     before that date, in which an applicable exempt organization 
     holds an interest on that date and which would be treated as 
     an applicable insurance contract under the provision. This 
     reporting is required within one year after the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page 7413]]


     3. Increase the amounts of excise taxes imposed on public 
         charities, social welfare organizations, and private 
         foundations (sec. 213 of the Senate amendment and secs. 
         4941, 4942, 4943, 4944, 4945, and 4958 of the Code)


                              present law

     Public charities and social welfare organizations
       The Code imposes excise taxes on excess benefit 
     transactions between disqualified persons (as defined in 
     section 4958(f)) and charitable organizations (other than 
     private foundations) or social welfare organizations (as 
     described in section 501(c)(4)).\124\An excess benefit 
     transaction generally is a transaction in which an economic 
     benefit is provided by a charitable or social welfare 
     organization directly or indirectly to or for the use of a 
     disqualified person, if the value of the economic benefit 
     provided exceeds the value of the consideration (including 
     the performance of services) received for providing such 
     benefit.
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     \124\Sec. 4958. The excess benefit transaction tax is 
     commonly referred to as ``intermediate sanctions,'' because 
     it imposes penalties generally considered to be less punitive 
     than revocation of the organization's exempt status.
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       The excess benefit tax is imposed on the disqualified 
     person and, in certain cases, on the organization manager, 
     but is not imposed on the exempt organization. An initial tax 
     of 25 percent of the excess benefit amount is imposed on the 
     disqualified person that receives the excess benefit. An 
     additional tax on the disqualified person of 200 percent of 
     the excess benefit applies if the violation is not corrected. 
     A tax of 10 percent of the excess benefit (not to exceed 
     $10,000 with respect to any excess benefit transaction) is 
     imposed on an organization manager that knowingly 
     participated in the excess benefit transaction, if the 
     manager's participation was willful and not due to reasonable 
     cause, and if the initial tax was imposed on the disqualified 
     person.\125\If more than one person is liable for the tax on 
     disqualified persons or on management, all such persons are 
     jointly and severally liable for the tax.\126\
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     \125\Sec. 4958(d)(2). Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \126\Sec. 4958(d)(1).
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     Private foundations
       Self-dealing by private foundations
       Excise taxes are imposed on acts of self-dealing between a 
     disqualified person (as defined in section 4946) and a 
     private foundation.\127\ In general, self-dealing 
     transactions are any direct or indirect: (1) sale or 
     exchange, or leasing, of property between a private 
     foundation and a disqualified person; (2) lending of money or 
     other extension of credit between a private foundation and a 
     disqualified person; (3) the furnishing of goods, services, 
     or facilities between a private foundation and a disqualified 
     person; (4) the payment of compensation (or payment or 
     reimbursement of expenses) by a private foundation to a 
     disqualified person; (5) the transfer to, or use by or for 
     the benefit of, a disqualified person of the income or assets 
     of the private foundation; and (6) certain payments of money 
     or property to a government official.\128\ Certain exceptions 
     apply.\129\
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     \127\Sec. 4941.
     \128\Sec. 4941(d)(1).
     \129\See sec. 4941(d)(2).
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       An initial tax of five percent of the amount involved with 
     respect to an act of self-dealing is imposed on any 
     disqualified person (other than a foundation manager acting 
     only as such) who participates in the act of self-dealing. If 
     such a tax is imposed, a 2.5-percent tax of the amount 
     involved is imposed on a foundation manager who participated 
     in the act of self-dealing knowing it was such an act (and 
     such participation was not willful and was due to reasonable 
     cause) up to $10,000 per act. Such initial taxes may not be 
     abated.\130\ Such initial taxes are imposed for each year in 
     the taxable period, which begins on the date the act of self-
     dealing occurs and ends on the earliest of the date of 
     mailing of a notice of deficiency for the tax, the date on 
     which the tax is assessed, or the date on which correction of 
     the act of self-dealing is completed. A government official 
     (as defined in section 4946(c)) is subject to such initial 
     tax only if the official participates in the act of self-
     dealing knowing it is such an act. If the act of self-dealing 
     is not corrected, a tax of 200 percent of the amount involved 
     is imposed on the disqualified person and a tax of 50 percent 
     of the amount involved (up to $10,000 per act) is imposed on 
     a foundation manager who refused to agree to correcting the 
     act of self-dealing. Such additional taxes are subject to 
     abatement.\131\
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     \130\Sec. 4962(b).
     \131\Sec. 4961.
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       Tax on failure to distribute income
       Private nonoperating foundations are required to pay out a 
     minimum amount each year as qualifying distributions. In 
     general, a qualifying distribution is an amount paid to 
     accomplish one or more of the organization's exempt purposes, 
     including reasonable and necessary administrative 
     expenses.\132\ Failure to pay out the minimum results in an 
     initial excise tax on the foundation of 15 percent of the 
     undistributed amount. An additional tax of 100 percent of the 
     undistributed amount applies if an initial tax is imposed and 
     the required distributions have not been made by the end of 
     the applicable taxable period.\133\ A foundation may include 
     as a qualifying distribution the salaries, occupancy 
     expenses, travel costs, and other reasonable and necessary 
     administrative expenses that the foundation incurs in 
     operating a grant program. A qualifying distribution also 
     includes any amount paid to acquire an asset used (or held 
     for use) directly in carrying out one or more of the 
     organization's exempt purposes and certain amounts set-aside 
     for exempt purposes.\134\ Private operating foundations are 
     not subject to the payout requirements.
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     \132\Sec. 4942(g)(1)(A).
     \133\Sec. 4942(a) and (b). Taxes imposed may be abated if 
     certain conditions are met. Secs. 4961 and 4962.
     \134\Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an 
     organization is permitted to adjust the distributable amount 
     in those cases where distributions during the five preceding 
     years have exceeded the payout requirements. Sec. 4942(i).
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       Tax on excess business holdings
       Private foundations are subject to tax on excess business 
     holdings.\135\ In general, a private foundation is permitted 
     to hold 20 percent of the voting stock in a corporation, 
     reduced by the amount of voting stock held by all 
     disqualified persons (as defined in section 4946). If it is 
     established that no disqualified person has effective control 
     of the corporation, a private foundation and disqualified 
     persons together may own up to 35 percent of the voting stock 
     of a corporation. A private foundation shall not be treated 
     as having excess business holdings in any corporation if it 
     owns (together with certain other related private 
     foundations) not more than two percent of the voting stock 
     and not more than two percent in value of all outstanding 
     shares of all classes of stock in that corporation. Similar 
     rules apply with respect to holdings in a partnership 
     (``profits interest'' is substituted for ``voting stock'' and 
     ``capital interest'' for ``nonvoting stock'') and to other 
     unincorporated enterprises (by substituting ``beneficial 
     interest'' for ``voting stock''). Private foundations are not 
     permitted to have holdings in a proprietorship. Foundations 
     generally have a five-year period to dispose of excess 
     business holdings (acquired other than by purchase) without 
     being subject to tax.\136\ This five-year period may be 
     extended an additional five years in limited 
     circumstances.\137\
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     \135\Sec. 4943. Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \136\Sec. 4943(c)(6).
     \137\Sec. 4943(c)(7).
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       The initial tax is equal to five percent of the value of 
     the excess business holdings held during the foundation's 
     applicable taxable year. An additional tax is imposed if an 
     initial tax is imposed and at the close of the applicable 
     taxable period, the foundation continues to hold excess 
     business holdings. The amount of the additional tax is equal 
     to 200 percent of such holdings.
       Tax on jeopardizing investments
       Private foundations and foundation managers are subject to 
     tax on investments that jeopardize the foundation's 
     charitable purpose.\138\ In general, an initial tax of five 
     percent of the amount of the investment applies to the 
     foundation and to foundation managers who participated in the 
     making of the investment knowing that it jeopardized the 
     carrying out of the foundation's exempt purposes. The initial 
     tax on foundation managers may not exceed $5,000 per 
     investment. If the investment is not removed from jeopardy 
     (e.g., sold or otherwise disposed of), an additional tax of 
     25 percent of the amount of the investment is imposed on the 
     foundation and five percent of the amount of the investment 
     on a foundation manager who refused to agree to removing the 
     investment from jeopardy. The additional tax on foundation 
     managers may not exceed $10,000 per investment. An 
     investment, the primary purpose of which is to accomplish a 
     charitable purpose and no significant purpose of which is the 
     production of income or the appreciation of property, is not 
     considered a jeopardizing investment.\139\
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     \138\Sec. 4944. Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \139\Sec. 4944(c).
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       Tax on taxable expenditures
       Certain expenditures of private foundations are subject to 
     tax.\140\ In general, taxable expenditures are expenses: (1) 
     for lobbying; (2) to influence the outcome of a public 
     election or carry on a voter registration drive (unless 
     certain requirements are met); (3) as a grant to an 
     individual for travel, study, or similar purposes unless made 
     pursuant to procedures approved by the Secretary; (4) as a 
     grant to an organization that is not a public charity or 
     exempt operating foundation unless the foundation exercises 
     expenditure responsibility\141\ with respect to the grant; or 
     (5) for any non-charitable purpose. For each taxable 
     expenditure, a tax is

[[Page 7414]]

     imposed on the foundation of 10 percent of the amount of the 
     expenditure, and an additional tax of 100 percent is imposed 
     on the foundation if the expenditure is not corrected. A tax 
     of 2.5 percent of the expenditure (up to $5,000) also is 
     imposed on a foundation manager who agrees to making a 
     taxable expenditure knowing that it is a taxable expenditure. 
     An additional tax of 50 percent of the amount of the 
     expenditure (up to $10,000) is imposed on a foundation 
     manager who refuses to agree to correction of such 
     expenditure.
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     \140\Sec. 4945. Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \141\In general, expenditure responsibility requires that a 
     foundation make all reasonable efforts and establish 
     reasonable procedures to ensure that the grant is spent 
     solely for the purpose for which it was made, to obtain 
     reports from the grantee on the expenditure of the grant, and 
     to make reports to the Secretary regarding such expenditures. 
     Sec. 4945(h).
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                               House Bill

       No provision.


                            Senate Amendment

     Self-dealing and excess benefit transaction initial taxes and 
         dollar limitations
       For acts of self-dealing other than the payment of 
     compensation by a private foundation to a disqualified 
     person, the provision increases the initial tax on the self-
     dealer from five percent of the amount involved to 10 percent 
     of the amount involved. For acts of self-dealing regarding 
     the payment of compensation by a private foundation to a 
     disqualified person, the provision increases the initial tax 
     on the self-dealer from five percent of the amount involved 
     (none of which is subject to abatement) to 25 percent of the 
     amount involved (15 percent of which is subject to 
     abatement). The provision increases the initial tax on 
     foundation managers from 2.5 percent of the amount involved 
     to five percent of the amount involved and increases the 
     dollar limitation on the amount of the initial and additional 
     taxes on foundation managers per act of self-dealing from 
     $10,000 per act to $20,000 per act. Similarly, the provision 
     doubles the dollar limitation on organization managers of 
     public charities and social welfare organizations for 
     participation in excess benefit transactions from $10,000 per 
     transaction to $20,000 per transaction.
     Failure to distribute income, excess business holdings, 
         jeopardizing investments, and taxable expenditures
       The provision doubles the amounts of the initial taxes and 
     the dollar limitations on foundation managers with respect to 
     the private foundation excise taxes on the failure to 
     distribute income, excess business holdings, jeopardizing 
     investments, and taxable expenditures.
       Specifically, for the failure to distribute income, the 
     initial tax on the foundation is increased from 15 percent of 
     the undistributed amount to 30 percent of the undistributed 
     amount.
       For excess business holdings, the initial tax on excess 
     business holdings is increased from five percent of the value 
     of such holdings to 10 percent of such value.
       For jeopardizing investments, the initial tax of five 
     percent of the amount of the investment that is imposed on 
     the foundation and on foundation managers is increased to 10 
     percent of the amount of the investment. The dollar 
     limitation on the initial tax on foundation managers of 
     $5,000 per investment is increased to $10,000 and the dollar 
     limitation on the additional tax on foundation managers of 
     $10,000 per investment is increased to $20,000.
       For taxable expenditures, the initial tax on the foundation 
     is increased from 10 percent of the amount of the expenditure 
     to 20 percent, the initial tax on the foundation manager is 
     increased from 2.5 percent of the amount of the expenditure 
     to five percent, the dollar limitation on the initial tax on 
     foundation managers is increased from $5,000 to $10,000, and 
     the dollar limitation on the additional tax on foundation 
     managers is increased from $10,000 to $20,000.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Reform rules for charitable contributions of easements on 
         buildings in registered historic districts (Sec. 214 of 
         the Senate amendment and sec. 170 of the Code)


                              Present Law

       In general
       Present law provides special rules that apply to charitable 
     deductions of qualified conservation contributions, which 
     include conservation easements and facade easements.\142\ 
     Qualified conservation contributions are not subject to the 
     ``partial interest'' rule, which generally bars deductions 
     for charitable contributions of partial interests in 
     property.\143\ Accordingly, qualified conservation 
     contributions are contributions of partial interests that are 
     eligible for a fair market value charitable deduction.
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     \142\Sec. 170(h).
     \143\Sec. 170(f)(3).
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       A qualified conservation contribution is a contribution of 
     a qualified real property interest to a qualified 
     organization exclusively for conservation purposes. A 
     qualified real property interest is defined as: (1) the 
     entire interest of the donor other than a qualified mineral 
     interest; (2) a remainder interest; or (3) a restriction 
     (granted in perpetuity) on the use that may be made of the 
     real property.\144\ Qualified organizations include certain 
     governmental units, public charities that meet certain public 
     support tests, and certain supporting organizations.
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     \144\Charitable contributions of interests that constitute 
     the taxpayer's entire interest in the property are not 
     regarded as qualified real property interests within the 
     meaning of section 170(h), but instead are subject to the 
     general rules applicable to charitable contributions of 
     entire interests of the taxpayer (i.e., generally are 
     deductible at fair market value, without regard to 
     satisfaction of the requirements of section 170(h)).
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       Conservation purposes include: (1) the preservation of land 
     areas for outdoor recreation by, or for the education of, the 
     general public; (2) the protection of a relatively natural 
     habitat of fish, wildlife, or plants, or similar ecosystem; 
     (3) the preservation of open space (including farmland and 
     forest land) where such preservation will yield a significant 
     public benefit and is either for the scenic enjoyment of the 
     general public or pursuant to a clearly delineated Federal, 
     State, or local governmental conservation policy; and (4) the 
     preservation of an historically important land area or a 
     certified historic structure.\145\
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     \145\Sec. 170(h)(4)(A).
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       In general, no deduction is available if the property may 
     be put to a use that is inconsistent with the conservation 
     purpose of the gift.\146\ A contribution is not deductible if 
     it accomplishes a permitted conservation purpose while also 
     destroying other significant conservation interests.\147\
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     \146\Treas. Reg. sec. 1.170A-14(e)(2).
     \147\Treas. Reg. sec. 1.170A-14(e)(2).
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       Taxpayers are required to obtain a qualified appraisal for 
     donated property with a value of $5,000 or more, and to 
     attach an appraisal summary to the tax return.\148\ Under 
     Treasury regulations, a qualified appraisal means an 
     appraisal document that, among other things: (1) relates to 
     an appraisal that is made not earlier than 60 days prior to 
     the date of contribution of the appraised property and not 
     later than the due date (including extensions) of the return 
     on which a deduction is first claimed under section 170;\149\ 
     (2) is prepared, signed, and dated by a qualified appraiser; 
     (3) includes (a) a description of the property appraised; (b) 
     the fair market value of such property on the date of 
     contribution and the specific basis for the valuation; (c) a 
     statement that such appraisal was prepared for income tax 
     purposes; (d) the qualifications of the qualified appraiser; 
     and (e) the signature and taxpayer identification number of 
     such appraiser; and (4) does not involve an appraisal fee 
     that violates certain prescribed rules.\150\
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     \148\Sec. 170(f)(11)(C).
     \149\In the case of a deduction first claimed or reported on 
     an amended return, the deadline is the date on which the 
     amended return is filed.
     \150\Treas. Reg. sec. 1.170A-13(c)(3).
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       Valuation
       The value of a conservation restriction granted in 
     perpetuity generally is determined under the ``before and 
     after approach.'' Such approach provides that the fair market 
     value of the restriction is equal to the difference (if any) 
     between the fair market value of the property the restriction 
     encumbers before the restriction is granted and the fair 
     market value of the encumbered property after the restriction 
     is granted.\151\
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     \151\Treas. Reg. sec. 1.170A-14(h)(3).
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       If the granting of a perpetual restriction has the effect 
     of increasing the value of any other property owned by the 
     donor or a related person, the amount of the charitable 
     deduction for the conservation contribution is to be reduced 
     by the amount of the increase in the value of the other 
     property.\152\ In addition, the donor is to reduce the amount 
     of the charitable deduction by the amount of financial or 
     economic benefits that the donor or a related person receives 
     or can reasonably be expected to receive as a result of the 
     contribution.\153\ If such benefits are greater than those 
     that will inure to the general public from the transfer, no 
     deduction is allowed.\154\ In those instances where the grant 
     of a conservation restriction has no material effect on the 
     value of the property, or serves to enhance, rather than 
     reduce, the value of the property, no deduction is 
     allowed.\155\
---------------------------------------------------------------------------
     \152\Treas. Reg. sec. 1.170A-14(h)(3)(i).
     \153\Id.
     \154\Id.
     \155\Treas. Reg. sec. 1.170A-14(h)(3)(ii).
---------------------------------------------------------------------------
       Preservation of a certified historic structure
       A certified historic structure means any building, 
     structure, or land which is (i) listed in the National 
     Register, or (ii) located in a registered historic district 
     (as defined in section 47(c)(3)(B)) and is certified by the 
     Secretary of the Interior to the Secretary of the Treasury as 
     being of historic significance to the district.\156\ For this 
     purpose, a structure means any structure, whether or not it 
     is depreciable, and, accordingly, easements on private 
     residences may qualify.\157\ If restrictions to preserve a 
     building or land area within a registered historic district 
     permit future development on the site, a deduction will be 
     allowed only if the terms of the restrictions require that 
     such development conform with appropriate local, State, or 
     Federal standards for construction or rehabilitation within 
     the district.\158\
---------------------------------------------------------------------------
     \156\Sec. 170(h)(4)(B).
     \157\Treas. Reg. sec. 1.170A-14(d)(5)(iii).
     \158\Treas. Reg. sec. 1.170A-14(d)(5)(i).
---------------------------------------------------------------------------
       The IRS and the courts have held that a facade easement may 
     constitute a qualifying

[[Page 7415]]

     conservation contribution.\159\ In general, a facade easement 
     is a restriction the purpose of which is to preserve certain 
     architectural, historic, and cultural features of the facade, 
     or front, of a building. The terms of a facade easement might 
     permit the property owner to make alterations to the facade 
     of the structure if the owner obtains consent from the 
     qualified organization that holds the easement.
---------------------------------------------------------------------------
     \159\Hillborn v. Commissioner, 85 T.C. 677 (1985) (holding 
     the fair market value of a facade donation generally is 
     determined by applying the ``before and after'' valuation 
     approach); Richmond v. U.S., 699 F. Supp. 578 (E.D. La. 
     1988); Priv. Ltr. Rul. 199933029 (May 24, 1999) (ruling that 
     a preservation and conservation easement relating to the 
     facade and certain interior portions of a fraternity house 
     was a qualified conservation contribution).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision revises the rules for qualified conservation 
     contributions with respect to property for which a charitable 
     deduction is allowable under section 170(h)(4)(B)(ii) by 
     reason of a property's location in a registered historic 
     district. Under the provision, a charitable deduction is not 
     allowable with respect to a structure or land area located in 
     such a district (by reason of the structure or land area's 
     location in such a district). A charitable deduction is 
     allowable with respect to buildings (as is the case under 
     present law) but the qualified real property interest that 
     relates to the exterior of the building must preserve the 
     entire exterior of the building, including the space above 
     the building, the sides, the rear, and the front of the 
     building. In addition, such qualified real property interest 
     must provide that no portion of the exterior of the building 
     may be changed in a manner inconsistent with the historical 
     character of such exterior.
       For any contribution relating to a registered historic 
     district made after the date of enactment of the provision, 
     taxpayers must include with the return for the taxable year 
     of the contribution a qualified appraisal of the qualified 
     real property interest (irrespective of the claimed value of 
     such interest) and attach the appraisal with the taxpayer's 
     return, photographs of the entire exterior of the building, 
     and descriptions of all current restrictions on development 
     of the building, including, for example, zoning laws, 
     ordinances, neighborhood association rules, restrictive 
     covenants, and other similar restrictions. Failure to obtain 
     and attach an appraisal or to include the required 
     information results in disallowance of the deduction. In 
     addition, the donor and the donee must enter into a written 
     agreement certifying, under penalty of perjury, that the 
     donee is a qualified organization, with a purpose of 
     environmental protection, land conservation, open space 
     preservation, or historic preservation, and that the donee 
     has the resources to manage and enforce the restriction and a 
     commitment to do so.
       Taxpayers claiming a deduction for a qualified conservation 
     contribution with respect to the exterior of a building 
     located in a registered historic district in excess of the 
     greater of three percent of the fair market value of the 
     underlying property or $10,000 must pay a $500 fee to the 
     Internal Revenue Service or the deduction is not allowed. 
     Amounts paid are required to be dedicated to Internal Revenue 
     Service enforcement of qualified conservation contributions.
       Effective date.--The provision relating to deductions for 
     contributions relating to structures and land areas is 
     effective for contributions made after the date of enactment. 
     The limitation on the amount that may be deducted and the 
     filing fee is effective for contributions made 180 days after 
     the date of enactment. The rest of the provision is effective 
     for contributions made after November 15, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Reform rules relating to charitable contributions of 
         taxidermy and recapture tax benefit on property not used 
         for an exempt use (secs. 215 and 216 of the Senate 
         amendment and secs. 170, 6050L, and new sec. 6720B of the 
         Code)


                              Present Law

     Deductibility of charitable contributions
       In general
       In computing taxable income, a taxpayer who itemizes 
     deductions generally is allowed to deduct the amount of cash 
     and the fair market value of property contributed to an 
     organization described in section 501(c)(3) or to a Federal, 
     State, or local governmental entity.\160\ The amount of the 
     deduction allowable for a taxable year with respect to a 
     charitable contribution of property may be reduced or limited 
     depending on the type of property contributed, the type of 
     charitable organization to which the property is contributed, 
     and the income of the taxpayer.\161\ In general, more 
     generous charitable contribution deduction rules apply to 
     gifts made to public charities than to gifts made to private 
     foundations. Within certain limitations, donors also are 
     entitled to deduct their contributions to section 501(c)(3) 
     organizations for Federal estate and gift tax purposes. By 
     contrast, contributions to nongovernmental, non-charitable 
     tax-exempt organizations generally are not deductible by the 
     donor,\162\ though such organizations are eligible for the 
     exemption from Federal income tax with respect to such 
     donations.
---------------------------------------------------------------------------
     \160\The deduction also is allowed for purposes of 
     calculating alternative minimum taxable income.
     \161\Secs. 170(b) and (e).
     \162\Exceptions to the general rule of non-deductibility 
     include certain gifts made to a veterans' organization or to 
     a domestic fraternal society. In addition, contributions to 
     certain nonprofit cemetery companies are deductible for 
     Federal income tax purposes, but generally are not deductible 
     for Federal estate and gift tax purposes. Secs. 170(c)(3), 
     170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
     2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------
       Contributions of property
       The amount of the deduction for charitable contributions of 
     capital gain property generally equals the fair market value 
     of the contributed property on the date of the contribution. 
     Capital gain property means any capital asset, or property 
     used in the taxpayer's trade or business, the sale of which 
     at its fair market value, at the time of contribution, would 
     have resulted in gain that would have been long-term capital 
     gain. Contributions of capital gain property are subject to 
     different percentage limitations (i.e., limitations based on 
     the donor's income) than other contributions of property.
       For certain contributions of property, the deductible 
     amount is reduced from the fair market value of the 
     contributed property by the amount of any gain, generally 
     resulting in a deduction equal to the taxpayer's basis. This 
     rule applies to contributions of: (1) ordinary income 
     property, e.g., property that, at the time of contribution, 
     would not have resulted in long-term capital gain if the 
     property was sold by the taxpayer on the contribution 
     date;\163\ (2) tangible personal property that is used by the 
     donee in a manner unrelated to the donee's exempt (or 
     governmental) purpose; and (3) property to or for the use of 
     a private foundation (other than a foundation defined in 
     section 170(b)(1)(E)).
---------------------------------------------------------------------------
     \163\For certain contributions of inventory, C corporations 
     may claim an enhanced deduction equal to the lesser of (1) 
     basis plus one-half of the item's appreciation (i.e., basis 
     plus one half of fair market value in excess of basis) or (2) 
     two times basis. Sec. 170(e)(3), 170(e)(4), 170(e)(6).
---------------------------------------------------------------------------
       Charitable contributions of taxidermy are subject to the 
     tangible personal property rule (number (2) above). For 
     example, for appreciated taxidermy, if the property is used 
     to further the donee's exempt purpose, the deduction is fair 
     market value. But if the property is not used to further the 
     donee's exempt purpose, the deduction is the donor's basis. 
     If the taxidermy is depreciated, i.e., the value is less than 
     the taxpayer's basis in such property, taxpayers generally 
     deduct the fair market value of such contributions, 
     regardless of whether the property is used for exempt or 
     unrelated purposes by the donee.
       Substantiation
       No charitable deduction is allowed for any contribution of 
     $250 or more unless the taxpayer substantiates the 
     contribution by a contemporaneous written acknowledgement of 
     the contribution by the donee organization.\164\ Such 
     acknowledgement must include the amount of cash and a 
     description (but not value) of any property other than cash 
     contributed, whether the donee provided any goods or services 
     in consideration for the contribution (and a good faith 
     estimate of the value of any such goods or services).
---------------------------------------------------------------------------
     \164\Sec. 170(f)(8).
---------------------------------------------------------------------------
       In general, if the total charitable deduction claimed for 
     non-cash property is more than $500, the taxpayer must attach 
     a completed Form 8283 (Noncash Charitable Contributions) to 
     the taxpayer's return or the deduction is not allowed.\165\ C 
     corporations (other than personal service corporations and 
     closely-held corporations) are required to file Form 8283 
     only if the deduction claimed is more than $5,000. 
     Information required on the Form 8283 includes, among other 
     things, a description of the property, the appraised fair 
     market value (if an appraisal is required), the donor's basis 
     in the property, how the donor acquired the property, a 
     declaration by the appraiser regarding the appraiser's 
     general qualifications, an acknowledgement by the donee that 
     it is eligible to receive deductible contributions, and an 
     indication by the donee whether the property is intended for 
     an unrelated use.
---------------------------------------------------------------------------
     \165\Sec. 170(f)(11).
---------------------------------------------------------------------------
       Taxpayers are required to obtain a qualified appraisal for 
     donated property with a value of more than $5,000, and to 
     attach an appraisal summary to the tax return.\166\ Under 
     Treasury regulations, a qualified appraisal means an 
     appraisal document that, among other things: (1) relates to 
     an appraisal that is made not earlier than 60 days prior to 
     the date of contribution of the appraised property and not 
     later than the due date (including extensions) of the return 
     on which a deduction is first claimed under section 170;\167\ 
     (2) is prepared, signed, and dated by a qualified appraiser; 
     (3) includes (a) a description of the property appraised; (b) 
     the fair market value of such property on the

[[Page 7416]]

     date of contribution and the specific basis for the 
     valuation; (c) a statement that such appraisal was prepared 
     for income tax purposes; (d) the qualifications of the 
     qualified appraiser; and (e) the signature and taxpayer 
     identification number of such appraiser; and (4) does not 
     involve an appraisal fee that violates certain prescribed 
     rules.\168\ In the case of contributions of art valued at 
     more than $20,000 and other contributions of more than 
     $500,000, taxpayers are required to attach the appraisal to 
     the tax return. Taxpayers may request a Statement of Value 
     from the Internal Revenue Service in order to substantiate 
     the value of art with an appraised value of $50,000 or more 
     for income, estate, or gift tax purposes.\169\ The fee for 
     such a Statement is $2,500 for one, two, or three items or 
     art plus $250 for each additional item.
---------------------------------------------------------------------------
     \166\Id.
     \167\In the case of a deduction first claimed or reported on 
     an amended return, the deadline is the date on which the 
     amended return is filed.
     \168\Treas. Reg. sec. 1.170A-13(c)(3). Sec. 170(f)(11)(E).
     \169\Rev. Proc. 96-15, 1996-1 C.B. 627.
---------------------------------------------------------------------------
       If a donee organization sells, exchanges, or otherwise 
     disposes of contributed property with a claimed value of more 
     than $5,000 (other than publicly traded securities) within 
     two years of the property's receipt, the donee is required to 
     file a return (Form 8282) with the Secretary, and to furnish 
     a copy of the return to the donor, showing the name, address, 
     and taxpayer identification number of the donor, a 
     description of the property, the date of the contribution, 
     the amount received on the disposition, and the date of the 
     disposition.\170\
---------------------------------------------------------------------------
     \170\Sec. 6050L(a)(1).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Contributions of taxidermy
       For contributions of taxidermy property with a claimed 
     value of more than $500, the individual must include with the 
     individual's return a photograph of the taxidermy and 
     comparable sales data for similar items. It is intended that 
     valuation must be based on comparable sales and that a 
     deduction is not allowable if sufficient comparable sales are 
     not provided.
       For claims of more than $5,000, the taxpayer must notify 
     the IRS of the deduction and include with the taxpayer's 
     return a statement of value from the IRS, similar to that 
     available under present law for items of art, or a request 
     for such a statement and a fee of $500. The provision defines 
     taxidermy property as a mounted work of art which contains 
     any part of a dead animal.
       It is intended that for purposes of the charitable 
     contribution deduction, a taxpayer may not include in the 
     taxpayer's basis of the contributed taxidermy any costs 
     attributable to travel.
     Recapture of tax benefit upon subsequent disposition of 
         tangible personal property intended for an exempt use
       In general, the provision recovers the tax benefit for 
     charitable contributions of tangible personal property with 
     respect to which a fair market value deduction is claimed and 
     which is not used for exempt purposes. The provision applies 
     to appreciated tangible personal property that is identified 
     by the donee organization as for a use related to the purpose 
     or function constituting the donee's basis for tax exemption, 
     and for which a deduction of more than $5,000 is claimed 
     (``applicable property'').\171\
---------------------------------------------------------------------------
     \171\Present law rules continue to apply to any contribution 
     of exempt use property for which a deduction of $5,000 or 
     less is claimed.
---------------------------------------------------------------------------
       Under the provision, if a donee organization disposes of 
     applicable property within three years of the contribution of 
     the property, the donor is subject to an adjustment of the 
     tax benefit. If the disposition occurs in the tax year of the 
     donor in which the contribution is made, the donor's 
     deduction generally is basis and not fair market value.\172\ 
     If the disposition occurs in a subsequent year, the donor 
     must include as ordinary income for its taxable year in which 
     the disposition occurs an amount equal to the excess (if any) 
     of (i) the amount of the deduction previously claimed by the 
     donor as a charitable contribution with respect to such 
     property, over (ii) the donor's basis in such property at the 
     time of the contribution.
---------------------------------------------------------------------------
     \172\The disposition proceeds are regarded as relevant to a 
     determination of fair market value.
---------------------------------------------------------------------------
       There is no adjustment of the tax benefit if the donee 
     organization makes a certification to the Secretary, by 
     written statement signed under penalties of perjury by an 
     officer of the organization. The statement must either (1) 
     certify that the use of the property by the donee was related 
     to the purpose or function constituting the basis for the 
     donee's exemption, and describe how the property was used and 
     how such use furthered such purpose or function; or (2) state 
     the intended use of the property by the donee at the time of 
     the contribution and certify that such use became impossible 
     or infeasible to implement. The organization must furnish a 
     copy of the certification to the donor.
       A penalty of $10,000 applies to a person that identifies 
     applicable property as having a use that is related to a 
     purpose or function constituting the basis for the donee's 
     exemption knowing that it is not intended for such a 
     use.\173\
---------------------------------------------------------------------------
     \173\Other present-law penalties also may apply, such as the 
     penalty for aiding and abetting the understatement of tax 
     liability under section 6701.
---------------------------------------------------------------------------
     Reporting of exempt use property contributions
       The provision modifies the present-law information return 
     requirements that apply upon the disposition of contributed 
     property by a charitable organization (Form 8282, sec. 
     6050L). The return requirement is extended to dispositions 
     made within three years after receipt (from two years). The 
     donee organization also must provide, in addition to the 
     information already required to be provided on the return, a 
     description of the donee's use of the property, a statement 
     of whether use of the property was related to the purpose or 
     function constituting the basis for the donee's exemption, 
     and, if applicable, a certification of any such use 
     (described above).
       Effective date.--With respect to contributions of taxidermy 
     property, the provision is effective for contributions made 
     after November 15, 2005. With respect to exempt use property 
     generally, the provision is effective for contributions made 
     and returns filed after June 1, 2006.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Limit charitable deduction for contributions of clothing 
         and household items and modify recordkeeping and 
         substantiation requirements for certain charitable 
         contributions (secs. 217 and 218 of the Senate amendment 
         and sec. 170 of the Code)


                              Present Law

     Deductibility of charitable contributions
       In general
       In computing taxable income, a taxpayer who itemizes 
     deductions generally is allowed to deduct the amount of cash 
     and the fair market value of property contributed to an 
     organization described in section 501(c)(3) or to a Federal, 
     State, or local governmental entity.\174\ The amount of the 
     deduction allowable for a taxable year with respect to a 
     charitable contribution of property may be reduced or limited 
     depending on the type of property contributed, the type of 
     charitable organization to which the property is contributed, 
     and the income of the taxpayer.\175\ In general, more 
     generous charitable contribution deduction rules apply to 
     gifts made to public charities than to gifts made to private 
     foundations. Within certain limitations, donors also are 
     entitled to deduct their contributions to section 501(c)(3) 
     organizations for Federal estate and gift tax purposes. By 
     contrast, contributions to nongovernmental, non-charitable 
     tax-exempt organizations generally are not deductible by the 
     donor,\176\ though such organizations are eligible for the 
     exemption from Federal income tax with respect to such 
     donations.
---------------------------------------------------------------------------
     \174\The deduction also is allowed for purposes of 
     calculating alternative minimum taxable income.
     \175\Secs. 170(b) and (e).
     \176\Exceptions to the general rule of non-deductibility 
     include certain gifts made to a veterans' organization or to 
     a domestic fraternal society. In addition, contributions to 
     certain nonprofit cemetery companies are deductible for 
     Federal income tax purposes, but generally are not deductible 
     for Federal estate and gift tax purposes. Secs. 170(c)(3), 
     170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
     2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------
       Contributions of property
       The amount of the deduction for charitable contributions of 
     capital gain property generally equals the fair market value 
     of the contributed property on the date of the contribution. 
     Capital gain property means any capital asset or property 
     used in the taxpayer's trade or business the sale of which at 
     its fair market value, at the time of contribution, would 
     have resulted in gain that would have been long-term capital 
     gain. Contributions of capital gain property are subject to 
     different percentage limitations than other contributions of 
     property.
       For certain contributions of property, the deductible 
     amount is reduced from the fair market value of the 
     contributed property by the amount of any gain, generally 
     resulting in a deduction equal to the taxpayer's basis. This 
     rule applies to contributions of: (1) ordinary income 
     property, e.g., property that, at the time of contribution, 
     would not have resulted in long-term capital gain if the 
     property was sold by the taxpayer on the contribution 
     date;\177\ (2) tangible personal property that is used by the 
     donee in a manner unrelated to the donee's exempt (or 
     governmental) purpose; and (3) property to or for the use of 
     a private foundation (other than a foundation defined in 
     section 170(b)(1)(E)).
---------------------------------------------------------------------------
     \177\For certain contributions of inventory and other 
     property, C corporations may claim an enhanced deduction 
     equal to the lesser of (1) basis plus one-half of the item's 
     appreciation (i.e., basis plus one half of fair market value 
     in excess of basis) or (2) two times basis. Sec. 170(e)(3), 
     170(e)(4), 170(e)(6).
---------------------------------------------------------------------------
       Charitable contributions of clothing and household items 
     are subject to the tangible personal property rule (number 
     (2) above). If such contributed property is appreciated 
     property in the hands of the taxpayer, and is not used to 
     further the donee's exempt purpose, the deduction is basis. 
     In general, however, the value of clothing and household 
     items is less than the taxpayer's basis in such property, 
     with the result that taxpayers generally deduct the fair 
     market value of such contributions, regardless of whether the 
     property is used for exempt or unrelated purposes by the 
     donee.

[[Page 7417]]


       Substantiation
       A donor who claims a deduction for a charitable 
     contribution must maintain reliable written records regarding 
     the contribution, regardless of the value or amount of such 
     contribution. For a contribution of money, the donor 
     generally must maintain one of the following: (1) a cancelled 
     check; (2) a receipt (or a letter or other written 
     communication) from the donee showing the name of the donee 
     organization, the date of the contribution, and the amount of 
     the contribution; or (3) in the absence of a cancelled check 
     or a receipt, other reliable written records showing the name 
     of the donee, the date of the contribution, and the amount of 
     the contribution. For a contribution of property other than 
     money, the donor generally must maintain a receipt from the 
     donee organization showing the name of the donee, the date 
     and location of the contribution, and a detailed description 
     (but not the value) of the property.\178\ A donor of property 
     other than money need not obtain a receipt, however, if 
     circumstances make obtaining a receipt impracticable. Under 
     such circumstances, the donor must maintain reliable written 
     records regarding the contribution. The required content of 
     such a record varies depending upon factors such as the type 
     and value of property contributed.\179\
---------------------------------------------------------------------------
     \178\Treas. Reg. sec. 1.170A-13(a).
     \179\Treas. Reg. sec. 1.170A-13(b).
---------------------------------------------------------------------------
       In addition to the foregoing recordkeeping requirements, 
     substantiation requirements apply in the case of charitable 
     contributions with a value of $250 or more. No charitable 
     deduction is allowed for any contribution of $250 or more 
     unless the taxpayer substantiates the contribution by a 
     contemporaneous written acknowledgement of the contribution 
     by the donee organization. Such acknowledgement must include 
     the amount of cash and a description (but not value) of any 
     property other than cash contributed, whether the donee 
     provided any goods or services in consideration for the 
     contribution, and a good faith estimate of the value of any 
     such goods or services.\180\ In general, if the total 
     charitable deduction claimed for non-cash property is more 
     than $500, the taxpayer must attach a completed Form 8283 
     (Noncash Charitable Contributions) to the taxpayer's return 
     or the deduction is not allowed.\181\ In general, taxpayers 
     are required to obtain a qualified appraisal for donated 
     property with a value of more than $5,000, and to attach an 
     appraisal summary to the tax return.
---------------------------------------------------------------------------
     \180\Sec. 170(f)(8).
     \181\Sec. 170(f)(11).
---------------------------------------------------------------------------


                               House Bill

                            Senate Amendment

     General rule relating to clothing and household items
       The provision requires the Secretary to prepare and publish 
     an itemized list of clothing and household items and to 
     assign an amount to each item on the list. The assigned 
     amount is treated as the fair market value of the item for 
     purposes of the charitable contribution deduction and is 
     based on an assumption that the item is in good used 
     condition or better. Any deduction for a charitable 
     contribution of each such item may not exceed the item's 
     assigned amount. Any deduction for an item not in good used 
     condition or better may not exceed 20 percent of the item's 
     assigned amount. Any deduction for an item that is not 
     functional with respect to the use for which it was designed 
     is not allowed. The list must be published by the Secretary 
     at least once each calendar year and is applicable to 
     contributions of clothing and household items made while the 
     list is effective. The Secretary has discretion to determine 
     the effective dates for each published list. The list should 
     be prepared in consultation with donee organizations that 
     accept charitable contributions of clothing and household 
     items. In assigning amounts to particular items, the 
     Secretary should take into account the sales price of such 
     contributed item when sold by the donee organizations, 
     whether through an exempt program of such organizations or 
     otherwise. If an item of clothing or household item is not 
     included on the list published by the Secretary, present law 
     rules apply to the contribution of the item.
       The provision does not apply to contributions for which the 
     donor has obtained a qualified appraisal. The provision also 
     does not apply to contributions for which a deduction of more 
     than $500 is claimed if (1) the donee sells the contributed 
     item before the earlier of the due date (including 
     extensions) for filing the return of tax for the taxable year 
     of the donor in which the contribution was made or the date 
     such return was filed; (2) the donee reports the sales price 
     of the contributed item to the donor; and (3) the amount 
     claimed as a deduction with respect to the contributed item 
     does not exceed the amount of the sales price reported to the 
     donor.
       The provision does not apply to contributions by C 
     corporations. The provision applies to new and used items. 
     Household items include furniture, furnishings, electronics, 
     appliances, linens, and other similar items. Food, paintings, 
     antiques, and other objects of art, jewelry and gems, and 
     collections are excluded from the provision.
     Substantiation
       Clothing and household items
       As under present law, for contributions with a claimed 
     value of $250 or more, the taxpayer must obtain 
     contemporaneous substantiation from the donee organization, 
     which must include a description of the property contributed. 
     The provision provides that, as part of such substantiation, 
     the taxpayer obtain an indication of the condition of the 
     item(s), a description of the type of item, and either a copy 
     of the published list or instructions as to how to find such 
     list.
       Under present law, if a taxpayer claims that the total 
     value of charitable contributions of noncash property is more 
     than $500, the taxpayer must include with the taxpayer's 
     return a description of the property contributed and such 
     other information as the Secretary may require in order to 
     claim a charitable deduction (sec. 170(f)(11)(B)). This 
     requirement presently is satisfied through completion by the 
     taxpayer of the Form 8283 and attachment of the form to the 
     taxpayer's return. The provision requires that the donor 
     include the information about the contribution that is 
     contained in the contemporaneous substantiation obtained from 
     the donee organization (for gifts of $250 or more) as part of 
     such requirement.
       Contributions of cash
       In addition, in the case of a charitable contribution of 
     money, regardless of the amount, applicable recordkeeping 
     requirements are satisfied under the provision only if the 
     donor maintains a cancelled check or a receipt (or a letter 
     or other written communication) from the donee showing the 
     name of the donee organization, the date of the contribution, 
     and the amount of the contribution. The recordkeeping 
     requirements may not be satisfied by maintaining other 
     written records.
       Effective date.--The provision relating to clothing and 
     household items is effective for contributions made after 
     December 31, 2006. The provision relating to substantiation 
     more generally is effective for contributions made in taxable 
     years beginning after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Contributions of fractional interests in tangible personal 
         property (sec. 219 of the Senate amendment and sec. 170 
         of the Code)


                              Present Law

       In general, a charitable deduction is not allowable for a 
     contribution of a partial interest in property, such as an 
     income interest, a remainder interest, or a right to use 
     property.\182\ A gift of an undivided portion of a donor's 
     entire interest in property generally is not treated as a 
     nondeductible gift of a partial interest in property.\183\ 
     For this purpose, an undivided portion of a donor's entire 
     interest in property must consist of a fraction or percentage 
     of each and every substantial interest or right owned by the 
     donor in such property and must extend over the entire term 
     of the donor's interest in such property.\184\ A gift 
     generally is treated as a gift of an undivided portion of a 
     donor's entire interest in property if the donee is given the 
     right, as a tenant in common with the donor, to possession, 
     dominion, and control of the property for a portion of each 
     year appropriate to its interest in such property.\185\
---------------------------------------------------------------------------
     \182\Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate 
     tax), and 2522(c)(2) (gift tax).
     \183\Sec. 170(f)(3)(B)(ii).
     \184\Treas. Reg. sec. 1.170A-7(b)(1).
     \185\Treas. Reg. sec. 1.170A-7(b)(1).
---------------------------------------------------------------------------
       Consistent with these requirements, a charitable 
     contribution deduction generally is not allowable for a 
     contribution of a future interest in tangible personal 
     property.\186\ For this purpose, a future interest is one 
     ``in which a donor purports to give tangible personal 
     property to a charitable organization, but has an 
     understanding, arrangement, agreement, etc., whether written 
     or oral, with the charitable organization which has the 
     effect of reserving to, or retaining in, such donor a right 
     to the use, possession, or enjoyment of the property.''\187\ 
     Treasury regulations provide that section 170(a)(3), which 
     generally denies a deduction for a contribution of a future 
     interest in tangible personal property, ``[has] no 
     application in respect of a transfer of an undivided present 
     interest in property. For example, a contribution of an 
     undivided one-quarter interest in a painting with respect to 
     which the donee is entitled to possession during three months 
     of each year shall be treated as made upon the receipt by the 
     donee of a formally executed and acknowledged deed of gift. 
     However, the period of initial possession by the donee may 
     not be deferred in time for more than one year.''\188\
---------------------------------------------------------------------------
     \186\Sec. 170(a)(3).
     \187\Treas. Reg. sec. 1.170A-5(a)(4).
     \188\Treas. Reg. sec. 1.170A-5(a)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Require consistent valuation of fractional interests in the 
         same item of property
       In general, under present law and the provision a donor may 
     take a deduction for a charitable contribution of a 
     fractional interest in tangible personal property (such as an

[[Page 7418]]

     artwork), provided the donor satisfies the requirements for 
     deductibility (including the requirements concerning 
     contributions of partial interests and future interests in 
     property), and in subsequent years make additional charitable 
     contributions of interests in the same property.\189\ Under 
     the provision, a donor's charitable deduction for the initial 
     contribution of a fractional interest in an item of tangible 
     personal property (or collection of such items) shall be 
     determined as under current law (e.g., based upon the fair 
     market value of the artwork at the time of the contribution 
     of the fractional interest and considering whether the use of 
     the artwork will be related to the donee's exempt purposes). 
     For purposes of determining the deductible amount of each 
     additional contribution of an interest (whether or not a 
     fractional interest) in the same item of property, under the 
     provision, the fair market value of the item shall be the 
     lesser of: (1) the value used for purposes of determining the 
     charitable deduction for the initial fractional contribution; 
     or (2) the fair market value of the item at the time of the 
     subsequent contribution. This portion of the provision 
     applies for income, gift, and estate tax purposes.
---------------------------------------------------------------------------
     \189\See, e.g., Winokur v. Commissioner, 90 T.C. 733 (1988).
---------------------------------------------------------------------------
     Require actual possession by the donee
       The provision provides for recapture of the income tax 
     charitable deduction or gift tax charitable deduction under 
     certain circumstances. Specifically, if, during any one-year 
     period following a contribution of a fractional interest in 
     an item of tangible personal property, the donee fails to 
     take actual possession of the item for a period of time 
     corresponding substantially to the donee's then-existing 
     percentage interest in the item, then the donee's charitable 
     deduction for all previous contributions of interests in the 
     item shall be recaptured (plus interest).
       Under the provision, the Secretary of the Treasury is 
     authorized to promulgate rules to prevent the circumvention 
     of the provision by, for example, engaging in a transaction 
     in which a donor first transfers one or more items of 
     tangible personal property to a separate entity in exchange 
     for ownership interests in the entity, and subsequently makes 
     charitable contributions of such ownership interests.
       Effective date.--The provision is applicable for 
     contributions, bequests, and gifts made after the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Provisions relating to substantial and gross overstatement 
         of valuations of property (Sec. 220 of the Senate 
         amendment and secs. 6662 and 6664 of the Code)


                              present law

     Taxpayer penalties
       Present law imposes accuracy-related penalties on a 
     taxpayer in cases involving a substantial valuation 
     misstatement or gross valuation misstatement relating to an 
     underpayment of income tax.\190\ For this purpose, a 
     substantial valuation misstatement generally means a value 
     claimed that is at least twice (200 percent or more) the 
     amount determined to be the correct value, and a gross 
     valuation misstatement generally means a value claimed that 
     is at least four times (400 percent or more) the amount 
     determined to be the correct value.
---------------------------------------------------------------------------
     \190\Sec. 6662(b)(3) and (h).
---------------------------------------------------------------------------
       The penalty is 20 percent of the underpayment of tax 
     resulting from a substantial valuation misstatement and rises 
     to 40 percent for a gross valuation misstatement. No penalty 
     is imposed unless the portion of the underpayment 
     attributable to the valuation misstatement exceeds $5,000 
     ($10,000 in the case of a corporation other than an S 
     corporation or a personal holding company). Under present 
     law, no penalty is imposed with respect to any portion of the 
     understatement attributable to any item if (1) the treatment 
     of the item on the return is or was supported by substantial 
     authority, or (2) facts relevant to the tax treatment of the 
     item were adequately disclosed on the return or on a 
     statement attached to the return and there is a reasonable 
     basis for the tax treatment. Special rules apply to tax 
     shelters.
       In addition, the accuracy-related penalty does not apply if 
     a taxpayer shows there was reasonable cause for an 
     underpayment and the taxpayer acted in good faith.\191\
---------------------------------------------------------------------------
     \191\Sec. 6664(c).
---------------------------------------------------------------------------
     Penalty for aiding and abetting understatement of tax
       A penalty is imposed on a person who: (1) aids or assists 
     in or advises with respect to a tax return or other document; 
     (2) knows (or has reason to believe) that such document will 
     be used in connection with a material tax matter; and (3) 
     knows that this would result in an understatement of tax of 
     another person. In general, the amount of the penalty is 
     $1,000. If the document relates to the tax return of a 
     corporation, the amount of the penalty is $10,000.
     Qualified appraisals
       Present law requires a taxpayer to obtain a qualified 
     appraisal for donated property with a value of more than 
     $5,000, and to attach an appraisal summary to the tax 
     return.\192\ Treasury Regulations state that a qualified 
     appraisal means an appraisal document that, among other 
     things: (1) relates to an appraisal that is made not earlier 
     than 60 days prior to the date of contribution of the 
     appraised property and not later than the due date (including 
     extensions) of the return on which a deduction is first 
     claimed under section 170; (2) is prepared, signed, and dated 
     by a qualified appraiser; (3) includes (a) a description of 
     the property appraised; (b) the fair market value of such 
     property on the date of contribution and the specific basis 
     for the valuation; (c) a statement that such appraisal was 
     prepared for income tax purposes; (d) the qualifications of 
     the qualified appraiser; and (e) the signature and taxpayer 
     identification number of such appraiser; and (4) does not 
     involve an appraisal fee that violates certain prescribed 
     rules.\193\
---------------------------------------------------------------------------
     \192\Sec. 170(f)(11).
     \193\Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------
     Qualified appraisers
       Treasury Regulations define a qualified appraiser as a 
     person who holds himself or herself out to the public as an 
     appraiser or performs appraisals on a regular basis, is 
     qualified to make appraisals of the type of property being 
     valued (as determined by the appraiser's background, 
     experience, education and membership, if any, in professional 
     appraisal associations), is independent, and understands that 
     an intentionally false or fraudulent overstatement of the 
     value of the appraised property may subject the appraiser to 
     civil penalties.\194\
---------------------------------------------------------------------------
     \194\Treas. Reg. sec. 1.170A-13(c)(5)(i).
---------------------------------------------------------------------------
     Appraiser oversight
       The Secretary is authorized to regulate the practice of 
     representatives of persons before the Department of the 
     Treasury (``Department'').\195\ After notice and hearing, the 
     Secretary is authorized to suspend or disbar from practice 
     before the Department or the Internal Revenue Service 
     (``IRS'') a representative who is incompetent, who is 
     disreputable, who violates the rules regulating practice 
     before the Department or the IRS, or who (with intent to 
     defraud) willfully and knowingly misleads or threatens the 
     person being represented (or a person who may be 
     represented).
---------------------------------------------------------------------------
     \195\31 U.S.C. sec. 330.
---------------------------------------------------------------------------
       The Secretary also is authorized to bar from appearing 
     before the Department or the IRS, for the purpose of offering 
     opinion evidence on the value of property or other assets, 
     any individual against whom a civil penalty for aiding and 
     abetting the understatement of tax has been assessed. Thus, 
     an appraiser who aids or assists in the preparation or 
     presentation of an appraisal will be subject to disciplinary 
     action if the appraiser knows that the appraisal will be used 
     in connection with the tax laws and will result in an 
     understatement of the tax liability of another person. The 
     Secretary has authority to provide that the appraisals of an 
     appraiser who has been disciplined have no probative effect 
     in any administrative proceeding before the Department or the 
     IRS.


                               house bill

       No provision.


