[Congressional Record (Bound Edition), Volume 155 (2009), Part 20]
[Senate]
[Pages 26862-26866]
[From the U.S. Government Publishing Office, www.gpo.gov]




                UNEMPLOYMENT COMPENSATION EXTENSION ACT

  Mr. BAUCUS. Mr. President, the provision of S.A. 2712 to H.R. 3548, 
The Worker, Homeownership, and Business Act of 2009 as voted on 
yesterday, November 4, 2009, provide relief for unemployed workers, 
homeowners and businesses. Senate Finance Committee Chairman Baucus has 
asked the nonpartisan Joint Committee on Taxation to make available to 
the public a technical explanation of the bill, JCX-44-09. The 
technical explanation expresses the committee's understanding and 
legislative intent behind this important legislation. It is available 
on the Joint Committee's Web site at www.house.gov/jct.
  Mr. President, I ask unanimous consent to have the technical 
explanation printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

  Technical Explanation of Certain Revenue Provisions of the Worker, 
           Homeownership, and Business Assistance Act of 2009

                              INTRODUCTION

       This document, prepared by the staff of the Joint Committee 
     on Taxation, provides a technical explanation of certain 
     revenue provisions of The Worker, Homeownership, and Business 
     Assistance Act of 2009.

A. Extension and Modification of First-Time Homebuyer Credit (secs. 11 
              and 12 of the bill and sec. 36 of the Code)


                              Present Law

     In general
       An individual who is a first-time homebuyer is allowed a 
     refundable tax credit equal to the lesser of $8,000 ($4,000 
     for a married individual filing separately) or 10 percent of 
     the purchase price of a principal residence. The credit is 
     allowed for qualifying home purchases on or after April 9, 
     2008, and before December 1, 2009.
       The credit phases out for individual taxpayers with 
     modified adjusted gross income between $75,000 and $95,000 
     ($150,000 and $170,000 for joint filers) for the year of 
     purchase.
       An individual is considered a first-time homebuyer if the 
     individual had no ownership interest in a principal residence 
     in the United States during the 3-year period prior to the 
     purchase of the home.
       An election is provided to treat a residence purchased 
     after December 31, 2008, and before

[[Page 26863]]

     December 1, 2009, as purchased on December 31, 2008, so that 
     the credit may be claimed on the 2008 income tax return.
       No District of Columbia first-time homebuyer credit is 
     allowed to any taxpayer with respect to the purchase of a 
     residence after December 31, 2008, and before December 1, 
     2009, if the national first-time homebuyer credit is 
     allowable to such taxpayer (or the taxpayer's spouse) with 
     respect to such purchase.
     Recapture
       For homes purchased on or before December 31, 2008, the 
     credit is recaptured ratably over fifteen years with no 
     interest charge beginning in the second taxable year after 
     the taxable year in which the home is purchased. For example, 
     if an individual purchases a home in 2008, recapture 
     commences with the 2010 tax return. If the individual sells 
     the home (or the home ceases to be used as the principal 
     residence of the individual or the individual's spouse) prior 
     to complete recapture of the credit, the amount of any credit 
     not previously recaptured is due on the tax return for the 
     year in which the home is sold (or ceases to be used as the 
     principal residence). However, in the case of a sale to an 
     unrelated person, the amount recaptured may not exceed the 
     amount of gain from the sale of the residence. For this 
     purpose, gain is determined by reducing the basis of the 
     residence by the amount of the credit to the extent not 
     previously recaptured. No amount is recaptured after the 
     death of an individual. In the case of an involuntary 
     conversion of the home, recapture is not accelerated if a new 
     principal residence is acquired within a two-year period. In 
     the case of a transfer of the residence to a spouse or to a 
     former spouse incident to divorce, the transferee spouse (and 
     not the transferor spouse) will be responsible for any future 
     recapture. Recapture does not apply to a home purchased after 
     December 31, 2008 that is treated (at the election of the 
     taxpayer) as purchased on December 31, 2008.
       For homes purchased after December 31, 2008, and before 
     December 1, 2009, the credit is recaptured only if the 
     taxpayer disposes of the home (or the home otherwise ceases 
     to be the principal residence of the taxpayer) within 36 
     months from the date of purchase.