                            senate amendment

     Taxpayer penalties
       The provision lowers the thresholds for imposing accuracy-
     related penalties on a taxpayer who claims a deduction for 
     donated property for which a qualified appraisal is required. 
     Under the provision, a substantial valuation misstatement 
     exists when the claimed value of donated property is 150 
     percent or more of the amount determined to be the correct 
     value. A gross valuation misstatement occurs when the claimed 
     value of donated property is 200 percent or more the amount 
     determined to be the correct value. Under the provision, the 
     reasonable cause exception to the accuracy-related penalty 
     does not apply in the case of gross valuation misstatements.
     Appraiser oversight
       Appraiser penalties
       The provision establishes a civil penalty on any person who 
     prepares an appraisal that is to be used to support a tax 
     position if such appraisal results in a substantial or gross 
     valuation misstatement. The penalty is equal to the greater 
     of $1,000 or 10 percent of the understatement of tax 
     resulting from a substantial or gross valuation misstatement, 
     up to a maximum of 125 percent of the gross income derived 
     from the appraisal. Under the provision, the penalty does not 
     apply if the appraiser establishes that it was ``more likely 
     than not'' that the appraisal was correct.
       Disciplinary proceeding
       The provision eliminates the requirement that the Secretary 
     assess against an appraiser the civil penalty for aiding and 
     abetting the understatement of tax before such appraiser may 
     be subject to disciplinary action. Thus, the Secretary is 
     authorized to discipline appraisers after notice and hearing. 
     Disciplinary action may include, but is

[[Page 7419]]

     not limited to, suspending or barring an appraiser from: 
     preparing or presenting appraisals on the value of property 
     or other assets to the Department or the IRS; appearing 
     before the Department or the IRS for the purpose of offering 
     opinion evidence on the value of property or other assets; 
     and providing that the appraisals of an appraiser who have 
     been disciplined have no probative effect in any 
     administrative proceeding before the Department or the IRS.
       Qualified appraisers
       The provision defines a qualified appraiser as an 
     individual who (1) has earned an appraisal designation from a 
     recognized professional appraiser organization or has 
     otherwise met minimum education and experience requirements 
     to be determined by the IRS in regulations; (2) regularly 
     performs appraisals for which he or she receives 
     compensation; (3) can demonstrate verifiable education and 
     experience in valuing the type of property for which the 
     appraisal is being performed; (4) has not been prohibited 
     from practicing before the IRS by the Secretary at any time 
     during the three years preceding the conduct of the 
     appraisal; and (5) is not excluded from being a qualified 
     appraiser under applicable Treasury regulations.
       Qualified appraisals
       The provision defines a qualified appraisal as an appraisal 
     of property prepared by a qualified appraiser (as defined by 
     the provision) in accordance with generally accepted 
     appraisal standards and any regulations or other guidance 
     prescribed by the Secretary.
     Effective date
       The provision amending the accuracy-related penalty applies 
     to returns filed after the date of enactment. The provision 
     establishing a civil penalty that may be imposed on any 
     person who prepares an appraisal that is to be used to 
     support a tax position if such appraisal results in a 
     substantial or gross valuation misstatement applies to 
     appraisals prepared with respect to returns or submissions 
     filed after the date of enactment. The provisions relating to 
     appraiser oversight apply to appraisals prepared with respect 
     to returns or submissions filed after the date of enactment. 
     With respect to any contribution of a qualified real property 
     interest which is a restriction with respect to the exterior 
     of a building described in section 170(h)(4)(C)(ii) 
     (currently designated section 170(h)(4)(B)(ii), relating to 
     certain property located in a registered historic district 
     and certified as being of historic significance to the 
     district), and any appraisal with respect to such 
     contribution, the provision generally applies to returns 
     filed after December 16, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Establish additional exemption standards for credit 
         counseling organizations (Sec. 221 of the Senate 
         amendment and secs. 501 and 513 of the Code)


                              Present Law

       Under present law, a credit counseling organization may be 
     exempt as a charitable or educational organization described 
     in section 501(c)(3), or as a social welfare organization 
     described in section 501(c)(4). The IRS has issued two 
     revenue rulings holding that certain credit counseling 
     organizations are exempt as charitable or educational 
     organizations or as social welfare organizations.
       In Revenue Ruling 65-299,\196\ an organization whose 
     purpose was to assist families and individuals with financial 
     problems, and help reduce the incidence of personal 
     bankruptcy, was determined to be a social welfare 
     organization described in section 501(c)(4). The organization 
     counseled people in financial difficulties, advised 
     applicants on payment of debts, and negotiated with creditors 
     and set up debt repayment plans. The organization did not 
     restrict its services to the poor, made no charge for 
     counseling services, and made a nominal charge for certain 
     services to cover postage and supplies. For financial 
     support, the organization relied on voluntary contributions 
     from local businesses, lending agencies, and labor unions.
---------------------------------------------------------------------------
     \196\Rev. Rul. 65-299, 1965-2 C.B. 165.
---------------------------------------------------------------------------
       In Revenue Ruling 69-441,\197\ the IRS ruled an 
     organization was a charitable or educational organization 
     exempt under section 501(c)(3) by virtue of aiding low-income 
     people who had financial problems and providing education to 
     the public. The organization in that ruling had two 
     functions: (1) educating the public on personal money 
     management, such as budgeting, buying practices, and the 
     sound use of consumer credit through the use of films, 
     speakers, and publications; and (2) providing individual 
     counseling to low-income individuals and families without 
     charge. As part of its counseling activities, the 
     organization established debt management plans for clients 
     who required such services, at no charge to the clients.\198\ 
     The organization was supported by contributions primarily 
     from creditors, and its board of directors was comprised of 
     representatives from religious organizations, civic groups, 
     labor unions, business groups, and educational institutions.
---------------------------------------------------------------------------
     \197\Rev. Rul. 65-441, 1969-2 C.B. 115.
     \198\Debt management plans are debt payment arrangements, 
     including debt consolidation arrangements, entered into by a 
     debtor and one or more of the debtor's creditors, generally 
     structured to reduce the amount of a debtor's regular ongoing 
     payment by modifying the interest rate, minimum payment, 
     maturity or other terms of the debt. Such plans frequently 
     are promoted as a means for a debtor to restructure debt 
     without filing for bankruptcy.
---------------------------------------------------------------------------
       In 1976, the IRS denied exempt status to an organization, 
     Consumer Credit Counseling Service of Alabama, whose 
     activities were distinguishable from those in Revenue Ruling 
     69-441 in that (1) it did not restrict its services to the 
     poor, and (2) it charged a nominal fee for its debt 
     management plans.\199\ The organization provided free 
     information to the general public through the use of 
     speakers, films, and publications on the subjects of 
     budgeting, buying practices, and the use of consumer credit. 
     It also provided counseling to debt-distressed individuals, 
     not necessarily poor or low-income, and provided debt 
     management plans at the cost of $10 per month, which was 
     waived in cases of financial hardship. Its debt management 
     activities were a relatively small part of its overall 
     activities. The district court determined the organization 
     qualified as charitable and educational within section 
     501(c)(3), finding the debt management plans to be an 
     integral part of the agency's counseling function, and that 
     its debt management activities were incidental to its 
     principal functions, as only approximately 12 percent of the 
     counselors' time was applied to such programs and the charge 
     for the service was nominal. The court also considered the 
     facts that the agency was publicly supported, and that it had 
     a board dominated by members of the general public, as 
     factors indicating a charitable operation.\200\
---------------------------------------------------------------------------
     \199\Consumer Credit Counseling Services of Alabama, Inc. v. 
     U.S., 44 A.F.T.R. 2d (RIA) 5122 (D.D.C. 1978). The case 
     involved 24 agencies throughout the United States.
     \200\See also, Credit Counseling Centers of Oklahoma, Inc. v. 
     U.S., 45 A.F.T.R. 2d (RIA) 1401 (D.D.C. 1979) (holding the 
     same on virtually identical facts).
---------------------------------------------------------------------------
       A recent estimate shows the number of credit counseling 
     organizations increased from approximately 200 in 1990 to 
     over 1,000 in 2002.\201\ During the period from 1994 to late 
     2003, 1,215 credit counseling organizations applied to the 
     IRS for tax exempt status under section 501(c)(3), including 
     810 during 2000 to 2003.\202\ The IRS has recognized more 
     than 850 credit counseling organizations as tax exempt under 
     section 501c)((3).\203\ Few credit counseling organizations 
     have sought section 501(c)(4) status, and the IRS reports it 
     has not seen any significant increase in the number or 
     activity of such organizations operating as social welfare 
     organizations.\204\ As of late 2003, there were 872 active 
     tax-exempt credit counseling agencies operating in the United 
     States.\205\
---------------------------------------------------------------------------
     \201\Opening Statement of The Honorable Max Sandlin, Hearing 
     on Non-Profit Credit Counseling Organizations, House Ways and 
     Means Committee, Subcommittee on Oversight (November 20, 
     2003).
     \202\United States Senate Permanent Subcommittee on 
     Investigations, Committee on Governmental Affairs, 
     Profiteering in a Non-Profit Industry: Abusive Practices in 
     Credit Counseling, Report Prepared by the Majority & Minority 
     Staffs of the Permanent Subcommittee on Investigations and 
     Released in Conjunction with the Permanent Subcommittee 
     Investigations' Hearing on March 24, 2004, p. 3 (citing 
     letter dated December 18, 2003, to the Subcommittee from IRS 
     Commissioner Everson).
     \203\Testimony of Commissioner Mark Everson before the House 
     Ways and Means Committee, Subcommittee on Oversight (November 
     20, 2003).
     \204\Testimony of Commissioner Mark Everson before the House 
     Ways and Means Committee, Subcommittee on Oversight (November 
     20, 2003).
     \205\United States Senate Permanent Subcommittee on 
     Investigations, Committee on Governmental Affairs, 
     Profiteering in a Non-Profit Industry: Abusive Practices in 
     Credit Counseling, Report Prepared by the Majority & Minority 
     Staffs of the Permanent Subcommittee on Investigations and 
     Released in Conjunction with the Permanent Subcommittee 
     Investigations' Hearing on March 24, 2004, p. 3 (citing 
     letter dated December 18, 2003 to the Subcommittee from IRS 
     Commissioner Everson).
---------------------------------------------------------------------------
       A credit counseling organization described in section 
     501(c)(3) is exempt from certain Federal and State consumer 
     protection laws that provide exemptions for organizations 
     described therein.\206\ Some believe that these exclusions 
     from Federal and State regulation may be a primary motivation 
     for the recent increase in the number of organizations 
     seeking and obtaining exempt status under section 
     501(c)(3).\207\Such regulatory exemptions generally are not 
     available for social welfare organizations described in 
     section 501(c)(4).
---------------------------------------------------------------------------
     \206\E.g., The Credit Repair Organizations Act, 15 U.S.C. 
     section 1679 et seq., effective April 1, 1997 (imposing 
     restrictions on credit repair organizations that are enforced 
     by the Federal Trade Commission, including forbidding the 
     making of untrue or misleading statements and forbidding 
     advance payments; section 501(c)(3) organizations are 
     explicitly exempt from such regulation). Testimony of 
     Commissioner Mark Everson before the House Ways and Means 
     Committee, Subcommittee on Oversight (November 20, 2003) 
     (California's consumer protections laws that impose strict 
     standards on credit service organizations and the credit 
     repair industry do not apply to nonprofit organizations that 
     have received a final determination from the IRS that they 
     are exempt from tax under section 501(c)(3) and are not 
     private foundations).
     \207\Testimony of Commissioner Mark Everson before the House 
     Ways and Means Committee, Subcommittee on Oversight (November 
     20, 2003).
---------------------------------------------------------------------------
       Congress recently conducted hearings investigating the 
     activities of credit counseling organizations under various 
     consumer

[[Page 7420]]

     protection laws,\208\such as the Federal Trade Commission 
     Act.\209\ In addition, the IRS has commenced a broad 
     examination and compliance program with respect to the credit 
     counseling industry, pursuant to which the IRS has initiated 
     audits of 50 credit counseling organizations, including nine 
     of the 15 largest in terms of gross receipts.\210\
---------------------------------------------------------------------------
     \208\United States Senate Permanent Subcommittee on 
     Investigations, Committee on Governmental Affairs, 
     Profiteering in a Non-Profit Industry: Abusive Practices in 
     Credit Counseling, Report Prepared by the Majority & Minority 
     Staffs of the Permanent Subcommittee on Investigations and 
     Released in Conjunction with the Permanent Subcommittee 
     Investigations' Hearing on March 24, 2004.
     \209\15 U.S.C. sec. 45(a) (prohibiting unfair and deceptive 
     acts or practices in or affecting commerce; although the 
     Federal Trade Commission generally lacks jurisdiction to 
     enforce consumer protection laws against bona fide nonprofit 
     organizations, it may assert jurisdiction over a nonprofit, 
     including a credit counseling organization, if it 
     demonstrates the organization is organized to carry on 
     business for profit, is a mere instrumentality of a for-
     profit entity, or operates through a common enterprise with 
     one or more for-profit entities).
     \210\United States Senate Permanent Subcommittee on 
     Investigations, Committee on Governmental Affairs, 
     Profiteering in a Non-Profit Industry: Abusive Practices in 
     Credit Counseling, Report Prepared by the Majority & Minority 
     Staffs of the Permanent Subcommittee on Investigations and 
     Released in Conjunction with the Permanent Subcommittee 
     Investigations' Hearing on March 24, 2004, p. 31.
---------------------------------------------------------------------------
       Under the Bankruptcy Abuse Prevention and Consumer 
     Protection Act of 2005, an individual generally may not be a 
     debtor in bankruptcy unless such individual has, within 180 
     days of filing a petition for bankruptcy, received from an 
     approved nonprofit budget and credit counseling agency an 
     individual or group briefing that outlines the opportunities 
     for available credit counseling and assists the individual in 
     performing a related budget analysis.\211\The clerk of the 
     court must maintain a publicly available list of nonprofit 
     budget and credit counseling agencies approved by the U.S. 
     Trustee (or bankruptcy administrator). In general, the U.S. 
     Trustee (or bankruptcy administrator) shall only approve an 
     agency that demonstrates that it will provide qualified 
     counselors, maintain adequate provision for safekeeping and 
     payment of client funds, provide adequate counseling with 
     respect to client credit problems, and deal responsibly and 
     effectively with other matters relating to the quality, 
     effectiveness, and financial security of the services it 
     provides. The minimum qualifications for approval of such an 
     agency include: (1) in general, having an independent board 
     of directors; (2) charging no more than a reasonable fee, and 
     providing services without regard to ability to pay; (3) 
     adequate provision for safekeeping and payment of client 
     funds; (4) provision of full disclosures to clients; (5) 
     provision of adequate counseling with respect to a client's 
     credit problems; (6) trained counselors who receive no 
     commissions or bonuses based on the outcome of the counseling 
     services; (7) experience and background in providing credit 
     counseling; and (8) adequate financial resources to provide 
     continuing support services for budgeting plans over the life 
     of any repayment plan. An individual debtor must file with 
     the court a certificate from the approved nonprofit budget 
     and credit counseling agency that provided the required 
     services describing the services provided, and a copy of the 
     debt management plan, if any, developed through the 
     agency.\212\
---------------------------------------------------------------------------
     \211\This requirement does not apply in certain 
     circumstances, such as: (1) in general, where a debtor 
     resides in a district for which the U.S. Trustee has 
     determined that the approved counseling agencies for such 
     district are not reasonably able to provide adequate services 
     to additional individuals; (2) where exigent circumstances 
     merit a waiver, the individual seeking bankruptcy protection 
     files an appropriate certification with the court, and the 
     certification is acceptable to the court; and (3) in general, 
     where a court determines, after notice and hearing, that the 
     individual is unable to complete the requirement because of 
     incapacity, disability, or active military duty in a military 
     combat zone.
     \212\The Act also requires that, prior to discharge of 
     indebtedness under chapter 7 or chapter 13, a debtor complete 
     an approved instructional course concerning personal 
     financial management, which course need not be conducted by a 
     nonprofit agency.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            Senate Amendment

     Requirements for exempt status of credit counseling 
         organizations
       Under the provision, an organization that provides credit 
     counseling services as a substantial purpose of the 
     organization (``credit counseling organization'') is eligible 
     for exemption from Federal income tax only as a charitable or 
     educational organization under section 501(c)(3) or as a 
     social welfare organization under section 501(c)(4), and only 
     if (in addition to present-law requirements) the credit 
     counseling organization is organized and operated in 
     accordance with the following:
       1. The organization provides credit counseling services 
     tailored to the specific needs and circumstances of the 
     consumer;
       2. The organization makes no loans to debtors and does not 
     negotiate the making of loans on behalf of debtors;
       3. The organization generally does not promote, or charge 
     any separate fee for any service for the purpose of improving 
     any consumer's credit record, credit history, or credit 
     rating;
       4. The organization does not refuse to provide credit 
     counseling services to a consumer due to inability of the 
     consumer to pay, the ineligibility of the consumer for debt 
     management plan enrollment, or the unwillingness of a 
     consumer to enroll in a debt management plan;
       5. The organization establishes and implements a fee policy 
     to require that any fees charged to a consumer for its 
     services are reasonable, and prohibits charging any fee based 
     in whole or in part on a percentage of the consumer's debt, 
     the consumer's payments to be made pursuant to a debt 
     management plan, or on the projected or actual savings to the 
     consumer resulting from enrolling in a debt management plan;
       6. The organization at all times has a board of directors 
     or other governing body (a) that is controlled by persons who 
     represent the broad interests of the public, such as public 
     officials acting in their capacities as such, persons having 
     special knowledge or expertise in credit or financial 
     education, and community leaders; (b) not more than 20 
     percent of the voting power of which is vested in persons who 
     are employed by the organization or who will benefit 
     financially, directly or indirectly, from the organization's 
     activities (other than through the receipt of reasonable 
     directors' fees or the repayment of consumer debt to 
     creditors other than the credit counseling organization or 
     its affiliates) and (c) not more than 49 percent of the 
     voting power of which is vested in persons who are employed 
     by the organization or who will benefit financially, directly 
     or indirectly, from the organization's activities (other than 
     through the receipt of reasonable directors' fees);
       7. The organization receives no amount for providing 
     referrals to others for financial services (including debt 
     management services) or credit counseling services to be 
     provided to consumers, and pays no amount to others for 
     obtaining referrals of consumers; and
       8. The organization does not own more than 35 percent of 
     the total combined voting power of a corporation (or profits 
     or beneficial interest in the case of a partnership or trust 
     or estate) that is in the business of lending money, 
     repairing credit, or providing debt management plan services, 
     payment processing, and similar services.
       The Secretary may require any credit counseling 
     organization to submit such information as the Secretary 
     requires to verify that such organization meets the 
     requirements of the provision.
     Additional requirements for charitable and educational 
         organizations
       Under the provision, a credit counseling organization is 
     described in section 501(c)(3) only if, in addition to 
     satisfying the above requirements, the organization is 
     organized and operated such that the organization (1) charges 
     no fees (other than nominal fees) for debt management plan 
     services and waives any fees if the consumer is unable to pay 
     such fees; (2) does not solicit contributions from consumers 
     during the initial counseling process or while the consumer 
     is receiving services from the organization; (3) normally 
     limits debt management plan services (in the aggregate) to 25 
     percent of the organization's total activities (determined by 
     taking into account time, resources, source of revenues or 
     effort expended by the organization, and any other measures 
     prescribed by the Secretary).\213\
---------------------------------------------------------------------------
     \213\If, under any such measure, the organization's debt 
     management plan services exceed 25 percent of the 
     organization's total activities, the organization is treated 
     as exceeding the 25-percent limit. For example, an 
     organization that devotes 30 percent of its total staff time 
     to debt management plan services is regarded as exceeding the 
     25-percent limit, even if the organization devotes less than 
     15 percent of its total financial resources to debt 
     management plan services.
---------------------------------------------------------------------------
     Additional requirements for social welfare organizations
       Under the provision, a credit counseling organization is 
     described in section 501(c)(4) only if, in addition to 
     satisfying the above requirements applicable to such 
     organizations, it is organized and operated such that the 
     organization charges no fees (other than nominal fees) for 
     its credit counseling services, and waives any fees if the 
     consumer is unable to pay such fees. In addition, a credit 
     counseling organization shall not be treated as an 
     organization described in section 501(c)(4) unless such 
     organization notifies the Secretary, in such manner as the 
     Secretary may by regulations prescribe, that it is applying 
     for recognition as a credit counseling organization.
     Debt management plan services treated as an unrelated trade 
         or business
       Under the provision, debt management plan services are 
     treated as an unrelated trade or business for purposes of the 
     tax on income from an unrelated trade or business to the 
     extent such services are not substantially related to the 
     provision of credit counseling services to a consumer or are 
     provided by an organization that is not a credit counseling 
     organization.

[[Page 7421]]


     Definitions
       Credit counseling services
       Credit counseling services are (a) the provision of 
     educational information to the general public on budgeting, 
     personal finance, financial literacy, saving and spending 
     practices, and the sound use of consumer credit; (b) the 
     assisting of individuals and families with financial problems 
     by providing them with counseling; or (c) any combination of 
     such activities.
       Debt management plan services
       Debt management plan services are services related to the 
     repayment, consolidation, or restructuring of a consumer's 
     debt, and includes the negotiation with creditors of lower 
     interest rates, the waiver or reduction of fees, and the 
     marketing and processing of debt management plans.
       Effective date.--In general the provision applies to 
     taxable years beginning after the date of enactment. For a 
     credit counseling organization that is described in section 
     501(c)(3) or 501(c)(4) on the date of enactment, the 
     provision is effective for taxable years beginning after the 
     date that is one year after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Expand the base of the tax on private foundation net 
         investment income (sec. 222 of the Senate amendment and 
         sec. 4940 of the Code)


                              Present Law

     In general
       Under section 4940(a) of the Code, private foundations that 
     are recognized as exempt from Federal income tax under 
     section 501(a) of the Code are subject to a two-percent 
     excise tax on their net investment income. Private 
     foundations that are not exempt from tax, such as certain 
     charitable trusts,\214\ also are subject to an excise tax 
     under section 4940(b) based on net investment income and 
     unrelated business income. The two-percent rate of tax is 
     reduced to one-percent if certain requirements are met in a 
     taxable year.\215\ Unlike certain other excise taxes imposed 
     on private foundations, the tax based on investment income 
     does not result from a violation of substantive law by the 
     private foundation; it is solely an excise tax.
---------------------------------------------------------------------------
     \214\See sec. 4947(a)(1).
     \215\Sec. 4940(e).
---------------------------------------------------------------------------
       The tax on taxable private foundations under section 
     4940(b) is equal to the excess of the sum of the excise tax 
     that would have been imposed under section 4940(a) if the 
     foundation were tax exempt and the amount of the unrelated 
     business income tax that would have been imposed if the 
     foundation were tax exempt, over the income tax imposed on 
     the foundation under subtitle A of the Code.
     Net investment income
       Internal Revenue Code
       In general, net investment income is defined as the amount 
     by which the sum of gross investment income and capital gain 
     net income exceeds the deductions relating to the production 
     of gross investment income.\216\
---------------------------------------------------------------------------
     \216\Sec. 4940(c)(1). Net investment income also is 
     determined by applying section 103 (generally providing an 
     exclusion for interest on certain State and local bonds) and 
     section 265 (generally disallowing the deduction for interest 
     and certain other expenses with respect to tax-exempt 
     income). Sec. 4940(c)(5).
---------------------------------------------------------------------------
       Gross investment income is the gross amount of income from 
     interest, dividends, rents, payments with respect to 
     securities loans, and royalties. Gross investment income does 
     not include any income that is included in computing a 
     foundation's unrelated business taxable income.\217\
---------------------------------------------------------------------------
     \217\Sec. 4940(c)(2).
---------------------------------------------------------------------------
       Capital gain net income takes into account only gains and 
     losses from the sale or other disposition of property used 
     for the production of interest, dividends, rents, and 
     royalties, and property used for the production of income 
     included in computing the unrelated business income tax 
     (except to the extent the gain or loss is taken into account 
     for purposes of such tax). Losses from sales or other 
     dispositions of property are allowed only to the extent of 
     gains from such sales or other dispositions, and no capital 
     loss carryovers are allowed.\218\
---------------------------------------------------------------------------
     \218\Sec. 4940(c)(4).
---------------------------------------------------------------------------
       Treasury Regulations and case law
       The Treasury regulations elaborate on the Code definition 
     of net investment income. The regulations cite items of 
     investment income listed in the Code, and in addition clarify 
     that net investment income includes interest, dividends, 
     rents, and royalties derived from all sources, including from 
     assets devoted to charitable activities. For example, 
     interest received on a student loan is includible in the 
     gross investment income of a foundation making the loan.\219\
---------------------------------------------------------------------------
     \219\Treas. Reg. sec. 53.4940-1(d)(1).
---------------------------------------------------------------------------
       The regulations further provide that gross investment 
     income includes certain items of investment income that are 
     described in the unrelated business income tax 
     regulations.\220\ Such additional items include payments with 
     respect to securities loans (an item added to the Code in 
     1978), annuities, income from notional principal contracts, 
     and other substantially similar income from ordinary and 
     routine investments to the extent determined by the 
     Commissioner.\221\ These latter three categories of income 
     are not enumerated as net investment income in the Code.
---------------------------------------------------------------------------
     \220\Id.
     \221\Treas. Reg. sec. 1.512(b)-1(a)(1).
---------------------------------------------------------------------------
       The Treasury regulations also elaborate on the Code 
     definition of capital gain net income. The regulations 
     provide that the only capital gains and losses that are taken 
     into account are (1) gains and losses from the sale or other 
     disposition of property held by a private foundation for 
     investment purposes (other than program related investments), 
     and (2) property used for the production of income included 
     in computing the unrelated business income tax (except to the 
     extent the gain or loss is taken into account for purposes of 
     such tax).
       This definition of capital gain net income builds on the 
     definition provided in the Code by providing an exception for 
     gain and loss from program related investments and by 
     stating, in addition, that ``gains and losses from the sale 
     or other disposition of property used for the exempt purposes 
     of the private foundation are excluded.''\222\ As an example, 
     the regulations provide that gain or loss on the sale of 
     buildings used for the foundation's exempt activities are not 
     taken into account for purposes of the section 4940 tax. If a 
     foundation uses exempt income for exempt purposes and (other 
     than incidentally) for investment purposes, then the portion 
     of the gain or loss received upon sale or other disposition 
     that is allocable to the investment use is taken into account 
     for purposes of the tax.
---------------------------------------------------------------------------
     \222\Treas. Reg. sec. 53.4940-1(f)(1).
---------------------------------------------------------------------------
       The regulations further provide that ``property shall be 
     treated as held for investment purposes even though such 
     property is disposed of by the foundation immediately upon 
     its receipt, if it is property of a type which generally 
     produces interest, dividends, rents, royalties, or capital 
     gains through appreciation (for example, rental real estate, 
     stock, bonds, mineral interest, mortgages, and 
     securities).''\223\
---------------------------------------------------------------------------
     \223\Id.
---------------------------------------------------------------------------
       This regulation has been challenged in the courts. The 
     regulation says that property is treated as held for 
     investment purposes if it is of a type that ``generally 
     produces'' certain types of income. By contrast, the Code 
     provides that the property be ``used'' to produce such 
     income. In Zemurray Foundation v. United States, 687 F.2d 97 
     (5th Cir. 1982), the taxpayer foundation challenged the 
     Treasury's attempt to tax under section 4940 capital gain on 
     the sale of timber property. The taxpayer asserted that the 
     property was not actually used to produce investment income, 
     and that the Treasury Regulation was invalid because the 
     regulation would subject to tax property that is of a type 
     that could generally be used to produce investment income. On 
     this issue, the court upheld the Treasury regulation, 
     reasoning that the regulation's use of the phrase ``generally 
     used,'' though permitting taxation ``so long as the property 
     sold is usable to produce the applicable types of income, 
     regardless of whether the property is actually used to 
     produce income or not'' was not unreasonable or plainly 
     inconsistent with the statute.\224\ However, on remand to the 
     district court, the district court concluded that the timber 
     property at issue, though a type of property generally used 
     to produce investment income, was not susceptible for such 
     use.\225\ Thus, the district court concluded that the 
     Treasury could not tax the gain under this portion of the 
     regulation.
---------------------------------------------------------------------------
     \224\Zemurray Foundation v. United States, 687 F.2d 97, 100 
     (5th Cir. 1982).
     \225\Zemurray Foundation v. United States, 53 A.F.T.R. 2d 
     (RIA) 842 (E. D. La. 1983).
---------------------------------------------------------------------------
       The question then turned to the taxpayer's second challenge 
     to the regulation. At issue was the meaning of the regulatory 
     phrase ``capital gains through appreciation.'' The regulation 
     provides that if property is of a type that generally 
     produces capital gains through appreciation, then the gain is 
     subject to tax. The Treasury argued that the timber property 
     at issue, although held by the court not to be property (in 
     this case) susceptible for use to produce interest, 
     dividends, rents, or royalties, still was held by the 
     taxpayer to produce capital gain through appreciation and 
     therefore the gain should be subject to tax under the 
     regulation.
       On this issue, the court held for the taxpayer, reasoning 
     that the language of the Code clearly is limited to certain 
     gains and losses, e.g., the court cited the Code language 
     providing that ``there shall be taken into account only gains 
     and losses from the sale or other disposition of property 
     used for the production of interest, dividends, rents, and 
     royalties. . . .''\226\ The court noted that ``capital gains 
     through appreciation'' is not enumerated in the statute. The 
     court used as an example a jade figurine held by a 
     foundation. Jade figurines do not generally produce interest, 
     dividends, rents, or royalties, but gain on the sale of such 
     a figurine would be taxable under the ``capital gains through 
     appreciation'' standard, yet such standard does not appear in 
     the statute. After Zemurray, the Treasury generally conceded 
     this issue.\227\
---------------------------------------------------------------------------
     \226\Zemurray Foundation v. United States, 755 F.2d 404 (5th 
     Cir. 1985), 413 (citing Code sec. 4940(c)(4)(A).
     \227\G.C.M. 39538 (July 23, 1986).

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

[[Page 7422]]

       With respect to capital losses, the Code provides that 
     carryovers are not permitted, whereas the regulations state 
     that neither carryovers nor carrybacks are permitted.\228\
---------------------------------------------------------------------------
     \228\Treas. Reg. sec. 53.4940-1(f)(3).
---------------------------------------------------------------------------
       Application of Zemurray to the Code and the regulations
       Applying the Zemurray case to the Code and regulations 
     results in a general principle for purposes of present law: 
     private foundations are subject to tax under section 4940 
     only on the items of income and only on gains and losses 
     specifically enumerated therein. Under this principle, 
     private foundations generally are not subject to the section 
     4940 tax on other substantially similar types of income from 
     ordinary and routine investments, notwithstanding Treasury 
     regulations to the contrary. In addition, the regulations 
     provide that gain or loss from the sale or other disposition 
     of assets used for exempt purposes, with specific reference 
     to program-related investments, is excluded. The Code 
     provides for no such blanket exclusion; thus, under the 
     language of the Code and the reasoning of Zemurray, if a 
     foundation provided office space at below market rent to a 
     charitable organization for use in the organization's exempt 
     purposes, gain on the sale of the building by the foundation 
     should be subject to the section 4940 tax despite the 
     Treasury regulations.\229\
---------------------------------------------------------------------------
     \229\See also the example in Treas. Reg. sec. 53.4940-
     1(f)(1).
---------------------------------------------------------------------------
       In addition, under the logic of Zemurray, capital loss 
     carrybacks arguably are permitted, notwithstanding Treasury 
     regulations to the contrary, because the Code mentions only a 
     bar on use of carryovers and says nothing about carrybacks.


                               house bill

       No provision.


                            senate amendment

       The provision amends the definition of gross investment 
     income (including for purposes of capital gain net income) to 
     include items of income that are similar to the items 
     presently enumerated in the Code. Such similar items include 
     income from notional principal contracts, annuities, and 
     other substantially similar income from ordinary and routine 
     investments, and, with respect to capital gain net income, 
     capital gains from appreciation, including capital gains and 
     losses from the sale or other disposition of assets used to 
     further an exempt purpose.
       The provision provides that there are no carrybacks of 
     losses from sales or other dispositions of property.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Definition of convention or association of churches (sec. 
         223 of the Senate amendment and sec. 7701 of the Code)


                              present law

       Under present law, an organization that qualifies as a 
     ``convention or association of churches'' (within the meaning 
     of sec. 170(b)(1)(A)(i)) is not required to file an annual 
     return,\230\ is subject to the church tax inquiry and church 
     tax examination provisions applicable to organizations 
     claiming to be a church,\231\ and is subject to certain other 
     provisions generally applicable to churches.\232\ The 
     Internal Revenue Code does not define the term ``convention 
     or association of churches.''
---------------------------------------------------------------------------
     \230\Sec. 6033(a)(2)(A)(i).
     \231\Sec. 7611(h)(1)(B).
     \232\See, e.g., Sec. 402(g)(8)(B) (limitation on elective 
     deferrals); sec. 403(b)(9)(B) (definition of retirement 
     income account); sec. 410(d) (election to have participation, 
     vesting, funding, and certain other provisions apply to 
     church plans); sec. 414(e) (definition of church plan); sec. 
     415(c)(7) (certain contributions by church plans); sec. 
     501(h)(5) (disqualification of certain organizations from 
     making the sec. 501(h) election regarding lobbying 
     expenditure limits); sec. 501(m)(3) (definition of 
     commercial-type insurance); sec. 508(c)(1)(A) (exception from 
     requirement to file application seeking recognition of exempt 
     status); sec. 512(b)(12) (allowance of up to $1,000 deduction 
     for purposes of determining unrelated business taxable 
     income); sec. 514(b)(3)(E) (definition of debt-financed 
     property); sec. 3121(w)(3)(A) (election regarding exemption 
     from social security taxes); sec. 3309(b)(1) (application of 
     federal unemployment tax provisions to services performed in 
     the employ of certain organizations); sec. 6043(b)(1) 
     (requirement to file a return upon liquidation or dissolution 
     of the organization); and sec. 7702(j)(3)(A) (treatment of 
     certain death benefit plans as life insurance).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision provides that an organization that otherwise 
     is a convention or association of churches does not fail to 
     so qualify merely because the membership of the organization 
     includes individuals as well as churches, or because 
     individuals have voting rights in the organization.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Notification requirement for exempt entities not 
         currently required to file an annual information return 
         (sec. 224 of the Senate amendment and secs. 6033, 6104, 
         6652, and 7428 of the Code)


                              present law

       Under present law, the requirement that an exempt 
     organization file an annual information return does not apply 
     to several categories of exempt organizations. Organizations 
     excepted from the filing requirement include organizations 
     (other than private foundations), the gross receipts of which 
     in each taxable year normally are not more than $25,000.\233\ 
     Also exempt from the requirement are churches, their 
     integrated auxiliaries, and conventions or associations of 
     churches; the exclusively religious activities of any 
     religious order; section 501(c)(1) instrumentalities of the 
     United States; section 501(c)(21) trusts; an interchurch 
     organization of local units of a church; certain mission 
     societies; certain church-affiliated elementary and high 
     schools; certain state institutions whose income is excluded 
     from gross income under section 115; certain governmental 
     units and affiliates of governmental units; and other 
     organizations that the IRS has relieved from the filing 
     requirement pursuant to its statutory discretionary 
     authority.
---------------------------------------------------------------------------
     \233\Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); 
     Treas. Reg. sec. 1.6033-2(g)(1). Sec. 6033(a)(2)(A)(ii) 
     provides a $5,000 annual gross receipts exception from the 
     annual reporting requirements for certain exempt 
     organizations. In Announcement 82-88, 1982-25 I.R.B. 23, the 
     IRS exercised its discretionary authority under section 6033 
     to increase the gross receipts exception to $25,000, and 
     enlarge the category of exempt organizations that are not 
     required to file Form 990.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision provides that organizations that are excused 
     from filing an information return by reason of normally 
     having gross receipts below a certain specified amount 
     (generally, under $25,000) shall furnish to the Secretary 
     annually the legal name of the organization, any name under 
     which the organization operates or does business, the 
     organization's mailing address and Internet web site address 
     (if any), the organization's taxpayer identification number, 
     the name and address of a principal officer, and evidence of 
     the organization's continuing basis for its exemption from 
     the generally applicable information return filing 
     requirements. Upon such organization's termination of 
     existence, the organization is required to furnish notice of 
     such termination.
       The provision provides that if an organization fails to 
     provide the required notice for three consecutive years, the 
     organization's tax-exempt status is revoked. In addition, if 
     an organization that is required to file an annual 
     information return under section 6033(a) (Form 990) fails to 
     file such an information return for three consecutive years, 
     the organization's tax-exempt status is revoked. If an 
     organization fails to meet its filing obligation to the IRS 
     for three consecutive years in cases where the organization 
     is subject to the information return filing requirement in 
     one or more years during a three-year period and also is 
     subject to the notice requirement for one or more years 
     during the same three-year period, the organization's tax-
     exempt status is revoked.
       A revocation under the provision is effective from the date 
     that the Secretary determines was the last day the 
     organization could have timely filed the third required 
     information return or notice. To again be recognized as tax-
     exempt, the organization must apply to the Secretary for 
     recognition of tax-exemption, irrespective of whether the 
     organization was required to make an application for 
     recognition of tax-exemption in order to gain tax-exemption 
     originally.
       If upon application for tax-exempt status after a 
     revocation under the provision, the organization shows to the 
     satisfaction of the Secretary reasonable cause for failing to 
     file the required annual notices or returns, the 
     organization's tax-exempt status may, in the discretion of 
     the Secretary, be reinstated retroactive to the date of 
     revocation. An organization may not challenge under the 
     Code's declaratory judgment procedures (section 7428) a 
     revocation of tax-exemption made pursuant to the provision.
       There is no monetary penalty for failure to file the 
     notice. The provision does not require that the notices be 
     made available to the public under the public disclosure and 
     inspection rules generally applicable to exempt 
     organizations. The provision does not affect an 
     organization's obligation under present law to file required 
     information returns or existing penalties for failure to file 
     such returns.
       The Secretary is required to notify in a timely manner 
     every organization that is subject to the notice filing 
     requirement of the new filing obligation. Notification by the 
     Secretary shall be by mail, in the case of any organization 
     the identity and address of which is included in the list of 
     exempt organizations maintained by the Secretary, and by 
     Internet or other means of outreach, in the case of any other 
     organization. In addition, the Secretary is required to 
     publicize in a timely manner in appropriate forms and 
     instructions and other means of outreach the new penalty 
     imposed for consecutive failures to file the information 
     return.
       The Secretary is authorized to publish a list of 
     organizations whose exempt status is revoked under the 
     provision.

[[Page 7423]]

       Effective date.--The provision is effective for notices and 
     returns with respect to annual periods beginning after 2005.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     13. Disclosure to state officials of proposed actions related 
         to section 501(c) organizations (sec. 225 of the Senate 
         amendment and secs. 6103, 6104, 7213, 7213A, and 7431 of 
         the Code)


                              present law

       In the case of organizations that are described in section 
     501(c)(3) and exempt from tax under section 501(a) or that 
     have applied for exemption as an organization so described, 
     present law (sec. 6104(c)) requires the Secretary to notify 
     the appropriate State officer of (1) a refusal to recognize 
     such organization as an organization described in section 
     501(c)(3), (2) a revocation of a section 501(c)(3) 
     organization's tax-exempt status, and (3) the mailing of a 
     notice of deficiency for any tax imposed under section 507, 
     chapter 41, or chapter 42.\234\ In addition, at the request 
     of such appropriate State officer, the Secretary is required 
     to make available for inspection and copying, such returns, 
     filed statements, records, reports, and other information 
     relating to the above-described disclosures, as are relevant 
     to any State law determination. An appropriate State officer 
     is the State attorney general, State tax officer, or any 
     State official charged with overseeing organizations of the 
     type described in section 501(c)(3).
---------------------------------------------------------------------------
     \234\The applicable taxes include the termination tax on 
     private foundations; taxes on public charities for certain 
     excess lobbying expenses; taxes on a private foundation's net 
     investment income, self-dealing activities, undistributed 
     income, excess business holdings, investments that jeopardize 
     charitable purposes, and taxable expenditures (some of these 
     taxes also apply to certain non-exempt trusts); taxes on the 
     political expenditures and excess benefit transactions of 
     section 501(c)(3) organizations; and certain taxes on black 
     lung benefit trusts and foreign organizations.
---------------------------------------------------------------------------
       In general, returns and return information (as such terms 
     are defined in section 6103(b)) are confidential and may not 
     be disclosed or inspected unless expressly provided by 
     law.\235\ Present law requires the Secretary to keep records 
     of disclosures and requests for inspection\236\ and requires 
     that persons authorized to receive returns and return 
     information maintain various safeguards to protect such 
     information against unauthorized disclosure.\237\ Willful 
     unauthorized disclosure or inspection of returns or return 
     information is subject to a fine and/or imprisonment.\238\ 
     The knowing or negligent unauthorized inspection or 
     disclosure of returns or return information gives the 
     taxpayer a right to bring a civil suit.\239\ Such present-law 
     protections against unauthorized disclosure or inspection of 
     returns and return information do not apply to the 
     disclosures or inspections, described above, that are 
     authorized by section 6104(c).
---------------------------------------------------------------------------
     \235\Sec. 6103(a).
     \236\Sec. 6103(p)(3).
     \237\Sec. 6103(p)(4).
     \238\Secs. 7213 and 7213A.
     \239\Sec. 7431.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision provides that upon written request by an 
     appropriate State officer, the Secretary may disclose: (1) a 
     notice of proposed refusal to recognize an organization as a 
     section 501(c)(3) organization; (2) a notice of proposed 
     revocation of tax-exemption of a section 501(c)(3) 
     organization; (3) the issuance of a proposed deficiency of 
     tax imposed under section 507, chapter 41, or chapter 42; (4) 
     the names, addresses, and taxpayer identification numbers of 
     organizations that have applied for recognition as section 
     501(c)(3) organizations; and (5) returns and return 
     information of organizations with respect to which 
     information has been disclosed under (1) through (4) 
     above.\240\ Disclosure or inspection is permitted for the 
     purpose of, and only to the extent necessary in, the 
     administration of State laws regulating section 501(c)(3) 
     organizations, such as laws regulating tax-exempt status, 
     charitable trusts, charitable solicitation, and fraud. Such 
     disclosure or inspection may be made only to or by an 
     appropriate State officer or to an officer or employee of the 
     State who is designated by the appropriate State officer, and 
     may not be made by or to a contractor or agent. The Secretary 
     also is permitted to disclose or open to inspection the 
     returns and return information of an organization that is 
     recognized as tax-exempt under section 501(c)(3), or that has 
     applied for such recognition, to an appropriate State officer 
     if the Secretary determines that disclosure or inspection may 
     facilitate the resolution of Federal or State issues relating 
     to the tax-exempt status of the organization. For this 
     purpose, appropriate State officer means the State attorney 
     general, the State tax official, or any other State official 
     charged with overseeing organizations of the type described 
     in section 501(c)(3).
---------------------------------------------------------------------------
     \240\Such returns and return information also may be open to 
     inspection by an appropriate State officer.
---------------------------------------------------------------------------
       In addition, the provision provides that upon the written 
     request by an appropriate State officer, the Secretary may 
     make available for inspection or disclosure returns and 
     return information of an organization described in section 
     501(c)(2) (certain title holding companies), 501(c)(4) 
     (certain social welfare organizations), 501(c)(6) (certain 
     business leagues and similar organizations), 501(c)(7) 
     (certain recreational clubs), 501(c)(8) (certain fraternal 
     organizations), 501(c)(10) (certain domestic fraternal 
     organizations operating under the lodge system), and 
     501(c)(13) (certain cemetery companies). Such returns and 
     return information are available for inspection or disclosure 
     only for the purpose of, and to the extent necessary in, the 
     administration of State laws regulating the solicitation or 
     administration of the charitable funds or charitable assets 
     of such organizations. Such disclosure or inspection may be 
     made only to or by an appropriate State officer or to an 
     officer or employee of the State who is designated by the 
     appropriate State officer, and may not be made by or to a 
     contractor or agent. For this purpose, appropriate State 
     officer means the State attorney general, the State tax 
     officer, and the head of an agency designated by the State 
     attorney general as having primary responsibility for 
     overseeing the solicitation of funds for charitable purposes 
     of such organizations.
       In addition, the provision provides that any returns and 
     return information disclosed under section 6104(c) may be 
     disclosed in civil administrative and civil judicial 
     proceedings pertaining to the enforcement of State laws 
     regulating the applicable tax-exempt organization in a manner 
     prescribed by the Secretary. Returns and return information 
     are not to be disclosed under section 6104(c), or in such an 
     administrative or judicial proceeding, to the extent that the 
     Secretary determines that such disclosure would seriously 
     impair Federal tax administration. The provision makes 
     disclosures of returns and return information under section 
     6104(c) subject to the disclosure, recordkeeping, and 
     safeguard provisions of section 6103, including the 
     requirements that the Secretary maintain a permanent system 
     of records of requests for disclosure (sec. 6103(p)(3)), and 
     that the appropriate State officer maintain various 
     safeguards that protect against unauthorized disclosure (sec. 
     6103(p)(4)). The provision provides that the willful 
     unauthorized disclosure of returns or return information 
     described in section 6104(c) is a felony subject to a fine of 
     up to $5,000 and/or imprisonment of up to five years (sec. 
     7213(a)(2)), the willful unauthorized inspection of returns 
     or return information described in section 6104(c) is subject 
     to a fine of up to $1,000 and/or imprisonment of up to one 
     year (sec. 7213A), and provides the taxpayer the right to 
     bring a civil action for damages in the case of knowing or 
     negligent unauthorized disclosure or inspection of such 
     information (sec. 7431(a)(2)).
       Effective date.--The provision is effective on the date of 
     enactment but does not apply to requests made before such 
     date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Improve accountability of donor advised funds (secs. 231 
         through 234 of the Senate amendment and secs. 170 and 
         4958 and new secs. 4967, 4968, and 4969 of the Code)


                              Present Law

     Requirements for section 501(c)(3) tax-exempt status
       Charitable organizations, i.e., organizations described in 
     section 501(c)(3), generally are exempt from Federal income 
     tax and are eligible to receive tax deductible contributions. 
     A charitable organization must operate primarily in pursuance 
     of one or more tax-exempt purposes constituting the basis of 
     its tax exemption.\241\ In order to qualify as operating 
     primarily for a purpose described in section 501(c)(3), an 
     organization must satisfy the following operational 
     requirements: (1) the net earnings of the organization may 
     not inure to the benefit of any person in a position to 
     influence the activities of the organization; (2) the 
     organization must operate to provide a public benefit, not a 
     private benefit;\242\ (3) the organization may not be 
     operated primarily to conduct an unrelated trade or 
     business;\243\ (4) the organization may not engage in 
     substantial legislative lobbying; and (5) the organization 
     may not participate or intervene in any political campaign.
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     \241\Treas. Reg. sec. 1.501(c)(3)-1(c)(1). The Code specifies 
     such purposes as religious, charitable, scientific, testing 
     for public safety, literary, or educational purposes, or to 
     foster international amateur sports competition, or for the 
     prevention of cruelty to children or animals. In general, an 
     organization is organized and operated for charitable 
     purposes if it provides relief for the poor and distressed or 
     the underprivileged. Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
     \242\Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
     \243\Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a 
     certain level of unrelated trade or business activity will 
     not jeopardize tax-exempt status.
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     Classification of section 501(c)(3) organizations
       Section 501(c)(3) organizations are classified either as 
     ``public charities'' or ``private foundations.''\244\ Private 
     foundations generally are defined under section 509(a) as all

[[Page 7424]]

     organizations described in section 501(c)(3) other than an 
     organization granted public charity status by reason of: (1) 
     being a specified type of organization (i.e., churches, 
     educational institutions, hospitals and certain other medical 
     organizations, certain organizations providing assistance to 
     colleges and universities, or a governmental unit); (2) 
     receiving a substantial part of its support from governmental 
     units or direct or indirect contributions from the general 
     public; or (3) providing support to another section 501(c)(3) 
     entity that is not a private foundation. In contrast to 
     public charities, private foundations generally are funded 
     from a limited number of sources (e.g., an individual, 
     family, or corporation). Donors to private foundations and 
     persons related to such donors together often control the 
     operations of private foundations.
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     \244\Sec. 509(a). Private foundations are either private 
     operating foundations or private non-operating foundations. 
     In general, private operating foundations operate their own 
     charitable programs in contrast to private non-operating 
     foundations, which generally are grant-making organizations. 
     Most private foundations are non-operating foundations.
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       Because private foundations receive support from, and 
     typically are controlled by, a small number of supporters, 
     private foundations are subject to a number of anti-abuse 
     rules and excise taxes not applicable to public 
     charities.\245\ For example, the Code imposes excise taxes on 
     acts of ``self-dealing'' between disqualified persons 
     (generally, an enumerated class of foundation insiders\246\) 
     and a private foundation. Acts of self-dealing include, for 
     example, sales or exchanges, or leasing, of property; lending 
     of money; or the furnishing of goods, services, or facilities 
     between a disqualified person and a private foundation.\247\ 
     In addition, private non-operating foundations are required 
     to pay out a minimum amount each year as qualifying 
     distributions. In general, a qualifying distribution is an 
     amount paid to accomplish one or more of the organization's 
     exempt purposes, including reasonable and necessary 
     administrative expenses.\248\ Certain expenditures of private 
     foundations are also subject to tax.\249\ In general, taxable 
     expenditures are expenditures: (1) for lobbying; (2) to 
     influence the outcome of a public election or carry on a 
     voter registration drive (unless certain requirements are 
     met); (3) as a grant to an individual for travel, study, or 
     similar purposes unless made pursuant to procedures approved 
     by the Secretary; (4) as a grant to an organization that is 
     not a public charity or exempt operating foundation unless 
     the foundation exercises expenditure responsibility\250\ with 
     respect to the grant; or (5) for any non-charitable purpose. 
     Additional excise taxes may also apply in the event a private 
     foundation holds certain business interests (``excess 
     business holdings'')\251\ or makes an investment that 
     jeopardizes the foundation's exempt purposes.\252\
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     \245\Secs. 4940-4945.
     \246\See sec. 4946(a).
     \247\Sec. 4941.
     \248\Sec. 4942(g)(1)(A). A qualifying distribution also 
     includes any amount paid to acquire an asset used (or held 
     for use) directly in carrying out one or more of the 
     organization's exempt purposes and certain amounts set-aside 
     for exempt purposes. Sec. 4942(g)(1)(B) and 4942(g)(2).
     \249\Sec. 4945. Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \250\In general, expenditure responsibility requires that a 
     foundation make all reasonable efforts and establish 
     reasonable procedures to ensure that the grant is spent 
     solely for the purpose for which it was made, to obtain 
     reports from the grantee on the expenditure of the grant, and 
     to make reports to the Secretary regarding such expenditures. 
     Sec. 4945(h).
     \251\Sec. 4943.
     \252\Sec. 4944.
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     Supporting organizations
       The Code provides that certain ``supporting organizations'' 
     (in general, organizations that provide support to another 
     section 501(c)(3) organization that is not a private 
     foundation) are classified as public charities rather than 
     private foundations.\253\ To qualify as a supporting 
     organization, an organization must meet all three of the 
     following tests: (1) it must be organized and at all times 
     operated exclusively for the benefit of, to perform the 
     functions of, or to carry out the purposes of one or more 
     ``publicly supported organizations''\254\ (the 
     ``organizational and operational tests'');\255\ (2) it must 
     be operated, supervised, or controlled by or in connection 
     with one or more publicly supported organizations (the 
     ``relationship test'');\256\ and (3) it must not be 
     controlled directly or indirectly by one or more disqualified 
     persons (as defined in section 4946) other than foundation 
     managers and other than one or more publicly supported 
     organizations (the ``lack of outside control test'').\257\
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     \253\Sec. 509(a)(3).
     \254\In general, supported organizations of a supporting 
     organization must be publicly supported charities described 
     in sections 509(a)(1) or (a)(2).
     \255\Sec. 509(a)(3)(A).
     \256\Sec. 509(a)(3)(B).
     \257\Sec. 509(a)(3)(C).
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       To satisfy the relationship test, a supporting organization 
     must hold one of three statutorily described close 
     relationships with the supported organization. The 
     organization must be: (1) operated, supervised, or controlled 
     by a publicly supported organization (commonly referred to as 
     ``Type I'' supporting organizations); (2) supervised or 
     controlled in connection with a publicly supported 
     organization (``Type II'' supporting organizations); or (3) 
     operated in connection with a publicly supported organization 
     (``Type III'' supporting organizations).\258\
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     \258\Treas. Reg. sec. 1.509(a)-4(f)(2).
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       Type I supporting organizations
       In the case of supporting organizations that are operated, 
     supervised, or controlled by one or more publicly supported 
     organizations (Type I supporting organizations), one or more 
     supported organizations must exercise a substantial degree of 
     direction over the policies, programs, and activities of the 
     supporting organization.\259\ The relationship between the 
     Type I supporting organization and the supported organization 
     generally is comparable to that of a parent and subsidiary. 
     The requisite relationship may be established by the fact 
     that a majority of the officers, directors, or trustees of 
     the supporting organization are appointed or elected by the 
     governing body, members of the governing body, officers 
     acting in their official capacity, or the membership of one 
     or more publicly supported organizations.\260\
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     \259\Treas. Reg. sec. 1.509(a)-4(g)(1)(i).
     \260\Id.
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       Type II supporting organizations
       Type II supporting organizations are supervised or 
     controlled in connection with one or more publicly supported 
     organizations. Rather than the parent-subsidiary relationship 
     characteristic of Type I organizations, the relationship 
     between a Type II organization and its supported 
     organizations is more analogous to a brother-sister 
     relationship. In order to satisfy the Type II relationship 
     requirement, generally there must be common supervision or 
     control by the persons supervising or controlling both the 
     supporting organization and the publicly supported 
     organizations.\261\ An organization generally is not 
     considered to be ``supervised or controlled in connection 
     with'' a publicly supported organization merely because the 
     supporting organization makes payments to the publicly 
     supported organization, even if the obligation to make 
     payments is enforceable under state law.\262\
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     \261\Treas. Reg. sec. 1.509(a)-4(h)(1).
     \262\Treas. Reg. sec. 1.509(a)-4(h)(2).
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       Type III supporting organizations
       Type III supporting organizations are ``operated in 
     connection with'' one or more publicly supported 
     organizations. To satisfy the ``operated in connection with'' 
     relationship, Treasury regulations require that the 
     supporting organization be responsive to, and significantly 
     involved in the operations of, the publicly supported 
     organization. This relationship is deemed to exist where the 
     supporting organization meets both a ``responsiveness test'' 
     and an ``integral part test.''\263\ In general, the 
     responsiveness test requires that the Type III supporting 
     organization be responsive to the needs or demands of the 
     publicly supported organizations. In general, the integral 
     part test requires that the Type III supporting organization 
     maintain significant involvement in the operations of one or 
     more publicly supported organizations, and that such publicly 
     supported organizations are in turn dependent upon the 
     supporting organization for the type of support which it 
     provides.
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     \263\Treas. Reg. sec. 1.509(a)-4(i)(1).
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     Charitable contributions
       Contributions to organizations described in section 
     501(c)(3) are deductible, subject to certain limitations, as 
     an itemized deduction from Federal income taxes.\264\ Such 
     contributions also generally are deductible for estate and 
     gift tax purposes.\265\ However, if the taxpayer retains 
     control over the assets transferred to charity, the transfer 
     may not qualify as a completed gift for purposes of claiming 
     an income, estate, or gift tax deduction.
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     \264\Sec. 170.
     \265\Secs. 2055 and 2522.
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       Public charities enjoy certain advantages over private 
     foundations regarding the deductibility of contributions. For 
     example, contributions of appreciated capital gain property 
     to a private foundation generally are deductible only to the 
     extent of the donor's cost basis.\266\ In contrast, 
     contributions to public charities generally are deductible in 
     an amount equal to the property's fair market value, except 
     for gifts of inventory and other ordinary income property, 
     short-term capital gain property, and tangible personal 
     property the use of which is unrelated to the donee 
     organization's exempt purpose. In addition, under present 
     law, a taxpayer's deductible contributions generally are 
     limited to specified percentages of the taxpayer's 
     contribution base, which generally is the taxpayer's adjusted 
     gross income for a taxable year. The applicable percentage 
     limitations vary depending upon the type of property 
     contributed and the classification of the donee organization. 
     In general, contributions to non-operating private 
     foundations are limited to a smaller percentage of the 
     donor's contribution base (up to 30 percent) than 
     contributions to public charities (up to 50 percent).\267\
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     \266\A special rule in section 170(e)(5) provides that 
     taxpayers are allowed a deduction equal to the fair market 
     value of certain contributions of appreciated, publicly 
     traded stock contributed to a private foundation.
     \267\Sec. 170(b).
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       In general, taxpayers who make contributions and claim a 
     charitable deduction must

[[Page 7425]]

     satisfy recordkeeping and substantiation requirements.\268\ 
     The requirements vary depending on the type and value of 
     property contributed. A deduction generally may be denied if 
     the donor fails to satisfy applicable recordkeeping or 
     substantiation requirements.
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     \268\Sec. 170(f)(8).
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     Intermediate sanctions (excess benefit transaction tax)
       The Code imposes excise taxes on excess benefit 
     transactions between disqualified persons and public 
     charities.\269\ An excess benefit transaction generally is a 
     transaction in which an economic benefit is provided by a 
     public charity directly or indirectly to or for the use of a 
     disqualified person, if the value of the economic benefit 
     provided exceeds the value of the consideration (including 
     the performance of services) received for providing such 
     benefit.
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     \269\Sec. 4958. The excess benefit transaction tax is 
     commonly referred to as ``intermediate sanctions,'' because 
     it imposes penalties generally considered to be less punitive 
     than revocation of the organization's exempt status. The tax 
     also applies to transactions between disqualified persons and 
     social welfare organizations (as described in section 
     501(c)(4)).
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       For purposes of the excess benefit transaction rules, a 
     disqualified person is any person in a position to exercise 
     substantial influence over the affairs of the public charity 
     at any time in the five-year period ending on the date of the 
     transaction at issue.\270\ Persons holding certain powers, 
     responsibilities, or interests (e.g., officers, directors, or 
     trustees) are considered to be in a position to exercise 
     substantial influence over the affairs of the public charity.
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     \270\Sec. 4958(f)(1). A disqualified person also includes 
     certain family members of such a person, and certain entities 
     that satisfy a control test with respect to such persons.
---------------------------------------------------------------------------
       An excess benefit transaction tax is imposed on the 
     disqualified person and, in certain cases, on the 
     organization managers, but is not imposed on the public 
     charity. An initial tax of 25 percent of the excess benefit 
     amount is imposed on the disqualified person that receives 
     the excess benefit. An additional tax on the disqualified 
     person of 200 percent of the excess benefit applies if the 
     violation is not corrected within a specified period. A tax 
     of 10 percent of the excess benefit (not to exceed $10,000 
     with respect to any excess benefit transaction) is imposed on 
     an organization manager that knowingly participated in the 
     excess benefit transaction, if the manager's participation 
     was willful and not due to reasonable cause, and if the 
     initial tax was imposed on the disqualified person.
     Community foundations
       Community foundations generally are broadly supported 
     section 501(c)(3) public charities that make grants to other 
     charitable organizations located within a community 
     foundation's particular geographic area. Donors sometimes 
     make contributions to a community foundation through 
     transfers to a separate trust or fund, the assets of which 
     are held and managed by a bank or investment company.
       Certain community foundations are subject to special rules 
     that permit them to treat the separate funds or trusts 
     maintained by the community foundation as a single entity for 
     tax purposes. This ``single entity'' status allows the 
     community foundation to be classified as a public charity. 
     One of the requirements that community foundations must meet 
     is that funds maintained by the community foundation may not 
     be subject by the donor to any material restrictions or 
     conditions. The prohibition against material restrictions or 
     conditions is designed to prevent a donor from encumbering a 
     fund in a manner that prevents the community foundation from 
     freely distributing the assets and income from it in 
     furtherance of the community foundation's charitable 
     purposes. Under Treasury regulations, whether a particular 
     restriction or condition placed by the donor on the transfer 
     of assets is material must be determined from all of the 
     facts and circumstances of the transfer. The regulations set 
     out some of the more significant facts and circumstances to 
     be considered in making a determination, including: (1) 
     whether the transferee public charity is the fee owner of the 
     assets received; (2) whether the assets are held and 
     administered by the public charity in a manner consistent 
     with its own exempt purposes; (3) whether the governing body 
     of the public charity has the ultimate authority and control 
     over the assets and the income derived from them; and (4) 
     whether the governing body of the public charity is 
     independent from the donor. The regulations provide several 
     non-adverse factors for determining whether a particular 
     restriction or condition placed by the donor on the transfer 
     of assets is material. In addition, the regulations list 
     numerous factors and subfactors that indicate that the 
     community foundation is prevented from freely and effectively 
     employing the donated assets and the income thereon.
     Donor advised funds
       Some charitable organizations (including community 
     foundations) establish accounts to which donors may 
     contribute and thereafter provide nonbinding advice or 
     recommendations with regard to distributions from the fund or 
     the investment of assets in the fund. Such accounts are 
     commonly referred to as ``donor advised funds.'' Donors who 
     make contributions to charities for maintenance in a donor 
     advised fund generally claim a charitable contribution 
     deduction at the time of the contribution. Although 
     sponsoring charities frequently permit donors (or other 
     persons appointed by donors) to provide nonbinding 
     recommendations concerning the distribution or investment of 
     assets in a donor advised fund, sponsoring charities 
     generally must have legal ownership and control of such 
     assets following the contribution. If the sponsoring charity 
     does not have such control (or permits a donor to exercise 
     control over amounts contributed), the donor's contributions 
     may not qualify for a charitable deduction, and, in the case 
     of a community foundation, the contribution may be treated as 
     being subject to a material restriction or condition by the 
     donor.
       In recent years, a number of financial institutions have 
     formed charitable corporations for the principal purpose of 
     offering donor advised funds, sometimes referred to as 
     ``commercial'' donor advised funds. In addition, some 
     established charities have begun operating donor advised 
     funds in addition to their primary activities. The IRS has 
     recognized several organizations that sponsor donor advised 
     funds, including ``commercial'' donor advised funds, as 
     section 501(c)(3) public charities. The term ``donor advised 
     fund'' is not defined in statute or regulations.
       Under the Katrina Emergency Tax Relief Act of 2005, certain 
     of the above-described percent limitations on contributions 
     to public charities are temporarily suspended for purposes of 
     certain ``qualified contributions'' to public charities. 
     Under the Act, 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.


                               House Bill

       No provision.


                            Senate Amendment

     Definitions
       Donor advised fund
       The provision defines a ``donor advised fund'' as a fund or 
     account that is: (1) separately identified by reference to 
     contributions of a donor or donors\271\ (2) owned and 
     controlled by a sponsoring organization and (3) with respect 
     to which a donor (or any person appointed or designated by 
     such donor (a ``donor advisor'')) has, or reasonably expects 
     to have, advisory privileges with respect to the distribution 
     or investment of amounts held in the separately identified 
     fund or account by reason of the donor's status as a donor.
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     \271\The requirement that a donor advised fund be separately 
     identified by reference to contributions of a donor or donors 
     is intended to exclude from the definition of ``donor advised 
     fund'' certain types of funds or accounts maintained by 
     community foundations and other charities, such as field-of-
     interest funds and scholarship funds, provided such funds or 
     accounts are not separately identified by reference to 
     contributions of a donor or donors.
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       Notwithstanding the foregoing, the term ``donor advised 
     fund'' does not include a fund or account from which are made 
     grants to individuals for travel, study, or other similar 
     purposes by such individual, provided that (1) a donor's or 
     donor advisor's advisory privileges are performed exclusively 
     by such donor or donor advisor in such person's capacity as a 
     member of a committee appointed by the sponsoring 
     organization, (2) no combination of a donor and persons 
     related to or appointed by such donor, control, directly or 
     indirectly, such committee, and (3) all grants from such fund 
     or account satisfy requirements similar to those described in 
     section 4945(g) (concerning grants to individuals by private 
     foundations). In addition, the Secretary may exempt a fund or 
     account from treatment as a donor advised fund if such fund 
     or account (1) is advised by a committee not directly or 
     indirectly controlled by a donor, donor advisor, or persons 
     related to a donor or donor advisor or (2) will benefit a 
     single identified organization or governmental entity or a 
     single identified charitable purpose.
       Sponsoring organization
       The provision defines a ``sponsoring organization'' as an 
     organization that: (1) is described in section 170(c)\272\ 
     (other than a governmental entity described in section 
     170(c)(1), and without regard to any requirement that the 
     organization be organized in the United States\273\); and (2) 
     maintains one or more donor advised funds.
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     \272\Section 170(c) describes organizations to which 
     charitable contributions that are deductible for income tax 
     purposes can be made.
     \273\See sec. 170(c)(2)(A).
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       Investment advisor
       Under the provision, the term ``investment advisor'' means, 
     with respect to any sponsoring organization, any person 
     (other than an employee of the sponsoring organization) 
     compensated by the sponsoring organization for managing the 
     investment of, or providing investment advice with respect 
     to, assets

[[Page 7426]]

     maintained in donor advised funds owned by the sponsoring 
     organization.
     Deductibility of contributions to a sponsoring organization 
         for maintenance in a donor advised fund
       Contributions to certain sponsoring organizations for 
           maintenance in a donor advised fund not eligible for a 
           charitable deduction
       Under the provision, contributions to a sponsoring 
     organization for maintenance in a donor advised fund are not 
     eligible for a charitable deduction for income tax purposes 
     if the sponsoring organization is a veterans' organization 
     described in section 170(c)(3), a fraternal society described 
     in section 170(c)(4), or a cemetery company described in 
     section 170(c)(5); for gift tax purposes if the sponsoring 
     organization is a fraternal society described in section 
     2522(a)(3) or a veterans' organization described in section 
     2522(a)(4); or for estate tax purposes if the sponsoring 
     organization is a fraternal society described in section 
     2055(a)(3) or a veterans' organization described in section 
     2055(a)(4). In addition, contributions to a sponsoring 
     organization for maintenance in a donor advised fund are not 
     eligible for a charitable deduction if the sponsoring 
     organization is a Type III supporting organization; a 
     deduction is allowed for such a contribution to a Type I or 
     Type II supporting organization to the extent not prohibited 
     by regulations. Regulations generally shall prohibit such a 
     deduction where the donor of the contribution directly or 
     indirectly controls a supported organization of the Type I or 
     Type II supporting organization.
       Additional substantiation requirements
       In addition to satisfying present-law substantiation 
     requirements under section 170(f), a donor must obtain, with 
     respect to each charitable contribution to a sponsoring 
     organization to be maintained in a donor advised fund, a 
     contemporaneous written acknowledgment from the sponsoring 
     organization providing that the sponsoring organization has 
     exclusive legal control over the assets contributed.
     Minimum distributions
       Aggregate distribution requirement
       Under the provision, a sponsoring organization is required, 
     for each taxable year of the organization, to make qualifying 
     distributions, from the assets of donor advised funds 
     maintained by the organization, equivalent to the applicable 
     percentage of the aggregate asset value of donor advised 
     funds maintained by the sponsoring organization as determined 
     on the last day of the immediately preceding taxable year. 
     Such qualifying distributions generally must be made by the 
     first day of the second taxable year following the taxable 
     year. The provision excludes from the computation of the 
     required distributable amount for a taxable year the assets 
     of donor advised funds that have been in existence for less 
     than one full year as of the end of the immediately preceding 
     taxable year.\274\ The aggregate payout rule does not apply 
     in the case of a donor advised fund maintained by a private 
     foundation that is subject to the requirements of section 
     4942. The applicable percentage is three percent for the 
     first taxable year beginning after the date of enactment, 
     four percent for the second such taxable year, and five 
     percent for any such taxable year thereafter.
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     \274\Assume, for example, that a sponsoring organization 
     initially maintained 10 donor advised funds, each established 
     in Year 1. In Year 3, a new donor advised fund is 
     established. For purposes of determining the sponsoring 
     organization's aggregate payout requirement for Year 4, the 
     donor advised fund established in Year 3 is excluded, because 
     it was in existence for less than a year as of the end of 
     Year 3. For these purposes, a donor advised fund is 
     considered created when the account is first established 
     (rather than, for example, when a donor achieves the minimum 
     account balance required under the sponsoring organization's 
     rules to begin grantmaking).
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       Generally applicable account-level activity requirement
       Under the provision, a sponsoring organization must 
     distribute from each of its donor advised funds at least a 
     certain amount in qualifying distributions during any 
     applicable three-year period by the 181st day of the first 
     taxable year following such period. The required 
     distributable amount is the greater of (1) $250 or (2) two 
     and one-half percent of the sponsoring organization's average 
     required minimum initial contribution amount for such 
     period\275\ (or average required minimum balance, if greater) 
     for the type of donor\276\ at issue. An applicable three-year 
     period must correspond with three consecutive taxable years 
     of the sponsoring organization. The first applicable three-
     year period for a donor advised fund begins only after the 
     fund has been in existence for one full year.\277\
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     \275\For purposes of the provision, the required minimum 
     initial contribution amount is the minimum contribution 
     amount required by the sponsoring organization in order to 
     open a donor advised fund.
     \276\Under some circumstances, for example, a sponsoring 
     organization may establish higher minimum initial 
     contribution amounts for corporate donors than for individual 
     donors.
     \277\Applicable three-year periods for any donor advised fund 
     run consecutively, such that the second three-year period 
     begins immediately after the first three-year period ends. 
     For example, assume donor advised fund X is established on 
     March 30 of Year 1, and the sponsoring organization's taxable 
     year corresponds to the calendar year. As of the end of Year 
     1, X has not been in existence for one full year; therefore, 
     X's first applicable three-year period does not begin in Year 
     2. Instead, the first such period begins on January 1 of Year 
     3 and runs through December 31 of Year 5. X's second 
     applicable three-year period begins on January 1 of Year 6 
     and ends on December 31 of Year 8.
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       Account-level distribution requirement for accounts that 
           hold illiquid assets
       If, as of the end of any taxable year of the sponsoring 
     organization, a donor advised fund holds assets other than 
     cash and marketable securities (i.e., ``illiquid assets'') 
     that equal more than 10 percent of the total value of assets 
     in the fund (determined using the valuation procedures 
     described below), the donor advised fund is considered to be 
     an ``illiquid asset donor advised fund'' for the subsequent 
     taxable year of the sponsoring organization. A sponsoring 
     organization must distribute from each illiquid asset donor 
     advised fund as qualifying distributions by the 181st day of 
     the second taxable year following such subsequent taxable 
     year an amount equal to the applicable percentage of the 
     value of the assets in the donor advised fund as of the end 
     of such year (the ``illiquid asset payout requirement''). The 
     applicable percentage is three percent for the first taxable 
     year beginning after the date of enactment, four percent for 
     the second such taxable year, and five percent for any such 
     taxable year thereafter.
       If, as of the end of a taxable year of the sponsoring 
     organization, an illiquid asset in a donor advised fund has 
     not been held for a period of 12 months, such asset is not 
     considered an illiquid asset for such year. However, if an 
     illiquid asset has been exchanged for another illiquid asset, 
     then the holding period for any such other illiquid asset 
     includes the period during which the illiquid asset that was 
     exchanged was held. The Secretary is authorized to promulgate 
     anti- abuse rules to prevent the circumvention of the 
     provision through transactions designed to avoid application 
     of illiquid asset payout requirement, such as through 
     exchanges of illiquid assets for other assets.
       Qualifying distributions
       For purposes of all of the distribution requirements 
     described in the provision, qualifying distributions are 
     amounts paid to organizations described in section 
     170(b)(1)(A) (other than Type III supporting organizations or 
     a sponsoring organization if the amount is for maintenance in 
     a donor advised fund). Distributions to Type I or Type II 
     supporting organizations may be qualifying distributions if 
     not prohibited by regulations.\278\ Distributions to the 
     sponsoring organization generally are qualifying 
     distributions; however, a distribution to the sponsoring 
     organization in satisfaction of the aggregate distribution 
     requirement is a qualifying distribution only if the 
     distribution is designated for use in connection with a 
     charitable program of the sponsoring organization (e.g., if 
     funds are transferred to a scholarship fund (that does not 
     meet the definition of donor advised fund because, for 
     example, the scholarship fund is not separately identified by 
     reference to donors) for the awarding of scholarships 
     consistent with the sponsoring organization's exempt 
     purposes). Amounts permanently set aside for purposes, and 
     under procedures similar to those, described in section 
     4942(g) are treated as qualifying distributions. Qualifying 
     distributions also include amounts paid during a taxable year 
     for reasonable and necessary administrative expenses charged 
     to a donor advised fund by a sponsoring organization.
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     \278\Regulations generally shall prohibit such a distribution 
     where the donor or donor advisor of the amounts distributed 
     directly or indirectly controls a supported organization of 
     the Type I or Type II supporting organization.
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       Valuation
       Special valuation rules apply for purposes of determining 
     the required distributable amount for a taxable year under 
     the aggregate payout requirement and the account-level payout 
     requirement applicable to accounts that hold illiquid assets. 
     For such purposes, the fair market values of cash and of 
     securities for which market quotations are readily available 
     are determined on a monthly basis. All other assets 
     (``illiquid assets'') transferred by a donor to a sponsoring 
     organization for maintenance in a donor advised fund are 
     valued at the sum of (1) the value claimed by the donor for 
     purposes of determining the donor's charitable deduction for 
     the contribution of such assets to the sponsoring 
     organization,\279\ and (2) an assumed annual rate of return 
     of five percent. If a donor advised fund purchases an 
     illiquid asset, such asset is valued at the sum of (1) the 
     purchase price paid for the assets, and (2) an assumed annual 
     rate of return of five percent. The Secretary of the Treasury 
     is authorized to specify the requirements for making such 
     computations. Under the provision, the Secretary of the 
     Treasury is also authorized to promulgate rules permitting 
     adjustments in the value of an illiquid asset

[[Page 7427]]

     in situations where the asset declines significantly in value 
     following a contribution or purchase of the asset.
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     \279\The donor is required to report to the sponsoring 
     organization the value of the asset claimed by the donor for 
     charitable deduction purposes either by supplying to the 
     sponsoring organization a copy of the donor's completed Form 
     8283 related to the deduction (if applicable) or by following 
     any alternative procedures specified by the Secretary.
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       Treatment of qualifying distributions
       Distributions made in satisfaction of any of the above-
     described distribution requirements are counted for purposes 
     of all payout requirements described in the provision. For 
     purposes of any distribution requirement described in this 
     provision, the taxpayer may designate a qualifying 
     distribution as being made out of the undistributed amount 
     remaining from any prior taxable year or as being made in 
     satisfaction of the distribution requirement for the current 
     taxable year. Amounts distributed in excess of the 
     undistributed amount for the current year and all previous 
     taxable years may be carried forward for up to five taxable 
     years following the taxable year in which the excess payment 
     is made.
       Excise tax for failure to distribute
       In the event of a failure to distribute the required amount 
     in connection with any of the above-described distribution 
     requirements within the prescribed time period, the provision 
     imposes excise taxes similar to the private foundation excise 
     taxes under section 4942. Specifically, a first-tier excise 
     tax equal to 30 percent of the undistributed amount is 
     imposed. If the failure is not corrected within the taxable 
     period (as defined in existing section 4942(j)(1)), a second-
     tier tax equal to 100 percent of the undistributed amount is 
     imposed. The first and second tier taxes are subject to 
     abatement under generally applicable present law rules. 
     Taxable period means, with respect to any undistributed 
     amount for any taxable year or applicable 3-year period, the 
     period beginning with the first day of the taxable year or 
     applicable period and ending on the earlier of the date of 
     mailing of a notice of deficiency with respect to the 
     imposition of the initial tax or the date on which such tax 
     is assessed.
     Disqualified persons, excess benefit transactions, and other 
         sanctions
       Disqualified persons
       The provision provides that donors, donor advisors, and 
     investment advisors to donor advised funds (as well as 
     persons related to the foregoing persons\280\) are treated as 
     disqualified persons with respect to the sponsoring 
     organization under section 4958 or under section 4946(a).
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     \280\For purposes of the provision, a person is treated as 
     related to another person if (1) such person bears a 
     relationship to such other person similar to the 
     relationships described in sections 4958(f)(1)(B) and 
     4958(f)(1)(C).
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       Excess benefit transactions
       The provision also provides that distributions from a donor 
     advised fund to a person that with respect to such fund is a 
     donor, donor adviser, or a person related to a donor or donor 
     adviser (though not an investment advisor) is treated as an 
     excess benefit transaction under section 4958, with the 
     entire amount paid to any such person treated as the amount 
     of the excess benefit. This rule applies regardless of 
     whether the sponsoring organization is a public charity or a 
     private foundation and regardless of whether, but for this 
     rule, the transaction would have been subject to the section 
     4941 self-dealing rules.\281\
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     \281\This rule includes any distribution to a donor, donor 
     advisor, or a related person, whether in the form of a grant, 
     loan, compensation arrangement, expense reimbursement, or 
     other payment. If the excess benefit results from the payment 
     of compensation, the entire amount paid as compensation will 
     be deemed the amount of the excess benefit, whether the 
     sponsoring organization is a private foundation or a public 
     charity.
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       Any amount repaid as a result of correcting such an excess 
     benefit transaction shall not be held in or credited to any 
     donor advised fund.
       Other sanctions
       Under the provision, distributions from a donor advised 
     fund (as opposed to a sponsoring organization's non donor 
     advised funds or accounts) to any person other than the 
     sponsoring organization's non donor advised funds or accounts 
     or organizations described in section 170(b)(1)(A)\282\ 
     (other than Type III supporting organizations\283\ or 
     sponsoring organizations for maintenance in a donor advised 
     fund) are prohibited.\284\ The provision provides for a 
     penalty in the event a distribution is made from a donor 
     advised fund to an ineligible person, such as a private non-
     operating foundation or a Type III supporting organization. 
     In the event of such a distribution, an excise tax equal to 
     20 percent of the amount of the distribution is imposed 
     against any donor or donor advisor who advised that such 
     distribution be made. In addition, an excise tax equal to 
     five percent of the amount of the distribution is imposed 
     against any manager of the sponsoring organization (defined 
     in a manner similar to the term ``foundation manager'' under 
     section 4945) who knowingly approved the distribution. The 
     taxes described in this paragraph are subject to abatement 
     under generally applicable present law rules.
---------------------------------------------------------------------------
     \282\By requiring that distributions from a donor advised 
     fund be made only to certain entities, the provision 
     prohibits distributions from a donor advised fund to a donor 
     or donor advisor (or person related to a donor or donor 
     advisor), whether as compensation, loans, or reimbursement of 
     expenses.
     \283\Distributions to Type I and Type II supporting 
     organizations generally are not prohibited unless prohibited 
     under regulations. Regulations generally shall prohibit such 
     distributions where the donor or donor advisor of the amounts 
     distributed directly or indirectly controls a supported 
     organization of the Type I or Type II supporting 
     organization.
     \284\Under the provision, distributions from donor advised 
     funds to individuals are prohibited. However, sponsoring 
     organizations may make grants to individuals from amounts not 
     held in donor advised funds and may establish scholarship 
     funds that are not donor advised funds. A donor may choose to 
     make a contribution directly to such a scholarship fund (or 
     advise that a donor advised fund make a distribution to such 
     a scholarship fund).
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       Under the provision, if a donor, a donor advisor, or a 
     person related to a donor or donor advisor of a donor advised 
     fund advises as to a distribution that results in any such 
     person receiving, directly or indirectly, a more than 
     incidental benefit, excise taxes are imposed against any 
     donor or donor advisor who advised as to the distribution, 
     and against the recipient of the benefit. The amount of the 
     tax is determined by multiplying the rate of the initial tax 
     imposed against a disqualified person under section 4958 by 
     the amount of the distribution that gave rise to the more-
     than-incidental benefit. Persons subject to the tax are 
     jointly and severally liable for the entire amount of the 
     tax. In addition, if a manager of the sponsoring organization 
     (defined in a manner similar to the term ``foundation 
     manager'' under section 4945) who agreed to the making of the 
     distribution knowing that the distribution would confer a 
     more than incidental benefit on a donor, a donor advisor, or 
     a person related to a donor or donor advisor of a donor 
     advised fund, the manager also is subject to an excise tax, 
     calculated by multiplying the rate of the initial tax 
     specified under section 4958 with respect to organization 
     managers by the amount of the distribution that gave rise to 
     the more than incidental benefit. The taxes on more than 
     incidental benefit are subject to abatement under generally 
     applicable present law rules.
     Reporting and disclosure
       The provision requires each sponsoring organization to 
     disclose on its information return: (1) the total number of 
     donor advised funds it owns; (2) the aggregate value of 
     assets held in those funds at the end of the organization's 
     taxable year; and (3) the aggregate contributions to and 
     grants made from those funds during the year. The statute of 
     limitations for assessing any tax arising under the provision 
     in any year with respect to which the required information 
     has not been provided shall not expire before three years 
     after the date on which the required information is disclosed 
     to the IRS.
       In addition, when seeking recognition of its tax-exempt 
     status, a sponsoring organization must disclose whether it 
     intends to maintain donor advised funds.
       Effective date.--The provision generally is effective for 
     taxable years beginning after the date of enactment. 
     Distribution requirements are effective for taxable years 
     beginning after the date of enactment. Information return 
     requirements are effective for taxable years ending after the 
     date of enactment. The requirements concerning disclosures on 
     an organization's application for tax exemption are effective 
     for organizations applying for recognition of exempt status 
     after the date of enactment. Requirements relating to 
     charitable contributions to donor advised funds are effective 
     for contributions made after 180 days from the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     15. Improve accountability of supporting organizations (secs. 
         241-246 of the Senate amendment and secs. 509, 4942, 
         4943, 4945, 4958, and 6033 and new sec. 4959 of the Code)


                              Present Law

     Requirements for section 501(c)(3) tax-exempt status
       Charitable organizations, i.e., organizations described in 
     section 501(c)(3), generally are exempt from Federal income 
     tax and are eligible to receive tax deductible contributions. 
     A charitable organization must operate primarily in pursuance 
     of one or more tax-exempt purposes constituting the basis of 
     its tax exemption.\285\ In order to qualify as operating 
     primarily for a purpose described in section 501(c)(3), an 
     organization must satisfy the following operational 
     requirements: (1) the net earnings of the organization may 
     not inure to the benefit of any person in a position to 
     influence the activities of the organization; (2) the 
     organization must operate to provide a public benefit, not a 
     private benefit;\286\ (3) the organization may not be 
     operated primarily to conduct an unrelated trade or 
     business;\287\ (4) the organization may not

[[Page 7428]]

     engage in substantial legislative lobbying; and (5) the 
     organization may not participate or intervene in any 
     political campaign.
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     \285\Treas. Reg. sec. 1.501(c)(3)-1(c)(1). The Code specifies 
     such purposes as religious, charitable, scientific, testing 
     for public safety, literary, or educational purposes, or to 
     foster international amateur sports competition, or for the 
     prevention of cruelty to children or animals. In general, an 
     organization is organized and operated for charitable 
     purposes if it provides relief for the poor and distressed or 
     the underprivileged. Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
     \286\Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
     \287\Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a 
     certain level of unrelated trade or business activity will 
     not jeopardize tax-exempt status.
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       Section 501(c)(3) organizations (with certain exceptions) 
     are required to seek formal recognition of tax-exempt status 
     by filing an application with the IRS (Form 1023). In 
     response to the application, the IRS issues a determination 
     letter or ruling either recognizing the applicant as tax-
     exempt or not.
       In general, organizations exempt from Federal income tax 
     under section 501(a) are required to file an annual 
     information return with the IRS.\288\ Under present law, the 
     information return requirement does not apply to several 
     categories of exempt organizations. Organizations exempt from 
     the filing requirement include organizations (other than 
     private foundations), the gross receipts of which in each 
     taxable year normally are not more than $25,000.\289\
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     \288\Sec. 6033(a)(1).
     \289\Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); 
     Treas. Reg. sec. 1.6033-2(g)(1). Sec. 6033(a)(2)(A)(ii) 
     provides a $5,000 annual gross receipts exception from the 
     annual reporting requirements for certain exempt 
     organizations. In Announcement 82-88, 1982-25 I.R.B. 23, the 
     IRS exercised its discretionary authority under section 6033 
     to increase the gross receipts exception to $25,000, and 
     enlarge the category of exempt organizations that are not 
     required to file Form 990.
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     Classification of section 501(c)(3) organizations
       In general
       Section 501(c)(3) organizations are classified either as 
     ``public charities'' or ``private foundations.''\290\ Private 
     foundations generally are defined under section 509(a) as all 
     organizations described in section 501(c)(3) other than an 
     organization granted public charity status by reason of: (1) 
     being a specified type of organization (i.e., churches, 
     educational institutions, hospitals and certain other medical 
     organizations, certain organizations providing assistance to 
     colleges and universities, or a governmental unit); (2) 
     receiving a substantial part of its support from governmental 
     units or direct or indirect contributions from the general 
     public; or (3) providing support to another section 501(c)(3) 
     entity that is not a private foundation. In contrast to 
     public charities, private foundations generally are funded 
     from a limited number of sources (e.g., an individual, 
     family, or corporation). Donors to private foundations and 
     persons related to such donors together often control the 
     operations of private foundations.
---------------------------------------------------------------------------
     \290\Sec. 509(a). Private foundations are either private 
     operating foundations or private non-operating foundations. 
     In general, private operating foundations operate their own 
     charitable programs in contrast to private non-operating 
     foundations, which generally are grant-making organizations. 
     Most private foundations are non-operating foundations.
---------------------------------------------------------------------------
       Because private foundations receive support from, and 
     typically are controlled by, a small number of supporters, 
     private foundations are subject to a number of anti-abuse 
     rules and excise taxes not applicable to public 
     charities.\291\ For example, the Code imposes excise taxes on 
     acts of ``self-dealing'' between disqualified persons 
     (generally, an enumerated class of foundation insiders\292\) 
     and a private foundation. Acts of self-dealing include, for 
     example, sales or exchanges, or leasing, of property; lending 
     of money; or the furnishing of goods, services, or facilities 
     between a disqualified person and a private foundation.\293\ 
     In addition, private non-operating foundations are required 
     to pay out a minimum amount each year as qualifying 
     distributions. In general, a qualifying distribution is an 
     amount paid to accomplish one or more of the organization's 
     exempt purposes, including reasonable and necessary 
     administrative expenses.\294\ Certain expenditures of private 
     foundations are also subject to tax.\295\ In general, taxable 
     expenditures are expenditures: (1) for lobbying; (2) to 
     influence the outcome of a public election or carry on a 
     voter registration drive (unless certain requirements are 
     met); (3) as a grant to an individual for travel, study, or 
     similar purposes unless made pursuant to procedures approved 
     by the Secretary; (4) as a grant to an organization that is 
     not a public charity or exempt operating foundation unless 
     the foundation exercises expenditure responsibility\296\ with 
     respect to the grant; or (5) for any non-charitable purpose. 
     Additional excise taxes may apply in the event a private 
     foundation holds certain business interests (``excess 
     business holdings'')\297\ or makes an investment that 
     jeopardizes the foundation's exempt purposes.\298\
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     \291\Secs. 4940-4945.
     \292\See sec. 4946(a).
     \293\Sec. 4941.
     \294\Sec. 4942(g)(1)(A). A qualifying distribution also 
     includes any amount paid to acquire an asset used (or held 
     for use) directly in carrying out one or more of the 
     organization's exempt purposes and certain amounts set-aside 
     for exempt purposes. Sec. 4942(g)(1)(B) and 4942(g)(2).
     \295\Sec. 4945. Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \296\In general, expenditure responsibility requires that a 
     foundation make all reasonable efforts and establish 
     reasonable procedures to ensure that the grant is spent 
     solely for the purpose for which it was made, to obtain 
     reports from the grantee on the expenditure of the grant, and 
     to make reports to the Secretary regarding such expenditures. 
     Sec. 4945(h).
     \297\Sec. 4943.
     \298\Sec. 4944.
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       Public charities also enjoy certain advantages over private 
     foundations regarding the deductibility of contributions. For 
     example, contributions of appreciated capital gain property 
     to a private foundation generally are deductible only to the 
     extent of the donor's cost basis.\299\ In contrast, 
     contributions to public charities generally are deductible in 
     an amount equal to the property's fair market value, except 
     for gifts of inventory and other ordinary income property, 
     short-term capital gain property, and tangible personal 
     property the use of which is unrelated to the donee 
     organization's exempt purpose. In addition, under present 
     law, a taxpayer's deductible contributions generally are 
     limited to specified percentages of the taxpayer's 
     contribution base, which generally is the taxpayer's adjusted 
     gross income for a taxable year. The applicable percentage 
     limitations vary depending upon the type of property 
     contributed and the classification of the donee organization. 
     In general, contributions to non-operating private 
     foundations are limited to a smaller percentage of the 
     donor's contribution base (up to 30 percent) than 
     contributions to public charities (up to 50 percent).\300\
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     \299\A special rule in section 170(e)(5) provides that 
     taxpayers are allowed a deduction equal to the fair market 
     value of certain contributions of appreciated, publicly 
     traded stock contributed to a private foundation.
     \300\Sec. 170(b).
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       Supporting organizations (section 509(a)(3))
       The Code provides that certain ``supporting organizations'' 
     (in general, organizations that provide support to another 
     section 501(c)(3) organization that is not a private 
     foundation) are classified as public charities rather than 
     private foundations.\301\ To qualify as a supporting 
     organization, an organization must meet all three of the 
     following tests: (1) it must be organized and at all times 
     operated exclusively for the benefit of, to perform the 
     functions of, or to carry out the purposes of one or more 
     ``publicly supported organizations''\302\ (the 
     ``organizational and operational tests'');\303\ (2) it must 
     be operated, supervised, or controlled by or in connection 
     with one or more publicly supported organizations (the 
     ``relationship test'');\304\ and (3) it must not be 
     controlled directly or indirectly by one or more disqualified 
     persons (as defined in section 4946) other than foundation 
     managers and other than one or more publicly supported 
     organizations (the ``lack of outside control test'').\305\
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     \301\Sec. 509(a)(3).
     \302\In general, supported organizations of a supporting 
     organization must be publicly supported charities described 
     in sections 509(a)(1) or (a)(2).
     \303\Sec. 509(a)(3)(A).
     \304\Sec. 509(a)(3)(B).
     \305\Sec. 509(a)(3)(C).
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       To satisfy the relationship test, a supporting organization 
     must hold one of three statutorily described close 
     relationships with the supported organization. The 
     organization must be: (1) operated, supervised, or controlled 
     by a publicly supported organization (commonly referred to as 
     ``Type I'' supporting organizations); (2) supervised or 
     controlled in connection with a publicly supported 
     organization (``Type II'' supporting organizations); or (3) 
     operated in connection with a publicly supported organization 
     (``Type III'' supporting organizations).\306\
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     \306\ Treas. Reg. sec. 1.509(a)-4(f)(2).
---------------------------------------------------------------------------
       Type I supporting organizations
       In the case of supporting organizations that are operated, 
     supervised, or controlled by one or more publicly supported 
     organizations (Type I supporting organizations), one or more 
     supported organizations must exercise a substantial degree of 
     direction over the policies, programs, and activities of the 
     supporting organization.\307\ The relationship between the 
     Type I supporting organization and the supported organization 
     generally is comparable to that of a parent and subsidiary. 
     The requisite relationship may be established by the fact 
     that a majority of the officers, directors, or trustees of 
     the supporting organization are appointed or elected by the 
     governing body, members of the governing body, officers 
     acting in their official capacity, or the membership of one 
     or more publicly supported organizations.\308\
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     \307\Treas. Reg. sec. 1.509(a)-4(g)(1)(i).
     \308\Id.
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       Type II supporting organizations
       Type II supporting organizations are supervised or 
     controlled in connection with one or more publicly supported 
     organizations. Rather than the parent-subsidiary relationship 
     characteristic of Type I organizations, the relationship 
     between a Type II organization and its supported 
     organizations is more analogous to a brother-sister 
     relationship. In order to satisfy the Type II relationship 
     requirement, generally there must be common supervision or 
     control by the persons supervising or controlling both the 
     supporting organization and the publicly supported 
     organizations.\309\ An organization generally is not 
     considered to be ``supervised or controlled in connection 
     with'' a publicly supported organization merely because the 
     supporting organization makes payments to the publicly 
     supported organization, even if the obligation to make 
     payments is enforceable under state law.\310\
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     \309\Treas. Reg. sec. 1.509(a)-4(h)(1).
     \310\Treas. Reg. sec. 1.509(a)-4(h)(2).
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       Type III supporting organizations
       Type III supporting organizations are ``operated in 
     connection with'' one or more publicly supported 
     organizations. To satisfy the

[[Page 7429]]

     ``operated in connection with'' relationship, Treasury 
     regulations require that the supporting organization be 
     responsive to, and significantly involved in the operations 
     of, the publicly supported organization. This relationship is 
     deemed to exist where the supporting organization meets both 
     a ``responsiveness test'' and an ``integral part test.''\311\
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     \311\Treas. Reg. sec. 1.509(a)-4(i)(1).
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       In general, the responsiveness test requires that the Type 
     III supporting organization be responsive to the needs or 
     demands of the publicly supported organizations. The 
     responsiveness test may be satisfied in one of two ways.\312\ 
     First, the supporting organization may demonstrate that: 
     (1)(a) one or more of its officers, directors, or trustees 
     are elected or appointed by the officers, directors, 
     trustees, or membership of the supported organization; (b) 
     one or more members of the governing bodies of the publicly 
     supported organizations are also officers, directors, or 
     trustees of the supporting organization; or (c) the officers, 
     directors, or trustees of the supporting organization 
     maintain a close continuous working relationship with the 
     officers, directors, or trustees of the publicly supported 
     organizations; and (2) by reason of such arrangement, the 
     officers, directors, or trustees of the supported 
     organization have a significant voice in the investment 
     policies of the supporting organization, the timing and 
     manner of making grants, the selection of grant recipients by 
     the supporting organization, and otherwise directing the use 
     of the income or assets of the supporting organization.\313\ 
     Alternatively, the responsiveness test may be satisfied if 
     the supporting organization is a charitable trust under state 
     law, each specified supported organization is a named 
     beneficiary under the trust's governing instrument, and the 
     beneficiary organization has the power to enforce the trust 
     and compel an accounting under state law.\314\
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     \312\For an organization that was supporting or benefiting 
     one or more publicly supported organizations before November 
     20, 1970, additional facts and circumstances, such as an 
     historic and continuing relationship between organizations, 
     also may be taken into consideration to establish compliance 
     with either of the responsiveness tests. Treas. Reg. sec. 
     1.509(a)-4(i)(1)(ii).
     \313\Treas. Reg. sec. 1.509(a)-4(i)(2)(ii).
     \314\Treas. Reg. sec. 1.509(a)-4(i)(2)(iii).
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       In general, the integral part test requires that the Type 
     III supporting organization maintain significant involvement 
     in the operations of one or more publicly supported 
     organizations, and that such publicly supported organizations 
     are in turn dependent upon the supporting organization for 
     the type of support which it provides. There are two 
     alternative methods for satisfying the integral part test. 
     The first alternative is to establish that (1) the activities 
     engaged in for or on behalf of the publicly supported 
     organization are activities to perform the functions of, or 
     carry out the purposes of, such organizations; and (2) these 
     activities, but for the involvement of the supporting 
     organization, normally would be engaged in by the publicly 
     supported organizations themselves.\315\ The second method 
     for satisfying the integral part test is to establish that: 
     (1) the supporting organization pays substantially all of its 
     income to or for the use of one or more publicly supported 
     organizations;\316\ (2) the amount of support received by one 
     or more of the publicly supported organizations is sufficient 
     to insure the attentiveness of the organization or 
     organizations to the operations of the supporting 
     organization (this is known as the ``attentiveness 
     requirement'');\317\ and (3) a significant amount of the 
     total support of the supporting organization goes to those 
     publicly supported organizations that meet the attentiveness 
     requirement.\318\
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     \315\Treas. Reg. sec. 1.509(a)-4(i)(3)(ii).
     \316\For this purpose, the IRS has defined the term 
     ``substantially all'' of an organization's income to mean 85 
     percent or more. Rev. Rul. 76-208, 1976-1 C.B. 161.
     \317\Although the regulations do not specify the requisite 
     level of support in numerical or percentage terms, the IRS 
     has suggested that grants that represent less than 10 percent 
     of the beneficiary's support likely would be viewed as 
     insufficient to ensure attentiveness. Gen. Couns. Mem. 36379 
     (August 15, 1975). As an alternative to satisfying the 
     attentiveness standard by the foregoing method, a supporting 
     organization may demonstrate attentiveness by showing that, 
     in order to avoid the interruption of the carrying on of a 
     particular function or activity, the beneficiary organization 
     will be sufficiently attentive to the operations of the 
     supporting organization. Treas. Reg. sec. 1.509(a)-
     4(i)(3)(iii)(b).
     \318\Treas. Reg. sec. 1.509(a)-4(i)(3)(iii).
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     Intermediate sanctions (excess benefit transaction tax)
       The Code imposes excise taxes on excess benefit 
     transactions between disqualified persons and public 
     charities.\319\ An excess benefit transaction generally is a 
     transaction in which an economic benefit is provided by a 
     public charity directly or indirectly to or for the use of a 
     disqualified person, if the value of the economic benefit 
     provided exceeds the value of the consideration (including 
     the performance of services) received for providing such 
     benefit.
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     \319\Sec. 4958. The excess benefit transaction tax is 
     commonly referred to as ``intermediate sanctions,'' because 
     it imposes penalties generally considered to be less punitive 
     than revocation of the organization's exempt status. The tax 
     also applies to transactions between disqualified persons and 
     social welfare organizations (as described in section 
     501(c)(4)).
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       For purposes of the excess benefit transaction rules, a 
     disqualified person is any person in a position to exercise 
     substantial influence over the affairs of the public charity 
     at any time in the five-year period ending on the date of the 
     transaction at issue.\320\ Persons holding certain powers, 
     responsibilities, or interests (e.g., officers, directors, or 
     trustees) are considered to be in a position to exercise 
     substantial influence over the affairs of the public charity.
---------------------------------------------------------------------------
     \320\Sec. 4958(f)(1). A disqualified person also includes 
     certain family members of such a person, and certain entities 
     that satisfy a control test with respect to such persons.
---------------------------------------------------------------------------
       An excess benefit transaction tax is imposed on the 
     disqualified person and, in certain cases, on the 
     organization managers, but is not imposed on the public 
     charity. An initial tax of 25 percent of the excess benefit 
     amount is imposed on the disqualified person that receives 
     the excess benefit. An additional tax on the disqualified 
     person of 200 percent of the excess benefit applies if the 
     violation is not corrected within a specified period. A tax 
     of 10 percent of the excess benefit (not to exceed $10,000 
     with respect to any excess benefit transaction) is imposed on 
     an organization manager that knowingly participated in the 
     excess benefit transaction, if the manager's participation 
     was willful and not due to reasonable cause, and if the 
     initial tax was imposed on the disqualified person.


                               House Bill

       No provision.


                            Senate Amendment

     Provisions relating to all (Type I, Type II, and Type III) 
         supporting organizations
       Excess benefit transactions
       Under the provision, if a supporting organization (Type I, 
     Type II, or Type III) makes a grant, loan, payment of 
     compensation, or other similar payment to a substantial 
     contributor (or person related to the substantial 
     contributor) of the supporting organization, for purposes of 
     the excess benefit transaction rules (sec. 4958), the 
     substantial contributor is treated as a disqualified person 
     and the payment is treated as an excess benefit transaction 
     with the entire amount of the payment treated as the excess 
     benefit.
       A substantial contributor means any person who contributed 
     or bequeathed an aggregate amount of more than $5,000 to the 
     organization, if such amount is more than two percent of the 
     total contributions and bequests received by the organization 
     before the close of the taxable year of the organization in 
     which the contribution or bequest is received by the 
     organization from such person. In the case of a trust, a 
     substantial contributor also includes the creator of the 
     trust. A substantial contributor does not include a public 
     charity (other than a supporting organization).
       A person is a related person (``related person'') if a 
     person is a member of the family (determined under section 
     4958(f)(4)) of a substantial contributor, or a 35 percent 
     entity, defined as a corporation, partnership, trust, or 
     estate in which a substantial contributor or family member 
     thereof own more than 35 percent of the total combined voting 
     power, profits interest, or beneficial interest, as the case 
     may be.
       In addition, under the provision, loans by any supporting 
     organization (Type I, Type II, or Type III) to a disqualified 
     person (as defined in section 4958) of the supporting 
     organization are treated as an excess benefit transaction 
     under section 4958 and the entire amount of the loan is 
     treated as an excess benefit. For this purpose, a 
     disqualified person does not include a public charity (other 
     than a supporting organization).
       Disclosure requirements
       All supporting organizations are required to file an annual 
     information return (Form 990 series) with the Secretary, 
     regardless of the organization's gross receipts. A supporting 
     organization must indicate on such annual information return 
     whether it is a Type I, Type II, or Type III supporting 
     organization and must identify its supported organizations.
       Supporting organizations must demonstrate annually that the 
     organization is not controlled directly or indirectly by one 
     or more disqualified persons (other than foundation managers 
     and other than one or more publicly supported organizations) 
     through a certification on the annual information return.
       Disqualified person
       For purposes of the excess benefit transaction rules (sec. 
     4958), a disqualified person of a supporting organization is 
     treated as a disqualified person of the supported 
     organization.
     Provisions that apply to Type III supporting organizations
       Modify payout requirement of Type III supporting 
           organizations
       A Type III supporting organization must pay each taxable 
     year, to or for the use of one or more public charities 
     described in section 509(a)(1) or 509(a)(2) (``qualifying 
     distributions''), the sum of (1) the greater of (i) 85 
     percent of its adjusted net income (as defined in section 
     4942(f)) for the preceding taxable year or (ii) the 
     applicable percentage\321\

[[Page 7430]]

     of the aggregate fair market value of all of the assets of 
     the organization other than assets that are used (or held for 
     use) directly in supporting the charitable programs of the 
     supporting organization or one or more supported 
     organizations, determined as of the last day of the preceding 
     taxable year, and (2) any amount received or accrued in such 
     year as repayments of amounts that were taken into account as 
     support provided by the supporting organization in prior 
     years. Qualifying distributions are treated as made first to 
     satisfy the pay out requirement of the immediately preceding 
     taxable year, and then of the taxable year, unless the 
     taxpayer elects to have an amount as satisfying the payout of 
     any prior taxable year. Amounts distributed in excess of the 
     required payout for the current year and all previous taxable 
     years may be carried forward for up to five taxable years 
     following the taxable year in which the excess payment is 
     made.
---------------------------------------------------------------------------
     \321\The percentage is three percent for the first taxable 
     year beginning after the date of enactment, four percent for 
     the second such taxable year, and five percent for any such 
     taxable year thereafter.
---------------------------------------------------------------------------
       A supporting organization's administrative expenses count 
     as expenses to or for the use of a supported organization. 
     The holding of assets for investment purposes, or to operate 
     an unrelated trade or business, is not considered a use or 
     holding for use directly to support a supported 
     organization's charitable programs. The Secretary may provide 
     guidance as to types of uses of assets that are considered to 
     be directly in support of a supported organization's 
     charitable programs similar to guidance provided under 
     Treasury Regulation section 53.4942(a)-2(c)(3)(i).
       An organization that fails to meet the payout requirement 
     is subject to an initial tax of 30 percent of the unpaid 
     amount, increased to 100 percent of the unpaid amount if the 
     payout requirement is not met by the earlier of the date of 
     mailing of a notice of deficiency with respect to the initial 
     tax or the date on which the initial tax is assessed.
       Excess business holdings
       The excess business holdings rules of section 4943 are 
     applied to Type III supporting organizations. In applying 
     such rules, the term disqualified person has the meaning 
     provided in section 4958, and also includes substantial 
     contributors and related persons and any organization that is 
     effectively controlled by the same person or persons who 
     control the supporting organization or any organization 
     substantially all of the contributions to which were made by 
     the same person or persons who made substantially all of the 
     contributions to the supporting organization. The excess 
     business holdings rules do not apply if the holdings are held 
     for the benefit of the community pursuant to the direction of 
     a State attorney general or a State official with 
     jurisdiction over the Type III supporting organization. The 
     Secretary has the authority not to impose the excess business 
     holding rules if the organization establishes to the 
     satisfaction of the Secretary that the excess holdings are 
     consistent with the exempt purposes of the organization. 
     Transition rules apply to the present holdings of an 
     organization similar to those of section 4943(c)(4)-(6).
       The excess business holdings rules also apply to Type II 
     supporting organizations but only if such organization 
     accepts any gift or contribution from a person (other than a 
     public charity, not including a supporting organization) who 
     (1) controls, directly or indirectly, either alone or 
     together (with persons described below) the governing body of 
     a supported organization of the supporting organization; (2) 
     is a member of the family of such a person; or (3) is a 35 
     percent controlled entity.
       Organizational and operational requirements
       In general, after the date of enactment of the provision, a 
     Type III supporting organization may not support more than 
     five organizations. A transition rule applies to Type III 
     supporting organizations that support more than five 
     organizations on such date. Such organizations are not 
     required to reduce the number of supported organizations, but 
     may not increase the number of organizations supported above 
     the number of organizations supported on the date of 
     enactment, and may not add new supported organizations as 
     beneficiaries unless no more than five organizations are 
     supported by the supporting organization following such 
     addition.
       A Type III supporting organization may not support an 
     organization that is not organized in the United States on 
     any date after the date which is 180 days after the date of 
     enactment,\322\ and may not be a donor with respect to a 
     donor advised fund.
---------------------------------------------------------------------------
     \322\U.S. charities established principally to provide 
     financial and other assistance to a foreign charity, 
     sometimes referred to as ``friends of'' organizations, may 
     not be established as supporting organizations under the 
     provision. Such organizations may continue to obtain public 
     charity status, however, by virtue of demonstrating broad 
     public support (as described in sections 509(a)(1) and 
     509(a)(2)).
---------------------------------------------------------------------------
       Relationship to supported organization(s)
       A Type III supporting organization must, as part of its 
     exemption application (Form 1023) attach a letter from each 
     supported organization acknowledging that the supported 
     organization has been designated by such organization as a 
     supported organization.
       On the annual information return filed by a Type III 
     supporting organization, the organization must indicate that 
     it has obtained letters from organizations that received its 
     support. It is intended that all such letters must be signed 
     by a senior officer or a member of the Board of the supported 
     organization. The letters must show (1) that the supported 
     organization agrees to be supported by the supporting 
     organization, (2) the type of support provided or to be 
     provided, and (3) how such support furthers the supported 
     organization's charitable purposes.
       A Type III supporting organization must apprise each 
     organization it supports of information regarding the 
     supporting organization in order to help ensure the 
     supporting organization's responsiveness. Such a showing 
     could be satisfied, for example, through provision of 
     documentation such as a copy of the supporting organization's 
     governing documents, any changes made to the governing 
     documents, the organization's annual information return filed 
     with the Secretary (Form 990 series), any tax return (Form 
     990-T) filed with the Secretary, and an annual report 
     (including a description of all of the support provided by 
     the supporting organization, how such support was calculated, 
     and a projection of the next year's support). Failure to make 
     a sufficient showing is a factor in determining whether the 
     responsiveness test of present law is met.
       A Type III supporting organization that is organized as a 
     trust must, in addition to present law requirements, 
     establish to the satisfaction of the Secretary, that it has a 
     close and continuous relationship with the supported 
     organization such that the trust is responsive to the needs 
     or demands of the supported organization.
     Other provisions
       Under the provision, if a Type I or Type III supporting 
     organization accepts any gift or contribution from a person 
     (other than a public charity, not including a supporting 
     organization) who (1) controls, directly or indirectly, 
     either alone or together (with persons described below) the 
     governing body of a supported organization of the supporting 
     organization; (2) is a member of the family of such a person; 
     or (3) is a 35 percent controlled entity, then the supporting 
     organization is treated as a private foundation for all 
     purposes until such time as the organization can demonstrate 
     to the satisfaction of the Secretary that it qualifies as a 
     public charity other than as a supporting organization.
       Under the provision, a non-operating private foundation may 
     not count as a qualifying distribution under section 4942 any 
     amount paid to a supporting organization. In addition, any 
     such amount is treated as a taxable expenditure under section 
     4945.
       Effective date.--The provision generally is effective on 
     the date of enactment. The distribution requirements are 
     effective for taxable years beginning after the date of 
     enactment. The prohibited transaction rules are effective for 
     transactions occurring after the date of enactment. The 
     excess business holdings requirements are effective for 
     taxable years beginning after the date of enactment. The 
     provision relating to distributions by nonoperating private 
     foundations is effective for distributions and expenditures 
     made after the date of enactment. The return requirements are 
     effective for returns filed for taxable years ending after 
     the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                   TITLE IV--MISCELLANEOUS PROVISIONS

          A. Restructure New York Liberty Zone Tax Incentives

     (Sec. 301 of the Senate amendment)


                              Present Law

     In general
       Present law includes a number of incentives to invest in 
     property located in the New York Liberty Zone (``NYLZ''), 
     which is the area located on or south of Canal Street, East 
     Broadway (east of its intersection with Canal Street), or 
     Grand Street (east of its intersection with East Broadway) in 
     the Borough of Manhattan in the City of New York, New York. 
     These incentives were enacted following the terrorist attack 
     in New York City on September 11, 2001.\323\
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     \323\In addition to the NYLZ provisions described above, 
     other NYLZ incentives are provided: (1) $8 billion of tax-
     exempt private activity bond financing for certain 
     nonresidential real property, residential rental property and 
     public utility property is authorized to be issued after 
     March 9, 2002, and before January 1, 2010; and (2) $9 billion 
     of additional tax-exempt advance refunding bonds is available 
     after March 9, 2002, and before January 1, 2006, with respect 
     to certain State or local bonds outstanding on September 11, 
     2001.
---------------------------------------------------------------------------
     Special depreciation allowance for qualified New York Liberty 
         Zone property
       Section 1400L(b) allows an additional first-year 
     depreciation deduction equal to 30 percent of the adjusted 
     basis of qualified NYLZ property.\324\ In order to qualify, 
     property generally must be placed in service on or before 
     December 31, 2006 (December 31, 2009 in the case of 
     nonresidential real property and residential rental 
     property).
---------------------------------------------------------------------------
     \324\The amount of the additional first-year depreciation 
     deduction is not affected by a short taxable year.
---------------------------------------------------------------------------
       The additional first-year depreciation deduction is allowed 
     for both regular tax and

[[Page 7431]]

     alternative minimum tax purposes for the taxable year in 
     which the property is placed in service. 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'')\325\ apply with (1) an applicable 
     recovery period of 20 years or less, (2) water utility 
     property (as defined in section 168(e)(5)), (3) certain 
     nonresidential real property and residential rental property, 
     or (4) computer software other than computer software covered 
     by section 197. A special rule precludes the additional 
     first-year depreciation under this provision for (1) 
     qualified NYLZ leasehold improvement property\326\ and (2) 
     property eligible for the additional first-year depreciation 
     deduction under section 168(k) (i.e., property is eligible 
     for only one 30 percent additional first-year depreciation). 
     Second, substantially all of the use of such property must be 
     in the NYLZ. Third, the original use of the property in the 
     NYLZ must commence with the taxpayer on or after September 
     11, 2001. Finally, the property must be acquired by 
     purchase\327\ by the taxpayer after September 10, 2001 and 
     placed in service on or before December 31, 2006. For 
     qualifying nonresidential real property and residential 
     rental property the property must be placed in service on or 
     before December 31, 2009 in lieu of December 31, 2006. 
     Property will not qualify if a binding written contract for 
     the acquisition of such property was in effect before 
     September 11, 2001.\328\
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     \325\A special rule precludes the additional first-year 
     depreciation deduction for property that is required to be 
     depreciated under the alternative depreciation system of 
     MACRS.
     \326\Qualified NYLZ leasehold improvement property is defined 
     in another provision. Leasehold improvements that do not 
     satisfy the requirements to be treated as ``qualified NYLZ 
     leasehold improvement property'' maybe eligible for the 30 
     percent additional first-year depreciation deduction 
     (assuming all other conditions are met).
     \327\For purposes of this provision, purchase is defined as 
     under section 179(d).
     \328\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 September 11, 2001.
---------------------------------------------------------------------------
       Nonresidential real property and residential rental 
     property is eligible for the additional first-year 
     depreciation only to the extent such property rehabilitates 
     real property damaged, or replaces real property destroyed or 
     condemned as a result of the terrorist attacks of September 
     11, 2001.
       Property that is manufactured, constructed, or produced by 
     the taxpayer for use by the taxpayer qualifies for the 
     additional first-year depreciation deduction if the taxpayer 
     begins the manufacture, construction, or production of the 
     property after September 10, 2001, and the property is placed 
     in service on or before December 31, 2006\329\ (and all other 
     requirements are met). Property that is manufactured, 
     constructed, or produced for the taxpayer by another person 
     under a contract that is entered into prior to the 
     manufacture, construction, or production of the property is 
     considered to be manufactured, constructed, or produced by 
     the taxpayer.
---------------------------------------------------------------------------
     \329\December 31, 2009 with respect to qualified 
     nonresidential real property and residential rental property.
---------------------------------------------------------------------------
     Depreciation of New York Liberty Zone leasehold improvements
       Generally, depreciation allowances for improvements made on 
     leased property are determined under MACRS, even if the MACRS 
     recovery period assigned to the property is longer than the 
     term of the lease.\330\ This rule applies regardless of 
     whether the lessor or the lessee places the leasehold 
     improvements in service.\331\ If a leasehold improvement 
     constitutes an addition or improvement to nonresidential real 
     property already placed in service, the improvement generally 
     is depreciated using the straight-line method over a 39-year 
     recovery period, beginning in the month the addition or 
     improvement is placed in service.\332\
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     \330\Sec. 168(i)(8). The Tax Reform Act of 1986 modified the 
     Accelerated Cost Recovery System (``ACRS'') to institute 
     MACRS. Prior to the adoption of ACRS by the Economic Recovery 
     Tax Act of 1981, taxpayers were allowed to depreciate the 
     various components of a building as separate assets with 
     separate useful lives. The use of component depreciation was 
     repealed upon the adoption of ACRS. The Tax Reform Act of 
     1986 also denied the use of component depreciation under 
     MACRS.
     \331\Former sections 168(f)(6) and 178 provided that, in 
     certain circumstances, a lessee could recover the cost of 
     leasehold improvements made over the remaining term of the 
     lease. The Tax Reform Act of 1986 repealed these provisions.
     \332\Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the 
     improvement is characterized as tangible personal property, 
     ACRS or MACRS depreciation is calculated using the shorter 
     recovery periods, accelerated methods, and conventions 
     applicable to such property. The determination of whether 
     improvements are characterized as tangible personal property 
     or as nonresidential real property often depends on whether 
     or not the improvements constitute a ``structural component'' 
     of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)). 
     See, e.g., Metro National Corp v. Commissioner, 52 TCM (CCH) 
     1440 (1987); King Radio Corp Inc. v. U.S., 486 F.2d 1091 
     (10th Cir. 1973); Mallinckrodt, Inc. v. Commissioner, 778 
     F.2d 402 (8th Cir. 1985) (with respect to various leasehold 
     improvements).
---------------------------------------------------------------------------
       A special rule exists for qualified NYLZ leasehold 
     improvement property, which is recovered over five years 
     using the straight-line method. The term qualified NYLZ 
     leasehold improvement property means property defined in 
     section 168(e)(6) that is acquired and placed in service 
     after September 10, 2001, and before January 1, 2007 (and not 
     subject to a binding contract on September 10, 2001), in the 
     NYLZ. For purposes of the alternative depreciation system, 
     the property is assigned a nine-year recovery period. A 
     taxpayer may elect out of the 5-year (and 9-year) recovery 
     period for qualified NYLZ leasehold improvement property.
     Increased section 179 expensing for qualified New York 
         Liberty Zone property
       In lieu of depreciation, a taxpayer with a sufficiently 
     small amount of annual investment may elect to deduct the 
     cost of qualifying property. For taxable years beginning in 
     2003 through 2007, a taxpayer may deduct up to $100,000 of 
     the cost of qualifying property placed in service for the 
     taxable year. In general, qualifying property for this 
     purpose is defined as depreciable tangible personal property 
     (and certain computer software) that is purchased for use in 
     the active conduct of a trade or business. 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 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. In general, 
     qualifying property for this purpose is defined as 
     depreciable tangible personal property that is purchased for 
     use in the active conduct of a trade or business.
       The amount eligible to be expensed for a taxable year may 
     not exceed the taxable income for 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.
       The amount a taxpayer can deduct under section 179 is 
     increased for qualifying property used in the NYLZ. 
     Specifically, the maximum dollar amount that may be deducted 
     under section 179 is increased by the lesser of (1) $35,000 
     or (2) the cost of qualifying property placed in service 
     during the taxable year. This amount is in addition to the 
     amount otherwise deductible under section 179.
       Qualifying property for purposes of the NYLZ provision 
     means section 179 property\333\ purchased and placed in 
     service by the taxpayer after September 10, 2001 and before 
     January 1, 2007, where (1) substantially all of the use of 
     such property is in the NYLZ in the active conduct of a trade 
     or business by the taxpayer in the NYLZ, and (2) the original 
     use of which in the NYLZ commences with the taxpayer after 
     September 10, 2001.\334\
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     \333\As defined in sec. 179(d)(1).
     \334\See Rev. Proc. 2002-33, 2002-20 I.R.B. 963 (May 20, 
     2002), for procedures on claiming the increased section 179 
     expensing deduction by taxpayers who filed their tax returns 
     before June 1, 2002.
---------------------------------------------------------------------------
       The phase-out range for the section 179 deduction 
     attributable to NYLZ property is applied by taking into 
     account only 50 percent of the cost of NYLZ property that is 
     section 179 property. Also, no general business credit under 
     section 38 is allowed with respect to any amount for which a 
     deduction is allowed under section 179.
       The provision is effective for property placed in service 
     after September 10, 2001 and before January 1, 2007.
     Extended replacement period for New York Liberty Zone 
         involuntary conversions
       A taxpayer may elect not to recognize gain with respect to 
     property that is involuntarily converted if the taxpayer 
     acquires within an applicable period (the ``replacement 
     period'') property similar or related in service or use 
     (section 1033). If the taxpayer does not replace the 
     converted property with property similar or related in 
     service or use, then gain generally is recognized. If the 
     taxpayer elects to apply the rules of section 1033, gain on 
     the converted property is recognized only to the extent that 
     the amount realized on the conversion exceeds the cost of the 
     replacement property. In general, the replacement period 
     begins with the date of the disposition of the converted 
     property and ends two years after the close of the first 
     taxable year in which any part of the gain upon conversion is 
     realized.\335\ The replacement period is extended to three 
     years if the

[[Page 7432]]

     converted property is real property held for the productive 
     use in a trade or business or for investment.\336\
---------------------------------------------------------------------------
     \335\Section 1033(a)(2)(B).
     \336\Section 1033(g)(4).
---------------------------------------------------------------------------
       The replacement period is extended to five years with 
     respect to property that was involuntarily converted within 
     the NYLZ as a result of the terrorist attacks that occurred 
     on September 11, 2001. However, the five-year period is 
     available only if substantially all of the use of the 
     replacement property is in New York City. In all other cases, 
     the present-law replacement period rules continue to apply.