                        Explanation of Provision

     Extension of application period
       In general, the credit is extended to apply to a principal 
     residence purchased by the taxpayer before May 1, 2010. The 
     credit applies to the purchase of a principal residence 
     before July 1, 2010 by any taxpayer who enters into a written 
     binding contract before May 1, 2010, to close on the purchase 
     of a principal residence before July 1, 2010.
       The waiver of recapture, except in the case of disposition 
     of the home (or the home otherwise ceases to be the principal 
     residence of the taxpayer) within 36 months from the date of 
     purchase, is extended to any purchase of a principal 
     residence after December 31, 2008.
       The election to treat a purchase as occurring in a prior 
     year is modified. In the case of a purchase of a principal 
     residence after December 31, 2008, a taxpayer may elect to 
     treat the purchase as made on December 31 of the calendar 
     year preceding the purchase for purposes of claiming the 
     credit on the prior year's tax return.
       No District of Columbia first-time homebuyer credit is 
     allowed to any taxpayer with respect to the purchase of a 
     residence after December 31, 2008, if the national first-time 
     homebuyer credit is allowable to such taxpayer (or the 
     taxpayer's spouse) with respect to such purchase.
     Long-time residents of the same principal residence
       An individual (and, if married, the individual's spouse) 
     who has maintained the same principal residence for any five-
     consecutive year period during the eight-year period ending 
     on the date of the purchase of a subsequent principal 
     residence is treated as a first-time homebuyer. The maximum 
     allowable credit for such taxpayers is $6,500 ($3,250 for a 
     married individual filing separately).
     Limitations
       The bill raises the income limitations to qualify for the 
     credit. The credit phases out for individual taxpayers with 
     modified adjusted gross income between $125,000 and $145,000 
     ($225,000 and $245,000 for joint filers) for the year of 
     purchase.
       No credit is allowed for the purchase of any residence if 
     the purchase price exceeds $800,000.
       No credit is allowed unless the taxpayer is 18 years of age 
     as of the date of purchase. A taxpayer who is married is 
     treated as meeting the age requirement if the taxpayer or the 
     taxpayer's spouse meets the age requirement.
       The definition of purchase excludes property acquired from 
     a person related to the person acquiring such property or the 
     spouse of the person acquiring the property, if married.
       No credit is allowed to any taxpayer if the taxpayer is a 
     dependent of another taxpayer.
       No credit is allowed unless the taxpayer attaches to the 
     relevant tax return a properly executed copy of the 
     settlement statement used to complete the purchase.
     Waiver of recapture for individuals on qualified official 
         extended duty
       In the case of a disposition of principal residence by an 
     individual (or a cessation of use of the residence that 
     otherwise would cause recapture) after December 31, 2008, in 
     connection with government orders received by the individual 
     (or the individual's spouse) for qualified official extended 
     duty service, no recapture applies by reason of the 
     disposition of the residence, and any 15-year recapture with 
     respect to a home acquired before January 1, 2009, ceases to 
     apply in the taxable year the disposition occurs.
       Qualified official extended duty service means service on 
     official extended duty as a member of the uniformed services, 
     a member of the Foreign Service of the United States, or an 
     employee of the intelligence community.
       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 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.
       The term ``member of the Foreign Service of the United 
     States'' includes: (1) chiefs of mission; (2) ambassadors at 
     large; (3) members of the Senior Foreign Service; (4) Foreign 
     Service officers; and (5) Foreign Service personnel.
       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) the elements of the Department of Homeland 
     Security concerned with the analyses of foreign intelligence 
     information.
     Extension of the first-time homebuyer credit for individuals 
         on qualified official extended duty outside of the United 
         States
       In the case of any individual (and, if married, the 
     individual's spouse) who serves on qualified official 
     extended duty service outside of the United States for at 
     least 90 days during the period beginning after December 31, 
     2008, and ending before May 1, 2010, the expiration date of 
     the first-time homebuyer credit is extended for one year, 
     through May 1, 2011 (July 1, 2011, in the case of an 
     individual who enters into a written binding contract before 
     May 1, 2011, to close on the purchase of a principal 
     residence before July 1, 2011).
     Mathematical error authority
       The bill makes a number of changes to expand the definition 
     of mathematical or clerical error for purposes of 
     administration of the credit by the Internal Revenue Service 
     (``IRS''). The IRS may assess additional tax without issuance 
     of a notice of deficiency as otherwise required in the case 
     of: an omission of any increase in tax required by the 
     recapture provisions of the credit; information from the 
     person issuing the taxpayer identification number of the 
     taxpayer that indicates that the taxpayer does not meet the 
     age requirement of the credit; information provided to the 
     Secretary by the taxpayer on an income tax return for at 
     least one of the two preceding taxable years that is 
     inconsistent with eligibility for such credit; or, failure to 
     attach to the return a properly executed copy of the 
     settlement statement used to complete the purchase.