                               House Bill

       No provision.


                            Senate Amendment

     Repeal of certain NYLZ incentives
       The provision repeals the four NYLZ incentives relating to 
     the additional first-year depreciation allowance of 30 
     percent, the five-year depreciation of leasehold 
     improvements, the additional section 179 expensing, and the 
     extended replacement period for involuntary conversions.\337\
---------------------------------------------------------------------------
     \337\The provision does not change the present-law rules 
     relating to certain NYLZ private activity bond financing and 
     additional advance refunding bonds.
---------------------------------------------------------------------------
     Creation of New York Liberty Zone tax credits
       The provision provides a credit against tax imposed (other 
     than taxes of section 3111(a), 3403, or subtitle D) paid or 
     incurred by any governmental unit of the State of New York 
     and the City of New York equal to the lesser of (1) the total 
     expenditures during such year by such governmental unit for 
     qualifying projects, or (2) the amount allocated to such 
     governmental unit for such calendar year.
       Qualifying projects means any transportation infrastructure 
     project, including highways, mass transit systems, railroads, 
     airports, ports, and waterways, in or connecting with the New 
     York Liberty Zone, which is designated as a qualifying 
     project jointly by the Governor of the State of New York and 
     the Mayor of the City of New York.
       The Governor of the State of New York and the Mayor of the 
     City of New York shall jointly allocate to a governmental 
     unit the amount of expenditures which may be taken into 
     account for purposes of the credit for any calendar year in 
     the credit period with respect to a qualifying project. The 
     aggregate limit that may be allocated for all calendar years 
     in the credit period is two billion dollars. The annual limit 
     for any calendar year in the credit period shall not exceed 
     the sum of 200 million dollars plus the aggregate amount 
     authorized to be allocated for all preceding calendar years 
     in the credit period which was not allocated. The credit 
     period is the ten-year period beginning on January 1, 2006.
       If, at the close of the credit period, the aggregate 
     amounts allocated are less than the 2 billion dollar 
     aggregate limit, the Governor of the State of New York and 
     the Mayor of the City of New York may jointly allocate, for 
     any calendar year following the credit period, for 
     expenditures with respect to qualifying projects, amounts 
     that in sum for all years following the credit period would 
     equal such shortfall.
       Under the provision, any expenditure for a qualifying 
     project taken into account for purposes of the credit shall 
     be considered State and local funds for the purpose of any 
     Federal program.
     Effective date
       The provision is effective on the date of enactment, with 
     an exception for property subject to a written binding 
     contract in effect on the date of enactment which is placed 
     in service prior to the original sunset dates under present 
     law. The extended replacement period for involuntarily 
     converted property ends on the earlier of (1) the date of 
     enactment or (2) the last day of the five-year period 
     specified in the Jobs Creation and Worker Assistance Act of 
     2002 (``JCWAA'').\338\
---------------------------------------------------------------------------
     \338\Pub. L. No. 107-147, sec. 301 (2002).
---------------------------------------------------------------------------


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

    B. Modification of S Corporation Passive Investment Income Rules

     (Sec. 302 of the Senate amendment and secs. 1362 and 1375 of 
         the Code)


                              Present Law

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


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the 25-percent threshold to 
     60 percent; eliminates gains from the sale or exchange of 
     stock or securities from the definition of passive investment 
     income; and eliminates the rule terminating an S election by 
     reason of having excess passive investment income for three 
     consecutive taxable years.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2006, and before October 1, 
     2009.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.

   C. Capital Expenditure Limitation for Qualified Small Issue Bonds

     (Sec. 303 of the Senate amendment and sec. 144 of the Code)


                              Present Law

       Qualified small-issue bonds are tax-exempt State and local 
     government bonds used to finance private business 
     manufacturing facilities (including certain directly related 
     and ancillary facilities) or the acquisition of land and 
     equipment by certain farmers. In both instances, these bonds 
     are subject to limits on the amount of financing that may be 
     provided, both for a single borrowing and in the aggregate. 
     In general, no more than $1 million of small-issue bond 
     financing may be outstanding at any time for property of a 
     business (including related parties) located in the same 
     municipality or county. Generally, this $1 million limit may 
     be increased to $10 million if all other capital expenditures 
     of the business in the same municipality or county are 
     counted toward the limit over a six-year period that begins 
     three years before the issue date of the bonds and ends three 
     years after such date. Outstanding aggregate borrowing is 
     limited to $40 million per borrower (including related 
     parties) regardless of where the property is located.
       For bonds issued after September 30, 2009, the Code permits 
     up to $10 million of capital expenditures to be disregarded, 
     in effect increasing from $10 million to $20 million the 
     maximum allowable amount of total capital expenditures by an 
     eligible business in the same municipality or county.\339\ 
     However, no more than $10 million of bond financing may be 
     outstanding at any time for property of an eligible business 
     (including related parties) located in the same municipality 
     or county. Other limits (e.g., the $40 million per borrower 
     limit) also continue to apply.
---------------------------------------------------------------------------
     \339\Sec. 144(a)(4)(G) as added by sec. 340(a) of the 
     American Jobs Creation Act of 2004, Pub. L. No. 108-357 
     (2004).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision accelerates the application of the $20 
     million capital expenditure limitation from bonds issued 
     after September 30, 2009, to bonds issued after December 31, 
     2006.
       Effective date.--The provision is effective on the date of 
     enactment for bonds issued after December 31, 2006.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision.

                   D. Premiums for Mortgage Insurance

     (Sec. 304 of the Senate amendment and secs. 163(h) and 6050H 
         of the Code)


                              Present Law

       Present law provides that qualified residence interest is 
     deductible notwithstanding the general rule that personal 
     interest is nondeductible (sec. 163(h)).
       Qualified residence interest is interest on acquisition 
     indebtedness and home equity indebtedness with respect to a 
     principal and a second residence of the taxpayer. The maximum 
     amount of home equity indebtedness is $100,000. The maximum 
     amount of acquisition indebtedness is $1 million. Acquisition 
     indebtedness means debt that is incurred in acquiring 
     constructing, or substantially improving a qualified 
     residence of the taxpayer, and that is secured by the 
     residence. Home equity indebtedness is debt (other than 
     acquisition indebtedness) that is secured by the taxpayer's 
     principal or second residence, to the extent the aggregate 
     amount of such debt does not exceed the difference between 
     the total acquisition indebtedness with respect to the 
     residence, and the fair market value of the residence.


                               House Bill

       No provision.

[[Page 7433]]




                            Senate Amendment

       The Senate amendment provision provides that premiums paid 
     or accrued for qualified mortgage insurance by a taxpayer 
     during the taxable year in connection with acquisition 
     indebtedness on a qualified residence of the taxpayer are 
     treated as interest that is qualified residence interest and 
     thus deductible. The amount allowable as a deduction under 
     the provision is phased out ratably by 10 percent for each 
     $1,000 by which the taxpayer's adjusted gross income exceeds 
     $100,000 ($500 and $50,000, respectively, in the case of a 
     married individual filing a separate return). Thus, the 
     deduction is not allowed if the taxpayer's adjusted gross 
     income exceeds $110,000 ($55,000 in the case of married 
     individual filing a separate return).
       For this purpose, qualified mortgage insurance means 
     mortgage insurance provided by the Veterans Administration, 
     the Federal Housing Administration, or the Rural Housing 
     Administration, and private mortgage insurance (defined in 
     section 2 of the Homeowners Protection Act of 1998 as in 
     effect on the date of enactment of the Senate amendment 
     provision).
       Amounts paid for qualified mortgage insurance that are 
     properly allocable to periods after the close of the taxable 
     year are treated as paid in the period to which they are 
     allocated. No deduction is allowed for the unamortized 
     balance if the mortgage is paid before its term (except in 
     the case of qualified mortgage insurance provided by the 
     Department of Veterans Affairs or Rural Housing 
     Administration).
       Reporting rules apply under the provision.
       Effective date.--The Senate amendment provision is 
     effective for amounts paid or accrued in taxable years 
     beginning after December 31, 2006, and ending before January 
     1, 2008, and properly allocable to that period, with respect 
     to mortgage insurance contracts issued after December 31, 
     2006.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

    E. Sense of the Senate on Use of No-Bid Contracting by Federal 
                      Emergency Management Agency

     (Sec. 305 of the Senate amendment)


                              present law

       Present law does not provide for the special rules 
     contemplated in the Sense of the Senate provision described 
     below.


                               house bill

       No provision.


                            senate amendment

       The Senate Amendment provision provides that it is the 
     sense of the Senate that the Federal Emergency Management 
     Agency should (1) rebid certain contracts entered into 
     following Hurricane Katrina for which competing bids were not 
     solicited; (2) implement its planned competitive contracting 
     strategy and, in carrying out that strategy, prioritize local 
     and small disadvantaged businesses in contracting and 
     subcontracting; and (3) immediately after awarding any 
     contract, make public the dollar amount of the contract and 
     whether competing bids were solicited.
       Effective date.--The Senate amendment provision is 
     effective upon enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

               F. Sense of Congress Regarding Doha Round

     (Sec. 306 of the Senate amendment)


                              present law

       Present law does not provide a sense of Congress regarding 
     the Doha Round of trade negotiations.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provision provides that it is the 
     sense of Congress that the United States should not be a 
     signatory to an agreement or protocol with respect to the 
     Doha Development Round of the World Trade Organization (WTO) 
     negotiations or any other bilateral or multilateral trade 
     negotiations if the agreement or protocol (1) adopts any 
     provision to lessen the effectiveness of domestic and 
     international disciplines on unfair trade or safeguard 
     provisions or (2) would lessen in any manner the ability of 
     the United States to enforce rigorously its trade laws, 
     including the antidumping, countervailing duty, and safeguard 
     laws. The provision also provides that it is the sense of 
     Congress that (1) the United States trade laws and 
     international rules appropriately serve the public interest 
     by offsetting injurious unfair trade, and that further 
     balancing modifications or other similar provisions are 
     unnecessary and would add to the complexity and difficulty of 
     achieving relief against injurious unfair trade practices, 
     and (2) the United States should ensure that any new 
     agreement relating to international disciplines on unfair 
     trade or safeguard provisions fully rectifies and corrects 
     decisions by WTO dispute settlement panels or the Appellate 
     Body that have unjustifiably and negatively impacted, or 
     threaten to negatively impact, United States law or practice, 
     including a law or practice with respect to foreign dumping 
     or subsidization.
       Effective date.--The Senate amendment provision is 
     effective upon enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

G. Treatment of Certain Stock Option Plans Under Nonqualified Deferred 
                           Compensation Rules

     (Sec. 308 of the Senate amendment)


                              present law

       Amounts deferred under a nonqualified deferred compensation 
     plan for all taxable years are currently includible in gross 
     income to the extent not subject to a substantial risk of 
     forfeiture and not previously included in gross income, 
     unless certain requirements are satisfied.\340\For example, 
     distributions from a nonqualified deferred compensation plan 
     may be allowed only upon certain times and events. Rules also 
     apply for the timing of elections. If the requirements are 
     not satisfied, in addition to current income inclusion, 
     interest at the underpayment rate plus one percentage point 
     is imposed on the underpayments that would have occurred had 
     the compensation been includible in income when first 
     deferred, or if later, when not subject to a substantial risk 
     of forfeiture. The amount required to be included in income 
     is also subject to a 20-percent additional tax.
---------------------------------------------------------------------------
     \340\Section 409A.
---------------------------------------------------------------------------
       The rules governing the tax treatment of nonqualified 
     deferred compensation generally apply to stock options 
     granted to employees. However, exceptions apply to incentive 
     stock options and options granted under employee stock 
     purchase plans.\341\
---------------------------------------------------------------------------
     \341\Sections 422 and 423, respectively.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, the Secretary of the Treasury 
     is directed to modify the regulations relating to 
     nonqualified deferred compensation to extend to applicable 
     foreign option plans the exceptions for incentive stock 
     options and options granted under employee stock purchase 
     plans. The exception for applicable foreign option plans is 
     subject to such terms and conditions as may be prescribed in 
     the regulations.
       An applicable foreign option plan means a plan that (1) 
     provides for the issuance of employee stock options; (2) is 
     established under the laws of a foreign jurisdiction; and (3) 
     under such laws or the terms of the plan (or both), is 
     subject to requirements substantially similar to the 
     requirements applicable to incentive stock options and 
     options granted under employee stock purchase plans.
       For this purpose, a foreign option plan is not treated as 
     subject to requirements substantially similar to the 
     requirements applicable to incentive stock options and 
     options granted under employee stock purchase plans unless 
     the foreign option plan: (1) is required to cover 
     substantially all employees; (2) in the case of an option 
     under an employee stock purchase plan, is required to provide 
     an option price of not less than the lesser of not less than 
     80 percent of the fair market value of the stock at the time 
     the option is granted or an amount which, under the terms of 
     the option, cannot be less than 80 percent of the fair market 
     value of the stock at the time the option is exercised; (3) 
     is required to provide coverage of individuals who, but for 
     the exception under the provision, would be subject to tax 
     under the nonqualified deferred compensation rules with 
     respect to the plan; and (4) meets such other requirements as 
     prescribed in regulations issued under the provision.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

    H. Sense of the Senate Regarding the Dedication of Excess Funds

     (Sec. 309 of the Senate amendment)


                              Present Law

       Present law does not provide a sense of the Senate 
     regarding the dedication of Treasury revenues that exceed 
     amounts specified in the reconciliation instructions for this 
     bill.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that it is the sense of the 
     Senate that any Federal revenue increases resulting from the 
     Senate amendment and exceeding the amounts specified in 
     applicable reconciliation instructions are to be dedicated to 
     the Low-Income Home Energy Assistance Program. The amount so 
     dedicated is not to exceed by more than $2.9 billion the 
     funding level established for the program for fiscal year 
     2005.
       Effective date.--The Senate amendment provision is 
     effective upon enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page 7434]]



  I. Modification of Treatment of Loans to Qualified Continuing Care 
                               Facilities

     (Sec. 310 of the Senate amendment and sec. 7872(g) of the 
         Code)


                              Present Law

       Present law provides generally that certain loans that bear 
     interest at a below-market rate are treated as loans bearing 
     interest at the market rate, accompanied by imputed payments 
     characterized in accordance with the substance of the 
     transaction (for example, as a gift, compensation, a 
     dividend, or interest).\342\
---------------------------------------------------------------------------
     \342\Sec. 7872.
---------------------------------------------------------------------------
       An exception to this imputation rule is provided for any 
     calendar year for a below-market loan made by a lender to a 
     qualified continuing care facility pursuant to a continuing 
     care contract, if the lender or the lender's spouse attains 
     age 65 before the close of the calendar year.\343\
---------------------------------------------------------------------------
     \343\Sec. 7872(g).
---------------------------------------------------------------------------
       The exception applies only to the extent the aggregate 
     outstanding loans by the lender (and spouse) to any qualified 
     continuing care facility do not exceed $163,300 (for 
     2006).\344\
---------------------------------------------------------------------------
     \344\Rev. Rul. 2005-75, 2005-49 I.R.B. 1073.
---------------------------------------------------------------------------
       For this purpose, a continuing care contract means a 
     written contract between an individual and a qualified 
     continuing care facility under which: (1) the individual or 
     the individual's spouse may use a qualified continuing care 
     facility for their life or lives; (2) the individual or the 
     individual's spouse will first reside in a separate, 
     independent living unit with additional facilities outside 
     such unit for the providing of meals and other personal care 
     and will not require long-term nursing care, and then will be 
     provided long-term and skilled nursing care as the health of 
     the individual or the individual's spouse requires; and (3) 
     no additional substantial payment is required if the 
     individual or the individual's spouse requires increased 
     personal care services or long-term and skilled nursing care.
       For this purpose, a qualified continuing care facility 
     means one or more facilities that are designed to provide 
     services under continuing care contracts, and substantially 
     all of the residents of which are covered by continuing care 
     contracts. A facility is not treated as a qualified 
     continuing care facility unless substantially all facilities 
     that are used to provide services required to be provided 
     under a continuing care contract are owned or operated by the 
     borrower. For these purposes, a nursing home is not a 
     qualified continuing care facility.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision modifies the present-law 
     exception under section 7872(g) relating to loans to 
     continuing care facilities by eliminating the dollar cap on 
     aggregate outstanding loans and making other modifications.
       The Senate amendment provision provides an exception to the 
     imputation rule of section 7872 for any calendar year for any 
     below-market loan owed by a facility which on the last day of 
     the year is a qualified continuing care facility, if the loan 
     was made pursuant to a continuing care contract and if the 
     lender or the lender's spouse attains age 62 before the close 
     of the year.
       For this purpose, a continuing care contract means a 
     written contract between an individual and a qualified 
     continuing care facility under which: (1) the individual or 
     the individual's spouse may use a qualified continuing care 
     facility for their life or lives; (2) the individual or the 
     individual's spouse will be provided with housing in an 
     independent living unit (which has additional available 
     facilities outside such unit for the provision of meals and 
     other personal care), an assisted living facility or nursing 
     facility, as is available in the continuing care facility, as 
     appropriate for the health of the individual or the 
     individual's spouse; and (3) the individual or the 
     individual's spouse will be provided assisted living or 
     nursing care as the health of the individual or the 
     individual's spouse requires, and as is available in the 
     continuing care facility.
       For this purpose, a qualified continuing care facility 
     means one or more facilities: (1) that are designed to 
     provide services under continuing care contracts; (2) that 
     include an independent living unit, plus an assisted living 
     or nursing facility, or both; and (3) substantially all of 
     the independent living unit residents of which are covered by 
     continuing care contracts. For these purposes, a nursing home 
     is not a qualified continuing care facility.
       Effective date.--The provision is effective for loans made 
     after December 31, 2005.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision, with modifications. The conference agreement 
     provision provides that a continuing care contract is a 
     written contract between an individual and a qualified 
     continuing care facility under which: (1) the individual or 
     the individual's spouse may use a qualified continuing care 
     facility for their life or lives; (2) the individual or the 
     individual's spouse will be provided with housing, as 
     appropriate for the health of such individual or individual's 
     spouse, (i) in an independent living unit (which has 
     additional available facilities outside such unit for the 
     provision of meals and other personal care), and (ii) in an 
     assisted living facility or a nursing facility, as is 
     available in the continuing care facility; and (3) the 
     individual or the individual's spouse will be provided 
     assisted living or nursing care as the health of the 
     individual or the individual's spouse requires, and as is 
     available in the continuing care facility. The Secretary is 
     required to issue guidance that limits the term ``continuing 
     care contract'' to contracts that provide only facilities, 
     care, and services described in the preceding sentence.
       For purposes of defining the terms ``continuing care 
     contract'' and ``qualified continuing care facility'' under 
     the conference agreement provision, the term ``assisted 
     living facility'' is intended to mean a facility at which 
     assistance is provided (1) with activities of daily living 
     (such as eating, toileting, transferring, bathing, dressing, 
     and continence) or (2) in cases of cognitive impairment, to 
     protect the health or safety of an individual. The term 
     ``nursing facility'' is intended to mean a facility that 
     offers care requiring the utilization of licensed nursing 
     staff.
       Effective date.--The conference agreement provision is 
     generally effective for calendar years beginning after 
     December 31, 2005, with respect to loans made before, on, or 
     after such date. The conference agreement provision does not 
     apply to any calendar year after 2010. Thus, the conference 
     agreement provision does not apply with respect to interest 
     imputed after December 31, 2010. After such date, the law as 
     in effect prior to enactment applies.

 J. Exclusion of Gain on Sale of a Principal Residence by a Member of 
                       the Intelligence Community

     (Sec. 311 of the Senate amendment and sec. 121 of the Code)


                              Present Law

       Under present law, an individual taxpayer may exclude up to 
     $250,000 ($500,000 if married filing a joint return) of gain 
     realized on the sale or exchange of a principal residence. To 
     be eligible for the exclusion, the taxpayer must have owned 
     and used the residence as a principal residence for at least 
     two of the five years ending on the sale or exchange. A 
     taxpayer who fails to meet these requirements by reason of a 
     change of place of employment, health, or, to the extent 
     provided under regulations, unforeseen circumstances is able 
     to exclude an amount equal to the fraction of the $250,000 
     ($500,000 if married filing a joint return) that is equal to 
     the fraction of the two years that the ownership and use 
     requirements are met.
       Present law also contains special rules relating to members 
     of the uniformed services or the Foreign Service of the 
     United States. An individual may elect to suspend for a 
     maximum of 10 years the five-year test period for ownership 
     and use during certain absences due to service in the 
     uniformed services or the Foreign Service of the United 
     States. The uniformed services include: (1) the Armed Forces 
     (the Army, Navy, Air Force, Marine Corps, and Coast Guard); 
     (2) the commissioned corps of the National Oceanic and 
     Atmospheric Administration; and (3) the commissioned corps of 
     the Public Health Service. If the election is made, the five-
     year period ending on the date of the sale or exchange of a 
     principal residence does not include any period up to five 
     years during which the taxpayer or the taxpayer's spouse is 
     on qualified official extended duty as a member of the 
     uniformed services or in the Foreign Service of the United 
     States. For these purposes, qualified official extended duty 
     is any period of extended duty while serving at a place of 
     duty at least 50 miles away from the taxpayer's principal 
     residence or under orders compelling residence in Government 
     furnished quarters. Extended duty is defined as any period of 
     duty pursuant to a call or order to such duty for a period in 
     excess of 90 days or for an indefinite period. The election 
     may be made with respect to only one property for a 
     suspension period.


                               House Bill

       No provision.


                            Senate Amendment

       Under the provision, specified employees of the 
     intelligence community may elect to suspend the running of 
     the five-year test period during any period in which they are 
     serving on extended duty. The term ``employee of the 
     intelligence community'' means an employee of the Office of 
     the Director of National Intelligence, the Central 
     Intelligence Agency, the National Security Agency, the 
     Defense Intelligence Agency, the National Geospatial-
     Intelligence Agency, or the National Reconnaissance Office. 
     The term also includes employment with: (1) any other office 
     within the Department of Defense for the collection of 
     specialized national intelligence through reconnaissance 
     programs; (2) any of the intelligence elements of the Army, 
     the Navy, the Air Force, the Marine Corps, the Federal Bureau 
     of Investigation, the Department of the Treasury, the 
     Department of Energy, and the Coast Guard; (3) the Bureau of 
     Intelligence and Research of the Department of State; and (4)

[[Page 7435]]

     the elements of the Department of Homeland Security concerned 
     with the analyses of foreign intelligence information. To 
     qualify, a specified employee must move from one duty station 
     to another and at least one of such duty stations must be 
     located outside of the Washington, D.C. and Baltimore 
     metropolitan statistical areas, as defined by the Secretary 
     of Commerce. As under present law, the five-year period may 
     not be extended more than 10 years.
       Effective date.--The provision is effective for sales and 
     exchanges after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

K. Sense of the Senate Regarding the Permanent Extension of EGTRRA and 
           JGTRRA Provisions Relating to the Child Tax Credit

     (Sec. 312 of the Senate amendment)


                              Present Law

       Present law provides for the sunset of the child tax credit 
     provisions under Economic Growth and Tax Relief 
     Reconciliation Act of 2001 (``EGTRRA'') and Jobs and Growth 
     Tax Relief Reconciliation Act of 2003 (``JGTRRA'').


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment includes a provision stating that it 
     is the sense of the Senate that the conferees for the Tax 
     Relief Act of 2006 should strive to permanently extend the 
     amendments to the child tax credit made by EGTRRA and JGTRRA.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

        L. Partial Expensing for Advanced Mine Safety Equipment

     (Sec. 313 of the Senate amendment)


                              Present Law

       A taxpayer generally must capitalize the cost of property 
     used in a trade or business and recover such cost over time 
     through annual deductions for depreciation or amortization. 
     Tangible property generally is depreciated under the Modified 
     Accelerated Cost Recovery System (``MACRS''), which 
     determines depreciation by applying specific recovery 
     periods, placed-in-service conventions, and depreciation 
     methods to the cost of various types of depreciable property 
     (sec. 168).
       Personal property is classified under MACRS based on the 
     property's class life unless a different classification is 
     specifically provided in section 168. The class life 
     applicable for personal property is the asset guideline 
     period (midpoint class life as of January 1, 1986). Based on 
     the property's classification, a recovery period is 
     prescribed under MACRS. In general, there are six classes of 
     recovery periods to which personal property can be assigned. 
     For example, personal property that has a class life of four 
     years or less has a recovery period of three years, whereas 
     personal property with a class life greater than four years 
     but less than 10 years has a recovery period of five years. 
     The class lives and recovery periods for most property are 
     contained in Revenue Procedure 87-56.\345\
---------------------------------------------------------------------------
     \345\1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 
     88-22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
       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. 
     In general, qualifying property is defined as depreciable 
     tangible personal property that is purchased for use in the 
     active conduct of a trade or business. The $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.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that the taxpayer may elect 
     to treat 50 percent of the cost of any qualified advanced 
     mine safety equipment property as a deduction in the taxable 
     year in which the equipment is placed in service.
       Advanced mine safety equipment property means any of the 
     following: (1) emergency communication technology or devices 
     used to allow a miner to maintain constant communication with 
     an individual who is not in the mine; (2) electronic 
     identification and location devices that allow individuals 
     not in the mine to track at all times the movements and 
     location of miners working in or at the mine; (3) emergency 
     oxygen-generating, self-rescue devices that provide oxygen 
     for at least 90 minutes; (4) pre-positioned supplies of 
     oxygen providing each miner on a shift the ability to survive 
     for at least 48 hours; and (5) comprehensive atmospheric 
     monitoring systems that monitor the levels of carbon 
     monoxide, methane and oxygen that are present in all areas of 
     the mine and that can detect smoke in the case of a fire in a 
     mine.
       To be treated as qualified advanced mine safety equipment 
     property under the provision, the original use of the 
     property must have commenced with the taxpayer, and the 
     taxpayer must have placed the property in service after the 
     date of enactment.
       The portion of the cost of any property with respect to 
     which an expensing election under section 179 is made may not 
     be taken into account for purposes of the 50-percent 
     deduction allowed under this provision. For Federal tax 
     purposes, the basis of property is reduced by the portion of 
     its cost that is taken into account for purposes of the 50-
     percent deduction allowed under the provision.
       The provision requires the taxpayer to report information 
     required by the Treasury Secretary with respect to the 
     operation of mines of the taxpayer, in order for the 
     deduction to be allowed for the taxable year.
       The provision includes a termination rule providing that it 
     does not apply to property placed in service after the date 
     that is three years after the date of enactment.
       Effective date.--The provision applies to costs paid or 
     incurred after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                  M. Mine Rescue Team Training Credit

     (Sec. 314 of the Senate amendment and new sec. 45N of the 
         Code)


                              Present Law

       There is no present law credit for expenditures incurred by 
     a taxpayer to train mine rescue workers. In general, a 
     deduction is allowed for all ordinary and necessary expenses 
     that are paid or incurred by the taxpayer during the taxable 
     year in carrying on any trade or business.\346\A taxpayer 
     that employs individuals as miners in underground mines will 
     generally be permitted to deduct as ordinary and necessary 
     expenses the educational expenditures such taxpayer incurs to 
     train its employees in the principles, procedures, and 
     techniques of mine rescue, as well as the wages paid by the 
     taxpayer for the time its employees were engaged in such 
     training.
---------------------------------------------------------------------------
     \346\Sec. 162(a).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that a taxpayer which is an 
     eligible employer may claim a credit equal to the lesser of 
     (1) 20 percent of the amount paid or incurred by the taxpayer 
     during the taxable year with respect to the training program 
     costs of each qualified mine rescue team employee (including 
     wages of the employee), or (2) $10,000.\347\An eligible 
     employer is any taxpayer which employs individuals as miners 
     in underground mines in the United States. No deduction is 
     allowed for the amount of the expenses otherwise deductible 
     which is equal to the amount of the credit.
---------------------------------------------------------------------------
     \347\The credit is part of the general business credit (sec. 
     38).
---------------------------------------------------------------------------
       A qualified mine rescue team employee is any full-time 
     employee of the taxpayer who is a miner eligible for more 
     than six months of a taxable year to serve as a mine rescue 
     team member by virtue of either having completed the initial 
     20-hour course of instruction prescribed by the Mine Safety 
     and Health Administration's Office of Educational Policy and 
     Development, or receiving at least 40 hours of refresher 
     training in such instruction.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2005, and before January 
     1, 2009.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  N. Funding for Veterans Health Care and Disability Compensation and 
                  Hospital Infrastructure for Veterans

     (Sec. 315 of the Senate amendment)


                              Present Law

       Within the U.S. Department of Veterans Affairs, the 
     Veterans Health Administration provides a broad spectrum of 
     medical, surgical, and rehabilitative care to veterans. The 
     Veteran Benefits Administration provides services to 
     veterans, including services related to compensation and 
     pensions.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment authorizes the appropriation of funds 
     for the Department of Veterans Affairs for the Veterans 
     Health Administration for Medical Care as well as the 
     Veterans Benefits Administration for Compensation and 
     Pensions for fiscal years 2006 through 2010 in the amounts 
     listed below. The amounts authorized are in addition to any 
     other amounts authorized for these Administrations under any 
     other provision of law.

------------------------------------------------------------------------
                                     Veterans health   Veterans benefits
            Fiscal year               administration     administration
------------------------------------------------------------------------
2006..............................       $900,000,000     $2,300,000,000

[[Page 7436]]

 
2007..............................      1,300,000,000      2,700,000,000
2008..............................      1,500,000,000      3,000,000,000
2009..............................      1,600,000,000      3,000,000,000
2010..............................      1,600,000,000      3,000,000,000
------------------------------------------------------------------------

       The Senate amendment also establishes the Veterans Hospital 
     Improvement Fund, with an initial balance of $1,000,000,000, 
     to be administered by the Secretary of Veterans Affairs. The 
     funds are to be used for improvements of health facilities 
     treating veterans.
       Effective date.--The Senate amendment is effective upon the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

O. Sense of the Senate Regarding Protecting Middle-Class Families From 
                      the Alternative Minimum Tax

     (Sec. 316 of the Senate amendment)


                              Present Law

       Present law imposes an alternative minimum tax. The 
     alternative minimum tax is the amount by which the tentative 
     minimum tax exceeds the regular income tax. An individual's 
     tentative minimum tax is the sum of (1) 26 percent of so much 
     of the taxable excess as does not exceed $175,000 ($87,500 in 
     the case of a married individual filing a separate return) 
     and (2) 28 percent of the remaining taxable excess. The 
     taxable excess is so much of the alternative minimum taxable 
     income (``AMTI'') as exceeds an exemption amount. AMTI is the 
     individual's taxable income adjusted to take account of 
     specified preferences and adjustments.
       Under present law, for taxable years beginning before 
     January 1, 2009, the maximum rate of tax on the adjusted net 
     capital gain of an individual is 15 percent, and dividends 
     received by an individual from domestic corporations and 
     qualified foreign corporations are taxed at the same rates 
     that apply to capital gains. For taxable years beginning 
     after December 31, 2008, the maximum rate of tax on the 
     adjusted net capital gain of an individual is 20 percent, and 
     dividends received by an individual are taxed as ordinary 
     income at rates of up to 35 percent.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that it is the sense of the 
     Senate that protecting middle-class families from the 
     alternative minimum tax should be a higher priority for 
     Congress in 2006 than extending a tax cut that does not 
     expire until the end of 2008.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                   TITLE V--REVENUE OFFSET PROVISIONS

             A. Provisions Designed to Curtail Tax Shelters

     1. Understatement of taxpayer's liability by income tax 
         return preparer (Sec. 401 of the Senate amendment and 
         sec. 6694 of the Code)


                              Present Law

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


                               House Bill

       No provision.


                            Senate Amendment

       The provision alters the standards of conduct that must be 
     met to avoid imposition of the first penalty described above 
     by replacing the realistic possibility standard with a 
     requirement that there be a reasonable belief that the tax 
     treatment of the position was more likely than not the proper 
     treatment. The provision also replaces the not-frivolous 
     standard with the requirement that there be a reasonable 
     basis for the tax treatment of the position, increases the 
     present-law $250 penalty to $1,000, and increases the 
     present-law $1,000 penalty to $5,000.
       Effective date.--The provision is effective for documents 
     prepared after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Frivolous tax submissions (Sec. 402 of the Senate 
         amendment and sec. 6702 of the Code)


                              Present Law

       The Code provides that an individual who files a frivolous 
     income tax return is subject to a penalty of $500 imposed by 
     the IRS (sec. 6702). The Code also permits the Tax Court\348\ 
     to impose a penalty of up to $25,000 if a taxpayer has 
     instituted or maintained proceedings primarily for delay or 
     if the taxpayer's position in the proceeding is frivolous or 
     groundless (sec. 6673(a)).
---------------------------------------------------------------------------
     \348\Because in general the Tax Court is the only pre-payment 
     forum available to taxpayers, it deals with most of the 
     frivolous, groundless, or dilatory arguments raised in tax 
     cases.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

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


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Penalty for promoting abusive tax shelters (Sec. 403 of 
         the Senate amendment and sec. 6700 of the Code)


                              Present Law

       A penalty is imposed on any person who organizes, assists 
     in the organization of, or participates in the sale of any 
     interest in, a partnership or other entity, any investment 
     plan or arrangement, or any other plan or arrangement, if in 
     connection with such activity the person makes or furnishes a 
     qualifying false or fraudulent statement or a gross valuation 
     overstatement.\349\ A qualified false or fraudulent statement 
     is any statement with respect to the allowability of any 
     deduction or credit, the excludability of any income, or the 
     securing of any other tax benefit by reason of holding an 
     interest in the entity or participating in the plan or 
     arrangement which the person knows or has reason to know is 
     false or fraudulent as to any material matter. A ``gross 
     valuation overstatement'' means any statement as to the value 
     of any property or services if the stated value exceeds 200 
     percent of the correct valuation, and the value is directly 
     related to the amount of any allowable income tax deduction 
     or credit.
---------------------------------------------------------------------------
     \349\Sec. 6700.
---------------------------------------------------------------------------
       In the case of a gross valuation overstatement, the amount 
     of the penalty is $1,000 (or, if the person establishes that 
     it is less, 100 percent of the gross income derived or to be 
     derived by the person from such activity). A penalty 
     attributable to a gross valuation misstatement can be waived 
     on a showing that there was a reasonable basis for the 
     valuation and it was made in good faith. In the case of any 
     activity that involves a qualified false or fraudulent 
     statement, the penalty amount is equal to 50 percent of the 
     gross income derived by the person from the activity.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the penalty rate imposed on 
     any person who organizes, assists in the organization of, or 
     participates in the sale of any interest in, a partnership or 
     other entity, any investment plan or arrangement, or any 
     other plan or arrangement, if in connection with such 
     activity the person makes or furnishes a qualifying false or 
     fraudulent statement or a gross valuation overstatement. The 
     penalty is equal to 100 percent of the gross income derived 
     (or to be derived) from the activity. The penalty amount is 
     calculated with respect to each instance of an activity 
     subject to the penalty, each instance in which income was 
     derived by the person or persons subject to the penalty, and 
     each person who participated in an activity subject to the 
     penalty.
       Under the Senate amendment, if more than one person is 
     liable for the penalty, all such persons are jointly and 
     severally liable for the penalty. In addition, the Senate 
     amendment provides that the penalty, as well as amounts paid 
     to settle or avoid the imposition of the penalty, is not 
     deductible for tax purposes.
       Effective date.--The provision is effective for activities 
     occurring after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page 7437]]


     4. Penalty for aiding and abetting the understatement of tax 
         liability (Sec. 404 of the Senate amendment and sec. 6701 
         of the Code)


                              Present Law

       A penalty is imposed on a person who: (1) aids or assists 
     in, procures, or advises with respect to a tax return or 
     other document; (2) knows (or has reason to believe) that 
     such document will be used in connection with a material tax 
     matter; and (3) knows that this would result in an 
     understatement of tax of another person. In general, the 
     amount of the penalty is $1,000. If the document relates to 
     the tax return of a corporation, the amount of the penalty is 
     $10,000.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment expands the scope of the penalty in 
     several ways. First, it applies the penalty to aiding or 
     assisting with respect to tax liability reflected in a tax 
     return. Second, it applies the penalty to each instance of 
     aiding or abetting. Third, it increases the amount of the 
     penalty to a maximum of 100 percent of the gross income 
     derived (or to be derived) from the aiding or abetting. 
     Fourth, if more than one person is liable for the penalty, 
     all such persons are jointly and severally liable for the 
     penalty. Fifth, the penalty, as well as amounts paid to 
     settle or avoid the imposition of the penalty, is not 
     deductible for tax purposes.
       Effective date.--The provision is effective for activities 
     occurring after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                     B. Economic Substance Doctrine

     1. Clarification of the economic substance doctrine (sec. 411 
         of the Senate amendment)


                              present law

     In general
       The Code provides specific rules regarding the computation 
     of taxable income, including the amount, timing, source, and 
     character of items of income, gain, loss and deduction. These 
     rules are designed to provide for the computation of taxable 
     income in a manner that provides for a degree of specificity 
     to both taxpayers and the government. Taxpayers generally may 
     plan their transactions in reliance on these rules to 
     determine the federal income tax consequences arising from 
     the transactions.
       In addition to the statutory provisions, courts have 
     developed several doctrines that can be applied to deny the 
     tax benefits of tax motivated transactions, notwithstanding 
     that the transaction may satisfy the literal requirements of 
     a specific tax provision. The common-law doctrines are not 
     entirely distinguishable, and their application to a given 
     set of facts is often blurred by the courts and the IRS. 
     Although these doctrines serve an important role in the 
     administration of the tax system, invocation of these 
     doctrines can be seen as at odds with an objective, ``rule-
     based'' system of taxation. Nonetheless, courts have applied 
     the doctrines to deny tax benefits arising from certain 
     transactions.\350\
---------------------------------------------------------------------------
     \350\See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 
     (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. 
     denied 526 U.S. 1017 (1999).
---------------------------------------------------------------------------
       A common-law doctrine applied with increasing frequency is 
     the ``economic substance'' doctrine. In general, this 
     doctrine denies tax benefits arising from transactions that 
     do not result in a meaningful change to the taxpayer's 
     economic position other than a purported reduction in federal 
     income tax.\351\
---------------------------------------------------------------------------
     \351\Closely related doctrines also applied by the courts 
     (sometimes interchangeable with the economic substance 
     doctrine) include the ``sham transaction doctrine'' and the 
     ``business purpose doctrine''. See, e.g., Knetsch v. United 
     States, 364 U.S. 361 (1960) (denying interest deductions on a 
     ``sham transaction'' whose only purpose was to create the 
     deductions).
---------------------------------------------------------------------------
       Economic substance doctrine
       Courts generally deny claimed tax benefits if the 
     transaction that gives rise to those benefits lacks economic 
     substance independent of tax considerations--notwithstanding 
     that the purported activity actually occurred. The tax court 
     has described the doctrine as follows:

       The tax law . . . requires that the intended transactions 
     have economic substance separate and distinct from economic 
     benefit achieved solely by tax reduction. The doctrine of 
     economic substance becomes applicable, and a judicial remedy 
     is warranted, where a taxpayer seeks to claim tax benefits, 
     unintended by Congress, by means of transactions that serve 
     no economic purpose other than tax savings.\352\
---------------------------------------------------------------------------
     \352\ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
---------------------------------------------------------------------------
       Business purpose doctrine
       Another common law doctrine that overlays and is often 
     considered together with (if not part and parcel of) the 
     economic substance doctrine is the business purpose doctrine. 
     The business purpose test is a subjective inquiry into the 
     motives of the taxpayer--that is, whether the taxpayer 
     intended the transaction to serve some useful non-tax 
     purpose. In making this determination, some courts have 
     bifurcated a transaction in which independent activities with 
     non-tax objectives have been combined with an unrelated item 
     having only tax-avoidance objectives in order to disallow the 
     tax benefits of the overall transaction.\353\
---------------------------------------------------------------------------
     \353\ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
---------------------------------------------------------------------------
     Application by the courts
       Elements of the doctrine
       There is a lack of uniformity regarding the proper 
     application of the economic substance doctrine.\354\ Some 
     courts apply a conjunctive test that requires a taxpayer to 
     establish the presence of both economic substance (i.e., the 
     objective component) and business purpose (i.e., the 
     subjective component) in order for the transaction to survive 
     judicial scrutiny.\355\ A narrower approach used by some 
     courts is to conclude that either a business purpose or 
     economic substance is sufficient to respect the 
     transaction).\356\ A third approach regards economic 
     substance and business purpose as ``simply more precise 
     factors to consider'' in determining whether a transaction 
     has any practical economic effects other than the creation of 
     tax benefits.\357\
---------------------------------------------------------------------------
     \354\``The casebooks are glutted with [economic substance] 
     tests. Many such tests proliferate because they give the 
     comforting illusion of consistency and precision. They often 
     obscure rather than clarify.'' Collins v. Commissioner, 857 
     F.2d 1383, 1386 (9th Cir. 1988).
     \355\See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 
     (6th Cir. 1993) (``The threshold question is whether the 
     transaction has economic substance. If the answer is yes, the 
     question becomes whether the taxpayer was motivated by profit 
     to participate in the transaction.'').
     \356\See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 
     89, 91-92 (4th Cir. 1985) (``To treat a transaction as a 
     sham, the court must find that the taxpayer was motivated by 
     no business purposes other than obtaining tax benefits in 
     entering the transaction, and, second, that the transaction 
     has no economic substance because no reasonable possibility 
     of a profit exists.''); IES Industries v. United States, 253 
     F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
     transaction is a sham for tax purposes [under the Eighth 
     Circuit test], a transaction will be characterized as a sham 
     if it is not motivated by any economic purpose out of tax 
     considerations (the business purpose test), and if it is 
     without economic substance because no real potential for 
     profit exists (the economic substance test).''). As noted 
     earlier, the economic substance doctrine and the sham 
     transaction doctrine are similar and sometimes are applied 
     interchangeably. For a more detailed discussion of the sham 
     transaction doctrine, see, e.g., Joint Committee on Taxation, 
     Study of Present-Law Penalty and Interest Provisions as 
     Required by Section 3801 of the Internal Revenue Service 
     Restructuring and Reform Act of 1998 (including Provisions 
     Relating to Corporate Tax Shelters) (JCS-3-99) at 182.
     \357\See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 
     247; James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 
     1995); Sacks v. Commissioner, 69 F.3d 982, 985 (9th Cir. 
     1995) (``Instead, the consideration of business purpose and 
     economic substance are simply more precise factors to 
     consider . . . We have repeatedly and carefully noted that 
     this formulation cannot be used as a `rigid two-step 
     analysis'.'').
---------------------------------------------------------------------------
       Recently, the Court of Federal Claims questioned the 
     continuing viability of the doctrine.\358\ The court also 
     stated that ``the use of the `economic substance' doctrine to 
     trump `mere compliance with the Code' would violate the 
     separation of powers.''\359\
---------------------------------------------------------------------------
     \358\Coltec Industries, Inc. v. United States, 62 Fed. Cl. 
     716 (2004) (slip opinion at 123-124). The court also found, 
     however, that the doctrine was satisfied in that case. Id. at 
     128.
     \359\Id. at 128.
---------------------------------------------------------------------------
       Nontax economic benefits
       There also is a lack of uniformity regarding the type of 
     non-tax economic benefit a taxpayer must establish in order 
     to satisfy economic substance. Several courts have denied tax 
     benefits on the grounds that the subject transactions lacked 
     profit potential.\360\ In addition, some courts have applied 
     the economic substance doctrine to disallow tax benefits in 
     transactions in which a taxpayer was exposed to risk and the 
     transaction had a profit potential, but the court concluded 
     that the economic risks and profit potential were 
     insignificant when compared to the tax benefits.\361\ Under 
     this analysis, the taxpayer's profit potential must be more 
     than nominal. Conversely, other courts view the application 
     of the economic substance doctrine as requiring an objective 
     determination of whether a ``reasonable possibility of 
     profit'' from the transaction existed apart from the tax 
     benefits.\362\ In these cases, in assessing whether a 
     reasonable possibility of profit exists, it is sufficient if 
     there is a nominal amount of pre-tax profit as measured 
     against expected net tax benefits.
---------------------------------------------------------------------------
     \360\See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
     Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
     unprofitable, leveraged acquisition of Treasury bills, and 
     accompanying prepaid interest deduction, lacked economic 
     substance).
     \361\See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 
     (disallowing deduction even though taxpayer had a possibility 
     of small gain or loss by owning Treasury bills); Sheldon v. 
     Commissioner, 94 T.C. 738, 768 (1990) (stating that 
     ``potential for gain . . . is infinitesimally nominal and 
     vastly insignificant when considered in comparison with the 
     claimed deductions'').
     \362\See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 
     at 94 (the economic substance inquiry requires an objective 
     determination of whether a reasonable possibility of profit 
     from the transaction existed apart from tax benefits); Compaq 
     Computer Corp. v. Commissioner, 277 F.3d at 781 (applied the 
     same test, citing Rice's Toyota World); IES Industries v. 
     United States, 253 F.3d 350, 354 (8th Cir. 2001).

[[Page 7438]]


       Financial accounting benefits
       In determining whether a taxpayer had a valid business 
     purpose for entering into a transaction, at least one court 
     has concluded that financial accounting benefits arising from 
     tax savings do not qualify as a non-tax business 
     purpose.\363\ However, based on court decisions that 
     recognize the importance of financial accounting treatment, 
     taxpayers have asserted that financial accounting benefits 
     arising from tax savings can satisfy the business purpose 
     test.\364\
---------------------------------------------------------------------------
     \363\See, American Electric Power, Inc. v. U.S., 136 F. Supp. 
     2d 762, 791-92 (S.D. Ohio 2001); aff'd 326 F.3d.737 (6th Cir. 
     2003).
     \364\See, e.g., Joint Committee on Taxation, Report of 
     Investigation of Enron Corporation and Related Entities 
     Regarding Federal Tax and Compensation Issues, and Policy 
     Recommendations (JSC-3-03) February, 2003 (``Enron Report''), 
     Volume III at C-93, 289. Enron Corporation relied on Frank 
     Lyon Co. v. United States, 435 U.S. 561, 577-78 (1978), and 
     Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir. 1990) to 
     argue that financial accounting benefits arising from tax 
     savings constitutes a good business purpose.
---------------------------------------------------------------------------


                               House bill

       No provision.


                            Senate Amendment

       The Senate amendment provision clarifies and enhances the 
     application of the economic substance doctrine. Under the 
     provision, in a case in which a court determines that the 
     economic substance doctrine is relevant to a transaction (or 
     a series of transactions), such transaction (or series of 
     transactions) has economic substance (and thus satisfies the 
     economic substance doctrine) only if the taxpayer establishes 
     that (1) the transaction changes in a meaningful way (apart 
     from Federal income tax consequences) the taxpayer's economic 
     position, and (2) the taxpayer has a substantial non-tax 
     purpose for entering into such transaction and the 
     transaction is a reasonable means of accomplishing such 
     purpose.\365\
---------------------------------------------------------------------------
     \365\If the tax benefits are clearly contemplated and 
     expected by the language and purpose of the relevant 
     authority, it is not intended that such tax benefits be 
     disallowed if the only reason for such disallowance is that 
     the transaction fails the economic substance doctrine as 
     defined in this provision.
---------------------------------------------------------------------------
       The provision does not change current law standards used by 
     courts in determining when to utilize an economic substance 
     analysis.\366\ Also, the provision does not alter the court's 
     ability to aggregate, disaggregate or otherwise 
     recharacterize a transaction when applying the doctrine.\367\ 
     The provision provides a uniform definition of economic 
     substance, but does not alter the flexibility of the courts 
     in other respects.
---------------------------------------------------------------------------
     \366\See, e.g., Treas. Reg. sec. 1.269-2, stating that 
     characteristic of circumstances in which a deduction 
     otherwise allowed will be disallowed are those in which the 
     effect of the deduction, credit, or other allowance would be 
     to distort the liability of the particular taxpayer when the 
     essential nature of the transaction or situation is examined 
     in the light of the basic purpose or plan which the 
     deduction, credit, or other allowance was designed by the 
     Congress to effectuate.
     \367\See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 609, 
     613 (1938) (``A given result at the end of a straight path is 
     not made a different result because reached by following a 
     devious path.'').
---------------------------------------------------------------------------
     Conjunctive analysis
       The provision clarifies that the economic substance 
     doctrine involves a conjunctive analysis--there must be an 
     objective inquiry regarding the effects of the transaction on 
     the taxpayer's economic position, as well as a subjective 
     inquiry regarding the taxpayer's motives for engaging in the 
     transaction. Under the provision, a transaction must satisfy 
     both tests--i.e., it must change in a meaningful way (apart 
     from Federal income tax consequences) the taxpayer's economic 
     position, and the taxpayer must have a substantial non-tax 
     purpose for entering into such transaction (and the 
     transaction is a reasonable means of accomplishing such 
     purpose)--in order to satisfy the economic substance 
     doctrine. This clarification eliminates the disparity that 
     exists among the circuits regarding the application of the 
     doctrine, and modifies its application in those circuits in 
     which either a change in economic position or a non-tax 
     business purpose (without having both) is sufficient to 
     satisfy the economic substance doctrine.
     Non-tax business purpose
       Under the provision, a taxpayer's non-tax purpose for 
     entering into a transaction (the second prong in the 
     analysis) must be ``substantial,'' and the transaction must 
     be ``a reasonable means'' of accomplishing such purpose. 
     Under this formulation, the non-tax purpose for the 
     transaction must bear a reasonable relationship to the 
     taxpayer's normal business operations or investment 
     activities.\368\
---------------------------------------------------------------------------
     \368\See, e.g., Treas. Reg. sec. 1.269-2(b) (stating that a 
     distortion of tax liability indicating the principal purpose 
     of tax evasion or avoidance might be evidenced by the fact 
     that ``the transaction was not undertaken for reasons germane 
     to the conduct of the business of the taxpayer''). Similarly, 
     in ACM Partnership v. Commissioner, 73 T.C.M. (CCH) 2189 
     (1997), the court stated:
     ``Key to [the determination of whether a transaction has 
     economic substance] is that the transaction must be 
     rationally related to a useful nontax purpose that is 
     plausible in light of the taxpayer's conduct and useful in 
     light of the taxpayer's economic situation and intentions. 
     Both the utility of the stated purpose and the rationality of 
     the means chosen to effectuate it must be evaluated in 
     accordance with commercial practices in the relevant 
     industry. A rational relationship between purpose and means 
     ordinarily will not be found unless there was a reasonable 
     expectation that the nontax benefits would be at least 
     commensurate with the transaction costs.'' [citations 
     omitted]
---------------------------------------------------------------------------
       In determining whether a taxpayer has a substantial non-tax 
     business purpose, an objective of achieving a favorable 
     accounting treatment for financial reporting purposes will 
     not be treated as having a substantial non-tax purpose.\369\ 
     Furthermore, a transaction that is expected to increase 
     financial accounting income as a result of generating tax 
     deductions or losses without a corresponding financial 
     accounting charge (i.e., a permanent book-tax 
     difference)\370\ should not be considered to have a 
     substantial non-tax purpose unless a substantial non-tax 
     purpose exists apart from the financial accounting 
     benefits.\371\
---------------------------------------------------------------------------
     \369\However, if the tax benefits are clearly contemplated 
     and expected by the language and purpose of the relevant 
     authority, such tax benefits should not be disallowed solely 
     because the transaction results in a favorable accounting 
     treatment. An example is the repealed foreign sales 
     corporation rules.
     \370\This includes tax deductions or losses that are 
     anticipated to be recognized in a period subsequent to the 
     period the financial accounting benefit is recognized. For 
     example, FAS 109 in some cases permits the recognition of 
     financial accounting benefits prior to the period in which 
     the tax benefits are recognized for income tax purposes.
     \371\Claiming that a financial accounting benefit constitutes 
     a substantial non-tax purpose fails to consider the origin of 
     the accounting benefit (i.e., reduction of taxes) and 
     significantly diminishes the purpose for having a substantial 
     non-tax purpose requirement. See, e.g., American Electric 
     Power, Inc. v. U.S., 136 F. Supp. 2d 762, 791-92 (S.D. Ohio, 
     2001) (``AEP's intended use of the cash flows generated by 
     the [corporate-owned life insurance] plan is irrelevant to 
     the subjective prong of the economic substance analysis. If a 
     legitimate business purpose for the use of the tax savings 
     'were sufficient to breathe substance into a transaction 
     whose only purpose was to reduce taxes, [then] every sham 
     tax-shelter device might succeed,''') (citing Winn-Dixie v. 
     Commissioner, 113 T.C. 254, 287 (1999)); aff'd 326 F3d 737 
     (6th Cir. 2003).
---------------------------------------------------------------------------
       By requiring that a transaction be a ``reasonable means'' 
     of accomplishing its non-tax purpose, the provision 
     reiterates the present-law ability of the courts to bifurcate 
     a transaction in which independent activities with non-tax 
     objectives are combined with an unrelated item having only 
     tax-avoidance objectives in order to disallow the tax 
     benefits of the overall transaction.\372\
---------------------------------------------------------------------------
     \372\See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 
     256 n.48.
---------------------------------------------------------------------------
     Profit potential
       Under the provision, a taxpayer may rely on factors other 
     than profit potential to demonstrate that a transaction 
     results in a meaningful change in the taxpayer's economic 
     position; the provision merely sets forth a minimum threshold 
     of profit potential if that test is relied on to demonstrate 
     a meaningful change in economic position. If a taxpayer 
     relies on a profit potential, however, the present value of 
     the reasonably expected pre-tax profit must be substantial in 
     relation to the present value of the expected net tax 
     benefits that would be allowed if the transaction were 
     respected.\373\ Moreover, the profit potential must exceed a 
     risk-free rate of return. In addition, in determining pre-tax 
     profit, fees and other transaction expenses and foreign taxes 
     are treated as expenses.
---------------------------------------------------------------------------
     \373\Thus, a ``reasonable possibility of profit'' will not be 
     sufficient to establish that a transaction has economic 
     substance.
---------------------------------------------------------------------------
       In applying the profit potential test to a lessor of 
     tangible property, depreciation, applicable tax credits (such 
     as the rehabilitation tax credit and the low income housing 
     tax credit), and any other deduction as provided in guidance 
     by the Secretary are not taken into account in measuring tax 
     benefits.
     Transactions with tax-indifferent parties
       The provision also provides special rules for transactions 
     with tax-indifferent parties. For this purpose, a tax-
     indifferent party means any person or entity not subject to 
     Federal income tax, or any person to whom an item would have 
     no substantial impact on its income tax liability. Under 
     these rules, the form of a financing transaction will not be 
     respected if the present value of the tax deductions to be 
     claimed is substantially in excess of the present value of 
     the anticipated economic returns to the lender. Also, the 
     form of a transaction with a tax-indifferent party will not 
     be respected if it results in an allocation of income or gain 
     to the tax-indifferent party in excess of the tax-indifferent 
     party's economic gain or income or if the transaction results 
     in the shifting of basis on account of overstating the income 
     or gain of the tax-indifferent party.
     Other rules
       The Secretary may prescribe regulations which provide (1) 
     exemptions from the application of the provision, and (2) 
     other rules as may be necessary or appropriate to carry out 
     the purposes of the provision.
       No inference is intended as to the proper application of 
     the economic substance doctrine under present law. In 
     addition, except with respect to the economic substance 
     doctrine, the provision shall not be construed as altering or 
     supplanting any other common law doctrine (including the sham 
     transaction doctrine), and the provision shall be construed 
     as being additive to any such other doctrine.

[[Page 7439]]

       Effective date.--The provision applies to transactions 
     entered into after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Penalty for understatements attributable to transactions 
         lacking economic substance, etc. (Sec. 412 of the Senate 
         amendment)


                              Present Law

     General accuracy-related penalty
       An accuracy-related penalty under section 6662 applies to 
     the portion of any underpayment that is attributable to (1) 
     negligence, (2) any substantial understatement of income tax, 
     (3) any substantial valuation misstatement, (4) any 
     substantial overstatement of pension liabilities, or (5) any 
     substantial estate or gift tax valuation understatement. If 
     the correct income tax liability exceeds that reported by the 
     taxpayer by the greater of 10 percent of the correct tax or 
     $5,000 (or, in the case of corporations, by the lesser of (a) 
     10 percent of the correct tax (or $10,000 if greater) or (b) 
     $10 million), then a substantial understatement exists and a 
     penalty may be imposed equal to 20 percent of the 
     underpayment of tax attributable to the understatement.\374\ 
     Except in the case of tax shelters,\375\ the amount of any 
     understatement is reduced by any portion attributable to an 
     item if (1) the treatment of the item is supported by 
     substantial authority, or (2) facts relevant to the tax 
     treatment of the item were adequately disclosed and there was 
     a reasonable basis for its tax treatment. The Treasury 
     Secretary may prescribe a list of positions which the 
     Secretary believes do not meet the requirements for 
     substantial authority under this provision.
---------------------------------------------------------------------------
     \374\Sec. 6662.
     \375\A tax shelter is defined for this purpose as a 
     partnership or other entity, an investment plan or 
     arrangement, or any other plan or arrangement if a 
     significant purpose of such partnership, other entity, plan, 
     or arrangement is the avoidance or evasion of Federal income 
     tax. Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
       The section 6662 penalty generally is abated (even with 
     respect to tax shelters) in cases in which the taxpayer can 
     demonstrate that there was ``reasonable cause'' for the 
     underpayment and that the taxpayer acted in good faith.\376\ 
     The relevant regulations provide that reasonable cause exists 
     where the taxpayer ``reasonably relies in good faith on an 
     opinion based on a professional tax advisor's analysis of the 
     pertinent facts and authorities [that] . . . unambiguously 
     concludes that there is a greater than 50-percent likelihood 
     that the tax treatment of the item will be upheld if 
     challenged'' by the IRS.\377\
---------------------------------------------------------------------------
     \376\Sec. 6664(c).
     \377\Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
     1.6664-4(c).
---------------------------------------------------------------------------
     Listed transactions and reportable avoidance transactions
       In general
       A separate accuracy-related penalty under section 6662A 
     applies to ``listed transactions'' and to other ``reportable 
     transactions'' with a significant tax avoidance purpose 
     (hereinafter referred to as a ``reportable avoidance 
     transaction''). The penalty rate and defenses available to 
     avoid the penalty vary depending on whether the transaction 
     was adequately disclosed.
       Both listed transactions and reportable transactions are 
     allowed to be described by the Treasury Department under 
     section 6707A(c), which imposes a penalty for failure 
     adequately to report such transactions under section 6011. A 
     reportable transaction is defined as one that the Treasury 
     Secretary determines is required to be disclosed because it 
     is determined to have a potential for tax avoidance or 
     evasion.\378\ A listed transaction is defined as a reportable 
     transaction which is the same as, or substantially similar 
     to, a transaction specifically identified by the Secretary as 
     a tax avoidance transaction for purposes of the reporting 
     disclosure requirements.\379\
---------------------------------------------------------------------------
     \378\Sec. 6707A(c)(1).
     \379\Sec. 6707A(c)(2).
---------------------------------------------------------------------------
       Disclosed transactions
       In general, a 20-percent accuracy-related penalty is 
     imposed on any understatement attributable to an adequately 
     disclosed listed transaction or reportable avoidance 
     transaction.\380\ The only exception to the penalty is if the 
     taxpayer satisfies a more stringent reasonable cause and good 
     faith exception (hereinafter referred to as the 
     ``strengthened reasonable cause exception''), which is 
     described below. The strengthened reasonable cause exception 
     is available only if the relevant facts affecting the tax 
     treatment are adequately disclosed, there is or was 
     substantial authority for the claimed tax treatment, and the 
     taxpayer reasonably believed that the claimed tax treatment 
     was more likely than not the proper treatment.
---------------------------------------------------------------------------
     \380\Sec. 6662A(a).
---------------------------------------------------------------------------
       Undisclosed transactions
       If the taxpayer does not adequately disclose the 
     transaction, the strengthened reasonable cause exception is 
     not available (i.e., a strict-liability penalty generally 
     applies), and the taxpayer is subject to an increased penalty 
     equal to 30 percent of the understatement.\381\ However, a 
     taxpayer will be treated as having adequately disclosed a 
     transaction for this purpose if the IRS Commissioner has 
     separately rescinded the separate penalty under section 6707A 
     for failure to disclose a reportable transaction.\382\ The 
     IRS Commissioner is authorized to do this only if the failure 
     does not relate to a listed transaction and only if 
     rescinding the penalty would promote compliance and effective 
     tax administration.\383\
---------------------------------------------------------------------------
     \381\Sec. 6662A(c).
     \382\Sec. 6664(d).
     \383\Sec. 6707A(d).
---------------------------------------------------------------------------
       A public entity that is required to pay a penalty for an 
     undisclosed listed or reportable transaction must disclose 
     the imposition of the penalty in reports to the SEC for such 
     periods as the Secretary shall specify. The disclosure to the 
     SEC applies without regard to whether the taxpayer determines 
     the amount of the penalty to be material to the reports in 
     which the penalty must appear; and any failure to disclose 
     such penalty in the reports is treated as a failure to 
     disclose a listed transaction. A taxpayer must disclose a 
     penalty in reports to the SEC once the taxpayer has exhausted 
     its administrative and judicial remedies with respect to the 
     penalty (or if earlier, when paid).\384\
---------------------------------------------------------------------------
     \384\Sec. 6707A(e).
---------------------------------------------------------------------------
       Determination of the understatement amount
       The penalty is applied to the amount of any understatement 
     attributable to the listed or reportable avoidance 
     transaction without regard to other items on the tax return. 
     For purposes of this provision, the amount of the 
     understatement is determined as the sum of: (1) the product 
     of the highest corporate or individual tax rate (as 
     appropriate) and the increase in taxable income resulting 
     from the difference between the taxpayer's treatment of the 
     item and the proper treatment of the item (without regard to 
     other items on the tax return);\385\ and (2) the amount of 
     any decrease in the aggregate amount of credits which results 
     from a difference between the taxpayer's treatment of an item 
     and the proper tax treatment of such item.
---------------------------------------------------------------------------
     \385\For this purpose, any reduction in the excess of 
     deductions allowed for the taxable year over gross income for 
     such year, and any reduction in the amount of capital losses 
     which would (without regard to section 1211) be allowed for 
     such year, shall be treated as an increase in taxable income. 
     Sec. 6662A(b).
---------------------------------------------------------------------------
       Except as provided in regulations, a taxpayer's treatment 
     of an item shall not take into account any amendment or 
     supplement to a return if the amendment or supplement is 
     filed after the earlier of when the taxpayer is first 
     contacted regarding an examination of the return or such 
     other date as specified by the Secretary.\386\
---------------------------------------------------------------------------
     \386\Sec. 6662A(e)(3).
---------------------------------------------------------------------------
       Strengthened reasonable cause exception
       A penalty is not imposed under the provision with respect 
     to any portion of an understatement if it is shown that there 
     was reasonable cause for such portion and the taxpayer acted 
     in good faith. Such a showing requires: (1) adequate 
     disclosure of the facts affecting the transaction in 
     accordance with the regulations under section 6011;\387\ (2) 
     that there is or was substantial authority for such 
     treatment; and (3) that the taxpayer reasonably believed that 
     such treatment was more likely than not the proper treatment. 
     For this purpose, a taxpayer will be treated as having a 
     reasonable belief with respect to the tax treatment of an 
     item only if such belief: (1) is based on the facts and law 
     that exist at the time the tax return (that includes the 
     item) is filed; and (2) relates solely to the taxpayer's 
     chances of success on the merits and does not take into 
     account the possibility that (a) a return will not be 
     audited, (b) the treatment will not be raised on audit, or 
     (c) the treatment will be resolved through settlement if 
     raised.\388\
---------------------------------------------------------------------------
     \387\See the previous discussion regarding the penalty for 
     failing to disclose a reportable transaction.
     \388\Sec. 6664(d).
---------------------------------------------------------------------------
       A taxpayer may (but is not required to) rely on an opinion 
     of a tax advisor in establishing its reasonable belief with 
     respect to the tax treatment of the item. However, a taxpayer 
     may not rely on an opinion of a tax advisor for this purpose 
     if the opinion (1) is provided by a ``disqualified tax 
     advisor'' or (2) is a ``disqualified opinion.''
       Disqualified tax advisor
       A disqualified tax advisor is any advisor who: (1) is a 
     material advisor\389\ and who participates in the 
     organization, management, promotion or sale of the 
     transaction or is related (within the meaning of section 
     267(b) or 707(b)(1)) to any person who so participates; (2) 
     is compensated directly or indirectly\390\ by a material 
     advisor with respect to the

[[Page 7440]]

     transaction; (3) has a fee arrangement with respect to the 
     transaction that is contingent on all or part of the intended 
     tax benefits from the transaction being sustained; or (4) as 
     determined under regulations prescribed by the Secretary, has 
     a disqualifying financial interest with respect to the 
     transaction.
---------------------------------------------------------------------------
     \389\The term ``material advisor'' means any person who 
     provides any material aid, assistance, or advice with respect 
     to organizing, managing, promoting, selling, implementing, or 
     carrying out any reportable transaction, and who derives 
     gross income in excess of $50,000 in the case of a reportable 
     transaction substantially all of the tax benefits from which 
     are provided to natural persons ($250,000 in any other case). 
     Sec. 6111(b)(1).
     \390\This situation could arise, for example, when an advisor 
     has an arrangement or understanding (oral or written) with an 
     organizer, manager, or promoter of a reportable transaction 
     that such party will recommend or refer potential 
     participants to the advisor for an opinion regarding the tax 
     treatment of the transaction.
---------------------------------------------------------------------------
       A material advisor is considered as participating in the 
     ``organization'' of a transaction if the advisor performs 
     acts relating to the development of the transaction. This may 
     include, for example, preparing documents: (1) establishing a 
     structure used in connection with the transaction (such as a 
     partnership agreement); (2) describing the transaction (such 
     as an offering memorandum or other statement describing the 
     transaction); or (3) relating to the registration of the 
     transaction with any federal, state or local government 
     body.\391\ Participation in the ``management'' of a 
     transaction means involvement in the decision-making process 
     regarding any business activity with respect to the 
     transaction. Participation in the ``promotion or sale'' of a 
     transaction means involvement in the marketing or 
     solicitation of the transaction to others. Thus, an advisor 
     who provides information about the transaction to a potential 
     participant is involved in the promotion or sale of a 
     transaction, as is any advisor who recommends the transaction 
     to a potential participant.
---------------------------------------------------------------------------
     \391\An advisor should not be treated as participating in the 
     organization of a transaction if the advisor's only 
     involvement with respect to the organization of the 
     transaction is the rendering of an opinion regarding the tax 
     consequences of such transaction. However, such an advisor 
     may be a ``disqualified tax advisor'' with respect to the 
     transaction if the advisor participates in the management, 
     promotion or sale of the transaction (or if the advisor is 
     compensated by a material advisor, has a fee arrangement that 
     is contingent on the tax benefits of the transaction, or as 
     determined by the Secretary, has a continuing financial 
     interest with respect to the transaction).
---------------------------------------------------------------------------
       Disqualified opinion
       An opinion may not be relied upon if the opinion: (1) is 
     based on unreasonable factual or legal assumptions (including 
     assumptions as to future events); (2) unreasonably relies 
     upon representations, statements, findings or agreements of 
     the taxpayer or any other person; (3) does not identify and 
     consider all relevant facts; or (4) fails to meet any other 
     requirement prescribed by the Secretary.
       Coordination with other penalties
       To the extent a penalty on an understatement is imposed 
     under section 6662A, that same amount of understatement is 
     not also subject to the accuracy-related penalty under 
     section 6662(a) or to the valuation misstatement penalties 
     under section 6662(e) or 6662(h). However, such amount of 
     understatement is included for purposes of determining 
     whether any understatement (as defined in sec. 6662(d)(2)) is 
     a substantial understatement as defined under section 
     6662(d)(1) and for purposes of identifying an underpayment 
     under the section 6663 fraud penalty.
       The penalty imposed under section 6662A does not apply to 
     any portion of an understatement to which a fraud penalty is 
     applied under section 6663.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision imposes a new, stronger 
     penalty for an understatement attributable to any transaction 
     that lacks economic substance (referred to in the statute as 
     a ``non-economic substance transaction 
     understatement'').\392\ The penalty rate is 40 percent 
     (reduced to 20 percent if the taxpayer adequately discloses 
     the relevant facts in accordance with regulations prescribed 
     under section 6011). No exceptions (including the reasonable 
     cause or rescission rules) to the penalty are available 
     (i.e., the penalty is a strict-liability penalty).
---------------------------------------------------------------------------
     \392\Thus, unlike the present-law accuracy-related penalty 
     under section 6662A (which applies only to listed and 
     reportable avoidance transactions), the new penalty under the 
     provision applies to any transaction that lacks economic 
     substance.
---------------------------------------------------------------------------
       A ``non-economic substance transaction'' means any 
     transaction if (1) the transaction lacks economic substance 
     (as defined in the Senate amendment provision regarding the 
     clarification of the economic substance doctrine),\393\ (2) 
     the transaction was not respected under the rules relating to 
     transactions with tax-indifferent parties (as described in 
     the Senate amendment provision regarding the clarification of 
     the economic substance doctrine),\394\ or (3) any similar 
     rule of law. For this purpose, a similar rule of law would 
     include, for example, an understatement attributable to a 
     transaction that is determined to be a sham transaction.
---------------------------------------------------------------------------
     \393\That Senate amendment provision generally provides that 
     in any case in which a court determines that the economic 
     substance doctrine is relevant, a transaction has economic 
     substance only if: (1) the transaction changes in a 
     meaningful way (apart from Federal income tax effects) the 
     taxpayer's economic position, and (2) the taxpayer has a 
     substantial non-tax purpose for entering into such 
     transaction and the transaction is a reasonable means of 
     accomplishing such purpose. Specific other rules also apply. 
     See ``Explanation of Provision'' for the immediately 
     preceding Senate amendment provision, ``Clarification of the 
     economic substance doctrine.''
     \394\That Senate amendment provision provides that the form 
     of a transaction that involves a tax-indifferent party will 
     not be respected in certain circumstances. See ``Explanation 
     of Provision'' for the immediately preceding Senate amendment 
     provision, ``Clarification of the economic substance 
     doctrine.''
---------------------------------------------------------------------------
       For purposes of the bill, the calculation of an 
     ``understatement'' is made in the same manner as in the 
     present law provision relating to accuracy-related penalties 
     for listed and reportable avoidance transactions (sec. 
     6662A). Thus, the amount of the understatement under the 
     provision would be determined as the sum of (1) the product 
     of the highest corporate or individual tax rate (as 
     appropriate) and the increase in taxable income resulting 
     from the difference between the taxpayer's treatment of the 
     item and the proper treatment of the item (without regard to 
     other items on the tax return),\395\ and (2) the amount of 
     any decrease in the aggregate amount of credits which results 
     from a difference between the taxpayer's treatment of an item 
     and the proper tax treatment of such item. In essence, the 
     penalty will apply to the amount of any understatement 
     attributable solely to a non-economic substance transaction.
---------------------------------------------------------------------------
     \395\For this purpose, any reduction in the excess of 
     deductions allowed for the taxable year over gross income for 
     such year, and any reduction in the amount of capital losses 
     that would (without regard to section 1211) be allowed for 
     such year, would be treated as an increase in taxable income.
---------------------------------------------------------------------------
       As in the case of the understatement penalty for reportable 
     and listed transactions under present law section 
     6662A(e)(3), except as provided in regulations, the 
     taxpayer's treatment of an item will not take into account 
     any amendment or supplement to a return if the amendment or 
     supplement is filed after the earlier of the date the 
     taxpayer is first contacted regarding an examination of such 
     return or such other date as specified by the Secretary.
       As in the case of the understatement penalty for 
     undisclosed reportable transactions under present law section 
     6707A, a public entity that is required to pay a penalty 
     under the provision (but in this case, regardless of whether 
     the transaction was disclosed) must disclose the imposition 
     of the penalty in reports to the SEC for such periods as the 
     Secretary shall specify. The disclosure to the SEC applies 
     without regard to whether the taxpayer determines the amount 
     of the penalty to be material to the reports in which the 
     penalty must appear, and any failure to disclose such penalty 
     in the reports is treated as a failure to disclose a listed 
     transaction. A taxpayer must disclose a penalty in reports to 
     the SEC once the taxpayer has exhausted its administrative 
     and judicial remedies with respect to the penalty (or if 
     earlier, when paid).
       Regardless of whether the transaction was disclosed, once a 
     penalty under the provision has been included in the first 
     letter of proposed deficiency which allows the taxpayer an 
     opportunity for administrative review in the IRS Office of 
     Appeals, the penalty cannot be compromised for purposes of a 
     settlement without approval of the Commissioner personally. 
     Furthermore, the IRS is required to keep records summarizing 
     the application of this penalty and providing a description 
     of each penalty compromised under the provision and the 
     reasons for the compromise.
       Any understatement on which a penalty is imposed under the 
     provision will not be subject to the accuracy-related penalty 
     under section 6662 or under 6662A (accuracy-related penalties 
     for listed and reportable avoidance transactions). However, 
     an understatement under the provision is taken into account 
     for purposes of determining whether any understatement (as 
     defined in sec. 6662(d)(2)) is a substantial understatement 
     as defined under section 6662(d)(1). The penalty imposed 
     under the provision will not apply to any portion of an 
     understatement to which a fraud penalty is applied under 
     section 6663.
       Effective date.--The provision applies to transactions 
     entered into after the date of enactment.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     3. Denial of deduction for interest on underpayments 
         attributable to noneconomic substance transactions (sec. 
         413 of the Senate amendment and sec. 163(m) of the Code)


                              Present Law

       No deduction for interest is allowed for interest paid or 
     accrued on any underpayment of tax which is attributable to 
     the portion of any reportable transaction understatement with 
     respect to which the relevant facts were not adequately 
     disclosed.\396\ The Secretary of the Treasury is authorized 
     to define reportable transactions for this purpose.\397\
---------------------------------------------------------------------------
     \396\Sec. 163(m). Under section 6664(d)(2)(A), in such a case 
     of nondisclosure, the taxpayer also is not entitled to the 
     ``reasonable cause and good faith'' exception to the section 
     6662A penalty for a reportable transaction understatement.
     \397\See the description of present law with respect to the 
     immediately preceding Senate amendment provision, ``Penalty 
     for understatements attributable to transactions lacking 
     economic substance, etc.''
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision extends the disallowance of 
     interest deductions to interest paid or accrued on any 
     underpayment

[[Page 7441]]

     of tax which is attributable to any noneconomic substance 
     underpayment (whether or not disclosed).
       Effective date.--The provision applies to transactions 
     after the date of enactment in taxable years ending after 
     such date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   C. Improvements in Efficiency and Safeguards in Internal Revenue 
                          Service Collections

     1. Waiver of user fee for installment agreements using 
         automated withdrawals (Sec. 421 of the Senate amendment 
         and sec. 6159 of the Code)


                              Present Law

       The Code authorizes the IRS to enter into written 
     agreements with any taxpayer under which the taxpayer is 
     allowed to pay taxes owed, as well as interest and penalties, 
     in installment payments if the IRS determines that doing so 
     will facilitate collection of the amounts owed.\398\ An 
     installment agreement does not reduce the amount of taxes, 
     interest, or penalties owed. Generally, during the period 
     installment payments are being made, other IRS enforcement 
     actions (such as levies or seizures) with respect to the 
     taxes included in that agreement are held in abeyance.
---------------------------------------------------------------------------
     \398\Sec. 6159.
---------------------------------------------------------------------------
       The IRS charges a user fee if a request for an installment 
     agreement is approved.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment waives the user fee for installment 
     agreements in which the parties agree to the use of automated 
     installment payments (such as automated debits from a bank 
     account).
       Effective date.--The provision is effective with respect to 
     agreements entered into on or after the date which is 180 
     days after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Termination of installment agreements (Sec. 422 of the 
         Senate amendment and sec. 6159 of the Code)


                              Present Law

       The Code authorizes the IRS to enter into written 
     agreements with any taxpayer under which the taxpayer is 
     allowed to pay taxes owed, as well as interest and penalties, 
     in installment payments, if the IRS determines that doing so 
     will facilitate collection of the amounts owed.\399\ An 
     installment agreement does not reduce the amount of taxes, 
     interest, or penalties owed. Generally, during the period 
     installment payments are being made, other IRS enforcement 
     actions (such as levies or seizures) with respect to the 
     taxes included in that agreement are held in abeyance.
---------------------------------------------------------------------------
     \399\Sec. 6159.
---------------------------------------------------------------------------
       Under present law, the IRS is permitted to terminate an 
     installment agreement only if: (1) the taxpayer fails to pay 
     an installment at the time the payment is due; (2) the 
     taxpayer fails to pay any other tax liability at the time 
     when such liability is due; (3) the taxpayer fails to provide 
     a financial condition update as required by the IRS; (4) the 
     taxpayer provides inadequate or incomplete information when 
     applying for an installment agreement; (5) there has been a 
     significant change in the financial condition of the 
     taxpayer; or (6) the collection of the tax is in 
     jeopardy.\400\
---------------------------------------------------------------------------
     \400\Sec. 6159(b)(2), (3), and (4).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment grants the IRS authority to terminate 
     installment agreement when a taxpayer fails to timely make a 
     required Federal tax deposit or fails to timely file a tax 
     return (including extensions). Under the provision, the IRS 
     may terminate an installment agreement even if the taxpayer 
     remained current with payments under the installment 
     agreement.
       Effective date.--The provision is effective for failures 
     occurring on or after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Partial payments required with submissions of offers-in-
         compromise (Sec. 423 of the Senate amendment and sec. 
         7122 of the Code)


                              Present Law

       The IRS has the authority to compromise any civil or 
     criminal case arising under the internal revenue laws.\401\ 
     In general, taxpayers initiate this process by making an 
     offer-in-compromise, which is an offer by the taxpayer to 
     settle an outstanding tax liability for less than the total 
     amount due. The IRS currently imposes a user fee of $150 on 
     most offers, payable upon submission of the offer to the IRS. 
     Taxpayers may justify their offers on the basis of doubt as 
     to collectibility or liability or on the basis of effective 
     tax administration. In general, enforcement action is 
     suspended during the period that the IRS evaluates an offer. 
     In some instances, it may take the IRS 12 to 18 months to 
     evaluate an offer.\402\ Taxpayers are permitted (but not 
     required) to make a deposit with their offer; if the offer is 
     rejected, the deposit is generally returned to the taxpayer. 
     There are two general categories\403\ of offers-in-
     compromise, lump-sum offers and periodic payment offers. 
     Taxpayers making lump-sum offers propose to make one lump-sum 
     payment of a specified dollar amount in settlement of their 
     outstanding liability. Taxpayers making periodic payment 
     offers propose to make a series of payments over time (either 
     short-term or long-term) in settlement of their outstanding 
     liability.
---------------------------------------------------------------------------
     \401\Sec. 7122.
     \402\Olsen v. United States, 326 F. Supp. 2d 184 (D. Mass. 
     2004).
     \403\The IRS categorizes payment plans with more specificity, 
     which is generally not significant for purposes of the 
     provision. See Form 656, Offer in Compromise, page 6 of 
     instruction booklet (revised July 2004).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision requires a taxpayer to make partial payments 
     to the IRS while the taxpayer's offer is being considered by 
     the IRS. For lump-sum offers, taxpayers must make a down 
     payment of 20 percent of the amount of the offer with any 
     application. For purposes of this provision, a lump-sum offer 
     includes single payments as well as payments made in five or 
     fewer installments. For periodic payment offers, the 
     provision requires the taxpayer to comply with the taxpayer's 
     own proposed payment schedule while the offer is being 
     considered. Offers submitted to the IRS that do not comport 
     with these payment requirements are returned to the taxpayer 
     as unprocessable and immediate enforcement action is 
     permitted. The provision eliminates the user fee requirement 
     for offers submitted with the appropriate partial payment.
       The provision also provides that an offer is deemed 
     accepted if the IRS does not make a decision with respect to 
     the offer within two years from the date the offer was 
     submitted.
       The Senate amendment authorizes the Secretary to issue 
     regulations providing exceptions to the partial payment 
     requirements in the case of offers from certain low-income 
     taxpayers and offers based on doubt as to liability.
       Effective date.--The provision is effective for offers-in-
     compromise submitted on and after the date which is 60 days 
     after the date of enactment.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision, with the following modifications. Under the 
     conference agreement, any user fee imposed by the IRS for 
     participation in the offer-in-compromise program must be 
     submitted with the appropriate partial payment. The user fee 
     is applied to the taxpayer's outstanding tax liability. In 
     addition, under the conference agreement, offers submitted to 
     the IRS that do not comport with the payment requirements may 
     be returned to the taxpayer as unprocessable.

                         D. Penalties and Fines

     1. Increase in criminal monetary penalty limitation for the 
         underpayment or overpayment of tax due to fraud (Sec. 431 
         of the Senate amendment and secs. 7201, 7203, and 7206 of 
         the Code)


                              Present Law

     Attempt to evade or defeat tax
       In general, section 7201 imposes a criminal penalty on 
     persons who willfully attempt to evade or defeat any tax 
     imposed by the Code. Upon conviction, the Code provides that 
     the penalty is up to $100,000 or imprisonment of not more 
     than five years (or both). In the case of a corporation, the 
     Code increases the monetary penalty to a maximum of $500,000.
     Willful failure to file return, supply information, or pay 
         tax
       In general, section 7203 imposes a criminal penalty on 
     persons required to make estimated tax payments, pay taxes, 
     keep records, or supply information under the Code who 
     willfully fails to do so. Upon conviction, the Code provides 
     that the penalty is up to $25,000 or imprisonment of not more 
     than one year (or both). In the case of a corporation, the 
     Code increases the monetary penalty to a maximum of $100,000.
     Fraud and false statements
       In general, section 7206 imposes a criminal penalty on 
     persons who make fraudulent or false statements under the 
     Code. Upon conviction, the Code provides that the penalty is 
     up to $100,000 or imprisonment of not more than three years 
     (or both). In the case of a corporation, the Code increases 
     the monetary penalty to a maximum of $500,000.
     Uniform sentencing guidelines
       Under the uniform sentencing guidelines established by 18 
     U.S.C. 3571, a defendant found guilty of a criminal offense 
     is subject to a maximum fine that is the greatest of: (a) the 
     amount specified in the underlying provision, (b) for a 
     felony\404\ $250,000 for an

[[Page 7442]]

     individual or $500,000 for an organization, or (c) twice the 
     gross gain if a person derives pecuniary gain from the 
     offense. This Title 18 provision applies to all criminal 
     provisions in the United States Code, including those in the 
     Internal Revenue Code. For example, for an individual, the 
     maximum fine under present law upon conviction of violating 
     section 7206 is $250,000 or, if greater, twice the amount of 
     gross gain from the offense.
---------------------------------------------------------------------------
     \404\Section 7206 states that making fraudulent or false 
     statements under the Code is a felony. In addition, this 
     offense is a felony pursuant to the classification guidelines 
     of 18 U.S.C. 3559(a)(5).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Attempt to evade or defeat tax
       The provision increases the criminal penalty under section 
     7201 of the Code for individuals to $500,000 and for 
     corporations to $1,000,000. The provision increases the 
     maximum prison sentence to ten years.
     Willful failure to file return, supply information, or pay 
         tax
       The provision increases the criminal penalty under section 
     7203 of the Code for individuals from $25,000 to $50,000 and, 
     in the case of an ``aggravated failure to file'' (defined as 
     a failure to file a return for a period of three or more 
     consecutive taxable years if the aggregated tax liability for 
     such period is at least $100,000), changes the crime from a 
     misdemeanor to a felony and increases the maximum prison 
     sentence to ten years.
     Fraud and false statements
       The provision increases the criminal penalty for making 
     fraudulent or false statements to $500,000 for individuals 
     and $1,000,000 for corporations. The provision increases the 
     maximum prison sentence for making fraudulent or false 
     statements to five years. The provision provides that in no 
     event shall the amount of the monetary penalty under the 
     provision be less than the amount of the underpayment or 
     overpayment attributable to fraud.
     Effective date
       The provision is effective for actions and failures to act 
     occurring after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Doubling of certain penalties, fines, and interest on 
         underpayments related to certain offshore financial 
         arrangements (Sec. 432 of the Senate amendment)


                              Present Law

     In general
       The Code contains numerous civil penalties, such as the 
     delinquency, accuracy-related, fraud, and assessable 
     penalties. These civil penalties are in addition to any 
     interest that may be due as a result of an underpayment of 
     tax. If all or any part of a tax is not paid when due, the 
     Code imposes interest on the underpayment, which is assessed 
     and collected in the same manner as the underlying tax and is 
     subject to the respective statutes of limitations for 
     assessment and collection.
     Delinquency penalties
       Failure to file.--Under present law, a taxpayer who fails 
     to file a tax return on a timely basis is generally subject 
     to a penalty equal to 5 percent of the net amount of tax due 
     for each month that the return is not filed, up to a maximum 
     of five months or 25 percent. An exception from the penalty 
     applies if the failure is due to reasonable cause. In the 
     case of fraudulent failure to file, the penalty is increased 
     to 15 percent of the net amount of tax due for each month 
     that the return is not filed, up to a maximum of five months 
     or 75 percent. The net amount of tax due is the excess of the 
     amount of the tax required to be shown on the return over the 
     amount of any tax paid on or before the due date prescribed 
     for the payment of tax.
       Failure to pay.--Taxpayers who fail to pay their taxes are 
     subject to a penalty of 0.5 percent per month on the unpaid 
     amount, up to a maximum of 25 percent. If a penalty for 
     failure to file and a penalty for failure to pay tax shown on 
     a return both apply for the same month, the amount of the 
     penalty for failure to file for such month is reduced by the 
     amount of the penalty for failure to pay tax shown on a 
     return. If an income tax return is filed more than 60 days 
     after its due date, then the penalty for failure to pay tax 
     shown on a return may not reduce the penalty for failure to 
     file below the lesser of $100 or 100 percent of the amount 
     required to be shown on the return. For any month in which an 
     installment payment agreement with the IRS is in effect, the 
     rate of the penalty is half the usual rate (0.25 percent 
     instead of 0.5 percent), provided that the taxpayer filed the 
     tax return in a timely manner (including extensions).
       Failure to make timely deposits of tax.--The penalty for 
     the failure to make timely deposits of tax consists of a 
     four-tiered structure in which the amount of the penalty 
     varies with the length of time within which the taxpayer 
     corrects the failure. A depositor is subject to a penalty 
     equal to 2 percent of the amount of the underpayment if the 
     failure is corrected on or before the date that is five days 
     after the prescribed due date. A depositor is subject to a 
     penalty equal to 5 percent of the amount of the underpayment 
     if the failure is corrected after the date that is five days 
     after the prescribed due date but on or before the date that 
     is 15 days after the prescribed due date. A depositor is 
     subject to a penalty equal to 10 percent of the amount of the 
     underpayment if the failure is corrected after the date that 
     is 15 days after the due date but on or before the date that 
     is 10 days after the date of the first delinquency notice to 
     the taxpayer (under sec. 6303). Finally, a depositor is 
     subject to a penalty equal to 15 percent of the amount of the 
     underpayment if the failure is not corrected on or before 
     earlier of 10 days after the date of the first delinquency 
     notice to the taxpayer and 10 days after the date on which 
     notice and demand for immediate payment of tax is given in 
     cases of jeopardy.
       An exception from the penalty applies if the failure is due 
     to reasonable cause. In addition, the Secretary may waive the 
     penalty for an inadvertent failure to deposit any tax by 
     specified first-time depositors.
     Accuracy-related penalties
       In general.--The accuracy-related penalties are imposed at 
     a rate of 20 percent of the portion of any underpayment that 
     is attributable, in relevant part, to (1) negligence, (2) any 
     substantial understatement of income tax, (3) any substantial 
     valuation misstatement, and (4) any reportable transaction 
     understatement. The penalty for a substantial valuation 
     misstatement is doubled for certain gross valuation 
     misstatements. In the case of a reportable transaction 
     understatement for which the transaction is not disclosed, 
     the penalty rate is 30 percent. These penalties are 
     coordinated with the fraud penalty. This statutory structure 
     operates to eliminate any stacking of the penalties.
       No penalty is to be imposed if it is shown that there was 
     reasonable cause for an underpayment and the taxpayer acted 
     in good faith, and in the case of a reportable transaction 
     understatement the relevant facts of the transaction have 
     been disclosed, there is or was substantial authority for the 
     taxpayer's treatment of such transaction, and the taxpayer 
     reasonably believed that such treatment was more likely than 
     not the proper treatment.
       Negligence or disregard for the rules or regulations.--If 
     an underpayment of tax is attributable to negligence, the 
     negligence penalty applies only to the portion of the 
     underpayment that is attributable to negligence. Negligence 
     means any failure to make a reasonable attempt to comply with 
     the provisions of the Code. Disregard includes any careless, 
     reckless, or intentional disregard of the rules or 
     regulations.
       Substantial understatement of income tax.--Generally, an 
     understatement is substantial if the understatement exceeds 
     the greater of (1) 10 percent of the tax required to be shown 
     on the return for the tax year, or (2) $5,000. In determining 
     whether a substantial understatement exists, the amount of 
     the understatement is reduced by any portion attributable to 
     an item if (1) the treatment of the item on the return is or 
     was supported by substantial authority, or (2) facts relevant 
     to the tax treatment of the item were adequately disclosed on 
     the return or on a statement attached to the return.
       Substantial valuation misstatement.--A penalty applies to 
     the portion of an underpayment that is attributable to a 
     substantial valuation misstatement. Generally, a substantial 
     valuation misstatement exists if the value or adjusted basis 
     of any property claimed on a return is 200 percent or more of 
     the correct value or adjusted basis. The amount of the 
     penalty for a substantial valuation misstatement is 20 
     percent of the amount of the underpayment if the value or 
     adjusted basis claimed is 200 percent or more but less than 
     400 percent of the correct value or adjusted basis. If the 
     value or adjusted basis claimed is 400 percent or more of the 
     correct value or adjusted basis, then the overvaluation is a 
     gross valuation mis-
     statement.
       Reportable transaction understatement.--A penalty applies 
     to any item that is attributable to any listed transaction, 
     or to any reportable transaction (other than a listed 
     transaction) if a significant purpose of such reportable 
     transaction is tax avoidance or evasion.
     Fraud penalty
       The fraud penalty is imposed at a rate of 75 percent of the 
     portion of any underpayment that is attributable to fraud. 
     The accuracy-related penalty does not apply to any portion of 
     an underpayment on which the fraud penalty is imposed.
     Assessable penalties
       In addition to the penalties described above, the Code 
     imposes a number of additional penalties, including, for 
     example, penalties for failure to file (or untimely filing 
     of) information returns with respect to foreign trusts, and 
     penalties for failure to disclose any required information 
     with respect to a reportable transaction.
     Interest provisions
       Taxpayers are required to pay interest to the IRS whenever 
     there is an underpayment of tax. An underpayment of tax 
     exists whenever the correct amount of tax is not paid by the 
     last date prescribed for the payment of the tax. The last 
     date prescribed for the payment of the income tax is the 
     original due date of the return.

[[Page 7443]]

       Different interest rates are provided for the payment of 
     interest depending upon the type of taxpayer, whether the 
     interest relates to an underpayment or overpayment, and the 
     size of the underpayment or overpayment. Interest on 
     underpayments is compounded daily.
     Offshore Voluntary Compliance Initiative
       In January 2003, Treasury announced the Offshore Voluntary 
     Compliance Initiative (``OVCI'') to encourage the voluntary 
     disclosure of previously unreported income placed by 
     taxpayers in offshore accounts and accessed through credit 
     card or other financial arrangements. A taxpayer had to 
     comply with various requirements in order to participate in 
     the OVCI, including sending a written request to participate 
     in the program by April 15, 2003. This request had to include 
     information about the taxpayer, the taxpayer's introduction 
     to the credit card or other financial arrangements and the 
     names of parties that promoted the transaction. A taxpayer 
     entering into a closing agreement under the OVCI is not 
     liable for the civil fraud penalty, the fraudulent failure to 
     file penalty, or the civil information return penalties. Such 
     a taxpayer is responsible for back taxes, interest, and 
     certain accuracy-related and delinquency penalties.\405\
---------------------------------------------------------------------------
     \405\Rev. Proc. 2003-11, 2003-4 C.B. 311.
---------------------------------------------------------------------------
     Voluntary disclosure policy
       A taxpayer's timely, voluntary disclosure of a substantial 
     unreported tax liability has long been an important factor in 
     deciding whether the taxpayer's case should ultimately be 
     referred for criminal prosecution. The voluntary disclosure 
     must be truthful, timely, and complete. The taxpayer must 
     show a willingness to cooperate (as well as actual 
     cooperation) with the IRS in determining the correct tax 
     liability. The taxpayer must make good-faith arrangements 
     with the IRS to pay in full the tax, interest, and any 
     penalties determined by the IRS to be applicable. A voluntary 
     disclosure does not guarantee immunity from prosecution. It 
     creates no substantive or procedural rights for 
     taxpayers.\406\ The IRS treats participation in the OVCI as a 
     voluntary disclosure.\407\
---------------------------------------------------------------------------
     \406\Internal Revenue News Release 2002-135, IR-2002-135 
     (December 11, 2002).
     \407\Rev. Proc. 2003-11, 2003-4 C.B. 311.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment doubles the amounts of civil 
     penalties, interest, and fines related to taxpayers' 
     underpayments of U.S. income tax liability through the direct 
     or indirect use of certain offshore financial arrangements. 
     The provision applies to taxpayers who did not (or do not) 
     voluntarily disclose such arrangements through the OVCI or 
     otherwise. Under the Senate amendment, the determination of 
     whether any civil penalty is to be applied to such 
     underpayment is made without regard to whether a return has 
     been filed, whether there was reasonable cause for such 
     underpayment, and whether the taxpayer acted in good faith.
       The proscribed financial arrangements include, but are not 
     limited to, the use of certain foreign leasing corporations 
     for providing domestic employee services,\408\ certain 
     arrangements whereby the taxpayer may hold securities trading 
     accounts through offshore banks or other financial 
     intermediaries, certain arrangements whereby the taxpayer may 
     access funds through the use of offshore credit, debit, or 
     charge cards, and offshore annuities or trusts.
---------------------------------------------------------------------------
     \408\These arrangements were described and classified as 
     listed transactions in Notice 2003-22, 2003-1 C.B. 851.
---------------------------------------------------------------------------
       The Secretary of the Treasury is granted the authority to 
     waive the application of the provision if the use of the 
     offshore financial arrangements is incidental to the 
     transaction and, in the case of a trade or business, such use 
     is conducted in the ordinary course of the type of trade or 
     business in which the taxpayer is engaged.
       Effective date.--The provision generally is effective with 
     respect to a taxpayer's open tax years on or after the date 
     of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Denial of deduction for certain fines, penalties, and 
         other amounts (Sec. 433 of the Senate Amendment and sec. 
         162 of the Code)


                              Present Law

       Under present law, no deduction is allowed as a trade or 
     business expense under section 162(a) for the payment of a 
     fine or similar penalty to a government for the violation of 
     any law (sec. 162(f)). The enactment of section 162(f) in 
     1969 codified existing case law that denied the deductibility 
     of fines as ordinary and necessary business expenses on the 
     grounds that ``allowance of the deduction would frustrate 
     sharply defined national or State policies proscribing the 
     particular types of conduct evidenced by some governmental 
     declaration thereof.''\409\
---------------------------------------------------------------------------
     \409\S. Rep. No. 91-552, 91st Cong, 1st Sess., 273-74 (1969), 
     referring to Tank Truck Rentals, Inc. v. Commissioner, 356 
     U.S. 30 (1958).
---------------------------------------------------------------------------
       Treasury regulation section 1.162-21(b)(1) provides that a 
     fine or similar penalty includes an amount: (1) paid pursuant 
     to conviction or a plea of guilty or nolo contendere for a 
     crime (felony or misdemeanor) in a criminal proceeding; (2) 
     paid as a civil penalty imposed by Federal, State, or local 
     law, including additions to tax and additional amounts and 
     assessable penalties imposed by chapter 68 of the Code; (3) 
     paid in settlement of the taxpayer's actual or potential 
     liability for a fine or penalty (civil or criminal); or (4) 
     forfeited as collateral posted in connection with a 
     proceeding which could result in imposition of such a fine or 
     penalty. Treasury regulation section 1.162-21(b)(2) provides, 
     among other things, that compensatory damages (including 
     damages under section 4A of the Clayton Act (15 U.S.C. 15a), 
     as amended) paid to a government do not constitute a fine or 
     penalty.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision modifies the rules regarding 
     the determination whether payments are nondeductible payments 
     of fines or penalties under section 162(f). In particular, 
     the provision generally provides that amounts paid or 
     incurred (whether by suit, agreement, or otherwise) to, or at 
     the direction of, a government in relation to the violation 
     of any law or the investigation or inquiry into the potential 
     violation of any law\410\ are nondeductible under any 
     provision of the income tax provisions.\411\ The provision 
     applies to deny a deduction for any such payments, including 
     those where there is no admission of guilt or liability and 
     those made for the purpose of avoiding further investigation 
     or litigation. An exception applies to payments that the 
     taxpayer establishes are either restitution (including 
     remediation of property), or amounts required to come into 
     compliance with any law that was violated or involved in the 
     investigation or inquiry, and that are identified in the 
     court order or settlement as restitution, remediation, or 
     required to come into compliance.\412\ The IRS remains free 
     to challenge the characterization of an amount so identified; 
     however, no deduction is allowed unless the identification is 
     made.\413\
---------------------------------------------------------------------------
     \410\The provision does not affect amounts paid or incurred 
     in performing routine audits or reviews such as annual audits 
     that are required of all organizations or individuals in a 
     similar business sector, or profession, as a requirement for 
     being allowed to conduct business. However, if the government 
     or regulator raised an issue of compliance and a payment is 
     required in settlement of such issue, the provision would 
     affect that payment.
     \411\The provision provides that such amounts are 
     nondeductible under chapter 1 of the Internal Revenue Code.
     \412\The provision does not affect the treatment of antitrust 
     payments made under section 4 of the Clayton Act, which 
     continue to be governed by the provisions of section 162(g).
     \413\If a settlement agreement does not specify a specific 
     amount to be paid for the purpose of coming into compliance 
     but instead simply requires the taxpayer to come into 
     compliance, it is sufficient identification to so state. 
     Amounts expended by the taxpayer for that purpose would then 
     be considered identified. However, if an agreement specifies 
     a specific dollar amount that must be paid or incurred, the 
     amount would not be eligible to be deducted without a 
     specification that it is for restitution (including 
     remediation of property), or coming into compliance.
---------------------------------------------------------------------------
       An exception also applies to any amount paid or incurred as 
     taxes due.\414\
---------------------------------------------------------------------------
     \414\Thus, amounts paid or incurred as taxes due are not 
     affected by the provision (e.g., State taxes that are 
     otherwise deductible). The reference to taxes due is also 
     intended to include interest with respect to such taxes (but 
     not interest, if any, with respect to any penalties imposed 
     with respect to such taxes).
---------------------------------------------------------------------------
       The provision is intended to apply only where a government 
     (or other entity treated in a manner similar to a government 
     under the amendment) is a complainant or investigator with 
     respect to the violation or potential violation of any 
     law.\415\
---------------------------------------------------------------------------
     \415\Thus, for example, the provision would not apply to 
     payments made by one private party to another in a lawsuit 
     between private parties, merely because a judge or jury 
     acting in the capacity as a court directs the payment to be 
     made. The mere fact that a court enters a judgment or directs 
     a result in a private dispute does not cause a payment to be 
     made ``at the direction of a government'' for purposes of the 
     provision.
---------------------------------------------------------------------------
       It is intended that a payment will be treated as 
     restitution (including remediation of property) only if 
     substantially all of the payment is required to be paid to 
     the specific persons, or in relation to the specific 
     property, actually harmed by the conduct of the taxpayer that 
     resulted in the payment. Thus, a payment to or with respect 
     to a class substantially broader than the specific persons or 
     property that were actually harmed (e.g., to a class 
     including similarly situated persons or property) does not 
     qualify as restitution or included remediation of 
     property.\416\ Restitution and included remediation of 
     property is limited to the amount that bears a substantial 
     quantitative relationship to the harm caused by the past 
     conduct or actions of the taxpayer that resulted in the 
     payment in question. If the party harmed is a government or 
     other entity, then restitution and included remediation of 
     property

[[Page 7444]]

     includes payment to such harmed government or entity, 
     provided the payment bears a substantial quantitative 
     relationship to the harm. However, restitution or included 
     remediation of property does not include reimbursement of 
     government investigative or litigation costs, or payments to 
     whistleblowers.
---------------------------------------------------------------------------
     \416\Similarly, a payment to a charitable organization 
     benefiting a broader class than the persons or property 
     actually harmed, or to be paid out without a substantial 
     quantitative relationship to the harm caused, would not 
     qualify as restitution. Under the provision, such a payment 
     not deductible under section 162 would also not be deductible 
     under section 170.
---------------------------------------------------------------------------
       It is intended that a payment will be treated as an amount 
     required to come into compliance only if it directly corrects 
     a violation with respect to a particular requirement of law 
     that was under investigation. For example, if the law 
     requires a particular emission standard to be met or 
     particular machinery to be used, amounts required to be paid 
     under a settlement agreement to meet the required standard or 
     install the machinery are deductible to the extent otherwise 
     allowed. Similarly, if the law requires certain practices and 
     procedures to be followed and a settlement agreement requires 
     the taxpayer to pay to establish such practices or 
     procedures, such amounts would be deductible. However, 
     amounts paid for other purposes not directly correcting a 
     violation of law are not deductible. For example, amounts 
     paid to bring other machinery that is already in compliance 
     up to a standard higher than required by the law, or to 
     create other benefits (such as a park or other action not 
     previously required by law), are not deductible if required 
     under a settlement agreement. Similarly, amounts paid to 
     educate consumers or customers about the risks of doing 
     business with the taxpayer or about the field in which the 
     taxpayer does business generally, which education efforts are 
     not specifically required under the law, are not deductible 
     if required under a settlement agreement.
       The provision requires government agencies to report to the 
     IRS and to the taxpayer the amount of each settlement 
     agreement or order entered where the aggregate amount 
     required to be paid or incurred to or at the direction of the 
     government under such settlement agreements and orders with 
     respect to the violation, investigation, or inquiry is least 
     $600 (or such other amount as may be specified by the 
     Secretary of the Treasury as necessary to ensure the 
     efficient administration of the Internal Revenue laws). The 
     reports must be made within 30 days of the date the court 
     order is issued or the settlement agreement is entered into, 
     or such other time as may be required by Secretary. The 
     report must separately identify any amounts that are 
     restitution or remediation of property, or correction of 
     noncompliance.\417\
---------------------------------------------------------------------------
     \417\As in the case of the identification requirement, if the 
     agreement does not specify a specific amount to be expended 
     to come into compliance but simply requires that to occur, it 
     is expected that the report may state simply that the 
     taxpayer is required to come into compliance but no specific 
     dollar amount has been specified for that purpose in the 
     settlement agreement.
---------------------------------------------------------------------------
       The IRS is encouraged to require taxpayers to identify 
     separately on their tax returns the amounts of any such 
     settlements with respect to which reporting is required under 
     the provision, including separate identification of the 
     nondeductible amount and of any amount deductible as 
     restitution, remediation, or required to correct 
     noncompliance.\418\
---------------------------------------------------------------------------
     \418\For example, the IRS might require such reporting as 
     part of the schedule M-3, whether or not the particular 
     amounts create a book-tax difference.
---------------------------------------------------------------------------
       Amounts paid or incurred (whether by suit, agreement, or 
     otherwise) to, or at the direction of, any self-regulatory 
     entity that regulates a financial market or other market that 
     is a qualified board or exchange under section 1256(g)(7), 
     and that is authorized to impose sanctions (e.g., the 
     National Association of Securities Dealers) are likewise 
     subject to the provision if paid in relation to a violation, 
     or investigation or inquiry into a potential violation, of 
     any law (or any rule or other requirement of such entity). To 
     the extent provided in regulations, amounts paid or incurred 
     to, or at the direction of, any other nongovernmental entity 
     that exercises self-regulatory powers as part of performing 
     an essential governmental function are similarly subject to 
     the provision. The exception for payments that the taxpayer 
     establishes are paid or incurred for restitution, remediation 
     of property, or coming into compliance and that are 
     identified as such in the order or settlement agreement 
     likewise applies in these cases. The requirement of reporting 
     to the IRS and the taxpayer also applies in these cases.
       No inference is intended as to the treatment of payments as 
     nondeductible fines or penalties under present law. In 
     particular, the provision is not intended to limit the scope 
     of present-law section 162(f) or the regulations thereunder.
       Effective date.--The provision is effective for amounts 
     paid or incurred on or after the date of enactment; however 
     the provision does not apply to amounts paid or incurred 
     under any binding order or agreement entered into before such 
     date. Any order or agreement requiring court approval is not 
     a binding order or agreement for this purpose unless such 
     approval was obtained before the date of enactment.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     4. Denial of deduction for punitive damages (Sec. 434 of the 
         Senate amendment and sec. 162 of the Code)


                              Present Law

       In general, a deduction is allowed for all ordinary and 
     necessary expenses that are paid or incurred by the taxpayer 
     during the taxable year in carrying on any trade or 
     business.\419\ However, no deduction is allowed for any 
     payment that is made to an official of any governmental 
     agency if the payment constitutes an illegal bribe or 
     kickback or if the payment is to an official or employee of a 
     foreign government and is illegal under Federal law.\420\ In 
     addition, no deduction is allowed under present law for any 
     fine or similar payment made to a government for violation of 
     any law.\421\ Furthermore, no deduction is permitted for two-
     thirds of any damage payments made by a taxpayer who is 
     convicted of a violation of the Clayton antitrust law or any 
     related antitrust law.\422\
---------------------------------------------------------------------------
     \419\Sec. 162(a).
     \420\Sec. 162(c).
     \421\Sec. 162(f).
     \422\Sec. 162(g).
---------------------------------------------------------------------------
       In general, gross income does not include amounts received 
     on account of personal physical injuries and physical 
     sickness.\423\ However, this exclusion does not apply to 
     punitive damages.\424\
---------------------------------------------------------------------------
     \423\Sec. 104(a).
     \424\Sec. 104(a)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

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


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Increase in penalty for bad checks and money orders (Sec. 
         435 of the Senate amendment and sec. 6657 of the Code)


                              Present Law

       The Code\425\ imposes a penalty for bad checks and money 
     orders on the person who tendered it. The penalty is two 
     percent of the amount of the bad check or money order. For 
     checks that are less than $750, the minimum penalty is $15 
     (or, if less, the amount of the check).
---------------------------------------------------------------------------
     \425\Sec. 6657.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision increases the minimum penalty to $25 (or, if 
     less, the amount of the check), applicable to checks that are 
     less than $1,250.
       Effective date.--The provision is effective with respect to 
     checks or money orders received after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                E. Provisions to Discourage Expatriation

     1. Tax treatment of inverted corporate entities (Sec. 441 of 
         the Senate amendment and sec. 7874 of the Code)


                              Present Law

     Determination of corporate residence
       The U.S. tax treatment of a multinational corporate group 
     depends significantly on whether the parent corporation of 
     the group is domestic or foreign. For purposes of U.S. tax 
     law, a corporation is treated as domestic if it is 
     incorporated under the law of the United States or of any 
     State. Other corporations (i.e., those incorporated under the 
     laws of foreign countries or U.S. possessions) generally are 
     treated as foreign.
     U.S. taxation of domestic corporations
       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. In 
     order to mitigate the double taxation that may arise from 
     taxing the foreign-source income of a domestic corporation, a 
     foreign tax credit for income taxes paid to foreign countries 
     is provided to reduce or eliminate the U.S. tax owed on such 
     income, subject to certain limitations.
       Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income generally is 
     deferred, and U.S. tax is imposed on such income when 
     repatriated. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless

[[Page 7445]]

     of whether the income has been distributed as a dividend to 
     the domestic parent corporation. The main anti-deferral 
     regimes in this context are the controlled foreign 
     corporation rules of subpart F (secs. 951-964) and the 
     passive foreign investment company rules (secs. 1291-1298). A 
     foreign tax credit is generally available to offset, in whole 
     or in part, the U.S. tax owed on this foreign-source income, 
     whether such income is repatriated as an actual dividend or 
     included under one of the anti-deferral regimes.
     U.S. taxation of foreign corporations
       The United States taxes foreign corporations only on income 
     that has a sufficient nexus to the United States. Thus, a 
     foreign corporation is generally subject to U.S. tax only on 
     income that is ``effectively connected'' with the conduct of 
     a trade or business in the United States. Such ``effectively 
     connected income'' generally is taxed in the same manner and 
     at the same rates as the income of a U.S. corporation. An 
     applicable tax treaty may limit the imposition of U.S. tax on 
     business operations of a foreign corporation to cases in 
     which the business is conducted through a ``permanent 
     establishment'' in the United States.
       In addition, foreign corporations generally are subject to 
     a gross-basis U.S. tax at a flat 30-percent rate on the 
     receipt of interest, dividends, rents, royalties, and certain 
     similar types of income derived from U.S. sources, subject to 
     certain exceptions. The tax generally is collected by means 
     of withholding by the person making the payment. This tax may 
     be reduced or eliminated under an applicable tax treaty.
     U.S. tax treatment of inversion transactions prior to the 
         American Jobs Creation Act of 2004
       Prior to the American Jobs Creation Act of 2004 (``AJCA''), 
     a U.S. corporation could reincorporate in a foreign 
     jurisdiction and thereby replace the U.S. parent corporation 
     of a multinational corporate group with a foreign parent 
     corporation. These transactions were commonly referred to as 
     inversion transactions. Inversion transactions could take 
     many different forms, including stock inversions, asset 
     inversions, and various combinations of and variations on the 
     two. Most of the known transactions were stock inversions. In 
     one example of a stock inversion, a U.S. corporation forms a 
     foreign corporation, which in turn forms a domestic merger 
     subsidiary. The domestic merger subsidiary then merges into 
     the U.S. corporation, with the U.S. corporation surviving, 
     now as a subsidiary of the new foreign corporation. The U.S. 
     corporation's shareholders receive shares of the foreign 
     corporation and are treated as having exchanged their U.S. 
     corporation shares for the foreign corporation shares. An 
     asset inversion could be used to reach a similar result, but 
     through a direct merger of the top-tier U.S. corporation into 
     a new foreign corporation, among other possible forms. An 
     inversion transaction could be accompanied or followed by 
     further restructuring of the corporate group. For example, in 
     the case of a stock inversion, in order to remove income from 
     foreign operations from the U.S. taxing jurisdiction, the 
     U.S. corporation could transfer some or all of its foreign 
     subsidiaries directly to the new foreign parent corporation 
     or other related foreign corporations.
       In addition to removing foreign operations from U.S. taxing 
     jurisdiction, the corporate group could seek to derive 
     further advantage from the inverted structure by reducing 
     U.S. tax on U.S.-source income through various earnings 
     stripping or other transactions. This could include earnings 
     stripping through payment by a U.S. corporation of deductible 
     amounts such as interest, royalties, rents, or management 
     service fees to the new foreign parent or other foreign 
     affiliates. In this respect, the post-inversion structure 
     could enable the group to employ the same tax-reduction 
     strategies that are available to other multinational 
     corporate groups with foreign parents and U.S. subsidiaries, 
     subject to the same limitations (e.g., secs. 163(j) and 482).
       Inversion transactions could give rise to immediate U.S. 
     tax consequences at the shareholder and/or the corporate 
     level, depending on the type of inversion. In stock 
     inversions, the U.S. shareholders generally recognized gain 
     (but not loss) under section 367(a), based on the difference 
     between the fair market value of the foreign corporation 
     shares received and the adjusted basis of the domestic 
     corporation stock exchanged. To the extent that a 
     corporation's share value had declined, and/or it had many 
     foreign or tax-exempt shareholders, the impact of this 
     section 367(a) ``toll charge'' was reduced. The transfer of 
     foreign subsidiaries or other assets to the foreign parent 
     corporation also could give rise to U.S. tax consequences at 
     the corporate level (e.g., gain recognition and earnings and 
     profits inclusions under secs. 1001, 311(b), 304, 367, 1248 
     or other provisions). The tax on any income recognized as a 
     result of these restructurings could be reduced or eliminated 
     through the use of net operating losses, foreign tax credits, 
     and other tax attributes.
       In asset inversions, the U.S. corporation generally 
     recognized gain (but not loss) under section 367(a) as though 
     it had sold all of its assets, but the shareholders generally 
     did not recognize gain or loss, assuming the transaction met 
     the requirements of a reorganization under section 368.
     U.S. tax treatment of inversion transactions under AJCA
       In general
       AJCA added new section 7874 to the Code, which defines two 
     different types of corporate inversion transactions and 
     establishes a different set of consequences for each type. 
     Certain partnership transactions also are covered.
       Transactions involving at least 80 percent identity of 
           stock ownership
       The first type of inversion is a transaction in which, 
     pursuant to a plan\426\ or a series of related transactions: 
     (1) a U.S. corporation becomes a subsidiary of a foreign-
     incorporated entity or otherwise transfers substantially all 
     of its properties to such an entity in a transaction 
     completed after March 4, 2003; (2) the former shareholders of 
     the U.S. corporation hold (by reason of holding stock in the 
     U.S. corporation) 80 percent or more (by vote or value) of 
     the stock of the foreign-incorporated entity after the 
     transaction; and (3) the foreign-incorporated entity, 
     considered together with all companies connected to it by a 
     chain of greater than 50 percent ownership (i.e., the 
     ``expanded affiliated group''), does not have substantial 
     business activities in the entity's country of incorporation, 
     compared to the total worldwide business activities of the 
     expanded affiliated group. The provision denies the intended 
     tax benefits of this type of inversion by deeming the top-
     tier foreign corporation to be a domestic corporation for all 
     purposes of the Code.\427\
---------------------------------------------------------------------------
     \426\Acquisitions with respect to a domestic corporation or 
     partnership are deemed to be ``pursuant to a plan'' if they 
     occur within the four-year period beginning on the date which 
     is two years before the ownership threshold under the 
     provision is met with respect to such corporation or 
     partnership.
     \427\Since the top-tier foreign corporation is treated for 
     all purposes of the Code as domestic, the shareholder-level 
     ``toll charge'' of sec. 367(a) does not apply to these 
     inversion transactions.
---------------------------------------------------------------------------
       In determining whether a transaction meets the definition 
     of an inversion under the provision, stock held by members of 
     the expanded affiliated group that includes the foreign 
     incorporated entity is disregarded. For example, if the 
     former top-tier U.S. corporation receives stock of the 
     foreign incorporated entity (e.g., so-called ``hook'' stock), 
     the stock would not be considered in determining whether the 
     transaction meets the definition. Similarly, if a U.S. parent 
     corporation converts an existing wholly owned U.S. subsidiary 
     into a new wholly owned controlled foreign corporation, the 
     stock of the new foreign corporation would be disregarded, 
     with the result that the transaction would not meet the 
     definition of an inversion under the provision. Stock sold in 
     a public offering related to the transaction also is 
     disregarded for these purposes.
       Transfers of properties or liabilities as part of a plan a 
     principal purpose of which is to avoid the purposes of the 
     provision are disregarded. In addition, the Treasury 
     Secretary is to provide regulations to carry out the 
     provision, including regulations to prevent the avoidance of 
     the purposes of the provision, including avoidance through 
     the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, and through 
     transactions designed to qualify or disqualify a person as a 
     related person or a member of an expanded affiliated group. 
     Similarly, the Treasury Secretary has the authority to treat 
     certain non-stock instruments as stock, and certain stock as 
     not stock, where necessary to carry out the purposes of the 
     provision.
       Transactions involving at least 60 percent but less than 80 
           percent identity of stock ownership
       The second type of inversion is a transaction that would 
     meet the definition of an inversion transaction described 
     above, except that the 80-percent ownership threshold is not 
     met. In such a case, if at least a 60-percent ownership 
     threshold is met, then a second set of rules applies to the 
     inversion. Under these rules, the inversion transaction is 
     respected (i.e., the foreign corporation is treated as 
     foreign), but any applicable corporate-level ``toll charges'' 
     for establishing the inverted structure are not offset by tax 
     attributes such as net operating losses or foreign tax 
     credits. Specifically, any applicable corporate-level income 
     or gain required to be recognized under sections 304, 311(b), 
     367, 1001, 1248, or any other provision with respect to the 
     transfer of controlled foreign corporation stock or the 
     transfer or license of other assets by a U.S. corporation as 
     part of the inversion transaction or after such transaction 
     to a related foreign person is taxable, without offset by any 
     tax attributes (e.g., net operating losses or foreign tax 
     credits). This rule does not apply to certain transfers of 
     inventory and similar property. These measures generally 
     apply for a 10-year period following the inversion 
     transaction.
       Other rules
       Under section 7874, inversion transactions include certain 
     partnership transactions.