                             Effective Date

       The extension of the first-time homebuyer credit and 
     coordination with the first-time homebuyer credit for the 
     District of Columbia apply to residences purchased after 
     November 30, 2009.
       Provisions relating to long-time residents of the same 
     principal residence, and income, purchase price, age, related 
     party, dependent, and documentation limitations apply for 
     purchases after the date of enactment.
       The waiver of recapture provision applies to dispositions 
     and cessations after December 31, 2008.
       The expansion of mathematical and clerical error authority 
     applies to returns for taxable years ending on or after April 
     9, 2008.

  B. Five-Year Carryback of Operating Losses (sec. 13 of the bill and 
                         sec. 172 of the Code)


                              Present Law

     In general
       Under present law, a net operating loss (``NOL'') generally 
     means the amount by which a taxpayer's business deductions 
     exceed its gross income. In general, an NOL

[[Page 26864]]

     may be carried back two years and carried over 20 years to 
     offset taxable income in such years. NOLs offset taxable 
     income in the order of the taxable years to which the NOL may 
     be carried.
       For purposes of computing the alternative minimum tax 
     (``AMT''), a taxpayer's NOL deduction cannot reduce the 
     taxpayer's alternative minimum taxable income (``AMTI'') by 
     more than 90 percent of the AMTI.
       In the case of a life insurance company, present law allows 
     a deduction for the operations loss carryovers and carrybacks 
     to the taxable year, in lieu of the deduction for net 
     operation losses allowed to other corporations. A life 
     insurance company is permitted to treat a loss from 
     operations (as defined under section 810(c)) for any taxable 
     year as an operations loss carryback to each of the three 
     taxable years preceding the loss year and an operations loss 
     carryover to each of the 15 taxable years following the loss 
     year.
     Temporary rule for small business
       Present law provides an eligible small business with an 
     election to increase the present-law carryback period for an 
     ``applicable 2008 NOL'' from two years to any whole number of 
     years elected by the taxpayer that is more than two and less 
     than six. An eligible small business is a taxpayer meeting a 
     $15,000,000 gross receipts test. An applicable 2008 NOL is 
     the taxpayer's NOL for any taxable year ending in 2008, or if 
     elected by the taxpayer, the NOL for any taxable year 
     beginning in 2008. However, any election under this provision 
     may be made only with respect to one taxable year.


                        Explanation of Provision

       The provision provides an election to increase the present-
     law carryback period for an applicable NOL from two years to 
     any whole number of years elected by the taxpayer which is 
     more than two and less than six. An applicable NOL is the 
     taxpayer's NOL for a taxable year beginning or ending in 
     either 2008 or 2009. Generally, a taxpayer may elect an 
     extended carryback period for only one taxable year.
       The amount of an NOL that may be carried back to the fifth 
     taxable year preceding the loss year is limited to 50 percent 
     of taxable income for such taxable year (computed without 
     regard to the NOL for the loss year or any taxable year 
     thereafter). The limitation does not apply to the applicable 
     2008 NOL of an eligible small business with respect to which 
     an election is made (either before or after the date of 
     enactment of the bill) under the provision as presently in 
     effect. The amount of the NOL otherwise carried to taxable 
     years subsequent to such fifth taxable year is to be adjusted 
     to take into account that the NOL could offset only 50 
     percent of the taxable income in such year. Thus, in 
     determining the excess of the applicable NOL over the sum of 
     the taxpayer's taxable income for each of the prior taxable 
     years to which the loss may be carried, only 50 percent of 
     the taxable income for the taxable year for which the 
     limitation applies is to be taken into account.
       The provision also suspends the 90-percent limitation on 
     the use of any alternative tax NOL deduction attributable to 
     carrybacks of the applicable NOL for which an extended 
     carryback period is elected.
       For life insurance companies, the provision provides an 
     election to increase the present-law carryback period for an 
     applicable loss from operations from three years to four or 
     five years. An applicable loss from operations is the 
     taxpayer's loss from operations for any taxable year 
     beginning or ending in either 2008 or 2009. A 50-percent of 
     taxable income limitation applies to the fifth taxable year 
     preceding the loss year.
       A taxpayer must make the election by the extended due date 
     for filing the return for the taxpayer's last taxable year 
     beginning in 2009, and in such manner as may be prescribed by 
     the Secretary. An election, once made, is irrevocable.
       An eligible small business that timely made (or timely 
     makes) an election under the provision as in effect on the 
     day before the enactment of the bill to carryback its 
     applicable 2008 NOL may also elect to carryback a 2009 NOL 
     under the amended provision. It is intended that an eligible 
     small business may continue to make the present-law election 
     under procedures prescribed in Rev. Proc. 2009-26 following 
     the enactment of the bill.
       The provision generally does not apply to: (1) any taxpayer 
     if (a) the Federal government acquired or acquires at any 
     time, an equity interest in the taxpayer pursuant to the 
     Emergency Economic Stabilization Act of 2008, or (b) the 
     Federal government acquired or acquires, at any time, any 
     warrant (or other right) to acquire any equity interest with 
     respect to the taxpayer pursuant to such Act; (2) the Federal 
     National Mortgage Association and the Federal Home Loan 
     Mortgage Corporation; and (3) any taxpayer that in 2008 or 
     2009 is a member of the same affiliated group (as defined in 
     section 1504 without regard to subsection (b) thereof) as a 
     taxpayer to which the provision does not otherwise apply. An 
     equity interest (or right to acquire an equity interest) is 
     disregarded for this purpose if acquired by the Federal 
     government after the date of enactment from a financial 
     institution pursuant to a program established by the 
     Secretary for the stated purpose of increasing the 
     availability of credit to small businesses using funding made 
     available under the Emergency Economic Stabilization Act of 
     2008.


                             Effective Date

       The provision is generally effective for net operating 
     losses arising in taxable years ending after December 31, 
     2007. The modification to the alternative tax NOL deduction 
     applies to taxable years ending after December 31, 2002. The 
     modification with respect to operating loss deductions of 
     life insurance companies applies to losses from operations 
     arising in taxable years ending after December 31, 2007.
       Under transition rules, a taxpayer may revoke any election 
     to waive the carryback period under either section 172(b)(3) 
     or section 810(b)(3) with respect to an applicable NOL or an 
     applicable loss from operations for a taxable year ending 
     before the date of enactment by the extended due date for 
     filing the tax return for the taxpayer's last taxable year 
     beginning in 2009. Similarly, any application for a tentative 
     carryback adjustment under section 6411(a) with respect to 
     such loss is treated as timely filed if filed by the extended 
     due date for filing the tax return for the taxpayer's last 
     taxable year beginning in 2009.

 C. Exclusion from Gross Income of Qualified Military Base Realignment 
   and Closure Fringe (sec. 14 of the bill and sec. 132 of the Code)