[[Page 7446]]

     Specifically, the provision applies to transactions in which 
     a foreign-incorporated entity acquires substantially all of 
     the properties constituting a trade or business of a domestic 
     partnership, if after the acquisition at least 60 percent (or 
     80 percent, as the case may be) of the stock of the entity is 
     held by former partners of the partnership (by reason of 
     holding their partnership interests), provided that the other 
     terms of the basic definition are met. For purposes of 
     applying this test, all partnerships that are under common 
     control within the meaning of section 482 are treated as one 
     partnership, except as provided otherwise in regulations. In 
     addition, the modified ``toll charge'' rules apply at the 
     partner level.
       A transaction otherwise meeting the definition of an 
     inversion transaction is not treated as an inversion 
     transaction if, on or before March 4, 2003, the foreign-
     incorporated entity had acquired directly or indirectly more 
     than half of the properties held directly or indirectly by 
     the domestic corporation, or more than half of the properties 
     constituting the partnership trade or business, as the case 
     may be.


                               House Bill

       No provision.


                            senate amendment

       The Senate amendment makes several changes to the 
     inversions regime of section 7874. First, the provision 
     applies the rules of section 7874 to transactions completed 
     after March 20, 2002 (as opposed to March 4, 2003 under 
     present law). A transaction otherwise meeting the definition 
     of an inversion transaction under the provision is not 
     treated as an inversion transaction if, on or before March 
     20, 2002, the foreign-incorporated entity had acquired 
     directly or indirectly more than half the properties held 
     directly or indirectly by the domestic corporation, or more 
     than half the properties constituting the partnership trade 
     or business, as the case may be.
       The Senate amendment also lowers the present-law 60-percent 
     ownership threshold for the second category of inversion 
     transactions to greater-than-50-percent, and increases the 
     accuracy-related penalties and tightens the earnings 
     stripping rules of section 163(j) with respect to companies 
     involved in this type of transaction. Specifically, the 20-
     percent penalty for negligence or disregard of rules or 
     regulations, substantial understatement of income tax, and 
     substantial valuation misstatement is increased to 30 percent 
     with respect to the inverting entity and taxpayers related to 
     the inverting entity, and the 40-percent penalty for gross 
     valuation misstatement is increased to 50 percent with 
     respect to such taxpayers. In applying section 163(j) to 
     taxpayers related to the inverted entity, the generally 
     applicable debt-equity threshold is eliminated, and the 50-
     percent thresholds for ``excess interest expense'' and 
     ``excess limitation'' are lowered to 25 percent.
       The Senate amendment also excludes from the inversions 
     regime the acquisition of a U.S. corporation in cases in 
     which none of the stock of the U.S. corporation was readily 
     tradable on an established securities market at any time 
     during the four-year period ending on the date of the 
     acquisition, except as provided in regulations.
       Effective date.--The provision in the Senate amendment is 
     effective for taxable years ending after March 20, 2002.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Revision of tax rules on expatriation of individuals (Sec. 
         442 of the Senate amendment and secs. 102, 877, 2107, 
         2501, 7701, and 6039G of the Code)


                              present law

     In general
       U.S. citizens and residents generally are subject to U.S. 
     income taxation on their worldwide income. The U.S. tax may 
     be reduced or offset by a credit allowed for foreign income 
     taxes paid with respect to foreign source income. Nonresident 
     aliens are taxed at a flat rate of 30 percent (or a lower 
     treaty rate) on certain types of passive income derived from 
     U.S. sources, and at regular graduated rates on net profits 
     derived from a U.S. trade or business. The estates of 
     nonresident aliens generally are subject to estate tax on 
     U.S.-situated property (e.g., real estate and tangible 
     property located within the United States and stock in a U.S. 
     corporation). Nonresident aliens generally are subject to 
     gift tax on transfers by gift of U.S.-situated property 
     (e.g., real estate and tangible property located within the 
     United States), but excluding intangibles, such as stock, 
     regardless of where they are located.
     Income tax rules with respect to expatriates
       For the 10 taxable years after an individual relinquishes 
     his or her U.S. citizenship or terminates his or her U.S. 
     long-term residency, unless certain conditions are met, the 
     individual is subject to an alternative method of income 
     taxation than that generally applicable to nonresident aliens 
     (the ``alternative tax regime''). Generally, the individual 
     is subject to income tax for the 10-year period at the rates 
     applicable to U.S. citizens, but only on U.S.-source 
     income.\428\
---------------------------------------------------------------------------
     \428\For this purpose, however, U.S.-source income has a 
     broader scope than it does typically in the Code.
---------------------------------------------------------------------------
       A ``long-term resident'' is a noncitizen who is a lawful 
     permanent resident of the United States for at least eight 
     taxable years during the period of 15 taxable years ending 
     with the taxable year during which the individual either 
     ceases to be a lawful permanent resident of the United States 
     or commences to be treated as a resident of a foreign country 
     under a tax treaty between such foreign country and the 
     United States (and does not waive such benefits).
       A former citizen or former long-term resident is subject to 
     the alternative tax regime for a 10-year period following 
     citizenship relinquishment or residency termination, unless 
     the former citizen or former long-term resident: (1) 
     establishes that his or her average annual net income tax 
     liability for the five preceding years does not exceed 
     $124,000 (adjusted for inflation after 2004) and his or her 
     net worth is less than $2 million, or alternatively satisfies 
     limited, objective exceptions for certain dual citizens and 
     minors who have had no substantial contacts with the United 
     States; and (2) certifies under penalties of perjury that he 
     or she has complied with all U.S. Federal tax obligations for 
     the preceding five years and provides such evidence of 
     compliance as the Secretary of the Treasury may require.
       Anti-abuse rules are provided to prevent the circumvention 
     of the alternative tax regime.
     Estate tax rules with respect to expatriates
       Special estate tax rules apply to individuals who die 
     during a taxable year in which he or she is subject to the 
     alternative tax regime. Under these special rules, certain 
     closely-held foreign stock owned by the former citizen or 
     former long-term resident is includible in his or her gross 
     estate to the extent that the foreign corporation owns U.S.-
     situated assets. The special rules apply if, at the time of 
     death: (1) the former citizen or former long-term resident 
     directly or indirectly owns 10 percent or more of the total 
     combined voting power of all classes of stock entitled to 
     vote of the foreign corporation; and (2) directly or 
     indirectly, is considered to own more than 50 percent of (a) 
     the total combined voting power of all classes of stock 
     entitled to vote in the foreign corporation, or (b) the total 
     value of the stock of such corporation. If this stock 
     ownership test is met, then the gross estate of the former 
     citizen or former long-term resident includes that proportion 
     of the fair market value of the foreign stock owned by the 
     individual at the time of death, which the fair market value 
     of any assets owned by such foreign corporation and situated 
     in the United States (at the time of death) bears to the 
     total fair market value of all assets owned by such foreign 
     corporation (at the time of death).
     Gift tax rules with respect to expatriates
       Special gift tax rules apply to individuals who make gifts 
     during a taxable year in which he or she is subject to the 
     alternative tax regime. The individual is subject to gift tax 
     on gifts of U.S.-situated intangibles made during the 10 
     years following citizenship relinquishment or residency 
     termination. In addition, gifts of stock of certain closely-
     held foreign corporations by a former citizen or former long-
     term resident are subject to gift tax, if the gift is made 
     during the time that such person is subject to the 
     alternative tax regime. The operative rules with respect to 
     these gifts of closely-held foreign stock are the same as 
     described above relating to the estate tax, except that the 
     relevant testing and valuation date is the date of gift 
     rather than the date of death.
     Termination of U.S. citizenship or long-term resident status 
         for U.S. Federal income tax purposes
       An individual continues to be treated as a U.S. citizen or 
     long-term resident for U.S. Federal tax purposes, including 
     for purposes of section 7701(b)(10), until the individual: 
     (1) gives notice of an expatriating act or termination of 
     residency (with the requisite intent to relinquish 
     citizenship or terminate residency) to the Secretary of State 
     or the Secretary of Homeland Security, respectively; and (2) 
     provides a statement to the Secretary of the Treasury in 
     accordance with section 6039G.
     Sanction for individuals subject to the individual tax regime 
         who return to the United States for extended periods
       The alternative tax regime does not apply to any individual 
     for any taxable year during the 10-year period following 
     citizenship relinquishment or residency termination if such 
     individual is present in the United States for more than 30 
     days in the calendar year ending in such taxable year. Such 
     individual is treated as a U.S. citizen or resident for such 
     taxable year and, therefore, is taxed on his or her worldwide 
     income.
       Similarly, if an individual subject to the alternative tax 
     regime is present in the United States for more than 30 days 
     in any calendar year ending during the 10-year period 
     following citizenship relinquishment or residency 
     termination, and the individual dies during that year, he or 
     she is treated as a U.S. resident, and the individual's 
     worldwide estate is subject to U.S. estate tax. Likewise, if 
     an individual subject to the alternative tax regime is 
     present in the United

[[Page 7447]]

     States for more than 30 days in any year during the 10-year 
     period following citizenship relinquishment or residency 
     termination, the individual is subject to U.S. gift tax on 
     any transfer of his or her worldwide assets by gift during 
     that taxable year.
       For purposes of these rules, an individual is treated as 
     present in the United States on any day if such individual is 
     physically present in the United States at any time during 
     that day. The present-law exceptions from being treated as 
     present in the United States for residency purposes\429\ 
     generally do not apply for this purpose. However, for 
     individuals with certain ties to countries other than the 
     United States\430\ and individuals with minimal prior 
     physical presence in the United States,\431\ a day of 
     physical presence in the United States is disregarded if the 
     individual is performing services in the United States on 
     such day for an unrelated employer (within the meaning of 
     sections 267 and 707(b)), who meets the requirements the 
     Secretary of the Treasury may prescribe in regulations. No 
     more than 30 days may be disregarded during any calendar year 
     under this rule.
---------------------------------------------------------------------------
     \429\Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
     \430\An individual has such a relationship to a foreign 
     country if (1) the individual becomes a citizen or resident 
     of the country in which the individual was born, such 
     individual's spouse was born, or either of the individual's 
     parents was born, and (2) the individual becomes fully liable 
     for income tax in such country.
     \431\An individual has a minimal prior physical presence in 
     the United States if the individual was physically present 
     for no more than 30 days during each year in the ten-year 
     period ending on the date of loss of United States 
     citizenship or termination of residency. However, for 
     purposes of this test, an individual is not treated as being 
     present in the United States on a day if the individual 
     remained in the United States because of a medical condition 
     that arose while the individual was in the United States. 
     Sec. 7701(b)(3)(D)(ii).
---------------------------------------------------------------------------
     Annual return
       Former citizens and former long-term residents are required 
     to file an annual return for each year following citizenship 
     relinquishment or residency termination in which they are 
     subject to the alternative tax regime. The annual return is 
     required even if no U.S. Federal income tax is due. The 
     annual return requires certain information, including 
     information on the permanent home of the individual, the 
     individual's country of residence, the number of days the 
     individual was present in the United States for the year, and 
     detailed information about the individual's income and assets 
     that are subject to the alternative tax regime. This 
     requirement includes information relating to foreign stock 
     potentially subject to the special estate and gift tax rules.
       If the individual fails to file the statement in a timely 
     manner or fails correctly to include all the required 
     information, the individual is required to pay a penalty of 
     $10,000. The $10,000 penalty does not apply if it is shown 
     that the failure is due to reasonable cause and not to 
     willful neglect.


                               house bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment creates new section 877A, that 
     generally subjects certain U.S. citizens who relinquish their 
     U.S. citizenship and certain long-term U.S. residents who 
     terminate their U.S. residence to tax on the net unrealized 
     gain in their property as if such property were sold for fair 
     market value on the day before the expatriation or residency 
     termination (``mark-to-market tax''). Gain from the deemed 
     sale is taken into account at that time without regard to 
     other Code provisions. Any loss from the deemed sale 
     generally is taken into account to the extent otherwise 
     provided in the Code, except that the wash sale rules of 
     section 1091 do not apply. Any net gain on the deemed sale, 
     is recognized to the extent it exceeds $600,000 ($1.2 million 
     in the case of married individuals filing a joint return, 
     both of whom relinquish citizenship or terminate residency). 
     The $600,000 amount is increased by a cost of living 
     adjustment factor for calendar years after 2005.
     Individuals covered
       Under the Senate amendment, the mark-to-market tax applies 
     to U.S. citizens who relinquish citizenship and long-term 
     residents who terminate U.S. residency (collectively, 
     ``covered expatriates''). The definition of ``long-term 
     resident'' under the provision is the same as that under 
     present law. As under present law, an individual is 
     considered to terminate long-term residency when the 
     individual either ceases to be a lawful permanent resident 
     (i.e., loses his or her green card status), or is treated as 
     a resident of another country under a tax treaty and does not 
     waive the benefits of the treaty.
       Exceptions to an individual's classification as a covered 
     expatriate are provided in two situations. The first 
     exception applies to an individual who was born with 
     citizenship both in the United States and in another country; 
     provided that (1) as of the expatriation date the individual 
     continues to be a citizen of, and is taxed as a resident of, 
     such other country, and (2) the individual was not a resident 
     of the United States for the five taxable years ending with 
     the year of expatriation. The second exception applies to a 
     U.S. citizen who relinquishes U.S. citizenship before 
     reaching age 18\1/2\, provided that the individual was a 
     resident of the United States for no more than five taxable 
     years before such relinquishment.
       For purposes of the mark-to-market tax, an individual is 
     treated as having relinquished U.S. citizenship on the 
     earliest of four possible dates: (1) the date that the 
     individual renounces U.S. nationality before a diplomatic or 
     consular officer of the United States (provided that the 
     voluntary relinquishment is later confirmed by the issuance 
     of a certificate of loss of nationality); (2) the date that 
     the individual furnishes to the State Department a signed 
     statement of voluntary relinquishment of U.S. nationality 
     confirming the performance of an expatriating act (again, 
     provided that the voluntary relinquishment is later confirmed 
     by the issuance of a certificate of loss of nationality); (3) 
     the date that the State Department issues a certificate of 
     loss of nationality; or (4) the date that a U.S. court 
     cancels a naturalized citizen's certificate of 
     naturalization.
       In addition, the provision provides that, for all tax 
     purposes (i.e., not limited to the mark-to-market tax), a 
     U.S. citizen continues to be treated as a U.S. citizen for 
     tax purposes until that individual's citizenship is treated 
     as relinquished under the rules of the immediately preceding 
     paragraph. However, under Treasury regulations, 
     relinquishment may occur earlier with respect to an 
     individual who became at birth a citizen of the United Sates 
     and of another country.
     Election to be treated as a U.S. citizen
       Under the provision, a covered expatriate is permitted to 
     make an irrevocable election to continue to be taxed as a 
     U.S. citizen with respect to all property that otherwise is 
     covered by the expatriation tax. This election is an ``all or 
     nothing'' election; an individual is not permitted to elect 
     this treatment for some property but not for other property. 
     The election, if made, applies to all property that would be 
     subject to the expatriation tax and to any property the basis 
     of which is determined by reference to such property. Under 
     this election, following expatriation the individual 
     continues to pay U.S. income taxes at the rates applicable to 
     U.S. citizens on any income generated by the property and on 
     any gain realized on the disposition of the property. In 
     addition, the property continues to be subject to U.S. gift, 
     estate, and generation-skipping transfer taxes. In order to 
     make this election, the taxpayer is required to waive any 
     treaty rights that would preclude the collection of the tax.
       The individual is also required to provide security to 
     ensure payment of the tax under this election in such form, 
     manner, and amount as the Secretary of the Treasury requires. 
     The amount of mark-to-market tax that would have been owed 
     but for this election (including any interest, penalties, and 
     certain other items) becomes a lien in favor of the United 
     States on all U.S.-situated property owned by the individual. 
     This lien arises on the expatriation date and continues until 
     the tax liability is satisfied, the tax liability has become 
     unenforceable by reason of lapse of time, or the Secretary of 
     the Treasury is satisfied that no further tax liability may 
     arise by reason of this provision. The rules of section 
     6324A(d)(1), (3), and (4) (relating to liens arising in 
     connection with the deferral of estate tax under section 
     6166) apply to liens arising under this provision.
     Deemed sale of property upon expatriation or residency 
         termination and tentative tax
       The deemed sale rule of the provision generally applies to 
     all property interests held by the individual on the date of 
     relinquishment of citizenship or termination of residency. 
     Special rules apply in the case of trust interests, as 
     described below. U.S. real property interests (which remain 
     subject to U.S. tax in the hands of nonresident noncitizens), 
     with the exception of stock of certain former U.S. real 
     property holding corporations, are exempted from the 
     provision. Regulatory authority is granted to the Treasury to 
     exempt other types of property from the provision.
       Under the provision, an individual who is subject to the 
     mark-to-market tax is required to pay a tentative tax equal 
     to the amount of tax that would be due for a hypothetical 
     short tax year ending on the date the individual relinquishes 
     citizenship or terminates residency. Thus, the tentative tax 
     is based on all income, gains, deductions, losses, and 
     credits of the individual for the year through such date, 
     including amounts realized from the deemed sale of property. 
     Moreover, notwithstanding any other provision of the Code, 
     any period during which recognition of income or gain had 
     been deferred terminates on the day before relinquishment of 
     citizenship or termination of residency (and, therefore, such 
     income or gain recognition becomes part of the tax base of 
     the tentative tax). The tentative tax is due on the 90th day 
     after the date of relinquishment of citizenship or 
     termination of residency, subject to the election, described 
     below, to defer payments of the mark-to-market tax. In 
     addition, notwithstanding any other provision of the Code, 
     any extension of time for payment of tax ceases to apply on 
     the day before relinquishment of

[[Page 7448]]

     citizenship or termination of residency, and the unpaid 
     portion of such tax becomes due and payable at the time and 
     in the manner prescribed by the Secretary of the Treasury.
     Deferral of payment of mark-to-market tax
       Under the provision, an individual is permitted to elect to 
     defer payment of the mark-to-market tax imposed on the deemed 
     sale of property. Interest is charged for the period the tax 
     is deferred at a rate two percentage points higher than the 
     rate normally applicable to individual underpayments. The 
     election is irrevocable and is made on a property-by-property 
     basis. Under the election, the deferred tax attributable to a 
     particular property is due when the property is disposed of 
     (or, if the property is disposed of in a transaction in which 
     gain is not recognized in whole or in part, at such other 
     time as the Secretary of the Treasury may prescribe). The 
     deferred tax attributable to a particular property is an 
     amount that bears the same ratio to the total mark-to-market 
     tax as the gain taken into account with respect to such 
     property bears to the total gain taken into account under 
     these rules. The deferral of the mark-to-market tax may not 
     be extended beyond the due date of the return for the taxable 
     year which includes the individual's death.
       In order to elect deferral of the mark-to-market tax, the 
     individual is required to provide a bond in the amount of the 
     deferred tax to the Secretary of the Treasury. Other security 
     mechanisms are permitted provided that the individual 
     establishes to the satisfaction of the Secretary of the 
     Treasury that the security is adequate. In the event that the 
     security provided with respect to a particular property 
     subsequently becomes inadequate and the individual fails to 
     correct the situation, the deferred tax and the interest with 
     respect to such property will become due. As a further 
     condition to making the election, the individual is required 
     to consent to the waiver of any treaty rights that would 
     preclude the collection of the tax.
       The deferred tax amount (including any interest, penalties, 
     and certain other items) becomes a lien in favor of the 
     United States on all U.S.-situated property owned by the 
     individual. This lien arises on the expatriation date and 
     continues until the tax liability is satisfied, the tax 
     liability has become unenforceable by reason of lapse of 
     time, or the Secretary is satisfied that no further tax 
     liability may arise by reason of this provision. The rules of 
     section 6324A(d)(1), (3), and (4) (relating to liens arising 
     in connection with the deferral of estate tax under section 
     6166) apply to such liens.
     Retirement plans and similar arrangements
       Subject to certain exceptions, the provision applies to all 
     property interests held by covered expatriates at the time of 
     relinquishment of citizenship or termination of residency. 
     Accordingly, such property includes an interest in an 
     employer-sponsored qualified plan or deferred compensation 
     arrangement as well as an interest in an individual 
     retirement account or annuity (i.e., an IRA).\432\ However, 
     the provision contains a special rule for an interest in a 
     ``retirement plan.'' For purposes of the provision, a 
     ``retirement plan'' includes an employer-sponsored qualified 
     plan (sec. 401(a)), a qualified annuity (sec. 403(a)), a tax-
     sheltered annuity (sec. 403(b)), an eligible deferred 
     compensation plan of a governmental employer (sec. 457(b)), 
     an individual retirement account (sec. 408(a)), and an 
     individual retirement annuity (sec. 408(b)). The special 
     retirement plan rule also applies, to the extent provided in 
     regulations, to any foreign plan or similar retirement 
     arrangement or program. An interest in a trust that is part 
     of a retirement plan is subject to the special retirement 
     plan rules and not to the rules for interests in trusts 
     (discussed below).
---------------------------------------------------------------------------
     \432\Application of the provision is not limited to an 
     interest that meets the definition of property under section 
     83 (relating to property transferred in connection with the 
     performance of services).
---------------------------------------------------------------------------
       Under the special retirement plan rules, in lieu of the 
     deemed sale rule, an amount equal to the present value of the 
     individual's vested, accrued benefit under a retirement plan 
     is treated as having been received by the individual as a 
     distribution under the retirement plan on the day before the 
     individual's relinquishment of citizenship or termination of 
     residency. In the case of any later distribution to the 
     individual from the retirement plan, the amount otherwise 
     includible in the individual's income as a result of the 
     distribution is reduced to reflect the amount previously 
     included in income under the special retirement plan rule. 
     The amount of the reduction applied to a distribution is the 
     excess of: (1) the amount included in income under the 
     special retirement plan rule, over (2) the total reductions 
     applied to any prior distributions. It is not intended that 
     the retirement plan would be deemed to have made a 
     distribution at the time of expatriation for purposes of the 
     tax-favored status of the retirement plan, such as whether a 
     plan may permit distributions before a participant has 
     severed employment. However, the retirement plan, and any 
     person acting on the plan's behalf, will treat any later 
     distribution in the same manner as the distribution would be 
     treated without regard to the special retirement plan rule.
       It is expected that the Treasury Department will provide 
     guidance for determining the present value of an individual's 
     vested, accrued benefit under a retirement plan, such as the 
     individual's account balance in the case of a defined 
     contribution plan or an IRA, or present value determined 
     under the qualified joint and survivor annuity rules 
     applicable to a defined benefit plan (sec. 417(e)).
     Interests in trusts
       Detailed rules apply under the provision to trust interests 
     held by an individual at the time of relinquishment of 
     citizenship or termination of residency. The treatment of 
     trust interests depends on whether the trust is a ``qualified 
     trust.'' A trust is a qualified trust if a court within the 
     United States is able to exercise primary supervision over 
     the administration of the trust and one or more U.S. persons 
     have the authority to control all substantial decisions of 
     the trust.
       Constructive ownership rules apply to a trust beneficiary 
     that is a corporation, partnership, trust, or estate. In such 
     cases, the shareholders, partners, or beneficiaries of the 
     entity are deemed to be the direct beneficiaries of the 
     trust. In addition, an individual who holds (or who is 
     treated as holding) a trust instrument at the time of 
     relinquishment of citizenship or termination of residency is 
     required to disclose on his or her tax return the methodology 
     used to determine his or her interest in the trust, and 
     whether such individual knows (or has reason to know) that 
     any other beneficiary of the trust uses a different method.
       Nonqualified trusts.--If an individual holds an interest in 
     a trust that is not a qualified trust, a special rule applies 
     for purposes of determining the amount of the mark-to-market 
     tax due with respect to such trust interest. The individual's 
     interest in the trust is treated as a separate trust 
     consisting of the trust assets allocable to such interest. 
     Such separate trust is treated as having sold its net assets 
     for their fair market value on the day before the date of 
     relinquishment of citizenship or termination of residency and 
     having distributed the assets to the individual, who then is 
     treated as having recontributed the assets to the trust. Any 
     income, gain, or loss of the individual arising from the 
     deemed distribution from the trust is taken into account as 
     if it had arisen under the deemed sale rules.
       The election to defer payment is available for the mark-to-
     market tax attributable to a nonqualified trust interest. A 
     beneficiary's interest in a nonqualified trust is determined 
     under all the facts and circumstances, including the trust 
     instrument, letters of wishes, historical patterns of trust 
     distributions, and the existence of, and function performed 
     by, a trust protector or any similar advisor.
       Qualified trusts.--If an individual has an interest in a 
     qualified trust, the amount of mark-to-market tax on 
     unrealized gain allocable to the individual's trust interest 
     (``allocable expatriation gain'') is calculated at the time 
     of expatriation or residency termination, but is collected as 
     the individual receives distributions from the qualified 
     trust. The allocable expatriation gain is the amount of gain 
     which would be allocable to the individual's trust interest 
     if the individual directly held all the assets allocable to 
     such interest.\433\ If any individual's interest in a trust 
     is vested as of the day before the expatriation date (e.g., 
     if the individual's interest in the trust is non-contingent 
     and non-discretionary), the gain allocable to the 
     individual's trust interest is determined based on the trust 
     assets allocable to his or her trust interest. If the 
     individual's interest in the trust is not vested as of the 
     expatriation date (e.g., if the individual's trust interest 
     is a contingent or discretionary interest), the gain 
     allocable to his or her trust interest is determined based on 
     all of the trust assets that could be allocable to his or her 
     trust interest, determined by resolving all contingencies and 
     discretionary powers in the individual's favor (i.e., the 
     individual is allocated the maximum amount that he or she 
     could receive).
---------------------------------------------------------------------------
     \433\Allocable expatriation gain is subject to the $600,000 
     exemption (adjusted for cost of living increases).
---------------------------------------------------------------------------
       Taxes are imposed on each distribution from a qualified 
     trust. These distributions also may be subject to other U.S. 
     income taxes. If a distribution from a qualified trust is 
     made after the individual relinquishes citizenship or 
     terminates residency, the mark-to-market tax is imposed in an 
     amount equal to the amount of the distribution multiplied by 
     the highest tax rate generally applicable to trusts and 
     estates for the taxable year which includes the date of 
     expatriation, but in no event will the tax imposed exceed the 
     balance in the ``deferred tax account'' with respect to the 
     trust interest. For this purpose, the balance in the deferred 
     tax account is equal to (1) the hypothetical tax calculated 
     under the ``regular'' deemed sale rules with respect to the 
     allocable expatriation gain, (2) increased by interest 
     charged on the balance in the deferred tax account at a rate 
     two percentage points higher than the rate normally 
     applicable to individual underpayments, for periods beginning 
     after the 90th day after the expatriation date and calculated 
     up to 30 days prior to the date of the distribution, (3) 
     reduced by any mark-to-market tax imposed on prior trust 
     distributions to the individual, and (4) to the extent

[[Page 7449]]

     provided in Treasury regulations, in the case of a covered 
     expatriate holding a nonvested interest, reduced by mark-to-
     market taxes imposed on trust distributions to other persons 
     holding nonvested interests.
       The tax that is imposed on distributions from a qualified 
     trust generally is to be deducted and withheld by the 
     trustees. If the individual does not agree to waive treaty 
     rights that would preclude collection of the tax, the tax 
     with respect to such distributions is imposed on the trust, 
     the trustee is personally liable for the tax, and any other 
     beneficiary has a right of contribution against such 
     individual with respect to the tax.
       Mark-to-market taxes become due immediately if the trust 
     ceases to be a qualified trust, the individual disposes of 
     his or her qualified trust interest, or the individual dies. 
     In such cases, the amount of mark-to-market tax equals the 
     lesser of (1) the tax calculated under the rules for 
     nonqualified trust interests as of the date of the triggering 
     event, or (2) the balance in the deferred tax account with 
     respect to the trust interest immediately before that date. 
     Such tax is imposed on the trust, the trustee is personally 
     liable for the tax, and any other beneficiary has a right of 
     contribution against such individual (or his or her estate) 
     with respect to such tax.
     Regulatory authority
       The provision authorizes the Secretary of the Treasury to 
     prescribe such regulations as may be necessary or appropriate 
     to carry out the purposes of section 877A. In addition, the 
     Secretary of the Treasury may provide for adjustments to the 
     bases of assets in a trust or a deferred tax account, and the 
     timing of such adjustments, to ensure that gain is taxed only 
     once.
     Income tax treatment of gifts and inheritances from a former 
         citizen or former long-term resident
       Under the provision, the exclusion from income provided in 
     section 102 (relating to exclusions from income for the value 
     of property acquired by gift or inheritance) does not apply 
     to the value of any property received by gift or inheritance 
     from a covered expatriate. Accordingly, a U.S. taxpayer who 
     receives a gift or inheritance from such an individual is 
     required to include the value of such gift or inheritance in 
     gross income and is subject to U.S. tax on such amount. 
     Having included the value of the property in income, the 
     recipient takes a basis in the property equal to that value. 
     The tax does not apply to property that is shown on a timely 
     filed gift tax return and that is a taxable gift by the 
     former citizen or former long-term resident, or property that 
     is shown on a timely filed estate tax return and included in 
     the gross U.S. estate of the former citizen or former long-
     term resident (regardless of whether the tax liability shown 
     on such a return is reduced by credits, deductions, or 
     exclusions available under the estate and gift tax rules). In 
     addition, the tax does not apply to property in cases in 
     which no estate or gift tax return was filed, but no such 
     return would have been required to be filed if the former 
     citizen or former long-term resident had not relinquished 
     citizenship or terminated residency, as the case may be.
     Coordination with present-law alternative tax regime
       The provision provides a coordination rule with the 
     present-law alternative tax regime. Under the provision, the 
     expatriation income tax rules under section 877, and the 
     special present-law expatriation estate and gift tax rules 
     under sections 2107 and 2501(a)(3) (generally described 
     above), do not apply to a covered expatriate whose 
     expatriation or residency termination occurs on or after the 
     date of enactment.
     Information reporting
       Certain information reporting requirements under the law 
     presently applicable to former citizens and former long-term 
     residents (sec. 6039G) also apply for purposes of the 
     provision.
     Immigration rules
       The provision denies former citizens reentry into the 
     United States if the individual is determined not to be in 
     compliance with his or her tax obligations under the 
     provision's expatriation tax rules (regardless of the 
     subjective motive for expatriating). For this purpose, the 
     provision permits the IRS to disclose certain items of return 
     information of an individual, upon written request of the 
     Attorney General or his delegate, as is necessary for making 
     a determination under section 212(a)(10)(E) of the 
     Immigration and Nationality Act. Specifically, the provision 
     permits the IRS to disclose to the agency administering 
     section 212(a)(10)(E) whether such taxpayer is in compliance 
     with section 877A, and to identify the items of any 
     noncompliance. Recordkeeping requirements, safeguards, and 
     civil and criminal penalties for unauthorized disclosure or 
     inspection apply to return information disclosed under this 
     provision.
     Effective date
       The provision generally is effective for U.S. citizens who 
     relinquish citizenship or long-term residents who terminate 
     their residency on or after the date of enactment. The due 
     date for tentative tax, however, may not occur before the 
     90th day after the date of enactment. The provision relating 
     to income taxes on gifts and inheritances is effective for 
     gifts and inheritances received from former citizens or 
     former long-term residents (or their estates) on or after the 
     date of enactment, whose relinquishment of citizenship or 
     residency termination occurs after such date. The immigration 
     and disclosure provisions relating to former citizens are 
     effective with respect to individuals who relinquish 
     citizenship on or after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                      F. Miscellaneous Provisions

     1. Treatment of contingent payment convertible debt 
         instruments (Sec. 451 of the Senate amendment and sec. 
         1275 of the Code)


                              Present Law

       Under present law, a taxpayer generally deducts the amount 
     of interest paid or accrued within the taxable year on 
     indebtedness issued by the taxpayer. In the case of original 
     issue discount (``OID''), the issuer of a debt instrument 
     generally accrues and deducts, as interest, the OID over the 
     life of the obligation, even though the amount of the OID may 
     not be paid until the maturity of the instrument.
       The amount of OID with respect to a debt instrument is 
     equal to the excess of the stated redemption price at 
     maturity over the issue price of the debt instrument. The 
     stated redemption price at maturity includes all amounts that 
     are payable on the debt instrument by maturity. The amount of 
     OID with respect to a debt instrument is allocated over the 
     life of the instrument through a series of adjustments to the 
     issue price for each accrual period. The adjustment to the 
     issue price is determined by multiplying the adjusted issue 
     price (i.e., the issue price increased or decreased by 
     adjustments prior to the accrual period) by the instrument's 
     yield to maturity, and then subtracting any payments on the 
     debt instrument (other than non-OID stated interest) during 
     the accrual period. Thus, in order to compute the amount of 
     OID and the portion of OID allocable to a particular period, 
     the stated redemption price at maturity and the time of 
     maturity must be known. Issuers of debt instruments with OID 
     accrue and deduct the amount of OID as interest expense in 
     the same manner as the holders of such instruments accrue and 
     include in gross income the amount of OID as interest income.
       Treasury regulations provide special rules for determining 
     the amount of OID allocated to a period with respect to 
     certain debt instruments that provide for one or more 
     contingent payments of principal or interest.\434\ The 
     regulations provide that a debt instrument does not provide 
     for contingent payments merely because it provides for an 
     option to convert the debt instrument into the stock of the 
     issuer, into the stock or debt of a related party, or into 
     cash or other property in an amount equal to the approximate 
     value of such stock or debt.\435\ The regulations also 
     provide that a payment is not a contingent payment merely 
     because of a contingency that, as of the issue date of the 
     debt instrument, is either remote or incidental.\436\
---------------------------------------------------------------------------
     \434\Treas. Reg. sec. 1.1275-4.
     \435\Treas. Reg. sec. 1.1275-4(a)(4).
     \436\Treas. Reg. sec. 1.1275-4(a)(5).
---------------------------------------------------------------------------
       In the case of contingent payment debt instruments that are 
     issued for money or publicly traded property,\437\ the 
     regulations provide that interest on a debt instrument must 
     be taken into account (as OID) whether or not the amount of 
     any payment is fixed or determinable in the taxable year. The 
     amount of OID that is taken into account for each accrual 
     period is determined by constructing a comparable yield and a 
     projected payment schedule for the debt instrument, and then 
     accruing the OID on the basis of the comparable yield and 
     projected payment schedule by applying rules similar to those 
     for accruing OID on a noncontingent debt instrument (the 
     ``noncontingent bond method''). If the actual amount of a 
     contingent payment is not equal to the projected amount, 
     appropriate adjustments are made to reflect the difference. 
     The comparable yield for a debt instrument is the yield at 
     which the issuer would be able to issue a fixed-rate 
     noncontingent debt instrument with terms and conditions 
     similar to those of the contingent payment debt instrument 
     (i.e., the comparable fixed-rate debt instrument), including 
     the level of subordination, term, timing of payments, and 
     general market conditions.\438\
---------------------------------------------------------------------------
     \437\Treas. Reg. sec. 1.1275-4(b).
     \438\Treas. Reg. sec. 1.1275-4(b)(4)(i)(A).
---------------------------------------------------------------------------
       With respect to certain debt instruments that are 
     convertible into the common stock of the issuer and that also 
     provide for contingent payments (other than the conversion 
     feature)--often referred to as ``contingent convertible'' 
     debt instruments--the IRS has stated that the noncontingent 
     bond method applies in computing the accrual of OID on the 
     debt instrument.\439\ In applying the noncontingent bond 
     method, the IRS has stated that the comparable yield for a 
     contingent convertible debt instrument is determined

[[Page 7450]]

     by reference to a comparable fixed-rate nonconvertible debt 
     instrument, and the projected payment schedule is determined 
     by treating the issuer stock received upon a conversion of 
     the debt instrument as a contingent payment.
---------------------------------------------------------------------------
     \439\Rev. Rul. 2002-31, 2002-1 C.B. 1023.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that, in the case of a 
     contingent convertible debt instrument,\440\ any Treasury 
     regulations which require OID to be determined by reference 
     to the comparable yield of a noncontingent fixed-rate debt 
     instrument shall be applied as requiring that such comparable 
     yield be determined by reference to a noncontingent fixed-
     rate debt instrument which is convertible into stock. For 
     purposes of applying the provision, the comparable yield 
     shall be determined without taking into account the yield 
     resulting from the conversion of a debt instrument into 
     stock. Thus, the noncontingent bond method in the Treasury 
     regulations shall be applied in a manner such that the 
     comparable yield for contingent convertible debt instruments 
     shall be determined by reference to comparable noncontingent 
     fixed-rate convertible (rather than nonconvertible) debt 
     instruments.
---------------------------------------------------------------------------
     \440\Under the provision, a contingent convertible debt 
     instrument is defined as a debt instrument that: (1) is 
     convertible into stock of the issuing corporation, or a 
     corporation in control of, or controlled by, the issuing 
     corporation; and (2) provides for contingent payments.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for debt 
     instruments issued on or after date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Grant Treasury regulatory authority to address foreign tax 
         credit transactions involving inappropriate separation of 
         foreign taxes from related foreign income (sec. 452 of 
         the Senate amendment and sec. 901 of the Code)


                              Present Law

       The United States employs a ``worldwide'' tax system, under 
     which residents generally are taxed on all income, whether 
     derived in the United States or abroad. In order to mitigate 
     the possibility of double taxation arising from overlapping 
     claims of the United States and a source country to tax the 
     same item of income, the United States provides a credit for 
     foreign income taxes paid or accrued, subject to several 
     conditions and limitations.
       For purposes of the foreign tax credit, regulations provide 
     that a foreign tax is treated as being paid by ``the person 
     on whom foreign law imposes legal liability for such 
     tax.''\441\ Thus, for example, if a U.S. corporation owns an 
     interest in a foreign partnership, the U.S. corporation can 
     claim foreign tax credits for the tax that is imposed on it 
     as a partner in the foreign entity. This would be true under 
     the regulations even if the U.S. corporation elected to treat 
     the foreign entity as a corporation for U.S. tax purposes. In 
     such a case, if the foreign entity does not meet the 
     definition of a controlled foreign corporation or does not 
     generate income that is subject to current inclusion under 
     the rules of subpart F, the income generated by the foreign 
     entity might never be reported on a U.S. return, and yet the 
     U.S. corporation might take the position that it can claim 
     credits for taxes imposed on that income. This is one example 
     of how a taxpayer might attempt to separate foreign taxes 
     from the related foreign income, and thereby attempt to claim 
     a foreign tax credit under circumstances in which there is no 
     threat of double taxation.
---------------------------------------------------------------------------
     \441\Treas. Reg. sec. 1.901-2(f)(1).
---------------------------------------------------------------------------
       The Treasury Department currently has the authority to 
     promulgate regulations under section 901 and other provisions 
     of the Code to address transactions and structures that 
     produce inappropriate foreign tax credit results.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment enhances the regulatory authority of 
     the Treasury Department to address transactions that involve 
     the inappropriate separation of foreign taxes from the 
     related foreign income or in which foreign taxes are imposed 
     on any person in respect of income of another person. This 
     grant of regulatory authority supplements existing Treasury 
     Department authority and thereby provide greater flexibility 
     in addressing a wide range of transactions and structures. 
     Regulations issued pursuant to this authority could, for 
     example, provide for the disallowance of a credit for all or 
     a portion of the foreign taxes, or for the allocation of the 
     foreign taxes among the participants in the transaction in a 
     manner more consistent with the economics of the transaction.
       Effective date.--The provision generally is effective for 
     transactions entered into after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision. No inference is intended as to the scope 
     of the Treasury Department's existing regulatory authority to 
     address transactions that involve the inappropriate 
     separation of foreign taxes from the related foreign income.
     3. Modifications of effective dates of leasing provisions of 
         the American Jobs Creation Act of 2004 (sec. 453 of the 
         Senate amendment and sec. 470 of the Code)


                              Present Law

       Present law provides for the deferral of losses 
     attributable to certain tax exempt use property, generally 
     effective for leases entered into after March 12, 2004. 
     However, the deferral provision does not apply to property 
     located in the United States that is subject to a lease with 
     respect to which a formal application: (1) was submitted for 
     approval to the Federal Transit Administration (an agency of 
     the Department of Transportation) after June 30, 2003, and 
     before March 13, 2004; (2) is approved by the Federal Transit 
     Administration before January 1, 2006; and (3) includes a 
     description and the fair market value of such property (the 
     ``qualified transportation property exception'').


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment makes two changes to the effective 
     date of the loss deferral rules. First, the Senate amendment 
     repeals the qualified transportation property exception. 
     Second, the Senate amendment applies the loss deferral rules 
     to leases entered into on or before March 12, 2004, if the 
     lessee is a foreign person or entity. With respect to such 
     leases, losses are deferred starting in taxable years 
     beginning after December 31, 2005.
       Effective date.--The Senate amendment is effective as if 
     included in the provisions of the American Jobs Creation Act 
     of 2004, Pub. L. No. 108-357 (2004), to which it relates.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Application of earnings stripping rules to partners which 
         are corporations (sec. 454 of the Senate amendment and 
         sec. 163 of the Code)


                              Present Law

       Present law provides rules to limit the ability of U.S. 
     corporations to reduce the U.S. tax on their U.S.-source 
     income through earnings stripping transactions. Section 
     163(j) specifically addresses earnings stripping involving 
     interest payments, by limiting the deductibility of interest 
     paid to certain related parties (``disqualified 
     interest''),\442\ if the payor's debt-equity ratio exceeds 
     1.5 to 1 and the payor's net interest expense exceeds 50 
     percent of its ``adjusted taxable income'' (generally taxable 
     income computed without regard to deductions for net interest 
     expense, net operating losses, and depreciation, 
     amortization, and depletion). Disallowed interest amounts can 
     be carried forward indefinitely. In addition, excess 
     limitation (i.e., any excess of the 50-percent limit over a 
     company's net interest expense for a given year) can be 
     carried forward three years.
---------------------------------------------------------------------------
     \442\This interest also may include interest paid to 
     unrelated parties in certain cases in which a related party 
     guarantees the debt.
---------------------------------------------------------------------------
       Proposed Treasury regulations provide that a partner's 
     proportionate share of partnership liabilities is treated as 
     liabilities incurred directly by the partner, for purposes of 
     applying the earnings stripping limitation to interest 
     payments by a corporate partner of a partnership.\443\ The 
     proposed Treasury regulations provide that interest paid or 
     accrued to a partnership is treated as paid or accrued to the 
     partners of the partnership in proportion to each partner's 
     distributive share of the partnership's interest income for 
     the taxable year.\444\ In addition, the proposed Treasury 
     regulations provide that interest expense paid or accrued by 
     a partnership is treated as paid or accrued by the partners 
     of the partnership in proportion to each partner's 
     distributive share of the partnership's interest 
     expense.\445\
---------------------------------------------------------------------------
     \443\Prop. Treas. Reg. sec. 1.163(j)-3(b)(3).
     \444\Prop. Treas. Reg. sec. 1.163(j)-2(e)(4).
     \445\Prop. Treas. reg. sec. 1.163(j)-2(e)(5).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision codifies the approach of the 
     proposed Treasury regulations by providing that, except to 
     the extent provided by regulations, in the case of a 
     corporation that owns, directly or indirectly, an interest in 
     a partnership, the corporation's share of partnership 
     liabilities is treated as liabilities of the corporation for 
     purposes of applying the earnings stripping rules to the 
     corporation. The provision provides that the corporation's 
     distributive share of interest income of the partnership, and 
     of interest expense of the partnership, is treated as 
     interest income or interest expense of the corporation.
       The provision provides Treasury regulatory authority to 
     reallocate shares of partnership debt, or distributive shares 
     of the partnership's interest income or interest expense, as 
     may be appropriate to carry out the purposes of the 
     provision. For example, it is not intended that the 
     application of the earnings stripping rules to corporations 
     with

[[Page 7451]]

     direct or indirect interests in partnerships be circumvented 
     through the use of allocations of partnership interest income 
     or expense (or partnership liabilities) to or away from 
     partners.
       Effective date.--The provision is effective for taxable 
     years beginning on or after the date of enactment.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision.
     5. Limitation on employer deduction for certain entertainment 
         expenses (sec. 455 of the Senate amendment and sec. 
         274(e) of the Code)


                              Present Law

     In general
       Under present law, no deduction is allowed with respect to 
     (1) an activity generally considered to be entertainment, 
     amusement or recreation, unless the taxpayer establishes that 
     the item was directly related to (or, in certain cases, 
     associated with) the active conduct of the taxpayer's trade 
     or business, or (2) a facility (e.g., an airplane) used in 
     connection with such activity.\446\ The Code includes a 
     number of exceptions to the general rule disallowing 
     deductions of entertainment expenses. Under one exception, 
     the deduction disallowance rule does not apply to expenses 
     for goods, services, and facilities to the extent that the 
     expenses are reported by the taxpayer as compensation and 
     wages to an employee.\447\ The deduction disallowance rule 
     also does not apply to expenses paid or incurred by the 
     taxpayer for goods, services, and facilities to the extent 
     that the expenses are includible in the gross income of a 
     recipient who is not an employee (e.g., a nonemployee 
     director) as compensation for services rendered or as a prize 
     or award.\448\ The exceptions apply only to the extent that 
     amounts are properly reported by the company as compensation 
     and wages or otherwise includible in income. In no event can 
     the amount of the deduction exceed the amount of the actual 
     cost, even if a greater amount is includible in income.
---------------------------------------------------------------------------
     \446\Sec. 274(a).
     \447\Sec. 274(e)(2). As discussed below, a special rule 
     applies in the case of specified individuals.
     \448\Sec. 274(e)(9).
---------------------------------------------------------------------------
       Except as otherwise provided, gross income includes 
     compensation for services, including fees, commissions, 
     fringe benefits, and similar items. In general, an employee 
     or other service provider must include in gross income the 
     amount by which the fair value of a fringe benefit exceeds 
     the amount paid by the individual. Treasury regulations 
     provide rules regarding the valuation of fringe benefits, 
     including flights on an employer-provided aircraft.\449\ In 
     general, the value of a non-commercial flight is determined 
     under the base aircraft valuation formula, also known as the 
     Standard Industry Fare Level formula or ``SIFL''.\450\ If the 
     SIFL valuation rules do not apply, the value of a flight on a 
     company-provided aircraft is generally equal to the amount 
     that an individual would have to pay in an arm's-length 
     transaction to charter the same or a comparable aircraft for 
     that period for the same or a comparable flight.\451\
---------------------------------------------------------------------------
     \449\Treas. Reg. sec. 1.61-21.
     \450\Treas. Reg. sec. 1.61-21(g).
     \451\Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------
       In the context of an employer providing an aircraft to 
     employees for nonbusiness (e.g., vacation) flights, the 
     exception for expenses treated as compensation was 
     interpreted in Sutherland Lumber-Southwest, Inc. v. 
     Commissioner (``Sutherland Lumber'') as not limiting the 
     company's deduction for operation of the aircraft to the 
     amount of compensation reportable to its employees,\452\ 
     which can result in a deduction many times larger than the 
     amount required to be included in income. In many cases, the 
     individual including amounts attributable to personal travel 
     in income directly benefits from the enhanced deduction, 
     resulting in a net deduction for the personal use of the 
     company aircraft.
---------------------------------------------------------------------------
     \452\Sutherland Lumber-Southwest, Inc. v. Comm., 114 T.C. 197 
     (2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., AOD 2002-
     02 (Feb. 11, 2002).
---------------------------------------------------------------------------
     Specified individuals
       In the case of specified individuals, the exceptions to the 
     general entertainment expense disallowance rule for expenses 
     treated as compensation or includible in income apply only to 
     the extent of the amount of expenses treated as compensation 
     or includible in income of the specified individual. For 
     example, a company's deduction attributable to aircraft 
     operating costs and other expenses for a specified 
     individual's vacation use of a company aircraft is limited to 
     the amount reported as compensation to the specified 
     individual. Sutherland Lumber is thus overturned with respect 
     to specified individuals.
       Specified individuals are individuals who, with respect to 
     an employer or other service recipient (or a related party), 
     are subject to the requirements of section 16(a) of the 
     Securities and Exchange Act of 1934, or would be subject to 
     such requirements if the employer or service recipient (or 
     the related party) were an issuer of equity securities 
     referred to in section 16(a).\453\ Such individuals generally 
     include officers (as defined by section 16(a)),\454\ 
     directors, and 10-percent-or-greater owners of private and 
     publicly-held companies.
---------------------------------------------------------------------------
     \453\For purposes of this definition, a person is a related 
     party with respect to another person if such person bears a 
     relationship to such other person described in section 267(b) 
     or 707(b).
     \454\An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policy-making function, or any 
     other person who performs similar policy-making functions.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, in the case of all individuals, 
     the exceptions to the general entertainment expense 
     disallowance rule for expenses treated as compensation or 
     includible in income apply only to the extent of the amount 
     of expenses treated as compensation or includible in income. 
     Thus, under those exceptions, no deduction is allowed with 
     respect to expenses for (1) a nonbusiness activity generally 
     considered to be entertainment, amusement or recreation, or 
     (2) a facility (e.g., an airplane) used in connection with 
     such activity to the extent that such expenses exceed the 
     amount treated as compensation or includible in income. The 
     provision is intended to overturn Sutherland Lumber for all 
     individuals. As under present law, the exceptions apply only 
     if amounts are properly reported by the company as 
     compensation and wages or otherwise includible in income.
       Effective date.--The provision is effective for expenses 
     incurred after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Increase in age of minor children whose unearned income is 
         taxed as if parent's income (Sec. 456 of the Senate 
         amendment and sec. 1(g) of the Code)