                              Present Law

     Homeowners Assistance Program payment
       The Department of Defense Homeowners Assistance Program 
     (``HAP'') provides payments to certain employees and members 
     of the Armed Forces to offset the adverse effects on housing 
     values that result from a military base realignment or 
     closure.
       In general, under the HAP, eligible individuals receive 
     either: (1) a cash payment as compensation for losses that 
     may be or have been sustained in a private sale, in an amount 
     not to exceed the difference between (a) 95 percent of the 
     fair market value of their property prior to public 
     announcement of intention to close all or part of the 
     military base or installation and (b) the fair market value 
     of such property at the time of the sale; or (2) as the 
     purchase price for their property, an amount not to exceed 90 
     percent of the prior fair market value as determined by the 
     Secretary of Defense, or the amount of the outstanding 
     mortgages.
       The American Recovery and Reinvestment Act of 2009 expands 
     the HAP in various ways. It amends the Demonstration Cities 
     and Metropolitan Development Act of 1966 to allow, under the 
     HAP under such Act, the Secretary of Defense to provide 
     assistance or reimbursement for certain losses in the sale of 
     family dwellings by members of the Armed Forces living on or 
     near a military installation in situations where: (1) there 
     was a base closure or realignment; (2) the property was 
     purchased before July 1, 2006, and sold between that date and 
     September 30, 2012; (3) the property is the owner's primary 
     residence; and (4) the owner has not previously received 
     benefits under the HAP. Further, it authorizes similar HAP 
     assistance or reimbursement with respect to: (1) wounded 
     members and wounded civilian Department of Defense and Coast 
     Guard employees (and their spouses); and (2) members 
     permanently reassigned from an area at or near a military 
     installation to a new duty station more than 50 miles away 
     (with similar purchase and sale date, residence, and no-
     previous-benefit requirements as above). It allows the 
     Secretary to provide compensation for losses from home sales 
     by such individuals to ensure the realization of at least 90 
     percent (in some cases, 95 percent) of the pre-mortgage-
     crisis assessed value of such property.
     Tax treatment
       Present law generally excludes from gross income amounts 
     received under the HAP (as in effect on November 11, 2003). 
     Amounts received under the program also are not considered 
     wages for FICA tax purposes (including Medicare). The 
     excludable amount is limited to the reduction in the fair 
     market value of property.


                        Explanation of Provision

       The bill expands the exclusion to HAP payments authorized 
     under the American Recovery and Reinvestment Tax Act of 2009.


                             Effective Date

       The provision is effective for payments made after February 
     17, 2009 (the date of enactment of the American Recovery and 
     Reinvestment Tax Act of 2009).

D. Delay in Application of Worldwide Allocation of Interest (sec. 15 of 
                   the bill and sec. 864 of the Code)


                              Present Law

     In general
       To compute the foreign tax credit limitation, a taxpayer 
     must determine the amount of its taxable income from foreign 
     sources. Thus, the taxpayer must allocate and apportion 
     deductions between items of U.S.-source gross income, on the 
     one hand, and items of foreign-source gross income, on the 
     other.
       In the case of interest expense, the rules generally are 
     based on the approach that money is fungible and that 
     interest expense

[[Page 26865]]

     is properly attributable to all business activities and 
     property of a taxpayer, regardless of any specific purpose 
     for incurring an obligation on which interest is paid. For 
     interest allocation purposes, all members of an affiliated 
     group of corporations generally are treated as a single 
     corporation (the so-called ``one-taxpayer rule'') and 
     allocation must be made on the basis of assets rather than 
     gross income. The term ``affiliated group'' in this context 
     generally is defined by reference to the rules for 
     determining whether corporations are eligible to file 
     consolidated returns.
       For consolidation purposes, the term ``affiliated group'' 
     means one or more chains of includible corporations connected 
     through stock ownership with a common parent corporation that 
     is an includible corporation, but only if: (1) the common 
     parent owns directly stock possessing at least 80 percent of 
     the total voting power and at least 80 percent of the total 
     value of at least one other includible corporation; and (2) 
     stock meeting the same voting power and value standards with 
     respect to each includible corporation (excluding the common 
     parent) is directly owned by one or more other includible 
     corporations.
       Generally, the term ``includible corporation'' means any 
     domestic corporation except certain corporations exempt from 
     tax under section 501 (for example, corporations organized 
     and operated exclusively for charitable or educational 
     purposes), certain life insurance companies, corporations 
     electing application of the possession tax credit, regulated 
     investment companies, real estate investment trusts, and 
     domestic international sales corporations. A foreign 
     corporation generally is not an includible corporation.
       Subject to exceptions, the consolidated return and interest 
     allocation definitions of affiliation generally are 
     consistent with each other. For example, both definitions 
     generally exclude all foreign corporations from the 
     affiliated group. Thus, while debt generally is considered 
     fungible among the assets of a group of domestic affiliated 
     corporations, the same rules do not apply as between the 
     domestic and foreign members of a group with the same degree 
     of common control as the domestic affiliated group.
       Banks, savings institutions, and other financial affiliates
       The affiliated group for interest allocation purposes 
     generally excludes what are referred to in the Treasury 
     regulations as ``financial corporations.'' A financial 
     corporation includes any corporation, otherwise a member of 
     the affiliated group for consolidation purposes, that is a 
     financial institution (described in section 581 or section 
     591), the business of which is predominantly with persons 
     other than related persons or their customers, and which is 
     required by State or Federal law to be operated separately 
     from any other entity that is not a financial institution. 
     The category of financial corporations also includes, to the 
     extent provided in regulations, bank holding companies 
     (including financial holding companies), subsidiaries of 
     banks and bank holding companies (including financial holding 
     companies), and savings institutions predominantly engaged in 
     the active conduct of a banking, financing, or similar 
     business.
       A financial corporation is not treated as a member of the 
     regular affiliated group for purposes of applying the one-
     taxpayer rule to other non-financial members of that group. 
     Instead, all such financial corporations that would be so 
     affiliated are treated as a separate single corporation for 
     interest allocation purposes.
     Worldwide interest allocation
       In general
       The American Jobs Creation Act of 2004 (``AJCA'') modified 
     the interest expense allocation rules described above (which 
     generally apply for purposes of computing the foreign tax 
     credit limitation) by providing a one-time election (the 
     ``worldwide affiliated group election'') under which the 
     taxable income of the domestic members of an affiliated group 
     from sources outside the United States generally is 
     determined by allocating and apportioning interest expense of 
     the domestic members of a worldwide affiliated group on a 
     worldwide-group basis (i.e., as if all members of the 
     worldwide group were a single corporation). If a group makes 
     this election, the taxable income of the domestic members of 
     a worldwide affiliated group from sources outside the United 
     States is determined by allocating and apportioning the 
     third-party interest expense of those domestic members to 
     foreign-source income in an amount equal to the excess (if 
     any) of (1) the worldwide affiliated group's worldwide third-
     party interest expense multiplied by the ratio that the 
     foreign assets of the worldwide affiliated group bears to the 
     total assets of the worldwide affiliated group, over (2) the 
     third-party interest expense incurred by foreign members of 
     the group to the extent such interest would be allocated to 
     foreign sources if the principles of worldwide interest 
     allocation were applied separately to the foreign members of 
     the group.
       For purposes of the new elective rules based on worldwide 
     fungibility, the worldwide affiliated group means all 
     corporations in an affiliated group as well as all controlled 
     foreign corporations that, in the aggregate, either directly 
     or indirectly, would be members of such an affiliated group 
     if section 1504(b)(3) did not apply (i.e., in which at least 
     80 percent of the vote and value of the stock of such 
     corporations is owned by one or more other corporations 
     included in the affiliated group). Thus, if an affiliated 
     group makes this election, the taxable income from sources 
     outside the United States of domestic group members generally 
     is determined by allocating and apportioning interest expense 
     of the domestic members of the worldwide affiliated group as 
     if all of the interest expense and assets of 80-percent or 
     greater owned domestic corporations (i.e., corporations that 
     are part of the affiliated group, as modified to include 
     insurance companies) and certain controlled foreign 
     corporations were attributable to a single corporation.
       Financial institution group election
       Taxpayers are allowed to apply the bank group rules to 
     exclude certain financial institutions from the affiliated 
     group for interest allocation purposes under the worldwide 
     fungibility approach. The rules also provide a one-time 
     ``financial institution group'' election that expands the 
     bank group. At the election of the common parent of the pre-
     election worldwide affiliated group, the interest expense 
     allocation rules are applied separately to a subgroup of the 
     worldwide affiliated group that consists of (1) all 
     corporations that are part of the bank group, and (2) all 
     ``financial corporations.'' For this purpose, a corporation 
     is a financial corporation if at least 80 percent of its 
     gross income is financial services income (as described in 
     section 904(d)(2)(C)(i) and the regulations thereunder) that 
     is derived from transactions with unrelated persons. For 
     these purposes, items of income or gain from a transaction or 
     series of transactions are disregarded if a principal purpose 
     for the transaction or transactions is to qualify any 
     corporation as a financial corporation.
       In addition, anti-abuse rules are provided under which 
     certain transfers from one member of a financial institution 
     group to a member of the worldwide affiliated group outside 
     of the financial institution group are treated as reducing 
     the amount of indebtedness of the separate financial 
     institution group. Regulatory authority is provided with 
     respect to the election to provide for the direct allocation 
     of interest expense in circumstances in which such allocation 
     is appropriate to carry out the purposes of these rules, to 
     prevent assets or interest expense from being taken into 
     account more than once, or to address changes in members of 
     any group (through acquisitions or otherwise) treated as 
     affiliated under these rules.
       Effective date of worldwide interest allocation
       The common parent of the domestic affiliated group must 
     make the worldwide affiliated group election. It must be made 
     for the first taxable year beginning after December 31, 2010, 
     in which a worldwide affiliated group exists that includes at 
     least one foreign corporation that meets the requirements for 
     inclusion in a worldwide affiliated group. The common parent 
     of the pre-election worldwide affiliated group must make the 
     election for the first taxable year beginning after December 
     31, 2010, in which a worldwide affiliated group includes a 
     financial corporation. Once either election is made, it 
     applies to the common parent and all other members of the 
     worldwide affiliated group or to all members of the financial 
     institution group, as applicable, for the taxable year for 
     which the election is made and all subsequent taxable years, 
     unless revoked with the consent of the Secretary of the 
     Treasury.
       Phase-in rule
       HERA also provided a special phase-in rule in the case of 
     the first taxable year to which the worldwide interest 
     allocation rules apply. For that year, the amount of the 
     taxpayer's taxable income from foreign sources is reduced by 
     70 percent of the excess of (i) the amount of its taxable 
     income from foreign sources as calculated using the worldwide 
     interest allocation rules over (ii) the amount of its taxable 
     income from foreign sources as calculated using the present-
     law interest allocation rules. For that year, the amount of 
     the taxpayer's taxable income from domestic sources is 
     increased by a corresponding amount. Any foreign tax credits 
     disallowed by virtue of this reduction in foreign-source 
     taxable income may be carried back or forward under the 
     normal rules for carrybacks and carryforwards of excess 
     foreign tax credits.