                              Present Law

     Filing requirements for children
       A single unmarried individual eligible to be claimed as a 
     dependent on another taxpayer's return generally must file an 
     individual income tax return if he or she has: (1) earned 
     income only over $5,150 (for 2006); (2) unearned income only 
     over the minimum standard deduction amount for dependents 
     ($850 in 2006); or (3) both earned income and unearned income 
     totaling more than the smaller of (a) $5,150 (for 2006) or 
     (b) the larger of (i) $850 (for 2006), or (ii) earned income 
     plus $300.\455\ Thus, if a dependent child has less than $850 
     in gross income, the child does not have to file an 
     individual income tax return for 2006.\456\
---------------------------------------------------------------------------
     \455\Sec. 6012(a)(1)(C). Other filing requirements apply to 
     dependents who are married, elderly, or blind. See, Internal 
     Revenue Service, Publication 929, Tax Rules for Children and 
     Dependents, at 2, Table 1 (2005).
     \456\A taxpayer generally need not file a return if he or she 
     has gross income in an amount less than the standard 
     deduction (and, if allowable to the taxpayer, the personal 
     exemption amount). An individual who may be claimed as a 
     dependent of another taxpayer is not eligible to claim the 
     dependency exemption relating to that individual. Sec. 
     151(d)(2). For taxable years beginning in 2006, the standard 
     deduction amount for an individual who may be claimed as a 
     dependent by another taxpayer may not exceed the greater of 
     $850 or the sum of $300 and the individual's earned income.
---------------------------------------------------------------------------
       A child who cannot be claimed as a dependent on another 
     person's tax return is subject to the generally applicable 
     filing requirements. Such a child generally must file a 
     return if the individual's gross income exceeds the sum of 
     the standard deduction and the personal exemption amount 
     ($3,300 for 2006).
     Taxation of unearned income under section 1(g)
       Special rules (generally referred to as the ``kiddie tax'') 
     apply to the unearned income of a child who is under age 
     14.\457\ The kiddie tax applies if: (1) the child has not 
     reached the age of 14 by the close of the taxable year; (2) 
     the child's unearned income was more than $1,700 (for 2006); 
     and (3) the child is required to file a return for the year. 
     The kiddie tax applies regardless of whether the child may be 
     claimed as a dependent on the parent's return.
---------------------------------------------------------------------------
     \457\Sec. 1(g).
---------------------------------------------------------------------------
       For these purposes, unearned income is income other than 
     wages, salaries, professional fees, or other amounts received 
     as compensation for personal services actually rendered.\458\ 
     For children under age 14, net unearned income (for 2006, 
     generally unearned income over $1,700) is taxed at the 
     parent's rate if the parent's rate is higher than the child's 
     rate. The remainder of a child's taxable income (i.e., earned 
     income, plus unearned income up to $1,700 (for 2006), less 
     the child's standard deduction) is taxed at the child's 
     rates, regardless of whether the kiddie tax applies to the 
     child. In general, a child is eligible to use the 
     preferential tax rates for qualified dividends and capital 
     gains.\459\
---------------------------------------------------------------------------
     \458\Sec. 1(g)(4) and sec. 911(d)(2).
     \459\Sec. 1(h).
---------------------------------------------------------------------------
       The kiddie tax is calculated by computing the ``allocable 
     parental tax.'' This involves adding the net unearned income 
     of the child to the parent's income and then applying the

[[Page 7452]]

     parent's tax rate. A child's ``net unearned income'' is the 
     child's unearned income less the sum of (1) the minimum 
     standard deduction allowed to dependents ($850 for 2006), and 
     (2) the greater of (a) such minimum standard deduction amount 
     or (b) the amount of allowable itemized deductions that are 
     directly connected with the production of the unearned 
     income.\460\ A child's net unearned income cannot exceed the 
     child's taxable income.
---------------------------------------------------------------------------
     \460\Sec. 1(g)(4).
---------------------------------------------------------------------------
       The allocable parental tax equals the hypothetical increase 
     in tax to the parent that results from adding the child's net 
     unearned income to the parent's taxable income. If the child 
     has net capital gains or qualified dividends, these items are 
     allocated to the parent's hypothetical taxable income 
     according to the ratio of net unearned income to the child's 
     total unearned income. If a parent has more than one child 
     subject to the kiddie tax, the net unearned income of all 
     children is combined, and a single kiddie tax is calculated. 
     Each child is then allocated a proportionate share of the 
     hypothetical increase, based upon the child's net unearned 
     income relative to the aggregate net unearned income of all 
     of the parent's children subject to the tax.
       Special rules apply to determine which parent's tax return 
     and rate is used to calculate the kiddie tax. If the parents 
     file a joint return, the allocable parental tax is calculated 
     using the income reported on the joint return. In the case of 
     parents who are married but file separate returns, the 
     allocable parental tax is calculated using the income of the 
     parent with the greater amount of taxable income. In the case 
     of unmarried parents, the child's custodial parent is the 
     parent whose taxable income is taken into account in 
     determining the child's liability. If the custodial parent 
     has remarried, the stepparent is treated as the child's other 
     parent. Thus, if the custodial parent and stepparent file a 
     joint return, the kiddie tax is calculated using that joint 
     return. If the custodial parent and stepparent file separate 
     returns, the return of the one with the greater taxable 
     income is used. If the parents are unmarried but lived 
     together all year, the return of the parent with the greater 
     taxable income is used.\461\
---------------------------------------------------------------------------
     \461\Sec. 1(g)(5); Internal Revenue Service, Publication 929, 
     Tax Rules for Children and Dependents, at 6 (2005).
---------------------------------------------------------------------------
       Unless the parent elects to include the child's income on 
     the parent's return (as described below) the child files a 
     separate return to report the child's income.\462\ In this 
     case, items on the parent's return are not affected by the 
     child's income. The total tax due from a child is the greater 
     of:
---------------------------------------------------------------------------
     \462\The child must attach to the return Form 8615, Tax for 
     Children Under Age 14 With Investment Income of More Than 
     $1,700 (2006).
---------------------------------------------------------------------------
       1. the sum of (a) the tax payable by the child on the 
     child's earned income and unearned income up to $1,700 (for 
     2006), plus (b) the allocable parental tax on the child's 
     unearned income, or
       2. the tax on the child's income without regard to the 
     kiddie tax provisions.
     Parental election to include child's dividends and interest 
         on parent's return
       Under certain circumstances, a parent may elect to report a 
     child's dividends and interest on the parent's return. If the 
     election is made, the child is treated as having no income 
     for the year and the child does not have to file a return. 
     The parent makes the election on Form 8814, Parents' Election 
     to Report Child's Interest and Dividends. The requirements 
     for the parent's election are that:
       1. the child has gross income only from interest and 
     dividends (including capital gains distributions and Alaska 
     Permanent Fund Dividends);\463\
---------------------------------------------------------------------------
     \463\Internal Revenue Service, Publication 929, Tax Rules for 
     Children and Dependents, at 6 (2005).
---------------------------------------------------------------------------
       2. such income is more than the minimum standard deduction 
     amount for dependents ($850 in 2006) and less than 10 times 
     that amount ($8500 in 2006);
       3. no estimated tax payments for the year were made in the 
     child's name and taxpayer identification number;
       4. no backup withholding occurred; and
       5. the child is required to file a return if the parent 
     does not make the election.
       Only the parent whose return must be used when calculating 
     the kiddie tax may make the election. The parent includes in 
     income the child's gross income in excess of twice the 
     minimum standard deduction amount for dependents (i.e., the 
     child's gross income in excess of $1,700 for 2007). This 
     amount is taxed at the parent's rate. The parent also must 
     report an additional tax liability equal to the lesser of: 
     (1) $85 (in 2006), or (2) 10 percent of the child's gross 
     income exceeding the child's standard deduction ($850 in 
     2006).
       Including the child's income on the parent's return can 
     affect the parent's deductions and credits that are based on 
     adjusted gross income, as well as income-based phaseouts, 
     limitations, and floors.\464\ In addition, certain deductions 
     that the child would have been entitled to take on his or her 
     own return are lost.\465\ Further, if the child received tax-
     exempt interest from a private activity bond, that item is 
     considered a tax preference of the parent for alternative 
     minimum tax purposes.\466\
---------------------------------------------------------------------------
     \464\Internal Revenue Service, Publication 929, Tax Rules for 
     Children and Dependents, at 7 (2005).
     \465\Internal Revenue Service, Publication 929, Tax Rules for 
     Children and Dependents, at 7 (2005).
     \466\Sec. 1(g)(7)(B).
---------------------------------------------------------------------------
     Taxation of compensation for services under section 1(g)
       Compensation for a child's services is considered the gross 
     income of the child, not the parent, even if the compensation 
     is not received or retained by the child (e.g. is the 
     parent's income under local law).\467\ If the child's income 
     tax is not paid, however, an assessment against the child 
     will be considered as also made against the parent to the 
     extent the assessment is attributable to amounts received for 
     the child's services.\468\
---------------------------------------------------------------------------
     \467\Sec. 73(a).
     \468\Sec. 6201(c).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision increases the age to which the kiddie tax 
     provisions apply from under 14 to under 18 years of age. The 
     provision also creates an exception to the kiddie tax for 
     distributions from certain qualified disability trusts, 
     defined by cross-reference to sections 1917 and 1614(a)(3) of 
     the Social Security Act.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision with one modification. This modification provides 
     that the kiddie tax does not apply to a child who is married 
     and files a joint return for the taxable year.
     7. Impose loan and redemption requirements on pooled 
         financing bonds (sec. 457 of the Senate amendment and 
         sec. 149 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 such bonds are used to 
     finance direct activities of governmental units or if such 
     bonds are repaid with revenues of governmental units. These 
     bonds are called ``governmental bonds.'' Interest on State or 
     local government bonds issued to finance activities of 
     private persons is taxable unless a specific exception 
     applies. These bonds are called ``private activity bonds.'' 
     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. In addition, the Code imposes 
     qualification requirements that apply to all State and local 
     bonds. Arbitrage restrictions, for example, limit the ability 
     of issuers to profit from investment of tax-exempt bond 
     proceeds. The Code also imposes requirements that only apply 
     to specific types of bond issues. For instance, pooled 
     financing bonds (defined below) are not tax-exempt unless the 
     issuer meets certain requirements regarding the expected use 
     of proceeds.
     Pooled financing bond restrictions
       State or local governments also issue bonds to provide 
     financing for the benefit of a third party (a ``conduit 
     borrower''). Pooled financing bonds are bond issues that are 
     used to make or finance loans to two or more conduit 
     borrowers, unless the conduit loans are to be used to finance 
     a single project.\469\ The Code imposes several requirements 
     on pooled financing bonds if more than $5 million of proceeds 
     are expected to be used to make loans to conduit borrowers. 
     For purposes of these rules, a pooled financing bond does not 
     include certain private activity bonds.\470\
---------------------------------------------------------------------------
     \469\Treas. Reg. sec. 1.150-1(b).
     \470\Sec. 149(f)(4)(B).
---------------------------------------------------------------------------
       A pooled financing bond is not tax-exempt unless the issuer 
     reasonably expects that at least 95 percent of the net 
     proceeds will be lent to ultimate borrowers by the end of the 
     third year after the date of issue. The term ``net proceeds'' 
     is defined to mean the proceeds of the issue less the 
     following amounts: 1) proceeds used to finance issuance 
     costs; 2) proceeds necessary to pay interest on the bonds 
     during a three-year period; and 3) amounts in reasonably 
     required reserves.\471\
---------------------------------------------------------------------------
     \471\Sec. 149(f)(2)(C).
---------------------------------------------------------------------------
       An issuer's past experience regarding loan origination is a 
     criterion upon which the reasonableness of the issuer's 
     expectations can be based. As an additional requirement for 
     tax exemption, all legal and underwriting costs associated 
     with the issuance of pooled financing bonds may not be 
     contingent and must be substantially paid within 180 days of 
     the date of issuance.
     Arbitrage restrictions on tax-exempt bonds
       To prevent the issuance of more Federally subsidized tax-
     exempt bonds than necessary; the tax exemption for State and 
     local bonds does not apply to any arbitrage bond.\472\ An 
     arbitrage bond is defined as any bond that is part of an 
     issue if any proceeds of the issue are reasonably expected to 
     be used (or intentionally are used) to acquire higher 
     yielding investments or to replace funds that are used to 
     acquire higher yielding investments. In

[[Page 7453]]

     general, arbitrage profits may be earned only during 
     specified periods (e.g., defined ``temporary periods'') 
     before funds are needed for the purpose of the borrowing or 
     on specified types of investments (e.g., ``reasonably 
     required reserve or replacement funds''). Subject to limited 
     exceptions, investment profits that are earned during these 
     periods or on such investments must be rebated to the Federal 
     Government (``arbitrage rebate'').
---------------------------------------------------------------------------
     \472\Secs. 103(a) and (b)(2).
---------------------------------------------------------------------------
       The Code contains several exceptions to the arbitrage 
     rebate requirement, including an exception for bonds issued 
     by small governments (the ``small issuer exception''). For 
     this purpose, small governments are defined as general 
     purpose governmental units that issue no more than $5 million 
     of tax-exempt governmental bonds in a calendar year.\473\
---------------------------------------------------------------------------
     \473\The $5 million limit is increased to $15 million if at 
     least $10 million of the bonds are used to finance public 
     schools.
---------------------------------------------------------------------------
       Pooled financing bonds are subject to the arbitrage 
     restrictions that apply to all tax-exempt bonds, including 
     arbitrage rebate. Under certain circumstances, however, small 
     governments may issue pooled financing bonds without those 
     bonds counting towards the determination of whether the 
     issuer qualifies for the small issuer exception to arbitrage 
     rebate. In the case of a pooled financing bond where the 
     ultimate borrowers are governmental units with general taxing 
     powers not subordinate to the issuer of the pooled bond, the 
     pooled bond does not count against the issuer's $5 million 
     limitation, provided the issuer is not a borrower from the 
     pooled bond.\474\ However, the issuer of the pooled financing 
     bond remains subject to the arbitrage rebate requirement for 
     unloaned proceeds.\475\
---------------------------------------------------------------------------
     \474\Sec. 148(f)(4)(D)(ii)(II).
     \475\Treas. Reg. sec. 1.148-8(d)(1).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The provision imposes new requirements on pooled financing 
     bonds as a condition of tax-exemption. First, the provision 
     imposes a written loan commitment requirement to restrict the 
     issuance of pooled bonds where potential borrowers have not 
     been identified (``blind pools''). Second, in addition to the 
     current three-year expectations requirement, the issuer must 
     reasonably expect that at least 50 percent of the net 
     proceeds of the pooled bond will be lent to borrowers one 
     year after the date of issue. Third, the provision requires 
     the redemption of outstanding bonds with proceeds that are 
     not loaned to borrowers within the expected loan origination 
     periods. Finally, the provision eliminates the rule allowing 
     an issuer of pooled financing bonds to disregard the pooled 
     bonds for purposes of determining whether the issuer 
     qualifies for the small issuer exception to rebate.
     Borrower identification
       Under the provision, interest on a pooled financing bond is 
     tax exempt only if the issuer obtains written commitments 
     with ultimate borrowers for loans equal to at least 50 
     percent of the net proceeds of the pooled bond prior to 
     issuance. The loan commitment requirement does not apply to 
     bonds issued by States (or an integral part of a State) to 
     provide loans to subordinate governmental units or State 
     entities created to provide financing for water-
     infrastructure projects through the federally-sponsored State 
     revolving fund program.
     Loan origination expectations
       The provision imposes new reasonable expectations 
     requirements for loan originations. The issuer must expect 
     that at least 50 percent of the net proceeds of a pooled 
     financing bond will be lent to ultimate borrowers one year 
     after the date of issue. This is in addition to the present-
     law requirement that at least 95 percent of the net proceeds 
     will be lent to ultimate borrowers by the end of the third 
     year after the date of issue.
     Redemption requirement
       Under the provision, if bond proceeds are not loaned to 
     borrowers within prescribed periods, outstanding bonds equal 
     to the amount of proceeds that were not loaned within the 
     required period must be redeemed with 90 days. The bond 
     redemption requirement applies with respect to proceeds that 
     are unloaned as of expiration of the one-year and three-year 
     loan origination periods. For example, if an amount equal to 
     45 percent of the net proceeds of an issue are used to make 
     loans to ultimate borrowers as of one year after the bonds 
     are issued, an amount equal to five percent of the net 
     proceeds of the issue is no longer available for lending and 
     must be used to redeem bonds within the following six-month 
     period. Similarly, if only 85 percent of the net proceeds of 
     the issue are used to make qualifying loans (or to redeem 
     bonds) as of three years after the bonds are issued, 10 
     percent of the remaining net proceeds is no longer available 
     for lending and must be used to redeem bonds within the 
     following six months.
     Small issuer exception
       The provision eliminates the rule disregarding pooled 
     financing bonds from the issuer's $5,000,000 annual 
     limitation for purposes of the small issuer exception to 
     arbitrage rebate.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision, with the following modifications.
       Under the conference agreement, issuers of pooled financing 
     bonds must reasonably expect that at least 30 percent of the 
     net proceeds of such bonds will be loaned to ultimate 
     borrowers one year after the date of issue. The present-law 
     requirement that issuers must reasonably expect to loan at 
     least 95 percent of the net proceeds of a pooled financing 
     bond to ultimate borrowers three years after the date of 
     issue is unchanged. Bond proceeds that are not loaned to 
     borrowers as required under the one- and three-year rules 
     must be used to redeem outstanding bonds within 90 days of 
     the expiration of such one- and three-year periods.
       The conference agreement requires issuers of pooled 
     financing bonds to obtain, prior to issuance, written 
     commitments from borrowers equal to at least 30 percent of 
     the net proceeds of the pooled financing bond. The conference 
     agreement includes the Senate amendment's exception to the 
     written loan commitment requirement. Thus, the loan 
     commitment requirement does not apply to pooled financing 
     bonds issued by States (or an integral part of a State) to 
     provide loans to subordinate governmental units or State 
     entities created to provide financing for water-
     infrastructure projects through the federally-sponsored State 
     revolving fund program.
     8. Amend information reporting requirements to include 
         interest on tax-exempt bonds (sec. 458 of the Senate 
         amendment and sec. 6049 of the Code)


                              Present Law

     Tax-exempt bonds
       Generally, gross income does not include interest on State 
     or local bonds.\476\ State and local bonds are classified 
     generally as either governmental bonds or private activity 
     bonds. Governmental bonds are bonds the proceeds of which are 
     primarily used to finance governmental facilities or the debt 
     is repaid with governmental funds. Private activity bonds are 
     bonds in which the State or local government serves as a 
     conduit providing financing to nongovernmental persons (e.g., 
     private businesses or individuals). The exclusion from income 
     for State and local bonds does not apply to private activity 
     bonds, unless the bonds are issued for certain purposes 
     (``qualified private activity bonds'') permitted by the 
     Code.\477\
---------------------------------------------------------------------------
     \476\Sec. 103.
     \477\Secs. 103(b)(1) and 141.
---------------------------------------------------------------------------
     Tax-exempt interest reporting by taxpayers
       The Code provides that every person required to file a 
     return must report the amount of tax-exempt interest received 
     or accrued during any taxable year.\478\ There are a number 
     of reasons why the amount of tax-exempt interest received is 
     relevant to determining tax liability despite the general 
     exclusion from income. For example, the interest income from 
     qualified private activity bonds (other than qualified 
     501(c)(3) bonds) issued after August 7, 1986, is a preference 
     item for purposes of calculating the alternative minimum tax 
     (``AMT'').\479\ Tax-exempt interest also is relevant for 
     determining eligibility for the earned income credit (the 
     ``EIC'')\480\ and the amount of Social Security benefits 
     includable in gross income.\481\ Moreover, determining 
     includable Social Security benefits is necessary for 
     calculating either adjusted or modified adjusted gross income 
     under several Code sections.\482\
---------------------------------------------------------------------------
     \478\Sec. 6012(d).
     \479\Sec. 57(a)(5). Special rules apply to exclude refundings 
     of bonds issued before August 8, 1986, and certain bonds 
     issued before September 1, 1986.
     \480\Sec. 32(i).
     \481\Sec. 86.
     \482\See Secs. 135, 219, and 221.
---------------------------------------------------------------------------
     Information reporting by payors
       The Code generally requires every person who makes payments 
     of interest aggregating $10 or more or receives payments of 
     interest as a nominee and who makes payments aggregating $10 
     or more to file an information return setting forth the 
     amount of interest payments for the calendar year and the 
     name, address, and TIN\483\ of the person to whom interest is 
     paid.\484\ Treasury regulations prescribe the form and manner 
     for filing interest payment information returns. Penalties 
     are imposed for failures to file interest payment information 
     returns or payee statements.\485\ Treasury Regulations also 
     impose recordkeeping requirements on any person required to 
     file information returns.\486\ The Code excludes interest 
     paid on tax-exempt bonds from interest reporting 
     requirements.\487\
---------------------------------------------------------------------------
     \483\The taxpayer's identification number, generally, for 
     individuals is the taxpayer's social security number. Sec. 
     7701(a)(41).
     \484\Sec. 6049.
     \485\Secs. 6721 and 6722.
     \486\Treas. Reg. sec. 1.6001-1(a).
     \487\Sec. 6049.
---------------------------------------------------------------------------


                               House Bill

       No provision.

[[Page 7454]]




                            Senate Amendment

       The provision eliminates the exception from information 
     reporting requirements for interest paid on tax-exempt bonds.
       Effective date.--The provision is effective for interest 
     paid on tax-exempt bonds after December 31, 2005.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision.
     9. Modification of credit for fuel from a non-conventional 
         source (sec. 459 of the Senate amendment and sec. 45K of 
         the Code)


                              Present Law

       Certain fuels produced from ``non-conventional sources'' 
     and sold to unrelated parties are eligible for an income tax 
     credit equal to $3 (generally adjusted for inflation)\488\ 
     per barrel or Btu oil barrel equivalent (``non- conventional 
     source fuel credit'').\489\ Qualified fuels must be produced 
     within the United States.
---------------------------------------------------------------------------
     \488\The inflation adjustment is generally calculated using 
     1979 as the base year. Generally, the value of the credit for 
     fuel produced in 2005 was $6.79 per barrel-of-oil equivalent 
     produced, which is approximately $1.20 per thousand cubic 
     feet of natural gas. The credit for coke or coke gas is 
     indexed for inflation using 2004 as the base year instead of 
     1979.
     \489\Sec. 29 (for tax years ending before 2006); sec. 45K 
     (for tax years ending after 2005).
---------------------------------------------------------------------------
       Qualified fuels include:
       --oil produced from shale and tar sands;
       --gas produced from geopressured brine, Devonian shale, 
     coal seams, tight formations, or biomass; and
       --liquid, gaseous, or solid synthetic fuels produced from 
     coal (including lignite).
       Generally, the non-conventional source fuel credit has 
     expired, except for certain biomass gas and synthetic fuels 
     sold before January 1, 2008, and produced at facilities 
     placed in service after December 31, 1992, and before July 1, 
     1998. The non-conventional source fuel credit provision also 
     includes a credit for producing coke or coke gas at qualified 
     facilities placed in service before 1993 or after June 30, 
     1998, and before 2010. The coke production credit is 
     available for coke or coke gas produced over the four-year 
     period beginning on January 1, 2006, or the date the facility 
     was placed in service, if later. The amount of credit-
     eligible coke produced at any one facility may not exceed an 
     average barrel-of-oil equivalent of 4,000 barrels per day.
       The non-conventional source fuel credit is reduced (but not 
     below zero) over a $6 (inflation-adjusted) phase-out period 
     as the reference price for oil exceeds $23.50 per barrel 
     (also adjusted for inflation). The reference price is the 
     Secretary's estimate of the annual average wellhead price per 
     barrel for all domestic crude oil. The credit did not phase-
     out for 2004 because the reference price for that year of 
     $50.26 did not exceed the inflation adjusted threshold of 
     $51.35.
       Beginning with taxable years ending after December 31, 
     2005, the non-conventional source fuel credit is part of the 
     general business credit (sec. 38).


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies the manner in which the phase-out of 
     the non-conventional source fuel credit is calculated. 
     Specifically, in calculating the phase-out of the credit 
     rather than relying upon the reference price for the calendar 
     year in which the sale of qualified non-conventional fuel 
     occurs, the provision uses the reference price for the 
     calendar year preceding the calendar year in which the sale 
     occurs. Thus, under the provision, whether the credit is 
     phased out in 2005 is determined by reference to 2004 
     wellhead prices, whether the credit is phased out in 2006 is 
     determined by reference to 2005 wellhead prices, and so on. 
     In addition, the provision repeals the phase-out limitation 
     entirely for coke and coke gas produced under section 45K(g).
       The provision eliminates the inflation adjustment for all 
     fuels other than coke and coke gas for 2005, 2006, and 2007. 
     Thus, the current credit amount of $6.79 per barrel of oil 
     equivalent would be retroactively reduced to $6.56 per barrel 
     of oil equivalent, and that reduced amount would remain in 
     effect through the December 31, 2007. Under the provision, 
     the credit amount of $3 per barrel of oil equivalent for coke 
     and coke gas produced under section 45K(g) would continue to 
     be adjusted for inflation using 2004 as the base year.
       Finally, the provision clarifies that qualifying facilities 
     producing coke and coke gas under section 45K(g) do not 
     include facilities that produce petroleum-based coke or coke 
     gas.
       Effective date.--The provision applies to fuel sold after 
     December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Modification of individual estimated tax safe harbor 
         (sec. 460 of the Senate Amendment and sec. 6654 of the 
         Code)


                              Present Law

       An individual taxpayer generally is subject to an addition 
     to tax for any underpayment of estimated tax. An individual 
     generally does not have an underpayment of estimated tax if 
     he or she makes timely estimated tax payments equal to the 
     lesser of: (1) 90 percent of the tax shown on the current 
     year's return or (2) 100 percent of the prior year's tax. For 
     individuals with a prior year's AGI above $150,000, however, 
     the rule that allows payment of 100 percent of prior year's 
     tax is modified. Individuals with prior-year AGI above 
     $150,000 generally must make estimated payments equal to the 
     lesser of (1) 90 percent of the tax shown on the current 
     year's return or (2) 110 percent of the tax shown on the 
     prior year's return.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that individuals with prior 
     year's AGI above $150,000 who make estimated tax payments 
     based on prior year's tax must do so based on 120 percent of 
     the tax shown on the prior year's return, for estimated tax 
     payments for taxable years beginning in 2006. That percentage 
     will revert back to 110 percent for taxable years beginning 
     after 2006.
       Effective date.--The provision is effective for estimated 
     tax payments for taxable years beginning after December 31, 
     2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Revaluation of LIFO inventories of large integrated oil 
         companies (sec. 461 of the Senate amendment)


                              Present Law

       A taxpayer is generally permitted to use a last-in, first-
     out (LIFO) method to inventory goods, on the condition that 
     the taxpayer also uses the LIFO method in reporting to 
     shareholders, partners, other proprietors, and beneficiaries, 
     and for credit purposes.\490\ Under the LIFO method, a 
     taxpayer (i) treats goods on hand at the close of the taxable 
     year as being: first, those goods included in the opening 
     inventory of the taxable year (in the order of acquisition) 
     to the extent thereof; and second, those acquired in the 
     taxable year; (ii) inventories the goods at cost; and (iii) 
     treats those goods included in the opening inventory of the 
     taxable year in which the LIFO method was first used as 
     having been acquired at the same time, and determines their 
     cost by the average cost method.\491\
---------------------------------------------------------------------------
     \490\Sec. 472(c).
     \491\Sec. 472.
---------------------------------------------------------------------------
       In periods during which a taxpayer produces or purchases 
     more goods than the taxpayer sells (such excess, an 
     ``inventory increment''), a LIFO method taxpayer generally 
     records the inventory cost of such excess (and separately 
     tracks such amount as the ``LIFO layer'' for such period), 
     adds it to the cost of inventory at the start of the period, 
     and carries such total inventory cost forward to the 
     beginning inventory of the following year.
       In periods during which the taxpayer sells more goods than 
     the taxpayer produces or purchases (such decrease, an 
     ``inventory decrement''), a LIFO method taxpayer generally 
     determines the cost of goods sold of the amount of the 
     decrement by treating such sales as occurring out of the most 
     recent LIFO layer (or the most recent LIFO layers, if the 
     amount of the decrement exceeds the amount of inventory in 
     the most recent LIFO layer) in reverse chronological order.


                               House Bill

       No provision.


                            Senate Amendment

       The provision disallows a portion of the benefit of the 
     LIFO method to integrated oil companies\492\ which have an 
     average daily production of crude oil of at least 500,000 
     barrels of oil and which have in excess of $1 billion for the 
     last taxable year ending during 2005.
---------------------------------------------------------------------------
     \492\The provision defines an ``integrated oil company'' by 
     cross-reference to section 291(b)(4), which generally 
     includes retailers and large refiners of oil or natural gas 
     or any product derived from oil or natural gas.
---------------------------------------------------------------------------
       Specifically, the provision requires such taxpayers to 
     revalue each historic LIFO layer of crude oil inventories by 
     adding to each layer an amount equal to $18.75 multiplied by 
     the number of barrels of crude oil represented by such LIFO 
     layer; the taxpayer must reduce its cost of sales for such 
     taxable year by a like amount.
       For example, suppose a taxpayer, which is an integrated oil 
     company with average daily production of at least 500,000 
     barrels of oil and revenues in excess of $1 billion, has a 
     2005 starting inventory of 200x barrels, comprised of a 1955 
     LIFO layer with 50x barrels valued at $5 per barrel (with a 
     total cost of $250x); a 1985 LIFO layer with 100x barrels 
     valued at $18 per barrel (with a total cost $1800x); a 2000 
     LIFO layer with 30x barrels valued at $25 per barrel (with a 
     total cost of $750x), and a 2004 LIFO layer with 20x barrels 
     valued at $35 per barrel (with a total cost $700x), for a 
     total inventory value of $3500x. Suppose further that the 
     taxpayer's ending inventory is 200x barrels, i.e., the same 
     as the starting inventory, so the taxpayer has neither an 
     inventory increment nor an inventory decrement for the 
     taxable year.
       Under the provision, the taxpayer will revalue each layer 
     upwards by $18.75/barrel.

[[Page 7455]]

     Thus, the taxpayer will increase its 1955 LIFO layer by 
     $937.50x; its 1985 LIFO layer by $1875x; its 2000 LIFO layer 
     by $562.50x; and its 2004 LIFO layer by $375x. The taxpayer 
     will offset this $3750x increase in inventory by reducing by 
     $3750x the taxpayer's cost of goods sold for the last taxable 
     year ending in 2005. In the event the taxpayer's cost of 
     goods sold for such taxable year prior to such reduction is 
     less than $3750x, the taxpayer will reduce its cost of goods 
     sold to zero and increase its gross income for such taxable 
     year by such difference.
       Effective date.--The provision is effective for the last 
     taxable year of a taxpayer ending in 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Amortization of geological and geophysical expenditures 
         (sec. 462 of the Senate amendment and sec. 167(h) of the 
         Code)


                              Present Law

       Geological and geophysical expenditures (``G&G costs'') are 
     costs incurred by a taxpayer for the purpose of obtaining and 
     accumulating data that will serve as the basis for the 
     acquisition and retention of mineral properties by taxpayers 
     exploring for minerals. G&G costs incurred in connection with 
     oil and gas exploration in the United States may be amortized 
     over two years.\493\ In the case of abandoned property, 
     remaining basis may not be recovered in the year of 
     abandonment of a property as all basis is recovered over the 
     two-year amortization period.
---------------------------------------------------------------------------
     \493\Sec. 167(h).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision repeals the two-year amortization period with 
     respect to G&G costs paid or incurred by certain large 
     integrated oil companies, defined to include integrated oil 
     companies (as defined in section 291(b)(4) of the Code) that 
     have an average daily worldwide production of crude oil of at 
     least 500,000 barrels. Thus, affected oil companies are 
     required to capitalize their G&G costs associated with 
     successful exploration projects that result in the 
     acquisition of property. Such companies can recover any G&G 
     costs associated with abandoned property in the year of 
     abandonment.
       Effective date.--The provision is effective for G&G costs 
     paid or incurred in taxable years beginning after August 8, 
     2005.


                          Conference Agreement

       The conference agreement extends the two-year amortization 
     period for G&G costs to five years for certain major 
     integrated oil companies. Under the conference agreement, the 
     five-year amortization rule for G&G costs applies only to 
     integrated oil companies that have an average daily worldwide 
     production of crude oil of at least 500,000 barrels for the 
     taxable year, gross receipts in excess of $1 billion in the 
     last taxable year ending during calendar year 2005, and an 
     ownership interest in a crude oil refiner of 15 percent or 
     more.
       Effective date.--The provision applies to amounts paid or 
     incurred after the date of enactment.
     13. Valuation of employee personal use of noncommercial 
         aircraft (sec. 463 of the Senate amendment)


                              Present Law

       Unless an exception applies, gross income includes 
     compensation for services, including fees, commissions, 
     fringe benefits, and similar items. In general, an employee 
     or other service provider must include in gross income the 
     amount by which the fair value of a fringe benefit exceeds 
     the amount paid by the individual. Treasury regulations 
     provide rules regarding the valuation of fringe benefits, 
     including flights on an employer-provided aircraft.\494\ In 
     general, the value of a non-commercial flight is determined 
     under the base aircraft valuation formula, also known as the 
     Standard Industry Fare Level formula or ``SIFL''.\495\ If the 
     SIFL valuation rules do not apply, the value of a flight on a 
     company-provided aircraft is generally equal to the amount 
     that an individual would have to pay in an arm's-length 
     transaction to charter the same or a comparable aircraft for 
     that period for the same or a comparable flight.\496\
---------------------------------------------------------------------------
     \494\Treas. Reg. sec. 1.61-21.
     \495\Treas. Reg. sec. 1.61-21(g).
     \496\Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, for purposes of income 
     inclusion, the value of any employee personal use of 
     noncommercial aircraft is equal to the excess of (1) the 
     greater of the fair market value of such use or actual cost 
     of such use (including all fixed and variable costs), over 
     (2) the amount paid by or on behalf of the employee for such 
     use. Thus, the SIFL valuation rules may no longer be used to 
     determine the value of such use.
       Effective date.--The provision applies to use after the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Application of Foreign Investment in Real Property Tax 
         Act (``FIRPTA'') to Regulated Investment Companies 
         (``RICs'') (sec. 464 of the Senate amendment and sec. 
         897(h)(4) of the Code)
     In general
       A nonresident alien individual or foreign corporation is 
     taxable on its taxable income which is effectively connected 
     with the conduct of a trade or business within the United 
     States, at the income tax rates applicable to U.S. persons. A 
     nonresident alien individual is taxed (at a 30-percent rate) 
     on gains, derived from sources within the United States, from 
     the sale or exchange of capital assets if the individual is 
     present in the United States for 183 days or more during the 
     taxable year.
       In addition, the Foreign Investment in Real Property Tax 
     Act (FIRPTA)\497\ generally treats a nonresident alien 
     individual or foreign corporation's gain or loss from the 
     disposition of a U.S. real property interest (USRPI) as 
     income that is effectively connected with a U.S. trade or 
     business, and thus taxable at the income tax rates applicable 
     to U.S. persons, including the rates for net capital gain. A 
     foreign investor subject to tax on this income is required to 
     file a U.S. income tax return under the normal rules relating 
     to receipt of income effectively connected with a U.S. trade 
     or business.
---------------------------------------------------------------------------
     \497\FIRPTA is codified in section 897 of the Code.
---------------------------------------------------------------------------
       The payor of FIRPTA effectively connected income to a 
     foreign person is generally required to withhold U.S. tax 
     from the payment. Withholding is generally 10 percent of the 
     sales price in the case of a direct sale by the foreign 
     person of a USRPI, and 35 percent of the amount of a 
     distribution to a foreign person of proceeds attributable to 
     such sales from an entity such as a partnership.\498\ The 
     foreign person can request a refund with its U.S. tax return, 
     if appropriate based on that person's total U.S. effectively 
     connected income and deductions (if any) for the taxable 
     year.
---------------------------------------------------------------------------
     \498\Sec. 1445 and Treasury regulations thereunder. The 
     Treasury department is authorized to issue regulations that 
     would reduce the 35 percent withholding on distributions to 
     15 percent during the time that the maximum income tax rate 
     on dividends and capital gains of U.S. persons is 15 percent. 
     Section 1445 statutorily requires the 10 percent withholding 
     by the purchaser of a USRPI and the 35 percent withholding 
     (or less if directed by Treasury) on certain distributions by 
     partnerships, trusts, and estates, among other situations. 
     Treasury regulations prescribe the 35 percent withholding 
     requirement for distributions by REITs to foreign 
     shareholders. Treas. Reg. sec. 1.1445-8. No regulations have 
     been issued relating specifically to RIC distributions, which 
     first became subject to FIRPTA in 2005.
---------------------------------------------------------------------------
       USRPIs include interests in real property located in the 
     United States or the U.S. Virgin Islands, and stock of a 
     domestic U.S. real property holding company (USRPHC), 
     generally defined as any corporation, unless the taxpayer 
     established that the fair market value of its U.S. real 
     property interests is less than 50 percent of the combined 
     fair market value of all its real property interests (U.S. 
     and worldwide) and of all its assets used or held for use in 
     a trade or business.\499\ However, any class of stock that is 
     regularly traded on an established securities market located 
     in the U.S. is treated as a U.S. real property interest only 
     if the seller held more than 5 percent of the stock at any 
     time during the 5-year period ending on the date of 
     disposition of the stock.\500\
---------------------------------------------------------------------------
     \499\Sec. 897(c)(2).
     \500\Sec. 897(c)(3).
---------------------------------------------------------------------------
     Special rules for certain investment entities
       Real estate investment trusts and regulated investment 
     companies are generally passive investment entities. They are 
     organized as U.S. domestic entities and are taxed as U.S. 
     domestic corporations. However, because of their special 
     status, they are entitled to deduct amounts distributed to 
     shareholders and, in some cases, to allow the shareholders to 
     characterize these amounts based on the type of income the 
     REIT or RIC received. Among numerous other requirements for 
     qualification as a REIT or RIC, the entity is required to 
     distribute to shareholders at least 90 percent of its income 
     (excluding net capital gain) annually.\501\ A REIT or RIC may 
     designate a capital gain dividend to its shareholders, who 
     then treat the amount designated as capital gain.\502\ A REIT 
     or RIC is taxed at regular corporate rates on undistributed 
     income; but the combination of the requirement to distribute 
     income other than net capital gain, plus the ability to 
     declare a capital gain dividend and avoid corporate level tax 
     on such income, can result in little, if any, corporate level 
     tax paid by a REIT or RIC. Instead, the shareholder-level tax 
     on distributions is the principal tax paid with respect to 
     income of these entities. The requirements for REIT 
     eligibility include primary investment in real estate assets 
     (which assets can include mortgages). The requirements for 
     RIC eligibility include primary investment in stocks and 
     securities (which can include stock of REITs or of other 
     RICs).
---------------------------------------------------------------------------
     \501\Secs. 852(a)(1) and 852(b)(2)(A); 857(a)(1).
     \502\Secs. 852(b)(3); 857(b)(3).
---------------------------------------------------------------------------
       FIRPTA contains special rules for real estate investment 
     trusts (REITs) and regulated investment companies 
     (RICs).\503\
---------------------------------------------------------------------------
     \503\Sec. 897(h).

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

[[Page 7456]]

       Stock of a ``domestically controlled'' REIT is not a USRPI. 
     The term ``domestically controlled'' is defined to mean that 
     less than 50 percent in value of the REIT has been owned by 
     non-U.S. shareholders during the 5-year period ending on the 
     date of disposition.\504\ For 2005, 2006, and 2007, a similar 
     exception applies to RIC stock. Thus, stock of a domestically 
     controlled REIT or RIC can be sold without FIRPTA 
     consequences. This exception applies regardless of whether 
     the sale of stock is made directly by a foreign person, or by 
     a REIT or RIC whose distributions to foreign persons of gain 
     attributable to the sale of USRPI's would be subject to 
     FIRPTA as described below.
---------------------------------------------------------------------------
     \504\Sec. 897(h)(2) and (h)(4)(B).
---------------------------------------------------------------------------
       A distribution by a REIT to a foreign shareholder, to the 
     extent attributable to gain from the REIT's sale or exchange 
     of USRPIs, is generally treated as FIRPTA gain to the 
     shareholder. An exception enacted in 2004 applies if the 
     distribution is made on a class of REIT stock that is 
     regularly traded on an established securities market located 
     in the United States and the foreign shareholder has not held 
     more than 5 percent of the class of stock at any time during 
     the one-year period ending on the date of the 
     distribution.\505\ Where the exception applies, the 
     distribution to the foreign shareholder is treated as the 
     distribution of an ordinary dividend (rather than as a 
     capital gain dividend), subject to 30-percent (or lower 
     treaty rate) withholding.\506\
---------------------------------------------------------------------------
     \505\This exception, effective beginning in 2005, was added 
     by section 418 of the American Jobs Creation Act of 2004 
     (``AJCA''), Pub. L. No. 108-357, and modified by section 
     403(p) of the Tax Technical Corrections Act of 2005.
     \506\Sec. 857(b)(3)(F).
---------------------------------------------------------------------------
       Prior to 2005, distributions by RICs to foreign 
     shareholders, to the extent attributable to the RIC's sale or 
     exchange of USRPIs, were not treated as FIRPTA gain. If 
     distributions were attributable to long-term capital gains, 
     the RIC could designate the distributions as long-term 
     capital gain dividends that would not be subject to any tax 
     to the foreign shareholder, rather than as a regular 
     dividends subject to 30-percent (or lower treaty rate) 
     withholding.\507\ For 2005, 2006, and 2007, RICs are subject 
     to the rule that had applied to REITs prior to 2005, i.e., 
     any distribution to a foreign shareholder attributable to 
     gain from the RIC's sale of a USRPI is characterized as 
     FIRPTA gain, without any exceptions.\508\
---------------------------------------------------------------------------
     \507\Sec. 852(b)(3)(C); Treas. Reg. sec. 1.1441-3(c)(2)(D).
     \508\This requirement for RICs was added by section 411 of 
     the American Jobs Creation Act of 2004 (``AJCA''), in 
     connection with the enactment of other rules that allow RICs 
     to identify certain types of distributions to foreign 
     shareholders, attributable to the RIC's receipt of short-term 
     capital gains or interest income, as distributions to such 
     shareholders of such short-term gains or interest income and 
     thus not taxed to the foreign shareholders, rather than as 
     regular dividends that would be subject to withholding. See 
     Secs. 871(k), 881(e), 1441(c)(12) and 1442(a). All these 
     rules are scheduled to expire at the end of 2007, as is the 
     rule subjecting to FIRPTA all distributions of RIC gain 
     attributable to sales of U.S. real property interests and the 
     rule excepting from FIRPTA a foreign person's sale of stock 
     of a ``domestically controlled'' RIC.
---------------------------------------------------------------------------


                               house Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision provides that distributions 
     by a RIC to foreign shareholders of amounts attributable to 
     the sale of USRPIs are not treated as FIRPTA income unless 
     the RIC itself is a U.S. real property holding corporation 
     (i.e. 50 percent or more of its value is represented by its 
     U.S. real property interests, including investments in U.S. 
     real property holding corporations). In determining whether a 
     RIC is a real property holding company for this purpose, a 
     special rule applies that requires the RIC to include as U.S. 
     real property interests its holdings of RIC or REIT stock if 
     such RIC or REIT is a U.S. real property holding corporation, 
     even if such stock is regularly traded on an established 
     securities market and even if the RIC owns less than 5 
     percent of such stock. Another special rule requires the RIC 
     to include as U.S. real property interests its interests in 
     any domestically controlled RIC or REIT that is a U.S. real 
     property holding corporation.
       Effective date.--The provision applies to distributions 
     with respect to taxable years beginning after December 31, 
     2004.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision with a clarification to the effective date. Under 
     the clarification, the provision takes effect as if included 
     in the provisions of section 411 of the American Jobs 
     Creation Act of 2004 to which it relates.
     15. Treatment of REIT and RIC distributions attributable to 
         FIRPTA gains (secs. 465 and 466 of the Senate amendment 
         and secs. 897, 852, and 871 of the Code)


                              Present Law

     General treatment of U.S.-source income of foreign investors
       Fixed and determinable annual and periodical income
       The United States generally imposes a flat 30-percent tax, 
     collected by withholding, on the gross amount of U.S.-source 
     investment income payments, such as interest, dividends, 
     rents, royalties and similar types of fixed and determinable 
     annual and periodical income, to nonresident alien 
     individuals and foreign corporations (``foreign 
     persons'').\509\ Under treaties, the United States may reduce 
     or eliminate such taxes.
---------------------------------------------------------------------------
     \509\Secs. 871(a), 881, 1441, and 1442.
---------------------------------------------------------------------------
       Dividends
       Even taking into account U.S. treaties, the tax on a 
     dividend generally is not entirely eliminated. Instead, U.S.-
     source portfolio investment dividends received by foreign 
     persons generally are subject to U.S. withholding tax at a 
     rate of at least 15 percent.
       Interest
       Although payments of U.S.-source interest that is not 
     effectively connected with a U.S. trade or business generally 
     are subject to the 30-percent withholding tax, there are 
     exceptions to that rule. For example, interest from certain 
     deposits with banks and other financial institutions is 
     exempt from tax.\510\ Original issue discount on obligations 
     maturing in 183 days or less from the date of original issue 
     (without regard to the period held by the taxpayer) is also 
     exempt from tax.\511\ An additional exception is provided for 
     certain interest paid on portfolio obligations.\512\ Such 
     ``portfolio interest'' generally is defined as any U.S.-
     source interest (including original issue discount), not 
     effectively connected with the conduct of a U.S. trade or 
     business, (i) on an obligation that satisfies certain 
     registration requirements or specified exceptions thereto 
     (i.e., the obligation is ``foreign targeted''), and (ii) that 
     is not received by a 10-percent shareholder.\513\ With 
     respect to a registered obligation, a statement that the 
     beneficial owner is not a U.S. person is required.\514\ This 
     exception is not available for any interest received either 
     by a bank on a loan extended in the ordinary course of its 
     business (except in the case of interest paid on an 
     obligation of the United States), or by a controlled foreign 
     corporation from a related person.\515\ Moreover, this 
     exception is not available for certain contingent interest 
     payments.\516\ For 2005, 2006 and 2007, a regulated 
     investment company (``RIC'') may designate certain 
     distributions to foreign shareholders that are attributable 
     to the RIC's qualified interest income as non-taxable 
     interest distributions to such foreign persons.\517\
---------------------------------------------------------------------------
     \510\Secs. 871(i)(2)(A) and 881(d).
     \511\Sec. 871(g).
     \512\Secs. 871(h) and 881(c).
     \513\Secs. 871(h)(3) and 881(c)(3).
     \514\Secs. 871(h)(2), (5) and 881(c)(2).
     \515\Sec. 881(c)(3).
     \516\Secs. 871(h)(4) and 881(c)(4).
     \517\This interest distribution rule was added by section 411 
     of the American Jobs Creation Act of 2004 (``AJCA''), Pub. L. 
     No. 108-357.
---------------------------------------------------------------------------
       Capital gains
       A foreign person generally is not subject to U.S. tax on 
     capital gain, including gain realized on the disposition of 
     stock or securities issued by a U.S. person, unless the gain 
     is effectively connected with the conduct of a trade or 
     business in the United States or such person is an individual 
     present in the United States for a period or periods 
     aggregating 183 days or more during the taxable year.\518\ A 
     regulated investment company (RIC) can generally designate 
     dividends to foreign persons that are attributable to the 
     RIC's long term capital gain as a long-term gain dividends 
     that are not subject to withholding.\519\ For 2005, 2006 and 
     2007, RICs may also designate short-term capital gain 
     dividends.\520\
---------------------------------------------------------------------------
     \518\Secs. 871(a)(2) and 881.
     \519\Treas. Reg. sec. 1.1441-3(c)(2)(D).
     \520\This short-term gain distribution rule was added by 
     section 411 of AJCA.
---------------------------------------------------------------------------
       For the years 2005, 2006 and 2007, RIC capital gain 
     dividends that are attributable to the sale of U.S. real 
     property interests (which can include stock of companies that 
     are U.S. real property holding companies) are subject to 
     special rules described below.
       Real estate investment trusts (REITs) can also designate 
     long-term capital gain dividends to shareholders; but when 
     made to a foreign person such distributions attributable to 
     the sale of U.S. real property interests are also subject to 
     the special rules described below.
     Foreign Investment in Real Property Tax Act (``FIRPTA'')
       Unlike most other U.S. source capital gains, which are 
     generally not taxed to a foreign investor, the Foreign 
     Investment in Real Property Tax Act of 1980 (FIRPTA) subjects 
     gain or loss of a foreign person from the disposition of a 
     U.S. real property interest (USRPI) to tax as if the taxpayer 
     were engaged in a trade or business within the United States 
     and the gain or loss were effectively connected with such 
     trade or business.\521\ In addition to an interest in real 
     property located in the United States or the Virgin Islands, 
     USRPIs include (among other things) any interest in a 
     domestic corporation unless the taxpayer establishes that the 
     corporation was not, during a five-year period ending on the 
     date of the disposition of the interest, a U.S. real property 
     holding corporation (which is defined generally to mean any 
     corporation the fair market value of whose U.S. real property 
     interests equals

[[Page 7457]]

     or exceeds 50 percent of the sum of the fair market values of 
     its real property interests and any other of its assets used 
     or held for use in a trade or business).
---------------------------------------------------------------------------
     \521\Sec. 897.
---------------------------------------------------------------------------
       Distributions by a REIT to its foreign shareholders 
     attributable to the sale of USRPI's are generally treated as 
     income from the sale of USRPIs.\522\ Treasury regulations 
     require the REIT to withhold at 35 percent on such a 
     distribution.\523\ However, there is an exception for 
     distributions by a REIT with respect to stock of the REIT 
     that is regularly traded on an established securities market 
     located in the U.S., to a foreign shareholder that has not 
     held more than 5 percent of the stock of the REIT for the one 
     year period ending with the date of the distribution.\524\ In 
     such cases, the REIT and the shareholder treat the 
     distribution to a foreign shareholder as the distribution of 
     an ordinary dividend,\525\ subject to the 30-percent (or 
     lower treaty rate) withholding applicable to dividends.
---------------------------------------------------------------------------
     \522\Sec. 897(h)(1).
     \523\Treas. Reg. sec. 1.1445-8.
     \524\Sec. 897(h)(1)(second sentence).
     \525\Sec. 857(b)(3)(F).
---------------------------------------------------------------------------
       For 2005, 2006, and 2007, any RIC distribution to a foreign 
     shareholder attributable to the sale of USRPIs is treated as 
     FIRPTA income, without any exceptions.\526\ However, no 
     Treasury regulations have been issued addressing withholding 
     obligations with respect to such distributions.
---------------------------------------------------------------------------
     \526\Sec. 897(h)(1)
---------------------------------------------------------------------------
       A more complete description of the provisions of FIRPTA and 
     the special rules under FIRPTA that apply to RICs and REITs 
     is contained under ``Present Law'' for the provision 
     ``Application of Foreign Investors in Real Property Tax Act 
     (FIRPTA) to Regulated Investment Companies (RICS).
       Although the law thus provides rules for taxing foreign 
     persons under FIRPTA on distributions of gain from the sale 
     of USRPIs by RICs or REITs, some taxpayers may be taking the 
     position that if a foreign person invests in a RIC or REIT 
     that, in turn, invests in a lower-tier RIC or REIT that is 
     the entity that disposes of USRPIs and distributes the 
     proceeds, then the proceeds from such disposition by the 
     lower-tier RIC or REIT cease to be FIRPTA income when 
     distributed to the upper-tier RIC or REIT (which is not 
     itself a foreign person), and can thereafter be distributed 
     by that latter entity to its foreign shareholders as non- 
     FIRPTA income of such RIC or REIT, rather than continuing to 
     be categorized as FIRPTA income. Furthermore, RICs may take 
     the position that in the absence of regulations or a specific 
     statutory rule addressing the withholding rules for FIRPTA 
     capital gain that is treated as effectively connected with a 
     U.S. trade or business, such gain should be considered 
     capital gain for which no withholding is required.
       In addition, some foreign persons may be attempting to 
     avoid FIRPTA tax on a distribution from a RIC or a REIT, by 
     selling the RIC or REIT stock shortly before the distribution 
     and buying back the stock shortly after the distribution. If 
     the stock is not a U.S. real property interest in the hands 
     of the foreign seller, that person would take the position 
     that the gain on the sale of the stock is capital gain not 
     subject to U.S. tax. Stock of a RIC or REIT that is 
     ``domestically controlled'' is not a U.S. real property 
     interest.\527\
---------------------------------------------------------------------------
     \527\Sec. 897(g)(3). A RIC or REIT is ``domestically 
     controlled'' if less than 50 percent in value of the entity's 
     stock is held by foreign persons. RIC stock ceases to be 
     eligible for this exception as of the end of 2007. 
     Distributions by a domestically controlled RIC or REIT, if 
     attributable to the sale of U.S. real property interests, are 
     not exempt from FIRPTA by reason of such domestic control. A 
     foreign person that would be subject to FIRPTA on receipt of 
     a distribution from such an entity might sell its stock 
     before the distribution and repurchase stock after the 
     distribution in an attempt to avoid FIRPTA consequences.
     Under a different exception from FIRPTA, applicable to stock 
     of all entities, neither RIC nor REIT stock is a U.S. real 
     property interest if the RIC or REIT stock is regularly 
     traded on an established securities market located in the 
     United States and if the stock sale is made by a foreign 
     shareholder that has not owned more than five percent of the 
     stock during the five years ending with the date of the sale. 
     Sec. 897(c)(3). Distributions by a REIT to a foreign person, 
     attributable to the sale of U.S. real property interests, are 
     also not subject to FIRPTA if made with respect to stock that 
     is regularly traded on an established securities market 
     located in the United States and made to a foreign person 
     that has not held more than five percent of the REIT stock 
     for the one-year period ending on the date of distribution. 
     (Sec. 897(h)(1), second sentence.) Thus, any foreign 
     shareholder of such a regularly traded REIT that would be 
     exempt from FIRPTA on a sale of the REIT stock immediately 
     before a distribution would also generally be exempt from 
     FIRPTA on a distribution from the REIT if such shareholder 
     held the stock through the date of the distribution, due to 
     the holding period requirements. Distributions that are not 
     subject to FIRPTA under this five percent exception are 
     recharacterized as ordinary dividends and thus would normally 
     be subject to ordinary dividend withholding rules. Secs. 
     857(b)(3)(F) and 1441.
---------------------------------------------------------------------------
       If the stock is a USRPI in the hands of the foreign person, 
     the transferee generally is required to withhold 10 percent 
     of the gross sales price under general FIRPTA withholding 
     rules.\528\
---------------------------------------------------------------------------
     \528\Secs. 1445(a) and 1445(e).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The first part of the Senate amendment provision requires 
     any distribution that is made by a RIC or a REIT that would 
     otherwise be subject to FIRPTA because the distribution is 
     attributable to the disposition of a U.S. real property 
     interest (USRPI) to retain its character as FIRPTA income 
     when distributed to any other RIC or REIT, and to be treated 
     as if it were from the disposition of a USRPI by that other 
     RIC or REIT. Under the provision, a RIC continues to be 
     subject to FIRPTA, even after December 31, 2007, in any case 
     in which a REIT makes a distribution to the RIC that is 
     attributable to gain from the sale of U.S. real property 
     interests.
       The second part of the Senate amendment provision provides 
     that a distribution by a RIC to a foreign shareholder, or to 
     a RIC or REIT shareholder, attributable to sales of USRPIs is 
     not treated as gain from the sale of a USRPI by that 
     shareholder if the distribution is made with respect to a 
     class of RIC stock that is regularly traded on an established 
     securities market\529\ located in the U.S. and if such 
     shareholder did not hold more than 5 percent of such stock 
     within the one year period ending on the date of the 
     distribution. Such distributions instead are treated as 
     dividend distributions.\530\
---------------------------------------------------------------------------
     \529\It is intended that the rules generally applicable for 
     this purpose under section 897 also apply under the provision 
     in determining whether a class of interests is regularly 
     traded on an established securities market located in the 
     United States. For example, at the present time the rules 
     currently in force for this purpose include Temp. Reg. sec. 
     1.897-9T(d)(2).
     \530\The provision treats such distributions as ordinary 
     dividend distributions rather than as distributions of long 
     term capital gain. This rule is the same as the present law 
     rule for publicly traded REITs making a distribution to a 
     foreign shareholder. In addition, under the immediately 
     preceding provision (sec. 464) of the Senate amendment, for 
     the years 2005, 2006 and 2007 that RICs are subject to 
     FIRPTA, a RIC can make distributions from sales of USRPIs to 
     shareholders who do not meet this rule, and such 
     distributions will be treated not as dividends but as non-
     taxable long- or short-term capital gain, if so designated by 
     the RIC, as long as the RIC itself is not a USRPHC after 
     applying the special rules for counting the RIC's ownership 
     of REIT or other RIC stock.
---------------------------------------------------------------------------
       The third part of the Senate amendment provision requires a 
     foreign person that disposes of stock of a RIC or REIT during 
     the 30-day period preceding a distribution on that stock that 
     would have been treated as a distribution from the 
     disposition of a USRPI, that acquires an identical stock 
     interest during the 60 day period beginning the first day of 
     such 30-day period preceding the distribution, and that does 
     not in fact receive the distribution in a manner that 
     subjects the person to tax under FIRPTA, to pay FIRPTA tax on 
     an amount equal to the amount of the distribution that was 
     not taxed under FIRPTA as a result of the disposition. A 
     foreign person is treated as having acquired any interest 
     acquired by any person treated as related to that foreign 
     first person under section 465(b)(3)(C).\531\
---------------------------------------------------------------------------
     \531\These relationships generally include persons that are 
     engaged in trades or businesses under common control 
     (generally, a more than 50 percent relationship) and also 
     include persons that have a more than 10 percent 
     relationship, such as (for example) a corporation and an 
     individual owning more than 10 percent of the corporation; or 
     a corporation and a partnership if the same persons own more 
     than 10 percent of the interests in each.
---------------------------------------------------------------------------
       This third part of the Senate amendment provision applies 
     only in the case of a shareholder that would have been 
     treated as receiving FIRPTA income on the distribution if 
     that shareholder had in fact received the distribution, but 
     that would not have been treated as receiving FIRPTA income 
     if the form of the disposition transaction were respected. 
     This category of persons consists of persons that are 
     shareholders in a domestically controlled RIC or REIT (since 
     sales of shares of such an entity are not subject to FIRPTA 
     tax), but does not include a person who sells stock that is 
     regularly traded on an established securities market located 
     in the U.S. and who did not own more than five percent of 
     such stock during the one year period ending on the date of 
     the distribution (since such a person would not have been 
     subject to FIRPTA tax under present law for REITs and under 
     the second part of the Senate amendment provision for RICs, 
     supra., if that person had received the dividend instead of 
     disposing of the stock).
       Notwithstanding the recharacterization of the disposition 
     as involving a FIRPTA distribution to the foreign person, no 
     withholding on disposition proceeds to the foreign person on 
     the disposition of such stock would be required. No inference 
     is intended as to what situations under present law would or 
     would not be respected as dispositions.
       Effective dates.--The first part of the Senate amendment 
     provision is effective for distributions with respect to 
     taxable years of a RIC or REIT beginning after the date of 
     enactment.
       The second part of the Senate amendment provision applies 
     to dividends with respect to taxable years of regulated 
     investment companies beginning after December 31, 2004.
       The third part of the Senate amendment provision is 
     effective for dispositions after December 31, 2005, in 
     taxable years ending after that date.