                        Explanation of Provision

       The provision delays the effective date of worldwide 
     interest allocation rules for seven years, until taxable 
     years beginning after December 31, 2017. The required dates 
     for making the worldwide affiliated group election and the 
     financial institution group election are changed accordingly.
       The provision also eliminates the special phase-in rule 
     that applies in the case of the first taxable year to which 
     the worldwide interest allocation rules apply.


                             Effective Date

       The provision is effective for taxable years beginning 
     after December 31, 2010.

[[Page 26866]]



    E. Modification of Penalty for Failure To File Partnership or S 
Corporation Returns (sec. 16 of the bill and secs. 6698 and 6699 of the 
                                 Code)


                              Present Law

       Both partnerships and S corporations are generally treated 
     as pass-through entities that do not incur an income tax at 
     the entity level. Income earned by a partnership, whether 
     distributed or not, is taxed to the partners. Distributions 
     from the partnership generally are tax-free. The items of 
     income, gain, loss, deduction or credit of a partnership 
     generally are taken into account by a partner as allocated 
     under the terms of the partnership agreement. If the 
     agreement does not provide for an allocation, or the agreed 
     allocation does not have substantial economic effect, then 
     the items are to be allocated in accordance with the 
     partners' interests in the partnership. To prevent double 
     taxation of these items, a partner's basis in its interest is 
     increased by its share of partnership income (including tax-
     exempt income), and is decreased by its share of any losses 
     (including nondeductible losses). An S corporation generally 
     is not subject to corporate-level income tax on its items of 
     income and loss. Instead, the S corporation passes through 
     its items of income and loss to its shareholders. The 
     shareholders take into account separately their shares of 
     these items on their individual income tax returns.
       Under present law, both partnerships and S corporations are 
     required to file tax returns for each taxable year. The 
     partnership's tax return is required to include the names and 
     addresses of the individuals who would be entitled to share 
     in the taxable income if distributed and the amount of the 
     distributive share of each individual. The S corporation's 
     tax return is required to include the following: the names 
     and addresses of all persons owning stock in the corporation 
     at any time during the taxable year; the number of shares of 
     stock owned by each shareholder at all times during the 
     taxable year; the amount of money and other property 
     distributed by the corporation during the taxable year to 
     each shareholder and the date of such distribution; each 
     shareholder's pro rata share of each item of the corporation 
     for the taxable year; and such other information as the 
     Secretary may require.
       In addition to applicable criminal penalties, present law 
     imposes assessable civil penalties for both the failure to 
     file a partnership return and the failure to file an S 
     corporation return. Each of these penalties is currently $89 
     times the number of shareholders or partners for each month 
     (or fraction of a month) that the failure continues, up to a 
     maximum of 12 months for returns required to be filed after 
     December 31, 2008.


                        Explanation of Provision

       Under the provision, the base amount on which a penalty is 
     computed for a failure with respect to filing either a 
     partnership or S corporation return is increased to $195 per 
     partner or shareholder.


                             Effective Date

       The provision applies to returns for taxable years 
     beginning after December 31, 2009.

 F. Expansion of Electronic Filing by Return Preparers (sec. 17 of the 
                   bill and sec. 6011(e) of the Code)


                              Present Law

       The IRS Restructuring and Reform Act of 1998 (``RRA 1998'') 
     states a Congressional policy to promote the paperless filing 
     of Federal tax returns. Section 2001(a) of RRA 1998 sets a 
     goal for the IRS to have at least 80 percent of all Federal 
     tax and information returns filed electronically by 2007. 
     Section 2001(b) of RRA 1998 requires the IRS to establish a 
     10-year strategic plan to eliminate barriers to electronic 
     filing.
       Present law authorizes the IRS to issue regulations 
     specifying which returns must be filed electronically. There 
     are several limitations on this authority. First, it can only 
     apply to persons required to file at least 250 returns during 
     the calendar year. Second, the Secretary is prohibited from 
     requiring that income tax returns of individuals, estates, 
     and trusts be submitted in any format other than paper, 
     although these returns may be filed electronically by choice.
       Regulations require corporations and tax-exempt 
     organizations that have assets of $10 million or more and 
     file at least 250 returns during a calendar year, including 
     income tax, information, excise tax, and employment tax 
     returns, to file electronically their Form 1120/1120S income 
     tax returns and Form 990 information returns for tax years 
     ending on or after December 31, 2006. Private foundations and 
     charitable trusts that file at least 250 returns during a 
     calendar year are required to file electronically their Form 
     990-PF information returns for tax years ending on or after 
     December 31, 2006, regardless of their asset size. Taxpayers 
     can request waivers of the electronic filing requirement if 
     they cannot meet that requirement due to technological 
     constraints, or if compliance with the requirement would 
     result in undue financial burden on the taxpayer.


                        Explanation of Provision

       The provision generally maintains the current rule that 
     regulations may not require any person to file electronically 
     unless the person files at least 250 tax returns during the 
     calendar year. However, the proposal provides an exception to 
     this rule and mandates that the Secretary require electronic 
     filing by specified tax return preparers. ``Specified tax 
     return preparers'' are all return preparers except those who 
     neither prepare nor reasonably expect to prepare ten or more 
     individual income tax returns in a calendar year. The term 
     ``individual income tax return'' is defined to include 
     returns for estates and trusts as well as individuals.


                             Effective Date

       The provision is effective for tax returns filed after 
     December 31, 2010.

 G. Time for Payment of Corporate Estimated Taxes (sec. 18 of the bill 
                       and sec. 6655 of the Code)


                              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. In the case of a corporation 
     with assets of at least $1 billion (determined as of the end 
     of the preceding tax year), payments due in July, August, or 
     September, 2014, are increased to 100.25 percent of the 
     payment otherwise due and the next required payment is 
     reduced accordingly.


                        Explanation of Provision

       The provision increases the required payment of estimated 
     tax otherwise due in July, August, or September, 2014, by 33 
     percentage points.


                             Effective Date

       The provision is effective on the date of the enactment of 
     this Act.

                          ____________________