[[Page 7458]]




                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision with modifications and clarifications.
       The conference agreement provides that the second part of 
     the Senate amendment provision, treating certain 
     distributions attributable to sales of U.S. real property 
     interests as dividends subject to dividend withholding, 
     applies when the distribution is made to a foreign 
     shareholder of a RIC or REIT, but does not apply when the 
     distribution is made to another RIC or a REIT. In such cases, 
     the character of the distribution as FIRPTA gain is retained 
     and must be tracked by the recipient RIC or REIT, but the 
     distribution itself does not become dividend income in the 
     hands of such RIC or REIT. Therefore, such recipient RIC or 
     REIT can in turn distribute amounts attributable to that 
     distribution (attributable to the sale of USRPIs) to its U.S 
     shareholders as capital gain. However, if any recipient RIC 
     or REIT in turn distributes to a foreign shareholder amounts 
     that are attributable to a sale by a lower tier RIC or REIT 
     of USRPIs, such amounts distributed to a foreign shareholder 
     shall be treated as FIRPTA gain or as dividend income, 
     according to whether or not such distribution to such foreign 
     shareholder qualifies for dividend treatment.
       The conference agreement amends section 1445 so that it 
     explicitly requires withholding on RIC and REIT distributions 
     to foreign persons, attributable to the sale of USRPIs, at 35 
     percent, or, to the extent provided by regulations, at 15 
     percent.\532\
---------------------------------------------------------------------------
     \532\This provision is similar to present law section 
     1445(c)(1). The regulatory authority to reduce the 
     withholding to 15 percent sunsets in accordance with the same 
     sunset that applies to section 1445(c)(1), at the time that 
     the present law maximum 15 percent rate on dividends is 
     scheduled to sunset.
     Treasury regulations under section 1445 already impose FIRPTA 
     withholding on REITs under present law. Treasury has not yet 
     written regulations applicable to RICs. No inference is 
     intended regarding the existing Treasury regulations in force 
     under section 1445 with respect to REITs.
---------------------------------------------------------------------------
       The conference agreement clarifies that the treatment of a 
     RIC as a qualified investment entity continues after December 
     2007 with respect to a RIC that receives a distribution from 
     a REIT, not only for purposes of the distribution rules, 
     including withholding on distributions to foreign 
     shareholders, but also for purposes of the new ``wash sale'' 
     rules of the provision.
       The conference agreement modifies the new ``wash sale'' 
     rule. The period within which the basic ``wash-sale'' rule 
     applies is changed from 60 days to 61 days.\533\ The 
     definition of ``applicable wash sales transaction'' is 
     expanded to cover not only situations in which the taxpayer 
     acquires a substantially identical interest, but also 
     situations in which the taxpayer enters into a contract or 
     option to acquire such an interest. The related party rule is 
     also modified to apply the 50-percent relationship test under 
     section 267(b) and 707(b)(1) rather than a 10-percent test.
---------------------------------------------------------------------------
     \533\Thus the period includes the 30 days before and the 30 
     days after the ex-dividend date, in addition to the ex-
     dividend date itself.
---------------------------------------------------------------------------
       In addition, treatment of a foreign shareholder of a RIC or 
     REIT as if it had received a FIRPTA distribution that is 
     treated as U.S. effectively connected income is extended to 
     transactions that meet the definition of ``substitute 
     dividend payments'' provided for purposes of section 861 and 
     that would be properly treated by the foreign taxpayer as 
     receipt of a distribution of FIRPTA gain if the distribution 
     from the RIC or REIT had itself been received by the 
     taxpayer, but that, by virtue of the substitute dividend 
     payment, is not so treated but for the provision,\534\ as 
     well as to other similar arrangements to which Treasury may 
     extend the rules.
---------------------------------------------------------------------------
     \534\The conference agreement adopts the definition of 
     ``substitute dividend payment'' used for purposes of section 
     861, which definition applies to determine substitute 
     dividend payments under the conference agreement provision, 
     even though the recipient may not be an individual and even 
     though the underlying payment would not have been treated as 
     a dividend to the recipient but as a distribution of FIRPTA 
     gain. Treasury regulations section 1.861-3(a)(6) defines a 
     ``substitute dividend payment'' as a payment, made to the 
     transferor of a security in a securities lending transaction 
     or a sale-repurchase transaction, of an amount equivalent to 
     a dividend distribution which the owner of the transferred 
     security is entitled to receive during the term of the 
     transaction. The regulation applies to amounts received or 
     accrued by the taxpayer. The regulation defines a securities 
     lending transaction as a transfer of one or more securities 
     that is described in section 1058(a) or a substantially 
     similar transaction. The regulation defines a sale-repurchase 
     transaction as an agreement under which a person transfers a 
     security in exchange for cash and simultaneously agrees to 
     receive substantially identical securities from the 
     transferee in the future in exchange for cash. Under the 
     regulation, a ``substitute dividend payment'' is generally 
     sourced and in many instances characterized in the same 
     manner as the underlying distribution with respect to the 
     transferred security.
---------------------------------------------------------------------------
       Effective date.--The first part of the conference agreement 
     provision, relating to distributions generally, applies to 
     distributions with respect to taxable years of RICs and REITs 
     beginning after December 31, 2005, except that no withholding 
     is required under sections 1441, 1442, or 1445 with respect 
     to any distribution before the date of enactment if such 
     amount was not otherwise required to be withheld under any 
     such section as in affect before the amendments made by the 
     conference agreement.
       The second part of the conference agreement, relating to 
     the ``wash sale'' and substitute dividend payment 
     transactions, is applicable to distributions and substitute 
     dividend payments occurring on or after the 30th day 
     following the date of enactment.
       No inference is intended regarding the treatment under 
     present law of any transactions addressed by the conference 
     agreement.
     16. Credit to holders of rural renaissance bonds (sec. 469 of 
         the Senate amendment)


                              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 such bonds are used to 
     finance direct activities of governmental units or if such 
     bonds are repaid with revenues of governmental units. These 
     bonds are called ``governmental bonds.'' Interest on State or 
     local government bonds issued to finance activities of 
     private persons is taxable unless a specific exception 
     applies. These bonds are called ``private activity bonds.'' 
     The term ``private person'' generally includes the Federal 
     Government and all other individuals and entities other than 
     States or local governments.
       Private activity bonds are eligible for tax-exemption if 
     issued for certain purposes permitted by the Code 
     (``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). Small issue and 
     redevelopment 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 certain 
     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. The following 
     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; ``clean renewable 
     energy bonds,'' which are bonds issued to finance for 
     facilities that would qualify for the tax credit under 
     section 45 without regard to the placed in service date 
     requirements of that section; and ``gulf tax credit bonds,'' 
     which are bonds issued by the States of Louisiana, 
     Mississippi, and Alabama to pay principal, interest, or 
     premium on certain prior bonds.
     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.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment creates a new category of tax-credit 
     bonds to finance certain projects located in rural areas 
     (``Rural Renaissance Bonds''). As with present law tax-credit 
     bonds, the taxpayer holding Rural Renaissance 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.

[[Page 7459]]

       Under the Senate amendment, Rural Renaissance Bonds are 
     defined as any bonds issued by a qualified issuer if, in 
     addition to the requirements discussed below, 95 percent or 
     more of the proceeds of such bonds are used to finance 
     capital expenditures incurred for one or more qualified 
     projects. ``Qualified projects'' include any of the following 
     projects located in a rural area: (i) a water or waste 
     treatment project, (ii) an affordable housing project, (iii) 
     a community facility project, including hospitals, fire and 
     police stations, and nursing and assisted-living facilities, 
     (iv) a value-added agriculture or renewable energy facility 
     project for agricultural producers or farmer-owned entities, 
     including any project to promote the production, processing, 
     or retail sale of ethanol (including fuel at least 85 percent 
     of the volume of which consists of ethanol), bio-diesel, 
     animal waste, biomass, raw commodities, or wind as a fuel, 
     (v) a distance learning or telemedicine project, (vi) a rural 
     utility infrastructure project, including any electric or 
     telephone system, (vii) a project to expand broadband 
     technology, (viii) a rural teleworks project, and (ix) any of 
     the previously described projects if carried out by the Delta 
     Regional Authority. A ``rural area'' means any area other 
     than a city or town which has a population of greater than 
     50,000 inhabitants or the urbanized area contiguous and 
     adjacent to such a city or town.
       For purposes of the provision, the term ``qualified 
     issuer'' means any not-for-profit cooperative lender which, 
     as of the date of enactment of this provision, has received a 
     guarantee under the Rural Electrification Act. A qualified 
     issuer must also meet a user fee requirement during the 
     period any Rural Renaissance Bond issued by such qualified 
     issuer is outstanding. The user fee requirement is met if the 
     qualified issuer makes semi-annual grants for qualified 
     projects equal to the outstanding principal of Rural 
     Renaissance Bond issued by such issuer multiplied by one-half 
     the rate on United States Treasury securities of the same 
     maturity.
       The Senate amendment imposes a maximum maturity limitation 
     on Rural Renaissance Bonds. The maximum maturity is the term 
     which the Secretary estimates will result in the present 
     value of the obligation to repay the principal on any bonds 
     being equal to 50 percent of the face amount of such bond. 
     The provision also requires level amortization of Rural 
     Renaissance Bonds during the period such bonds are 
     outstanding.
       To qualify as Rural Renaissance Bonds, the qualified issuer 
     of such bonds must reasonably expect to and actually spend 95 
     percent or more of the proceeds of such bonds on qualified 
     projects within the five-year period that begins on the date 
     of issuance. To the extent less than 95 percent of the 
     proceeds are used to finance qualified projects during the 
     five-year spending period, bonds will continue to qualify as 
     Rural Renaissance Bonds if unspent proceeds are used within 
     90 days from the end of such five-year period to redeem any 
     ``nonqualified bonds.'' For these purposes, the amount of 
     nonqualified bonds is to be determined in the same manner as 
     Treasury regulations under section 142. In addition, the 
     provision provides that the five-year spending period may be 
     extended by the Secretary upon the qualified issuer's 
     request.
       Under the provision, Rural Renaissance Bonds are subject to 
     the arbitrage requirements of section 148 that apply to 
     traditional tax-exempt bonds. Principles under section 148 
     and the regulations thereunder shall apply for purposes of 
     determining the yield restriction and arbitrage rebate 
     requirements applicable to Rural Renaissance Bonds. For 
     example, for arbitrage purposes, the yield on an issue of 
     Rural Renaissance Bonds is computed by taking into account 
     all payments of interest, if any, on such bonds, i.e., 
     whether the bonds are issued at par, premium, or discount. 
     However, for purposes of determining yield, the amount of the 
     credit allowed to a taxpayer holding Rural Renaissance Bonds 
     is not treated as interest, although such credit amount is 
     treated as interest income to the taxpayer.
       Rural Renaissance Bonds must be designated as such by the 
     qualified issuer and must be issued in registered form. The 
     provision also requires issuers of Rural Renaissance Bonds to 
     report issuance to the IRS in a manner similar to that 
     required for tax-exempt bonds. There is a national limitation 
     of $200 million of Rural Renaissance Bonds that the Secretary 
     may allocate, in the aggregate, to qualified projects. The 
     authority to issue Rural Renaissance Bonds expires December 
     31, 2009.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment and before January 1, 
     2010.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     17. Modify foreign tax credit rules for large integrated oil 
         companies which are dual capacity taxpayers (sec. 470 of 
         the Senate amendment and sec. 901 of the Code)


                              Present Law

       U.S. persons are subject to U.S. income tax on their 
     worldwide income. A credit against U.S. tax on foreign source 
     income is allowed for foreign taxes that are paid or 
     accrued.\535\ In addition, a domestic corporation which owns 
     10 percent or more of the voting stock of a foreign 
     corporation from which it receives dividends or with respect 
     to which it is taxed under the rules of subpart F is deemed 
     to have paid a portion of the foreign taxes of such foreign 
     corporation.\536\ The foreign tax credit is available only 
     for foreign income, war profits, and excess profits taxes, 
     and for certain taxes that qualify under section 903 as 
     imposed ``in lieu'' of such taxes. Other foreign levies 
     generally are treated as deductible expenses only.
---------------------------------------------------------------------------
     \535\Sec. 901. Foreign taxes include taxes imposed by 
     possessions.
     \536\Secs. 902 and 960. Foreign corporations include 
     corporations created or organized in possessions.
---------------------------------------------------------------------------
       The amount of foreign tax credits that a taxpayer may claim 
     in a year is subject to a limitation that prevents taxpayers 
     from using foreign tax credits to offset U.S. tax on U.S. 
     source income. The foreign tax credit limitation is 
     calculated separately for specific categories of income. The 
     amount of creditable taxes paid or accrued (or deemed paid) 
     in any taxable year which exceeds the foreign tax credit 
     limitation is permitted to be carried back one year and 
     carried forward 10 years.
       Treasury regulations provide detailed rules for determining 
     whether a foreign levy is a creditable income tax. A levy 
     generally is a tax if it is a compulsory payment under the 
     authority of a foreign country to levy taxes and is not 
     compensation for a specific economic benefit provided by a 
     foreign country. A taxpayer that is subject to a foreign levy 
     and also receives a specific economic benefit from such 
     country is considered a ``dual capacity taxpayer.''\537\ 
     Treasury regulations provide that the portion of a foreign 
     levy paid by a dual capacity taxpayer that is considered a 
     tax is determined based on all the facts and 
     circumstances.\538\ Alternatively, under a safe harbor 
     provided in the regulations, the portion of a foreign levy 
     paid by a dual capacity taxpayer that is creditable is 
     determined based on the foreign country's generally imposed 
     income tax or, if the foreign country has no generally 
     imposed income tax, the U.S. tax.\539\
---------------------------------------------------------------------------
     \537\Treas. Reg. sec. 1.901-2(a)(2)(ii)(A).
     \538\Treas. Reg. sec. 1.901-2A(c)(2)(i).
     \539\Treas. Reg. sec. 1.901-2A(e).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment denies the foreign tax credit with 
     respect to all amounts paid or accrued (or deemed paid) to 
     any foreign country or possession by a large integrated oil 
     company which is a dual capacity taxpayer if the country or 
     possession does not impose a generally applicable income tax. 
     The provision modifies the safe harbor rule currently 
     provided by Treasury Regulations. Under the provision, as 
     under present law, a dual capacity taxpayer is a person who 
     is subject to a levy in a foreign country or possession and 
     also directly or indirectly receives (or will receive) a 
     specific economic benefit (as determined in accordance with 
     regulations) from such foreign country or possession. A 
     generally applicable income tax is an income tax that is 
     generally imposed on income derived from a trade or business 
     conducted within that foreign country or possession (which 
     may include taxes qualifying under section 903 as imposed in 
     lieu of income taxes), provided that the tax has substantial 
     application (by its terms and in practice) to persons who are 
     not dual capacity taxpayers and to persons who are citizens 
     or residents of the foreign country or possession.
       If the country does impose a generally applicable income 
     tax, the foreign tax credit is denied to the extent that such 
     amounts exceed the amount (as determined under regulations) 
     which is paid by the dual capacity taxpayer pursuant to such 
     generally applicable income tax, or which would have been 
     paid if such generally applicable income tax were applicable 
     to the dual capacity taxpayer. Amounts not in excess of the 
     amount calculated under the generally applicable income tax 
     are subject to all other rules pertaining to foreign tax 
     credits. Amounts for which the foreign tax credit is denied 
     under the provision are not subject to carryback or 
     carryforward, but could constitute deductible expenses if 
     such amounts qualify under the relevant deduction provisions. 
     The provision does not apply to the extent contrary to any 
     treaty obligation of the United States.
       The provision applies only to ``large integrated oil 
     companies.'' These are persons that meet all of the following 
     requirements for a particular taxable year: (1) the person is 
     a producer of crude oil; (2) the person has gross receipts in 
     excess of one billion dollars; (3) the person or persons 
     related to such person has an average daily worldwide 
     production of crude oil of at least 500,000 barrels; and (4) 
     either (a) the person or persons related to such person sells 
     at retail oil or natural gas (excluding bulk sales of such 
     items to commercial or industrial users), or any product 
     derived from oil or natural gas (excluding bulk sales of 
     aviation fuels to the Department of Defense), in an aggregate 
     amount of five million dollars or greater, or (b) the person 
     or persons related to such person engage in the refining of 
     crude oil, if the

[[Page 7460]]

     aggregate average daily refinery runs for that taxable year 
     exceeds 75,000 barrels. For purposes of requirement (4), a 
     person is a related person with respect to another person if 
     either one owns a five percent or greater interest in the 
     other, or if a third person owns such an interest in both.
       Effective date.--The provision applies to taxes paid or 
     accrued in taxable years beginning after the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     18. Disability preference program for tax collection 
         contracts (sec. 471 of the Senate amendment)


                              present law

       Under present law, the IRS may use private debt collection 
     companies to locate and contact taxpayers owing outstanding 
     tax liabilities of any type and to arrange payment of those 
     taxes by the taxpayers.
       There are several procedural conditions applicable to the 
     use of private debt collection contracts. First, provisions 
     of the Fair Debt Collection Practices Act apply to the 
     private debt collection company. Second, taxpayer protections 
     that are statutorily applicable to the IRS are also made 
     statutorily applicable to the private sector debt collection 
     companies. In addition, taxpayer protections that are 
     statutorily applicable to IRS employees also are made 
     statutorily applicable to employees of private sector debt 
     collection companies. Third, subcontractors are prohibited 
     from having contact with taxpayers, providing quality 
     assurance services, and composing debt collection notices; 
     any other service provided by a subcontractor must receive 
     prior approval from the IRS.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that the IRS may not enter a 
     contract with a private debt collection company after April 
     1, 2006, until the Secretary implements a qualified 
     disability preference program. A qualified disability 
     preference program is a program that requires qualified 
     employers to receive not less than 10 percent of taxpayer 
     accounts (based on dollar value) awarded to private debt 
     collection companies. A qualified employer is an employer 
     who, as of the date the private debt collection contract is 
     awarded, employs not less than 50 severely disabled 
     individuals or not less than 30 percent of such employer's 
     employees are severely disabled. In addition, a qualified 
     employer must agree that not more than 90 days after being 
     awarded a private debt collection contract not less than 35 
     percent of the employees providing services under the private 
     debt collection contract shall be severely disabled 
     individuals and hired after the date the contract is awarded.
       For purposes of the provision, a severely disabled 
     individual means (i) a veteran of the United States armed 
     forces with a disability of 50 percent or greater determined 
     by law or the Secretary of Veterans Affairs to be service-
     connected or (ii) any individual who is a disabled 
     beneficiary as defined by the Social Security Act or would be 
     considered to such a disabled beneficiary but for having 
     income or resources in excess of limits established by the 
     Social Security Act.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

         TITLE VI--SUNSET OF CERTAIN PROVISIONS AND AMENDMENTS

     (Sec. 501 of the Senate amendment)


                              present law

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


                               house bill

       No provision.


                            senate amendment

       To ensure compliance with the Budget Act, the Senate 
     amendment provides that the provisions of, and amendments 
     made by, title I, subtitle A of title II, and title III of 
     the Senate amendment shall not apply to taxable years 
     beginning after September 30, 2010, and that the Code shall 
     be applied and administered to such years as if those 
     provisions and amendments had never been enacted.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

               TITLE VII--FUNDING FOR MILITARY OPERATIONS

     (Secs. 601 and 602 of the Senate amendment)


                              present law

       Present law does not include the Senate amendment 
     provision.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that there is to be 
     appropriated, out of any money in the Treasury that is not 
     otherwise appropriated, for the fiscal years 2006 through 
     2010, the following amounts, to be used for resetting and 
     recapitalizing equipment being used in theaters of 
     operations: (1) $16,900,000,000 for operations and 
     maintenance of the Army; (2) $1,800,000,000 for aircraft for 
     the Army; (3) $6,300,000,000 for other Army procurement; (4) 
     $10,000,000,000 for wheeled and tracked combat vehicles for 
     the Army; (5) $467,000,000 for the Army working capital fund; 
     (6) $6,000,000 for missiles for the Department of Defense; 
     (7) $100,000,000 for defense wide procurement for the 
     Department of Defense; (8) $4,500,000,000 for Marine Corps 
     procurement; (9) $4,500,000,000 for operations and 
     maintenance of the Marine Corps; and (10) $2,700,000,000 for 
     Navy aircraft procurement.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

              TITLE VIII--OTHER REVENUE OFFSET PROVISIONS

  A. Imposition of Withholding on Certain Payments Made by Government 
                                Entities

     (Sec. 3402 of the Code)


                              Present Law

     Withholding requirements
       Employers are required to withhold income tax on wages paid 
     to employees, including wages and salaries of employees or 
     elected officials of Federal, State, and local government 
     units. Withholding rates vary depending on the amount of 
     wages paid, the length of the payroll period, and the number 
     of withholding allowances claimed by the employee.
       Certain non-wage payments also are subject to mandatory or 
     voluntary withholding. For example:
       --Employers are required to withhold FICA and Railroad 
     Retirement taxes from wages paid to their employees. 
     Withholding rates are generally uniform.
       --Payors of pensions are required to withhold from payments 
     made to payees, unless the payee elects no withholding.\540\ 
     Withholding from periodic payments is at variable rates, 
     parallel to income tax withholding from wages, whereas 
     withholding from nonperiodic payments is at a flat 10-percent 
     rate.
---------------------------------------------------------------------------
     \540\Withholding at a rate of 20 percent is required in the 
     case of an eligible rollover distribution that is not 
     directly rolled over.
---------------------------------------------------------------------------
       --A variety of payments (such as interest and dividends) 
     are subject to backup withholding if the payee has not 
     provided a valid taxpayer identification number (TIN). 
     Withholding is at a flat rate based on the fourth lowest rate 
     of tax applicable to single taxpayers.
       --Certain gambling proceeds are subject to withholding. 
     Withholding is at a flat rate based on the third lowest rate 
     of tax applicable to single taxpayers.
       --Voluntary withholding applies to certain Federal 
     payments, such as Social Security payments. Withholding is at 
     rates specified by Treasury regulations.
       --Voluntary withholding applies to unemployment 
     compensation benefits. Withholding is at a flat 10-percent 
     rate.
       --Foreign taxpayers are generally subject to withholding on 
     certain U.S.-source income which is not effectively connected 
     with the conduct of a U.S. trade or business. Withholding is 
     at a flat 30-percent rate (14-percent for certain items of 
     income).
       Many payments, including payments made by government 
     entities, are not subject to withholding under present law. 
     For example, no tax is generally withheld from payments made 
     to workers who are not classified as employees (i.e., 
     independent contractors).
     Information reporting
       Present law imposes numerous information reporting 
     requirements that enable the Internal Revenue Service 
     (``IRS'') to verify the

[[Page 7461]]

     correctness of taxpayers' returns. For example, every person 
     engaged in a trade or business generally is required to file 
     information returns for each calendar year for payments of 
     $600 or more made in the course of the payor's trade or 
     business. Special information reporting requirements exist 
     for employers required to deduct and withhold tax from 
     employees' income. In addition, any service recipient engaged 
     in a trade or business and paying for services is required to 
     make a return according to regulations when the aggregate of 
     payments is $600 or more. Government entities are 
     specifically required to make an information return, 
     reporting certain payments to corporations as well as 
     individuals. Moreover, the head of every Federal executive 
     agency that enters into certain contracts must file an 
     information return reporting the contractor's name, address, 
     TIN, date of contract action, amount to be paid to the 
     contractor, and any other information required by Forms 8596 
     (Information Return for Federal Contracts) and 8596A 
     (Quarterly Transmittal of Information Returns for Federal 
     Contracts).


                               House Bill

       No provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement requires withholding on certain 
     payments to persons providing property or services made by 
     the Government of the United States, every State, every 
     political subdivision thereof, and every instrumentality of 
     the foregoing (including multi-State agencies). The 
     withholding requirement applies regardless of whether the 
     government entity making such payment is the recipient of the 
     property or services. Political subdivisions of States (or 
     any instrumentality thereof) with less than $100 million of 
     annual expenditures for property or services that would 
     otherwise be subject to withholding under this provision are 
     exempt from the withholding requirement.
       The rate of withholding is three percent on all payments 
     regardless of whether the payments are for property or 
     services. Payments subject to withholding under the provision 
     include any payment made in connection with a government 
     voucher or certificate program which functions as a payment 
     for property or services. For example, payments to a 
     commodity producer under a government commodity support 
     program are subject to the withholding requirement. The 
     provision imposes information reporting requirements on the 
     payments that are subject to withholding under the provision.
       The provision does not apply to any payments made through a 
     Federal, State, or local government public assistance or 
     public welfare program for which eligibility is determined by 
     a needs or income test. For example, payments under 
     government programs providing food vouchers or medical 
     assistance to low-income individuals are not subject to 
     withholding under the provision. However, payments under 
     government programs to provide health care or other services 
     that are not based on the needs or income of the recipients 
     are subject to withholding, including programs where 
     eligibility is based on the age of the beneficiary.
       The provision does not apply to payments of wages or to any 
     other payment with respect to which mandatory (e.g., U.S.-
     source income of foreign taxpayers) or voluntary (e.g., 
     unemployment benefits) withholding applies under present law. 
     The provision does not exclude payments that are potentially 
     subject to backup withholding under section 3406. If, 
     however, payments are actually being withheld under backup 
     withholding, withholding under the provision does not apply.
       The provision also does not apply to the following: 
     payments of interest; payments for real property; payments to 
     tax-exempt entities or foreign governments; intra-
     governmental payments; payments made pursuant to a classified 
     or confidential contract (as defined in section 6050M(e)(3)); 
     and payments to government employees that are not otherwise 
     excludable from the new withholding provision with respect to 
     the employees' services as an employees.
       Effective date.--The provision applies to payments made 
     after December 31, 2010.

        B. Eliminate Income Limitations on Roth IRA Conversions

     (Sec. 408A of the Code)


                              Present Law

       There are two general types of individual retirement 
     arrangements (``IRAs''): traditional IRAs and Roth IRAs. The 
     total amount that an individual may contribute to one or more 
     IRAs for a year is generally limited to the lesser of: (1) a 
     dollar amount ($4,000 for 2006); and (2) the amount of the 
     individual's compensation that is includible in gross income 
     for the year. In the case of an individual who has attained 
     age 50 before the end of the year, the dollar amount is 
     increased by an additional amount ($1,000 for 2006). In the 
     case of a married couple, contributions can be made up to the 
     dollar limit for each spouse if the combined compensation of 
     the spouses that is includible in gross income is at least 
     equal to the contributed amount. IRA contributions in excess 
     of the applicable limit are generally subject to an excise 
     tax of six percent per year until withdrawn.
       Contributions to a traditional IRA may or may not be 
     deductible. The extent to which contributions to a 
     traditional IRA are deductible depends on whether or not the 
     individual (or the individual's spouse) is an active 
     participant in an employer-sponsored retirement plan and the 
     taxpayer's AGI. An individual may deduct his or her 
     contributions to a traditional IRA if neither the individual 
     nor the individual's spouse is an active participant in an 
     employer-sponsored retirement plan. If an individual or the 
     individual's spouse is an active participant in an employer-
     sponsored retirement plan, the deduction is phased out for 
     taxpayers with AGI over certain levels. To the extent an 
     individual does not or cannot make deductible contributions, 
     the individual may make nondeductible contributions to a 
     traditional IRA, subject to the maximum contribution limit. 
     Distributions from a traditional IRA are includible in gross 
     income to the extent not attributable to a return of 
     nondeductible contributions.
       Individuals with adjusted gross income (``AGI'') below 
     certain levels may make contributions to a Roth IRA (up to 
     the maximum IRA contribution limit). The maximum Roth IRA 
     contribution is phased out between $150,000 to $160,000 of 
     AGI in the case of married taxpayers filing a joint return 
     and between $95,000 to $105,000 in the case of all other 
     returns (except a separate return of a married 
     individual).\541\ Contributions to a Roth IRA are not 
     deductible. Qualified distributions from a Roth IRA are 
     excludable from gross income. Distributions from a Roth IRA 
     that are not qualified distributions are includible in gross 
     income to the extent attributable to earnings. In general, a 
     qualified distribution is a distribution that is made on or 
     after the individual attains age 59\1/2\, death, or 
     disability or which is a qualified special purpose 
     distribution. A distribution is not a qualified distribution 
     if it is made within the five-taxable year period beginning 
     with the taxable year for which an individual first made a 
     contribution to a Roth IRA.
---------------------------------------------------------------------------
     \541\In the case of a married taxpayer filing a separate 
     return, the phaseout range is $0 to $10,000 of AGI.
---------------------------------------------------------------------------
       A taxpayer with AGI of $100,000 or less may convert all or 
     a portion of a traditional IRA to a Roth IRA.\542\ The amount 
     converted is treated as a distribution from the traditional 
     IRA for income tax purposes, except that the 10-percent 
     additional tax on early withdrawals does not apply.
---------------------------------------------------------------------------
     \542\Married taxpayers filing a separate return may not 
     convert amounts in a traditional IRA into a Roth IRA.
---------------------------------------------------------------------------
       In the case of a distribution from a Roth IRA that is not a 
     qualified distribution, certain ordering rules apply in 
     determining the amount of the distribution that is includible 
     in income. For this purpose, a distribution that is not a 
     qualified distribution is treated as made in the following 
     order: (1) regular Roth IRA contributions; (2) conversion 
     contributions (on a first in, first out basis); and (3) 
     earnings. To the extent a distribution is treated as made 
     from a conversion contribution, it is treated as made first 
     from the portion, if any, of the conversion contribution that 
     was required to be included in income as a result of the 
     conversion.
       Includible amounts withdrawn from a traditional IRA or a 
     Roth IRA before attainment of age 59\1/2\, death, or 
     disability are subject to an additional 10-percent early 
     withdrawal tax, unless an exception applies.


                               House Bill

       No provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement eliminates the income limits on 
     conversions of traditional IRAs to Roth IRAs.\543\ Thus, 
     taxpayers may make such conversions without regard to their 
     AGI.
---------------------------------------------------------------------------
     \543\Under the conference agreement, married taxpayers filing 
     a separate return may convert amounts in a traditional IRA 
     into a Roth IRA.
---------------------------------------------------------------------------
       For conversions occurring in 2010, unless a taxpayer elects 
     otherwise, the amount includible in gross income as a result 
     of the conversion is included ratably in 2011 and 2012. That 
     is, unless a taxpayer elects otherwise, none of the amount 
     includible in gross income as a result of a conversion 
     occurring in 2010 is included in income in 2010, and half of 
     the income resulting from the conversion is includible in 
     gross income in 2011 and half in 2012. However, income 
     inclusion is accelerated if converted amounts are distributed 
     before 2012.\544\ In that case, the amount included in income 
     in the year of the distribution is increased by the amount 
     distributed, and the amount included in income in 2012 (or 
     2011 and 2012 in the case of a distribution in 2010) is the 
     lesser of: (1) half of the amount includible in income as a 
     result of the conversion; and (2) the remaining portion of 
     such amount not already included in income. The following 
     example illustrates the application of the accelerated 
     inclusion rule.
---------------------------------------------------------------------------
     \544\Whether a distribution consists of converted amounts is 
     determined under the present-law ordering rules.
---------------------------------------------------------------------------
       Example.--Taxpayer A has a traditional IRA with a value of 
     $100, consisting of deductible contributions and earnings. A 
     does

[[Page 7462]]

     not have a Roth IRA. A converts the traditional IRA to a Roth 
     IRA in 2010, and, as a result of the conversion, $100 is 
     includible in gross income. Unless A elects otherwise, $50 of 
     the income resulting from the conversion is included in 
     income in 2011 and $50 in 2012. Later in 2010, A takes a $20 
     distribution, which is not a qualified distribution and all 
     of which, under the ordering rules, is attributable to 
     amounts includible in gross income as a result of the 
     conversion. Under the accelerated inclusion rule, $20 is 
     included in income in 2010. The amount included in income in 
     2011 is the lesser of (1) $50 (half of the income resulting 
     from the conversion) or (2) $70 (the remaining income from 
     the conversion), or $50. The amount included in income in 
     2012 is the lesser of (1) $50 (half of the income resulting 
     from the conversion) or (2) $30 (the remaining income from 
     the conversion, i.e., $100--$70 ($20 included in income in 
     2010 and $50 included in income in 2011)), or $30.
       Effective date.---he provision is effective for taxable 
     years beginning after December 31, 2009.

              C. Repeal of FSC/ETI Binding Contract Relief


                         Prior and Present Law

       For most of the last two decades, the United States 
     provided export-related tax benefits under the foreign sales 
     corporation (``FSC'') regime. In 2000, the World Trade 
     Organization (``WTO'') held that the FSC regime constituted a 
     prohibited export subsidy under the relevant trade 
     agreements. In response to this WTO finding, the United 
     States repealed the FSC rules and enacted a new regime, under 
     the FSC Repeal and Extraterritorial Income (``ETI'') 
     Exclusion Act of 2000. Transition rules delayed the repeal of 
     the FSC rules and the effective date of ETI for transactions 
     in the ordinary course of a trade or business occurring 
     before January 1, 2002, or after December 31, 2001 pursuant 
     to a binding contract between the taxpayer and an unrelated 
     person which was in effect on September 30, 2000 and at all 
     times thereafter (the ``FSC binding contract relief'').\545\ 
     In 2002, the WTO held that the ETI regime also constituted a 
     prohibited export subsidy.
---------------------------------------------------------------------------
     \545\An election was provided, however, under which taxpayers 
     could adopt ETI at an earlier date for transactions after 
     September 30, 2000. This election allowed the ETI rules to 
     apply to transactions after September 30, 2000, including 
     transactions occurring pursuant to pre-existing binding 
     contracts.
---------------------------------------------------------------------------
       In general, under the ETI regime, an exclusion from gross 
     income applied with respect to ``extraterritorial income,'' 
     which was a taxpayer's gross income attributable to ``foreign 
     trading gross receipts.'' This income was eligible for the 
     exclusion to the extent that it was ``qualifying foreign 
     trade income.'' Qualifying foreign trade income was the 
     amount of gross income that, if excluded, would result in a 
     reduction of taxable income by the greatest of: (1) 1.2 
     percent of the foreign trading gross receipts derived by the 
     taxpayer from the transaction; (2) 15 percent of the 
     ``foreign trade income'' derived by the taxpayer from the 
     transaction;\546\ or (3) 30 percent of the ``foreign sale and 
     leasing income'' derived by the taxpayer from the 
     transaction.\547\
---------------------------------------------------------------------------
     \546\``Foreign trade income'' was the taxable income of the 
     taxpayer (determined without regard to the exclusion of 
     qualifying foreign trade income) attributable to foreign 
     trading gross receipts.
     \547\``Foreign sale and leasing income'' was the amount of 
     the taxpayer's foreign trade income (with respect to a 
     transaction) that was properly allocable to activities 
     constituting foreign economic processes. Foreign sale and 
     leasing income also included foreign trade income derived by 
     the taxpayer in connection with the lease or rental of 
     qualifying foreign trade property for use by the lessee 
     outside the United States.
---------------------------------------------------------------------------
       Foreign trading gross receipts were gross receipts derived 
     from certain activities in connection with ``qualifying 
     foreign trade property'' with respect to which certain 
     economic processes had taken place outside of the United 
     States. Specifically, the gross receipts must have been: (1) 
     from the sale, exchange, or other disposition of qualifying 
     foreign trade property; (2) from the lease or rental of 
     qualifying foreign trade property for use by the lessee 
     outside the United States; (3) for services which were 
     related and subsidiary to the sale, exchange, disposition, 
     lease, or rental of qualifying foreign trade property (as 
     described above); (4) for engineering or architectural 
     services for construction projects located outside the United 
     States; or (5) for the performance of certain managerial 
     services for unrelated persons. A taxpayer could elect to 
     treat gross receipts from a transaction as not being foreign 
     trading gross receipts. As a result of such an election, a 
     taxpayer could use any related foreign tax credits in lieu of 
     the exclusion.
       Qualifying foreign trade property generally was property 
     manufactured, produced, grown, or extracted within or outside 
     the United States that was held primarily for sale, lease, or 
     rental in the ordinary course of a trade or business for 
     direct use, consumption, or disposition outside the United 
     States. No more than 50 percent of the fair market value of 
     such property could be attributable to the sum of: (1) the 
     fair market value of articles manufactured outside the United 
     States; and (2) the direct costs of labor performed outside 
     the United States. With respect to property that was 
     manufactured outside the United States, certain rules were 
     provided to ensure consistent U.S. tax treatment with respect 
     to manufacturers.
       The American Jobs Creation Act of 2004 (``AJCA'') repealed 
     the ETI exclusion,\548\ generally effective for transactions 
     after December 31, 2004. AJCA provides a general transition 
     rule under which taxpayers retain 100 percent of their ETI 
     benefits for transactions prior to 2005, 80 percent of their 
     otherwise-applicable ETI benefits for transactions during 
     2005, and 60 percent of their otherwise-applicable ETI 
     benefits for transactions during 2006.
---------------------------------------------------------------------------
     \548\Pub. L. No. 108-357, sec. 101. In addition, foreign 
     corporations that elected to be treated for all Federal tax 
     purposes as domestic corporations in order to facilitate the 
     claiming of ETI benefits were allowed to revoke such 
     elections within one year of the date of enactment of the 
     repeal without recognition of gain or loss, subject to anti-
     abuse rules.
---------------------------------------------------------------------------
       In addition to the general transition rule, AJCA provides 
     that the ETI exclusion provisions remain in effect for 
     transactions in the ordinary course of a trade or business if 
     such transactions are pursuant to a binding contract\549\ 
     between the taxpayer and an unrelated person and such 
     contract is in effect on September 17, 2003, and at all times 
     thereafter (the ``ETI binding contract relief'').
---------------------------------------------------------------------------
     \549\This rule also applies to a purchase option, renewal 
     option, or replacement option that is included in such 
     contract. For this purpose, a replacement option is 
     considered enforceable against a lessor notwithstanding the 
     fact that a lessor retained approval of the replacement 
     lessee.
---------------------------------------------------------------------------
       In early 2006, the WTO Appellate Body held that the ETI 
     general transition rule and the FSC and ETI binding contract 
     relief measures are prohibited export subsidies.


                               House Bill

       No provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement repeals both the FSC binding 
     contract relief and the ETI binding contract relief. The 
     general transition rule remains in effect.
       Effective date.--The provision is effective for taxable 
     years beginning after date of enactment.

   D. Modification of Wage Limit for Purposes of Domestic Production 
                          Activities Deduction

     (Sec. 199 of the Code)


                              Present Law

     In general
       Present law provides a deduction from taxable income (or, 
     in the case of an individual, adjusted gross income) that is 
     equal to a portion of the taxpayer's qualified production 
     activities income. For taxable years beginning after 2009, 
     the deduction is nine percent of such income. For taxable 
     years beginning in 2005 and 2006, the deduction is three 
     percent of income and, for taxable years beginning in 2007, 
     2008 and 2009, the deduction is six percent of income. 
     However, the deduction for a taxable year is limited to 50 
     percent of the wages paid by the taxpayer during the calendar 
     year that ends in such taxable year.\550\
---------------------------------------------------------------------------
     \550\For purposes of the provision, ``wages'' include the sum 
     of the amounts of wages as defined in section 3401(a) and 
     elective deferrals that the taxpayer properly reports to the 
     Social Security Administration with respect to the employment 
     of employees of the taxpayer during the calendar year ending 
     during the taxpayer's taxable year. Elective deferrals 
     include elective deferrals as defined in section 402(g)(3), 
     amounts deferred under section 457, and, for taxable years 
     beginning after December 31, 2005, designated Roth 
     contributions (as defined in section 402A).
---------------------------------------------------------------------------
     Qualified production activities income
       In general, ``qualified production activities income'' is 
     equal to domestic production gross receipts (defined by 
     section 199(c)(4)), reduced by the sum of: (1) the costs of 
     goods sold that are allocable to such receipts; and (2) other 
     expenses, losses, or deductions which are properly allocable 
     to such receipts.
     Application of wage limitation to passthrough entities
       For purposes of applying the wage limitation, a 
     shareholder, partner, or similar person who is allocated 
     components of qualified production activities income from a 
     passthrough entity also is treated as having been allocated 
     wages from such entity in an amount that is equal to the 
     lesser of: (1) such person's allocable share of wages, as 
     determined under regulations prescribed by the Secretary; or 
     (2) twice the qualified production activities income that 
     actually is allocated to such person for the taxable year.


                               House Bill

       No provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       Under the conference agreement, the wage limitation is 
     modified such that taxpayers may only include amounts which 
     are properly allocable to domestic production gross 
     receipts.\551\ Thus, the wage limitation is 50 percent of 
     those wages which are deducted in

[[Page 7463]]

     arriving at qualified production activities income.
---------------------------------------------------------------------------
     \551\As under present law, the Secretary shall provide rules 
     for the proper allocation of items (including wages) in 
     determining qualified production activities income. Section 
     199(c)(2).
---------------------------------------------------------------------------
       In addition, the conference agreement repeals the special 
     limitation on wages treated as allocated to partners or 
     shareholders of passthrough entities. Accordingly, for 
     purposes of the wage limitation, a shareholder, partner, or 
     similar person who is allocated components of qualified 
     production activities income from a passthrough entity is 
     treated as having been allocated wages from such entity in an 
     amount that is equal to such person's allocable share of 
     wages as determined under regulations prescribed by the 
     Secretary, even if such amount is more than twice the 
     qualified production activities income that actually is 
     allocated to such person for the taxable year. The 
     shareholder, partner, or similar person will then include in 
     its wage limitation only those wages which are deducted in 
     arriving at qualified production activities income.
       Effective date.--The conference agreement is effective with 
     respect to taxable years beginning after the date of 
     enactment.

        E. Modification of Exclusion for Citizens Living Abroad

     (Sec. 911 of the Code)


                              Present Law

     In general
       U.S. citizens generally are subject to U.S. income tax on 
     all their income, whether derived in the United States or 
     elsewhere. A U.S. citizen who earns income in a foreign 
     country also may be taxed on that income by the foreign 
     country. The United States generally cedes the primary right 
     to tax a U.S. citizen's non-U.S. source income to the foreign 
     country in which the income is derived. This concession is 
     effected by the allowance of a credit against the U.S. income 
     tax imposed on foreign-source income for foreign taxes paid 
     on that income. The amount of the credit for foreign income 
     tax paid on foreign-source income generally is limited to the 
     amount of U.S. tax otherwise owed on that income. 
     Accordingly, if the amount of foreign tax paid on foreign-
     source income is less than the amount of U.S. tax owed on 
     that income, a foreign tax credit generally is allowed in an 
     amount not exceeding the amount of the foreign tax, and a 
     residual U.S. tax liability remains.
       A U.S. citizen or resident living abroad may be eligible to 
     exclude from U.S. taxable income certain foreign earned 
     income and foreign housing costs.\552\ This exclusion applies 
     regardless of whether any foreign tax is paid on the foreign 
     earned income or housing costs. To qualify for these 
     exclusions, an individual (a ``qualified individual'') must 
     have his or her tax home in a foreign country and must be 
     either (1) a U.S. citizen\553\ who is a bona fide resident of 
     a foreign country or countries for an uninterrupted period 
     that includes an entire taxable year, or (2) a U.S. citizen 
     or resident present in a foreign country or countries for at 
     least 330 full days in any 12-consecutive-month period.
---------------------------------------------------------------------------
     \552\Sec. 911.
     \553\Generally, only U.S. citizens may qualify under the bona 
     fide residence test. A U.S. resident alien who is a citizen 
     of a country with which the United States has a tax treaty 
     may, however, qualify for the section 911 exclusions under 
     the bona fide residence test by application of a 
     nondiscrimination provision of the treaty.
---------------------------------------------------------------------------
     Exclusion for compensation
       The foreign earned income exclusion generally is available 
     for a qualified individual's non-U.S. source earned income 
     attributable to personal services performed by that 
     individual during the period of foreign residence or presence 
     described above. The maximum exclusion amount for any 
     calendar year is $80,000 in 2002 through 2007 and is indexed 
     for inflation after 2007.
     Exclusion for housing costs
       A qualified individual is allowed an exclusion from gross 
     income (or, as described below, a deduction) for certain 
     foreign housing costs paid or incurred by or on behalf of the 
     individual. The amount of this housing cost exclusion is 
     equal to the excess of a taxpayer's ``housing expenses'' over 
     a base housing amount. The term ``housing expenses'' means 
     the reasonable expenses paid or incurred during the taxable 
     year for a taxpayer's housing (and, if they live with the 
     taxpayer, for the housing of the taxpayer's spouse and 
     dependents) in a foreign country. The term includes expenses 
     attributable to housing such as utilities and insurance, but 
     it does not include separately deductible interest and taxes. 
     If the taxpayer maintains a second household outside the 
     United States for a spouse or dependents who do not reside 
     with the taxpayer because of dangerous, unhealthful, or 
     otherwise adverse living conditions, the housing expenses of 
     the second household also are eligible for exclusion. The 
     base housing amount above which costs are eligible for 
     exclusion in a taxable year is 16 percent of the annual 
     salary (computed on a daily basis) of a grade GS-14, step 1, 
     U.S. government employee, multiplied by the number of days of 
     foreign residence or presence (as described above) in the 
     taxable year. For 2006 this salary is $77,793; the current 
     base housing amount therefore is $12,447 (assuming the 
     taxpayer is a bona fide resident of or is present in a 
     foreign country every day during the year).
       To the extent otherwise excludable housing costs are not 
     paid or reimbursed by a taxpayer's employer, these costs 
     generally are allowed as a deduction in computing adjusted 
     gross income.
     Exclusion limitation amounts
       The combined foreign earned income exclusion and housing 
     cost exclusion (including the amount of any deductible 
     housing costs) may not exceed the taxpayer's total foreign 
     earned income for the taxable year. The taxpayer's foreign 
     tax credit is reduced by the amount of the credit that is 
     attributable to excluded income.
     Tax brackets
       A taxpayer with excludable income under section 911 is 
     subject to tax on the taxpayer's other income, after 
     deductions, starting in the lowest tax rate bracket.


                               house bill

       No provision.


                            senate amendment

       No provision.


                          conference agreement

     Exclusion for compensation
       The conference agreement provision adjusts for inflation 
     the maximum amount of the foreign earned income exclusion in 
     taxable years beginning in calendar years after 2005 (rather 
     than, as under present law, after 2007). The limitation in 
     2006 therefore is $82,400.\554\
---------------------------------------------------------------------------
     \554\This $82,400 amount is calculated under section 
     911(b)(2)(D)(ii), as amended by the conference agreement 
     provision, using current U.S. Bureau of Labor Statistics 
     (``BLS'') Consumer Price Index data.
---------------------------------------------------------------------------
     Exclusion for housing costs
       Under the conference agreement, the base housing amount 
     used in calculating the foreign housing cost exclusion in a 
     taxable year is 16 percent of the amount (computed on a daily 
     basis) of the foreign earned income exclusion limitation 
     (instead of the present law 16 percent of the grade GS-14, 
     step 1 amount), multiplied by the number of days of foreign 
     residence or presence (as previously described) in that year.
       Reasonable foreign housing expenses in excess of the base 
     housing amount remain excluded from gross income (or, if paid 
     by the taxpayer, are deductible) under the conference 
     agreement, but the amount of the exclusion is limited to 30 
     percent of the maximum amount of a taxpayer's foreign earned 
     income exclusion.\555\ The Secretary is given authority to 
     issue regulations or other guidance providing for the 
     adjustment of this 30-percent housing cost limitation based 
     on geographic differences in housing costs relative to 
     housing costs in the United States. The conferees intend that 
     the Secretary be permitted to use publicly available data, 
     such as the Quarterly Report Indexes published by the U.S. 
     Department of State or any other information deemed reliable 
     by the Secretary, in making adjustments. The conferees also 
     intend that the Secretary may adjust the 30-percent amount 
     upward or downward. The conferees intend that the Secretary 
     make adjustments annually.
---------------------------------------------------------------------------
     \555\In certain programs including grant-making to subsidize 
     rents, the U.S. Department of Housing and Urban Development 
     considers maximum affordable housing costs to be 30 percent 
     of a household's income. See, e.g., United States Housing Act 
     of 1937, 42 U.S.C. sec. 1437a (a)(1)(A), as amended.
---------------------------------------------------------------------------
       Under the 30-percent rule described above, the maximum 
     amount of the foreign housing cost exclusion in 2006 is 
     (assuming foreign residence or presence on all days in the 
     year) $11,536 (= ($82,400 x 30 percent)--($82,400 x 16 
     percent)).\556\
---------------------------------------------------------------------------
     \556\The $11,536 amount is based on a calculation under 
     section 911(b)(2)(D)(ii), as amended by the conference 
     agreement, using the BLS data described above.
---------------------------------------------------------------------------
     Tax brackets
       Under the conference agreement, if an individual excludes 
     an amount from income under section 911, any income in excess 
     of the exclusion amount determined under section 911 is taxed 
     (under the regular tax and alternative minimum tax) by 
     applying to that income the tax rates that would have been 
     applicable had the individual not elected the section 911 
     exclusion. For example, an individual with $80,000 of foreign 
     earned income that is excluded under section 911 and with 
     $20,000 in other taxable income (after deductions) would be 
     subject to tax on that $20,000 at the rate or rates 
     applicable to taxable income in the range of $80,000 to 
     $100,000.
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2005.

              TITLE IX--CORPORATE ESTIMATED TAX PROVISIONS


                              present law

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


                               house bill

       No provision.


                            senate amendment

       No provision.


                          conference agreement

       In case of a corporation with assets of at least $1 
     billion, payments due in July, August, and September, 2006, 
     shall be increased

[[Page 7464]]

     to 105 percent of the payment otherwise due and the next 
     required payment shall be reduced accordingly.
       In case of a corporation with assets of at least $1 
     billion, the payments due in July, August, and September, 
     2012, shall be increased to 106.25 percent of the payment 
     otherwise due and the next required payment shall be reduced 
     accordingly.
       In case of a corporation with assets of at least $1 
     billion, the payments due in July, August, and September, 
     2013, shall be increased to 100.75 percent of the payment 
     otherwise due and the next required payment shall be reduced 
     accordingly.
       With respect to corporate estimated tax payments due on 
     September 15, 2010, 20.5 percent shall not be due until 
     October 1, 2010.
       With respect to corporate estimated tax payments due on 
     September 15, 2011, 27.5 percent shall not be due until 
     October 1, 2011.
       Effective date.--The provision is effective on the date of 
     enactment.

                      TITLE X--COMPLEXITY ANALYSIS

       Section 4022(b) of the Internal Revenue Service Reform and 
     Restructuring Act of 1998 (the ``IRS Reform Act'') requires 
     the Joint Committee on Taxation (in consultation with the 
     Internal Revenue Service (``IRS'') and the Department of the 
     Treasury) to provide a tax complexity analysis. The 
     complexity analysis is required for all legislation reported 
     by the Senate Committee on Finance, the House Committee on 
     Ways and Means, or any committee of conference if the 
     legislation includes a provision that directly or indirectly 
     amends the Internal Revenue Code (the ``Code'') and has 
     widespread applicability to individuals or small businesses. 
     For each such provision identified by the staff of the Joint 
     Committee on Taxation, a summary description of the provision 
     is provided along with an estimate of the number and type of 
     affected taxpayers, and a discussion regarding the relevant 
     complexity and administrative issues.
       Following the analysis of the staff of the Joint Committee 
     on Taxation are the comments of the IRS and Treasury 
     regarding each of the provisions included in the complexity 
     analysis.
     Capital gain and dividend rate reduction (sec. 102 of the 
         conference agreement)
       Summary description of provision
       The conference agreement extends the zero- and 15-percent 
     capital gain and dividend rates to taxable years beginning in 
     2009 and 2010.
       Number of affected taxpayers
       It is estimated that the provision will affect 33 million 
     individual tax returns.
       Discussion
       The extension of the provision means that for 2009 and 2010 
     individual taxpayers and the IRS will continue to use the 
     same forms for capital gains and dividends.
       The extension of the lower rates for net capital gain will 
     achieve simplification because the extension prevents the 
     separate five-year holding periods from going into effect in 
     2009 and 2010. On the other hand, the extension of the lower 
     rates for dividends will continue requiring dividends to be 
     classified as qualified dividends and nonqualified dividends 
     in 2009 and 2010 and will continue to require the tax to be 
     computed using the capital gains forms.
     Increase in the AMT exemption amount (sec. 301 of the 
         conference agreement)
       Summary description of the provision
       The alternative minimum tax exemption amounts for 2006 are 
     increased.
       Number of affected taxpayers
       It is estimated that the provisions will affect 
     approximately 19 million individual tax returns.
       Discussion
       Many individuals will not have to compute their alternative 
     minimum tax and file the IRS forms relating to that tax.

                      TITLE XI--UNFUNDED MANDATES

       The staff of the Joint Committee on Taxation has reviewed 
     the tax provisions in the conference agreement for H.R. 4297, 
     the ``Tax Relief Extension Reconciliation Act of 2005'' as 
     agreed to by the conferees. This information is provided in 
     accordance with the requirements of Public Law 104-04, the 
     Unfunded Mandates Reform Act of 1995, which provides that if 
     a conference agreement contains (1) a mandate that was not 
     previously considered by either the House or the Senate, or 
     (2) an increase in the direct cost of a previously considered 
     mandate, then the committee of conference is to ensure, to 
     the greatest extent practicable, that a mandates statement is 
     prepared.
       We have determined that the tax provisions of the 
     conference agreement contain two unfunded private sector 
     mandates that were not previously considered by either the 
     House or the Senate: (1) repeal of FSC-ETI grandfather rule, 
     and (2) amend section 911 housing exclusion. In addition, the 
     provision relating to withholding on certain government 
     payments imposes an intergovernmental mandate not previously 
     considered by either the House or the Senate.
       The costs required to comply with each Federal private 
     sector mandate and Federal intergovernmental mandate 
     generally are no greater than the aggregate estimated budget 
     effects of the provision as indicated on the enclosed revenue 
     table. Benefits from the provisions include improved 
     administration of the tax laws and a more accurate 
     measurement of income for Federal income tax purposes.

[[Page 7465]]

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[[Page 7466]]

     TH09MY06.002
     


[[Page 7467]]

     TH09MY06.003
     


[[Page 7468]]


     William Thomas,
     Jim McCrery,
     Dave Camp,
                                Managers on the Part of the House.

     Chuck Grassley,
     Jon Kyl,
     Managers on the Part of the Senate.

                          ____________________